This is from an excellent article from Bloomberg:
A chronically depressed economy, rising unemployment and an aversion to free-market reforms. Sound like a familiar European tale?
But it’s not Greece, Spain or Portugal. It’s Finland.
As the indebted and ailing countries in the euro region’s southern rim struggle out of their six-year crisis, some with more success than others, Finland is succumbing to its own.
Its economy, which has contracted every year since 2012, was the worst performer in the common-currency area in the first three quarters of 2015, according to Eurostat data. Its deficit is relatively higher than Italy’s, despite being ranked fourth in the European Union in terms of how much taxes and social charges it demands from its citizens, and its unemployment rate exceeds those of its Nordic neighbors. The latest data published Wednesday by Statistics Finland showed the jobless rate rising to 9.2 percent in December, the highest level since June 2015.
I have written a lot about Finland (see for example here, here, here and here). It is really a textbook example of how to drag out a recession – no currency flexibility and too tight monetary policy (euro membership), extremely rigid nominal wages (collective bargaining and overly generous welfare benefits) and quite a bit of bad luck (Russian recession and negative terms-of-trade shocks – primarily in the pulp and paper industry). And of course the demise of Nokia…
It is not really that different from Denmark. Denmark has just been a lot more lucky in terms of terms-of-trade shocks (LEGO and Novo are doing great, Nokia has died), but the pegged exchange rate regime is causing the same problems for Denmark as euro membership is for Finland.
That said, Denmark seems to have significantly higher wage flexibility and Danish labour unions seem to have understood much better than their Finnish counterparts that when there is no currency flexibility then you need downward wage flexibility.
Denmark and Finland’s lacklustre economic performance is particularly striking when you compare it with the performance of Sweden, Norway and Iceland – three other Nordic, but with floating exchange rate regimes.
I have used this graph before, but I think it tells the importance monetary policy quite well.
So either the Finns have to leave the euro or hope for a lot more monetary easing from the ECB and then of course it is time for Finland to scrap the 1970s style collective bargaining system. It is a job killer.