Finland's economy: In search of the sunny side

It is 9:30am on a freezing morning in Helsinki and the queue outside a nondescript building in the north of the city is hundreds of people long. An old woman at the front says she has been waiting for two-and-a-half hours.

The 2,600 people who will eventually traipse in are not waiting for the latest Nokia or Apple phone but something more basic: eggs, bread, milk, bananas, fruit juice and other staples. "The queue is longer and longer and longer," says Marcus, one of the workers at the Helsinginkatu food bank. "We have many rich people here in Finland but this is the other side."

Heikki Hursti, the manager, says the number of people using the facility has doubled since 2012. "People don't have enough to pay for food and rent. They just don't have enough to live, because a lot of them don't have a job."

The hardship in Finland, which has been mired in recession for the past three years, upends the notion of the eurozone crisis being just about free-spending southern Europeans. It has also infected parts of the austere, triple-A rated north. Many policy makers and business people talk of the Nordic country being in a depression that exceeds its crisis in the 1990s, a period Finns see as worse than the 1930s. "Finland is in very, very deep trouble," says Anders Borg, the former Swedish finance minister who is conducting a review of Finland's economy for the government. Alex Stubb, Finland's prime minister, talks of a "lost decade".

At the heart of Finland's woes is a competitiveness problem. Wage costs have spiralled higher than any other European country in recent years and it has one of the most rapidly ageing populations after Japan. Public finances are in much better shape compared with many southern European countries. But like their cousins to the south, many are beginning to bristle at the constraints of euro membership.

"The problem with a structural crisis like we have today is that there is no easy solution to it," says Bjorn Wahlroos, the country's leading businessman. "We are stuck with a domestic labour market that used to have an escape clause: that was the currency or devaluation. But the escape valve has been closed, and the consequence is catastrophic."

The problems are deep-rooted. The mainstays of the economy for decades - the forestry industry and the electronics sector around Nokia - have fallen into sharp decline. As in the 1990s, the economic problems of neighbouring Russia have spilled across the border. And Finland's post-second world war baby boom is now weighing on the country as the number of people employed starts to drop, leading Standard & Poor's last year to become the first rating agency to strip it of its triple-A ranking.

"We have been hit by various shocks at the same time. There are few, if any, countries in Europe that have had the same shocks," says Erkki Liikanen, the central bank governor.

Need for a remedy

There is a sense of malaise as Finland approaches parliamentary elections on April 19. Even as there appears to be broad agreement on the outlines of what needs to be done - reforms of everything from the labour market to healthcare, municipalities and tax - questions remain about the willingness of the country to take tough medicine.

In many European countries, the ideal formula would involve economic stimulus, especially since Helsinki's debt-to-GDP ratio is a relatively low 60 per cent. But in Finland, which became renowned among southern European countries as the main cheerleader for austerity during the euro crisis, most party leaders say more belt-tightening is needed.

There is an acknowledgment that this could hurt growth in the short run but a hope that it will make the country more dynamic in the long term, especially by trimming back the size of a state that is one of the largest in Europe.

Juha Sipila, the frontrunner to be prime minister after the election and leader of the opposition Centre party, says he wants to cut spending by €2bn a year. Finland's budget deficit in 2014 was 3.4 per cent, the first time it exceeded the EU's stability and growth pact's limit of 3 per cent since 1996, while debt-to-GDP is likely to exceed 60 per cent this year.

"I think this situation is worse than in the early 90s because we don't have any big vision at the moment . . . We haven't done the big reforms in the good times and they are very difficult to make now in the bad times," says Mr Sipila.

In some ways, the comparison with the 1990s seems favourable. Real gross domestic product fell 13 per cent from the peak in 1989 to the trough in 1993; today, it is only about 5 per cent below its 2008 high, with the economy contracting by just 0.1 per cent last year. Unemployment has ticked up from about 6 per cent in 2008 to close to 9 per cent but that is still well below the 18 per cent reached in the 1990s. Shares on the Helsinki stock exchange have risen by three-quarters during the past three years of recession while they fell by two-thirds during the 1990s crisis.

But there was a clear course of action for the problems in the 1990s: purging lenders of bad loans, government intervention. The prescription for the current crisis is not as clear. The gradual economic downturn also means some Finns may be oblivious to the scale of the challenge, say some policy makers.

Pasi Sorjonen, an economist at Nordea, the biggest bank in the Nordic region, says Finland is in the midst of a depression and is heading for its fourth consecutive year of recession. The government will need to cut taxes and spending at the same time, he argues. "Putting the house in order is the first and most important thing that the government must do," he says. "If at the same time they cut taxes they help healthy businesses. Whereas they now harm the healthy businesses just to protect jobs in the public sector."

Competitiveness crisis

Finland could be helped by the lower oil prices and weaker euro but it is battling formidable long-term trends. Since 2008, Finland has lost competitiveness against all EU countries as its wage costs have spiralled. As the unit labour costs of Ireland and Spain have fallen, Finland's have increased by about 20 per cent, according to ING.

Figures from the Conference Board, a US business group, are just as damning: from 2007 to 2012 Finland's unit labour costs in manufacturing rose by 6.3 per cent a year, faster than any of the countries surveyed except Australia and Japan. At the same time, Finland's productivity fell by 3.9 per cent a year, far more than any other country.

Mr Wahlroos is scathing about the big pay increases, especially in 2007-08. He adds that the average Finn works about 50,000 hours in his or her lifetime, compared with 70,000 for Germans, 85,000 for Americans and more than 100,000 for many Asians. "We are losing jobs not just to China and India but also Germany or Spain," he adds. Like others in Finland, he pins the blame at least in part on the euro.

As in Greece, which saw the biggest pre-crisis rise in labour costs, Finland previously dealt with the problem by devaluing its currency. Now its options are tougher. "In terms of competitiveness, their cost level is the same as France, 20 per cent more than Germany, 15 per cent more than Sweden. To take back some 10-15 per cent in competitiveness is an enormous challenge. There is a huge need for structural reforms," says Mr Borg.

The government - once a six-party coalition that is now down to four parties - has tried to change this by pushing up the retirement age and pulling down the age for young people to stop studying and start working. But the trend in recent years is ever downwards, with the employment rate falling from 74.4 per cent of people aged 15-64 in June 2008 to 66.7 per cent this January.

Without further action, it could weaken more. The proportion of Finland's population that is of working age is due to fall from 65 per cent in 2012 to 58 per cent by 2030. Over the same period, the over 65s are expected to rise from 18 per cent to 26 per cent.

Mr Liikanen concedes that the key structural issue is not unemployment but lower employment. While he is adamant that Finland is not in a depression, the central bank governor says global growth is not nearly as supportive of Finnish attempts to exit recession as it was in the 1990s. "The capacity to act is what will be tested today."

The consensus is that the government - in charge since 2011 but with a prime minister in the job for less than a year - has not done a great job at halting the decline.

Mr Stubb acknowledges the problem. "I think the truth should always be told: I don't think this has been a successful government," he said last month.

In other countries, this might lead to rich pickings for populist parties, particularly anti-EU ones such as the Finns Party, formerly known as the True Finns. But in recent polls they are performing less well than in 2011, at the height of anxiety over the Greek crisis. Timo Soini, the party leader, is still hopeful of joining a new coalition, blaming government inaction and the single currency for Finland's predicament.

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Coalition focus

If Mr Sipila wins the election - his Centre party remains about 8 percentage points clear off its rivals - he is likely to form a more compact coalition consisting of one or two of Mr Stubb's National Coalition party, Mr Soini's Finns and the Social Democrats.

Mr Sipila, who made millions in telecoms and bioenergy, says he wants to run the government more like a business with a smaller cabinet that functions like an executive board, implementing five big ideas. He points with distaste to the fact that the public sector accounts for 58 per cent of GDP while taxes are equivalent to 46 per cent of GDP. "The number one priority is to find a growth path again," he adds, saying the main solutions include streamlining the healthcare system, shrinking the public sector and creating 200,000 new jobs in the next decade.

Many in Finland invoke the concept of sisu, a term that means courage or perseverance, much on display in the 1939-40 winter war with the Soviet Union, for the reason the country will eventually pull through. Growth this year could well be slightly positive.

There are plenty, however, who think the effort involved may be more than many Finns appreciate.

"Once you have gone far enough down the road to depression or whatever you want to call it, the remedies you need to come up with tend to be too distasteful to those who think there is a welfare state solution," Mr Wahlroos says.

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