Opinion: Real economic challenges come after Finnish elections

During a recent visit to Helsinki, I noticed that Finland is haunted by a brooding sense of crisis. The past record of solid economic growth has stalled.

The economy has been in recession for three out of the last five years. This is the context for the general election on Sunday (19 April).

The incumbent government is a four-party coalition, consisting of two big parties, the conservative National Coalition Party, and the Social Democrats, and two small parties, the Swedish People’s Party and the Christian Democrats.

The key question is whether the Centre Party - which is expected to emerge as victor on Sunday - can reverse Finland’s economic decline.

Between 2011 and 2014, the Finnish government was led by conservative Prime Minister Jyrki Katainen i, currently vice president of European Commission. He spoke of the need for structural reforms but was not able to execute them.

When Katainen left for Brussels, his foreign minister Alexander Stubb i was chosen as the chair of the party and thus PM last June.

The conservatives hoped he would create momentum ahead of the elections. That did not happen. In the past nine months, support for the conservatives has plunged from 22 percent to 16 percent, and soared to 24 percent for the Centre Party. The latter is led by Juha Sipilae, a politician and businessman.

In Finland, the centrists offer an alternative to the conservative right and the socialist left, by appealing to the urban middle class, rural conservatives and those voters who are increasingly critical of Brussels but not willing to join the eurosceptic and nationalist Finns Party.

Today, the eurosceptics, led by Timo Soini, are supported by 17 percent of Finnish voters, almost as many as the Social Democrats, led by Antti Rinne, current finance minister. The rest is split among the leftists (8%), Greens (8%), the Swedish People’s Party (4%) and the Christian Democrats (4%).

According to pre-election polls, 60 percent of the Finns expect the Centre Party to play the leading role in the next government, while nearly as many anticipate the Social Democrats to be the second government party.

To create a majority government, Sipilae also needs The Finns, however.

Eclipse of export-led growth

Not so long ago, economist Paul Krugman criticised ex-EU economic chief Olli Rehn, who oversaw Brussels’s austerity policy, for having misguided “Rehn of terror” policies; now Rehn is running for Finnish parliament as a (very liberal) centrist.

And now Finnish people are likely to have a taste of their own conservative austerity medicine.

The economic landscape is dire.

Credit agencies expect growth to plunge to 0.5 percent in 2015. Unemployment exceeds 10 percent. Vital sectors of the economy are deteriorating.

Not so long ago, Finnish electronics still accounted for more than 20 percent of exports. Today, its share is barely 11 percent. Instead, Finnish exports are dominated by metal-engineering (32%), chemical industry (25%) and forest industry (20%).

As even thriving core economies in the Eurozone are slowing down, export-led growth is lingering across the region.

The current account deficit in 2011 was the first in nearly two decades - but not the last.

What’s worse, 80 percent of Finnish exports continue to be dominated by Europe.

With foreign direct investment, the reliance on Europe remains even more overwhelming.

Finally, as wages are falling and both household and corporate investment plans are postponed, Finland is beginning to suffer from demographics - it has Europe’s fastest aging population.

Standard and Poor’s docked Finland’s rating to AA+ in October 2014.

Moreover, the EU sanctions on Russia have had a particularly adverse impact on Finnish exports to and investments in Russia.

Deepening bilateral friction has not helped matters. On Sunday (12 April), Russia’s foreign ministry said that moves by Finland and Sweden toward closer ties with NATO are of “special concern.”

The keys to Finland's future

After the election, the Centre Party - if it wins - holds the key to Finland’s future. Incremental changes are no longer enough. The priorities should be reforms for growth, determined but gradual, fiscal consolidation, as well as measures to address lingering financial stability concerns.

In order to sustain its high living standards and generous social model, Finland can no longer price itself out of global competition.

As Finland’s first postwar president Paasikivi put it: “The beginning of all wisdom is the acknowledgement of facts.”

After seven years of missed opportunities, Finland’s incoming leaders will need adequate political consensus to carry out the needed structural reforms.

Dan Steinbock is research director of International Business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore)