The Eurocrisis and Finnish industrial relations

In all the turbulence of the Eurocrisis, it is useful to ponder what effects this crisis might have on the Finnish system of industrial relations. As these things go, there is a lot of speculation and a fair amount of educated guesses based on data (such as what I wrote here). But there are at least two central issues that determine the possible influence of the Eurocrisis on Finnish industrial relations.

  1. Finland is a small, open economy
  2. Germany remains the main export market for Finland

It should be no secret anymore that even the German economy is starting to sputter as a result of the Eurocrisis (see here). This is not a big surprise, as German economic growth has been for a long time based on the gigantic trade surplus with the rest of Europe, which was made possible by the ECB’s monetary policy. On this issue, even German media are catching on, finally, such as in the August edition of Cicero. The dramatic decline in growth (i.e. simply shrinkin economies) in Greece, Spain and Italy also mean that Germany can export less to those countries. Many have critized Germany for a weakness of domestic demand, and this in combination with disaster in the periphery of the Eurozone most likely means that Germany is also going to import less.

As Finland is a small open economy, changes in its export-markets can have dramatic effects. In this post I already showed the weakening trade balance for Finland. With a not at all unimaginable decline in German demand for Finnish products, it is likely that sooner rather than later this trade balance will turn into a deficit, i.e. that Finland imports more than it exports.

A decline in exports will predominantly affect the manufacturing sector, but also the IT sector comes to mind. But to focus on the manufacturing sector for the moment – although this sector does not anymore represent the largest share of workers in the economy, it is still very important in Finnish industrial relations (although this may be changing as well). Accordingin to Pohjala (2009) the greatest increases in labour productivity (as part of overall labour productivity changes) happened in the forest industries and electro-technical (and other) industries. Significant has also been the relative contribution of distribution services in overall productivity growth. Other services don’t contribut much or have shown a decrease in productivity in the period 2000-2007. Here, it may be seen that there is a large difference between manufacturing and services, where the latter are mostly consumed domestically and the former mostly consumed abroad (yes, this is a great simplification).

Edward Hugh presents a new or altered concept of international competitiveness of countries here,  which means that countries are internationally competitive if they have a large enough export sector to drive economic growth. Given the trade balance of Finland and the unit cost and productivity data, it is maybe possible to assess this issue, which will be of vital importance for Finland’s future, including its welfare state. To do this, below some charts based on Eurostat data are presented. The combination to achieve in terms of these measures is (according to Hugh) a stable Relative Labour Unit Cost curve and an increasing (labour) productivity curve. Although Hugh states that countries with a high median population age tend to be export-dependent, the Finnish median age is not presented because I could not easily find this data from Eurostat, but it can be assumed that Finland, like other European countries is experiencing a grey wave, which would mean a rising median age. In the reason presented in the alternative definition of international competitiveness, export-dependency is a fairly dangerous situation for a country that has an aging population (the reasoning being that an aging population has less demand for credit and therefor ‘hurts’ domestic demand).

Labour Productivity for Germany and Finland:

It is clear that after the 1990s economic crisis Finland could catch up quickly, and this is shown in the steeper curve for Finland. For the period since 2007 it is not clear, both Germany and Finland seem to have a similar rise in productivity as before. But Finnish productivity dropped a lot more than German.

The curves for the Real Unit Labour Curves look a bit similar, and in any case the way Hugh indicates they would preferably look: since 1995 largely stable or even falling. The jump in unit labour costs in Finland since 2007 is worrying though, since this has the potential to suddenly make the Finnish economy less competitive. In any case, the fact that the Finnish values have so clearly risen over the German values (the country’s main export market) is case for concern, as it makes Finnish products more expensive.

So, what does this all mean for Finnish industrial relations? For the export-sector, not much good. As can be seen from the trade balance figure in the older post, Finland’s export position is sputtering. This may in part be because of general lack of demand, but no doubt the rapid rise of unit labour costs and therefore the cost of Finnish products abroad. My best guess, for the moment, is that in coming negotiations the employer federations will be strongly against any kind of centralized agreement (whether or not they call it that or not, like the one recently concluded), because the needs for wage restraints (from the point of view of the employers) is much greater for export-oriented sectors than domestic (service) sectors. Thus, when the current ‘frame agreement’ expires and there are new negotiations, and if the Finnish trade balance has indeed gone negative, don’t expect similar results this time around, because in the Finnish economy there are different interests and it might be the employers who disagree more with one another over wage issues than employers and labour unions, in particular when keeping in mind the relatively high inflation in Finland.

But it all depends on what happens with the Euro. I haven’t even started considering the potential fall-out from the crisis to Finnish banks and from there to companies.

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2 responses to “The Eurocrisis and Finnish industrial relations

  1. Pingback: The expected noise about the framework agreement is here already | Arjen Polku

  2. Pingback: What should be done? | Arjen Polku

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