Finnish anti-crisis prescription

The unfurling worldwide financial crisis has affected a lot of countries. Many countries, including even European Union member states, have already turned to international financial organizations for help. At the same time, there are quite a few countries which have almost escaped the current crisis. Finland is one of them. How can this be explained? A strong Finnish economy and financial system? And can the experience of Finland, which once suffered from a banking crisis, be of use in Ukraine which has been hit by the crisis and even made a deal with the International Monetary Fund on an aid package. This is the subject of an exclusive interview with Tapio MUTIKAINEN, director of the international affairs secretariat at Finland‘s Ministry of Finance.

Mr. Mutikainen, the impression is that, unlike many other countries, Finland has escaped the financial crisis. In any case, there are no media reports that your country is having a financial or mortgage crisis.

“This is true. There are several reasons why it is so. You might know that about 15 years ago our country experienced a grave banking crisis. This occurred in the first six months of 1990. The GDP dropped by 12 percent within three years. The banking crisis took very much time and money. We had to pay almost seven percent of the GDP to offset the losses of banks. We learned a major lesson from that crisis. Now Finnish banks are very efficient and competitive. In this respect, the economic situation is good in the country. We have had no risk loans. This is why the financial crisis has not yet had a very negative effect on the Finnish banking system. It should be noted that almost 80 percent of the Finnish banks belong to Swedish and Danish banks. This is why all Scandinavian banks are very efficient and are in a superb shape. This does not mean that the global recession has bypassed us. I would also like to emphasize that joining the euro zone helped us stabilize the economic situation and domestic prices. As Finland is a small export-oriented country, it depends very much on foreign demand.

“Should any external shock occur, there will certainly be a heavy impact on the domestic situation. Now that we are part of the euro group, the domestic situation is stable and prices rise quite slowly. It is a very important factor.

“As for the public sector, the situation in the European Union and in the euro zone in general if far from the best. This can be explained by the fact that there has been a 4-to-5-percent surplus in this sector over the past seven or eight years. This is also important, and it shouldbe taken into account.

“When passing the budget, we set the upper limit of budgetary expenditures for the next four years. This made it possible to improve control over the budgetary sector. And this was a very successful step.

“Besides, we should note that Finland is the world’s second largest spender on research and development after Sweden: we spend 3.5 percent of the GDP on this. Sweden spends 4 percent. As Finland is a small country, it is important that it should be flexible. To cushion or quickly adapt to an external shock, there should be a very flexible market of commodities, labor and finances. In this case the economy will quickly return to the norm, as far as possible.

“I must day that we are also beginning to feel the emerging global recession. According to the latest forecast in Finland, economic growth will stop the nest year. The Bank of Finland predicts that the growth will slow down in 2009 and be just 0.5 percent of the GDP. In 2010 the growth will be 0.7 percent of the GDP. In other words, Finland will also experience a slump next year.

“Finnish businesses and households will have to step up repayment of their loans. There are many dismissals today at enterprises. It is forecast that the unemployment level will increase from the current 6.3 percent to 7.2 percent in the next year and to 7.7 in 2010. The Finnish government is well aware of what is going on and is preparing an economic incentive package that makes up 1.5 percent of the GDP. This is how we are trying to alleviate the industrial slump. But we cannot avoid this slump altogether. So we will have to carry out structural reforms to restore the growth, and we expect this to happen in the second half of 2010. But this only a forecast, and we do not know exactly when this restoration will begin.”

Mr. Mutikainen, what do you think can be a prescription for Ukraine to reduce the negative effect of the current crisis and not to be vulnerable to such financial crises in the future or, maybe even to be able to avoid them?

“I am not an expert in the economy of Ukraine. All countries have specifics of their own. But I know that Ukraine and the International Monetary Fund recently signed a document that allowed your country to receive a $16.4-billion loan. I would like to say the following in this respect. It is very important to have trust in the governmental program and this program should be sustainable. Politicians should also be involved in drawing it up. The grassroots should trust the economic strategy. For, to be able to buy new houses and cars, people have to borrow money from a bank. Entrepreneurs, too, should rely on money in their strategy in order to make investments. I want to emphasize that it is extremely important to trust the policy of anti-crisis measures. Policy-makers should rely on this strategy, and experience very often shows that things may go not so well in the first year or two, when stabilization measures are being taken, but it is still more difficult to maintain control in the third year.

“This is why I stress that there should be a sustainable political anti-crisis strategy. Concurrently, structural reforms should be carried out con the commodity and labor market and in the financial sector. Structural reforms should support the strategy. For example, when we going through a very difficult period of recession in the early 1990s, we adopted an export-growth strategy. So we had to devalue the Finnish mark to increase our competitiveness. We also had to slash the inflation rate. And when we managed to increase our competitiveness, we also managed to stabilize the balance of payments. And we thus proved our responsibility on the national level. This allowed us to cut the interest rate, which enabled entrepreneurs to make investments. And investments helped increase employment. Accordingly, this led to the revival of the domestic market, which in turn increased consumption. The increased consumption triggered the growth of tax earnings. We managed to balance public finances. It was also important to ensure stability of the financial system. This means the necessity of proper supervision over banks, accountability, and transparency. The banking balance should rest on a sound basis. I think the above-mentioned rules are important.

“In general, the anti-crisis program agreed upon by the IMF and the Ukrainian government looks very good. All you have to do is put this strategy on a sustainable basis in order to enhance trust in the policy. This may launch a cycle of economic revival.”