April 12, 2015 / 2:23 PM / 2 years ago

Taste of its own medicine? Austerity overshadows Finland vote

Juha Sipila (R), leader of Finnish Centre Party, posing for a photo with a Finnish citizen during campaigning for the upcoming parliamentary elections in Vantaa, April 9, 2015. Finland's parliamentary elections will be held on April 19, 2015. Picture taken April 9, 2015.Jussi Nukari/Lehtikuva ATTENTION EDITORS - THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. IT IS DISTRIBUTED, EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS. NO THIRD PARTY SALES. NOT FOR USE BY REUTERS THIRD PARTY DISTRIBUTORS. FINLAND OUT. NO COMMERCIAL OR EDITORIAL SALES IN FINLAND.

KOTKA, Finland (Reuters) - When Finland's opposition leader and likely new prime minister Juha Sipila warned Finland could be the next Greece, it was an election campaign quip with a serious side - signaling the risks for a country facing a perfect storm of economic woes.

Two hours drive Sipila's office in bustling Helsinki, the town of Kotka shows signs of what he means. Around one in five people is unemployed, a rate not far off Greece. Hit by the closure of paper mills left behind by the digital age, it is light years from Finland's tech-savvy image.

"When a pulp factory closes, that can be 400 people," said Sirpa Paatero, a government minister handing out campaign leaflets in the windswept town square. "The new companies coming up employ one, or two or three. That's just not enough."

Finland heads to an April 19 parliamentary election facing its worst crisis in decades - three years of recession in an economy shackled by the shrinking of its flagship Nokia, rising labor costs and a diminishing working population. Economic crisis in Russia, a big export market, has struck another blow.

Finland has been one of the toughest of the euro zone's critics of Greece and other southern European members for failing to implement market-oriented reforms. Now stagnation hovers over a country where most parties agree reform is necessary, but cannot agree how to go about it.

"There are lay-offs everywhere, young people being left unemployed straight after school,” said Karoliina Karesti, who helps the unemployed in Kotka to find jobs.

With no clear winner expected, poll leader Sipila - a millionaire businessman touting himself as a technocrat - may end up with a coalition including a center left and anti-immigration, self-described populist party.

That looks like a recipe for more squabbling about whether the best way forward is state investment and job creation or cuts in state spending and a showdown with powerful trade unions to hold down debt.

With an assertive Russia on its 833 mile (1,340 km) border and the rouble fall hitting trade, Finland faces problems on all fronts - Standard & Poor's last year cut its rating to AA+, citing growth problems and political indecisiveness. That strikes a contrast with the rest of a largely buoyant Nordics.

"I am very afraid for Finland," said Aki Kangasharju, chief economist at Nordea Bank in Helsinki, adding that bond buying by the European Central Bank may also be feeding into complacency, by shielding Finland from the pressure financial markets normally put on governments they view as weak on reform.

"The thing is we don’t get the signal from financial markets right now," he added. "Bond yields are only getting lower although our own politics is getting worse. That is correlated to ECB, not our politics."

COALITION WOES

Sipila's party has around 25 percent in polls so may need to form a coalition with some combination of the mildly Eurosceptic and anti-immigration Finns Party, National Coalition headed by Prime Minister Alexander Stubb or center left Social Democrats.

Sipila is an unknown quantity. Respected as a businessman in startups and telecommunications, the rural grassroots of his party are conservative. He himself is a member of "Word of Peace", part of a Lutheran revival movement that sets himself apart from more secular-orientated political leaders.

There are fears of the same political scenario that blighted Finland in the last four years - a coalition of parties which cannot agree. The government failed on plans to reform health care and local government budgets, and canceled some spending cuts.

It would be stagnation Finland can ill afford.

Sweden's former center-right finance minister Anders Borg, who wrote a report for the government on Finland's economy, said its export competitiveness had fallen about 20 percent relative to the euro zone since 2007.

With little immigration, Finland's also one of the fastest shrinking workforces of any developed economy. The finance ministry says public debt may jump to 160 percent of GDP by 2040 from current 59 percent without reforms or spending cuts.

"I think we're now ready to accept very hard times," said Sipila, who wants to freeze wages and trim welfare in an extensive deal with powerful unions. "The situation is so bad in Finland that it’s the only way out."

Stubb said Finland could face another "lost decade".

Economists say it will be hard for a new government to spend its way out of recession. While public debt is 60 percent of GDP, the budget gap is 3.2 percent of GDP, over the 3.0 percent EU limit. Public spending is already at 58 percent of GDP.

As Finland's post-war babyboomers begin to retire without enough locally born or immigrant workers to replace them, the share of working-age Finns is expected to fall from today's 65 percent to 58 percent by 2030.

"We are not Greece but we are on the way there," said Juhana Vartiainen, head of the Government Institute for Economic Research and a National Coalition candidate. "That is quite shameful for a Nordic country."

Editing by Philippa Fletcher

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