Crisis Hangover Traps Best-Rated Euro Nation as Jobs Disappear

Crisis Hangover Traps Best-Rated Euro Nation as Jobs Disappear

As the euro area surfaces from its worst crisis on record, the bloc’s best-rated member and a key proponent of austerity is losing jobs and gaining debt.

The challenges facing Finland — a stable AAA rated economy — are “historic,” Finance Minister Jutta Urpilainen said Jan. 10 in Helsinki. “I would like to promise that the euro crisis will end this year, that Finnish structural change in industry will stop and government-debt growth will halt. Unfortunately, I can’t.”Finland, which has topped euro-zone credit rankings since Moody’s Investors Service cut Germany’s outlook in 2012, is now in a “depressed” state, Nobel Laureate Paul Krugman said last week during a Nordic tour. He blames the administration of Prime Minister Jyrki Katainen for peddling austerity policies that have undermined demand while failing to reduce the government’s debt load.

Finland’s fate underscores doubts about the value of driving policies that focus on debt reduction while an economy is losing jobs. The nation is one of eight in the 18-member euro area that saw its economy contract in both 2012 and 2013, according to the European Commission. The bloc’s jobless rate remains at a record 12.1 percent, with youth unemployment at 24.2 percent in November, Eurostat estimates.

Jobs Lost

Now, Katainen’s six-party coalition says it risks breaching the European Union’s debt requirements, which limit public borrowing to 60 percent of gross domestic product. Unemployment rose to 7.9 percent in November from 7.4 percent a month earlier, Finland’s statistics office estimates. An indicator tracking GDP fell an annual 0.6 percent in October.

“Finland is still quite significantly depressed,” according to Krugman, who questions the value of sacrificing an independent monetary policy for euro membership.

Finland’s economy lags behind neighbors Sweden and Norway, export-led countries that chose to remain outside the euro. Sweden’s buoyed by domestic demand and Norway is shielded by the world’s largest sovereign wealth fund managing $820 billion in investments built from the country’s oil and gas revenue. Even as Norway’s economy slowed last year, projected growth of 3 percent in the mainland economy this year far exceeds the 1.3 percent forecast for Finland, according to the Organization for Economic Cooperation and Development. Sweden will expand 2.3 percent, it said.

Industrial Decline

Katainen’s budget cuts have coincided with a decline in Finland’s biggest industries. Nokia Oyj (NOK1V), once the poster-child of Finnish ingenuity, capped years of losses by selling its flagship mobile phone operations to Microsoft Corp. in 2013 as the nation loses out on technology growth.

Another key provider of Finnish jobs, the forest industry, has floundered as paper mills are shuttered and books and magazines get replaced by the electronic word. That’s pushed Europe’s two biggest papermakers, Stora Enso Oyj (STERV) and UPM-Kymmene Oyj (UPM1V), to cut staff in their efforts to survive.

Meanwhile, Finland is at least half a decade behind Spain and Portugal in matching pay with productivity as it drops behind southern Europe in boosting exports, the Research Institute of the Finnish Economy ETLA said in August.

Finland’s economic plight has forced policy makers to review their commitment to welfare. And while Urpilainen says her Social Democratic Party has chosen to defend Finns’ rights to state-paid benefits, she says her country “will have to find answers to welfare society challenges and figure out what kind of a welfare state is possible in the future.”

“Globalization and the international division of labor have had an impact, as have technological advances and increasing automation,” Urpilainen said. “These are a challenge to the Finnish labor market.”

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net