At the height of the European sovereign debt crisis, internal devaluation—economists’ jargon for “cutting wages”—was the recipe of choice for addressing the woes of the eurozone’s periphery.
Several years on, governments with a view of the Mediterranean or the Atlantic have tried to boost competitiveness with mixed results. Crucially, those efforts have come at a high political price. Just ask the leaders of mainstream parties in Greece, Spain Portugal or Italy, Bloomberg reported.
Now, Finland is having a go. After three years of recession, and with little scope for maneuver on the spending front (the government is holding talks Tuesday on how to find extra savings worth €400 million or $456 million), the ruling coalition says Finland must lower labor costs or face more credit rating downgrades.
So, how do you cut your workers’ salaries without stoking anti-EU sentiments, provoking massive unrest or suffering the ultimate punishment—being ousted from power?
4-Point Plan
Here’s how it’s being done in Finland by the center-right coalition government of former businessman Prime Minister Juha Sipila and his Brussels-savvy finance and economic ministers, Alexander Stubb and Olli Rehn:
1. Persuade unions that an overall cut in labor costs of around 5% is in their best interest, since it will eventually fuel growth by boosting exports, then gently bash their heads together with those of employers until they agree on a plan and a deadline—in this case June 2016
2. Threaten to impose measures by law if they don’t come up with a solution, but brace yourself for compromises. The Labor Pact now being completed involves shifting the onus of some social contributions to workers from employers; persuading people to work an extra 24 hours a year at the same pay; and cutting the public sector’s holiday bonuses by 30%
3. Get unions and employers to agree to a temporary wage freeze—for a minimum of one year
4. Increase labor market flexibility by, for example, creating so-called “time banks,” which help redistribute work when it’s most needed.
In due course, those measures should lead to rising employment and extra fiscal revenue that can be used to restore purchasing power and obtain re-election.
So far, most Finns have responded to the austerity drive in typical phlegmatic style, causing only limited disruptions to economic activity. And unlike other cash-strapped governments in the eurozone, Sipila’s government still retains some degree of popularity (the fact that Finns continue to enjoy a relatively strong social safety net certainly helps allay many concerns).
Still, there’s plenty of time for things to go wrong before the next elections are due, in 2019.
There’s a very concrete risk that reluctant unions may eventually water down and even sink the deal. Moreover, even if labor costs are actually cut by 5% (the current calculations point to around 4%), there’s no guarantee that reducing labor costs will translate into greater exports, as the demise of Nokia’s consumer electronics business has shown.
