Can Finland control its national debt?

Can Finland control its national debt?

Finland’s debt-to-GDP ratio has risen while growth has remained sluggish, leaving Finland’s government with some important choices ahead. So far, the government has taken concrete steps in the right direction, sparking hope among the population.

Slowly but surely, more and more people are beginning to talk about the Eurozone in optimistic tones. ‘Problem countries’ such as Ireland and Spain are exiting their bailout programs, and EU-wide economic growth is on the rise. But now Finland, usually admired for its fiscal responsibility, is one of five countries to raise complaints at the EU Commission over its national debt-to-GDP ratio.

Considering statistics coming out of Finland, this is no surprise. Finland’s projected growth falls below the EU average at only 0.3 percent for this year, and unemployment predictions are equally dispiriting at 7 to 8 percent. Finland’s government debt, at the moment hovering around 50 percent, is set to cross the European Commission’s threshold of 60 percent sometime next year. Though Finland managed to avoid coming under closer EU-supervision this time, there is a real chance it could attract a stronger response (including fines), if it does not pick up its performance before 2015.

One main problem Finland faces is a widening current account deficit. Having traditionally relied on export-led growth, Finland is suffering from both decreasing prices and demand in the raw materials and investment goods that make up a large portion of its exports. While consumer demand is doing better in global markets (to the benefit of Japan and Germany, for example), the loss of Nokia’s market share in the mobile phone industry and subsequent unit sale to Microsoft means Finland’s production of consumer goods is thinner than it used to be.

Weak exports and high unemployment equal less income from taxes, but fortunately Finland’s government is making some visible efforts to fix its shortcomings. In its desire to promote fiscal responsibility, Finland has looked for ways to restructure the welfare system to meet the needs of austerity. The government is even tackling some of the more politically sensitive areas such as the healthcare system, introducing some experimental free-market elements to boost efficiency.

Finland is even cutting its corporate tax from 24.5 percent to 20 percent starting next year. Although this goes against traditional norms in the social democracy, the expected boost to competitiveness and investment are widely approved of. These changes should make continuing investments, such as Google’s $1 billion data center in Hamina, easier to attract.

Optimistically, a pick-up in global demand for Finland’s investment goods is possible and would be great news for Finland. Demand from China and India helped Finland boost exports before 2008, and this may be complemented by increasing demand from other places such as Africa’s ‘lion economies.’ A better-performing EU will also help Finland in the long run. Nevertheless, until then Finland is doing well by heeding advice and diversifying its industries to better meet global demand.

One interesting development is that Finland looks to cash in on its decades of expertise in operating amidst sub-zero temperatures. The Arctic is attracting more economic activity from governments and oil companies alike. Finnish ‘snow-how’ has so far attracted attention from Asian countries and neighboring Russia.

Another promising initiative comes from the burgeoning start-up scene, endorsed by the government and focusing on tech-savvy projects such as mobile phone games. At last week’s major start-up conference in Helsinki, Slush, venture capitalists flocked from all around the world in search of good investments.

A recent success story made headlines in October when the Finnish company SuperCell, famous for the mobile game Clash of Clans, was acquired for over $1 billion by two Japanese firms. One of the buyers, GungHo, is also shifting operations to Finland, citing the lower corporate tax rate as one reason. In turn, the SuperCell founders aim to invest a lot in creating a regional ‘Silicon Valley’ in Finland. An obvious hope is to find suitable replacements for Nokia’s position in Finland’s economy.

Finland has a lot of experience in managing difficult economic situations. Finland’s economic crisis in the early 1990s, sparked by the collapse of the Soviet Union, means that Finland’s banks are more regulated and thus healthier than many other European countries’. This will go a long way in supporting domestic entrepreneurs and maintaining Finland’s AAA credit rating.

Considering the willingness of Finland’s government to try new approaches, the accelerating entrepreneurial atmosphere and other healthy credentials, Finland’s future is looking encouragingly open to improvement. Indeed, with any luck at all Finland should get back on track with its national debt, and help bring the rest of the Eurozone out of its disappointing slump.

Categories: Economics, Europe

About Author

Karl Sorri

Karl has gained global experience working at the Transparency International Secretariat in Berlin, the Political/Economic Section of the U.S. Embassy in Helsinki, and as a freelance journalist. Karl holds an MA in Politics from the University of Glasgow and an MSc in International Relations from the London School of Economics.