Not even a political crisis can shake investors’ confidence in Finland.
A relatively unproductive workforce and years of economic underperforming might have damaged most eurozone members. Yet Finnish bonds have remained competitive throughout, with the difference between the country’s 10-year debt and similar maturities in Germany averaging less than 20 basis points — the narrowest spread among the nations that share the single currency.
Now that the government has overcome the impasse caused by last week’s coalition shakeup, winning a parliamentary vote of confidence on Tuesday, Prime Minister Juha Sipila can get on with the business of restoring competitiveness, say analysts at BMI Research, a unit of Fitch Group.
“Definitely the biggest challenge ahead is the catching up in labour costs and productivity,” Lorenz Unger, an analyst at BMI, said in an interview. “With the government now back on a stable footing,” Unger said BMI sees “Finland moving on a fairly strong growth trajectory in 2017.”
A fondness for fiscal prudence, which has helped keep public debt levels relatively low through periods of recession and muted growth, means investors still consider the Nordic nation a haven.
Finland never faced “the risk of a government coming in that would say ‘we want to open the taps’,” said Lucas dos Santos, BMI’s head of Europe country risk.
“There’s never been a blow up in terms of investor confidence,” despite the fact that the economy “has performed as badly as some of the weaker economies.”
Such stability means Sipila’s near-resignation last week caused scarcely a flutter on the bond market.
“Finland has a track record of maintaining prudent fiscal policies that resulted in relatively low debt levels pre-crisis,” Moody’s Investors Service said in a report. “Although the deterioration in fiscal metrics since 2007 has been notable, there is still a broad political consensus in favour of fiscal consolidation and debt reduction.”
A 2016 labour pact designed to lower unit labour costs by about 4% and freeze wages until the end of this year is already showing signs of having bridged part of the gap with trade rivals Germany and Sweden.
Exports are increasing again and the fastest economic growth since 2011 has helped quash any talk of leaving the euro.
In any case, going back to the Finnish markka would do little to fix Finland’s competitiveness problems, according to BMI.
“It’s unclear whether, if Finland left, their new currency would be substantially weaker,” dos Santos said. “Despite the challenges facing the economy, it’s still in the upper end in terms of the core versus periphery debate.”
Rather, now is the time to push ahead with unpopular economic reforms targeting key welfare services and the labour market.
“Finland is in a sweet spot in a sense,” dos Santos said. “These liberalising reforms tend to be painful in the short term, but the best time to do them is during a general economic upswing” as that “can smooth the transition.”




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