Tag Archives: Inflation

On the Country-specific Recommendations for Finland in the context of the European Semester

Last week, a slew of reports in the context of the European Semester 2013 came out. Their goal is to point out what to do to restore growth and jobs and ‘The recommendations are based on a thorough assessment of every Member State’s plans for sound public finances (Stability or Convergence Programmes, or SCPs) and policy measures to boost growth and jobs (National Reform Programmes, or NRPs).’ The reports and associated documents can be found here. I apologize that most of the links are in Finnish.

There is a lot of material here to discuss, and it probably takes time for me to work through it all – even regarding just Finland. But this bit caught my attention:

The next wage agreement should aim for lower wage growth, in line with productivity growth.
Negotiations between the employer associa
tions and trade unions will start in 2013.
Given the current state of the economy, the
employer associations are hinting towards a
nominal wage freeze as their starting position fo
r the negotiations. This would help to bring
wages back in line with productivity levels.
Productivity developments should be considered
explicitly in each wage negotiation round. Sectoral agreements as opposed to one centralized
agreement could help ensure wage growth does
not outpace productivity growth in one of the
sectors. The approach of the 2007 round of sectoral
agreements however should be avoided, where the first concluded sectoral agreement was taken up by the other sectors as a minimum benchmark, with each sector outbidding the other sectors’ wage growth.
First of all, this recommendation is a bit weird, because research by Traxler et al (2003) shows that it is quite possible that exactly at the sectoral level wage drift is most likely to happen, if there is not some kind of mechanism to keep sectoral wage increases in check.  The characterization of Finland’s 2007 bargaining rounds is more like the Finland of the 1970s and 1980s than of current Finland – because this ‘outbidding’ might have been fine as posturing, but given the apparent lack of strikes (apart from the health care sector!) it is not at all clear that there was any success in trying to get higher wages.
No, 2007 was characterized, like earlier periods of sectoral bargaining, by an ‘opening’ by the main industry sectors, whose agreed wage increases were then taken as a kind of standard for other sectors. As shown in the article here, the health care sector was the big exception, and a story of its own. But the people who wrote the Country Specific Report for Finland really stretch the truth by stating that the first collective agreement was taken ‘by the other sectors as a minimum benchmark, with each sector outbidding the other sectors’ wage growth.’ And while the wage increases (in nominal terms!) were relatively high, so were those in Germany at the time. Furthermore, it should be remembered, that Finland saw at the time quite rapidly rising inflation, so in real terms the developments were more or less the same as before. In picture of the link there is a sharp uptick in the real wage, which is entirely due to a lag in nominal wages relative to the sharp drop in inflation following the start of the Eurocrisis in 2008 – which was of course unexpected. As can seen in this graph, which is the most recent Statistics Finland has, it can be quite clearly seen that real wage developments are not something to write home about.
If employers really go for the zere-wage-growth strategy (nominal!), or even wage reduction, then with the (again) increasing inflation in Finland, employees will soon (again) face wage deflation. With the recent news by the Bank of Finland, of forecasting faltering internal demand, i.e. consumer spending, it is clear that aiming for lower wages will harm the Finnish economy more than it helps exports – especially since Finland’s main export sectors (metals and wood/wood-products) do have competitive advantages regardless of supposedly high unit labour costs (according to the EU report, that is). As I say in Finnish here, the Finnish labour union federations can do a lot worse than opening wage negatiotations with a goal between 2 and 4 percent wage increases, and that is just taking into account expected inflation.
The bottom line: the Country Specific Recommendations for Finland seem to some extent very political in their intended effect on Finland’s industrial relations system, something which Thorsten Schulten also has written about in the context of the Troika.
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It’s Domestic Demand, Stupid!

There are many ways to communicate fairly difficult issues. The case against austerity is one; again and again the ‘families tighten their belt thus also the state must do so’-argument comes up. This argument has been defeated as many times. Here you can see a ‘layman’s argument against austerity’. But in my opinion this new post by ‘A Gloomy European Economist’ puts the argument much clearer. To quote from the main points of his graph:

What is this figure telling us? Many things, actually; but I’d like to point out just three:

  1. The first is that while the US have recovered and are now above their pre-crisis GDP level, the EMU is still more than 3% below its level of January 2008. We are not going to see the pre-crisis level of activity for at least 2 or 3 years, as the Commission just revised downwards its (negative) growth forecast for 2013 (not surprising, and bound to be further revised, as the readers of this blog may know).
  2. Domestic demand is down almost 6%, mostly because of investment (-19.1%).It makes no sense claiming otherwise: this is a Keynesian (sorry for the bad word; should I rate this post R?) aggregate demand deficiency crisis. On the contrary, in the US, robust consumption growth has compensated for the equally dramatic drop of investment, and as a result domestic demand is also above its pre-crisis level. As a sidenote, the dramatic decrease of investment makes one wonder what will be left of the EMU capacity to produce, once aggregate demand resumes.(my bold)
  3. The only two engines of growth, today are public consumption (!) and exports, both at around +4% with respect to the pre-crisis peak ; they compensate, unfortunately only partially, the dramatic drop in domestic private demand. Further reducing government spending, as will most probably keep happening, will lay the burden of recovery only on the external component. It is worth repeating that this small-country-syndrome, in the second largest economic bloc of the world, can only spell disaster. It is impossible to conceive a long-term reliance of our prosperity on demand coming from the rest of the world, as proponents of the “Berlin view” would like us to believe.

If you look at the picture, then indeed public consumption and exports keep the Euro area somewhat afloat. But with the intense desire to slash government spending, this might not last. I think this picture shows very succinctly why we need a Keynesian and/or MMT view of the economy very badly – if everybody cuts expenditure at the same time, how is the economy supposed to grow, or – more specifically – where is demand coming from? Mars?

While this post is very important in showing the core problem, I personally would like to see a bit more country-specific information. It is well-known that Germany has a great domestic demand-deficit, but what about Finland, the Netherlands, Austria? A recent post by Ambrose Pritchard-Evans, and earlier ones by me (referring to yet other posts) indicate that domestic demand is being killed in the Netherlands at least through austerity, private indebtedness and a stuck and plunging housing market, but as I showed here, Finnish domestic demand (at least retail) has kept up fairly well. I haven’t recently checked the numbers, but food price inflation in Finland seems to be rather high, so domestic demand may have reached its peak already.

(in general it would be nice to have a better idea of how to get key data out of Eurostat – there is so much stuff there!)

Mr. Gloomy Economist also points to the need for wage increases; at least for Germany, this is acknowledged by serious economists (i.e. from the IMK of the Hans-Böckler-Stiftung). This is a subject which I have great interest in, as it relates strongly to industrial relations and the relevance of labour unions. As I pointed out here (sorry, in Finnish), Olli Rehn warns Finland of overindebtedness (of the state, of course) and states Finland needs wage restraint. Well, as the graph shows, the index of real wage earnings has grown approximately by 2% per year, which is consistent with the inflation of the ECB target (if I understand Andrew Watt correctly).

So, in this light I eagerly await what the employers’ and employees’ federations in Finland are serving as opening bids in the run-up to the Finnish collective agreement/centralized incomes agreement -negotiations this Autumn. I expect lots of disagreement, at least.

Updated – The state of Finland in the Eurocrisis

UPDATE: these graphs are already outdated, I have to see what Eurostat can give in terms of newer data. A year is a long time in economies! And maybe in particular the stuff about the housing bubble is not accurate – I have a newer post about that here.

——

Something slightly different this time. In a reaction to this news, which says that Finnish exports suffer from the eurocrisis, I would like to present some data (all from Eurostat) on how Finland has fared since around 2007. The idea came from posts like this one by Edward Hugh, most recently about Slovenia. I haven’t managed to get completely similar data graphs, but these will do.

First of all, Finland is one of the few Eurocountries left with a triple-A status, which apparently gives it some clout regarding its wished in the ongoing resolution of the crisis (recall the demands for collateral on Greece, now repeated for Spain?). The triple-A status derives ostensibly from Finland’s low government debt, which is show below since 2007.

Finnish and German Government Debt

Although it is still much lower than Germany’s level, it is creeping upwards. But Finland is clearly one of the ‘good boys’.

Does the low interest rate of the ECB fuel a housing bubble in Finland? It does not appear to be so, at least for the aggregate, it is nonetheless a slowly upwards trend which has its own problems. But there might be a distinction between the capital area around Helsinki and the rest of Finland. I will try to figure that out using Eurostat data.

Also construction output is remarkably stable, not much affected by the eurocrisis. or showing signs of a bubble. One reason for this might be the pull of the Helsinki area, where there is a shortage of affordable housing.

But the low rates of the ECB may seem to lead to increasing inflation in Finland. This is in itself not so surprising at this moment, but it is part of the explanation of Finnish reluctance to go ‘all-in’ regarding interest rates, because these would lead to increasing inflationary pressure. A more detailed investigation of the various components of Eurostat’s inflation indicator will give a hint of the sources for the inflation, but I expect that these are mostly related to imported products (but that is an educated guess, will follow up).

This may also be seen in Finland’s worsening position on exporting goods:

As can be seen, this is a long term trend, although the crisis from 2007 onwards may have worsened this position. In a different graph, exports and imports to the EU show nonetheless that the balance is more positive, but barely so.

Finally, the primary balance of government budget shows that things have been slightly bad, but with the current government’s focus on getting the budget balanced, the budget deficit will probably soon disappear.

All in all, this is a very quick and dirty post about the current status of the Finnish economy- There are two things in particular that are worrying: inflation and the trade balance. The first has to do with the interest rate set by the ECB at a very low level, and the second with (presumably) declining demand in especially Germany and the rest of the world. Considering retail, domestic demand seems to be holding up quite well.

At least after the worst of the initial economic crisis, retail has recovered to its 2007 peak.

Many aspects of the economy are left outside this post, especially concerning unemployment and various export sectors, but the Finnish economy seems to be doing quite well still. It remains to be seen what happens to inflation and the balance of trade, though. For a small export-oriented economy it is not a good development that it might be importing more than it is exporting.

UPDATE:

I toyed around with Eurostat some more and I extracted more statistical information. First up is GDP per head, which does look good still for Finland:

Source: Eurostat

Two things do stand out however: the financial crisis in the early 1990s was indeed very severe and not unlike the present one (a lot could be learned from how Finland and Sweden dealt with their banking crises). Second, although the path of growth has been resumed it nonetheless looks like the Finnish economy is performing under its full potential (if we’d extrapolate the trend from pre-2007, it is clear the current growth track is at a lower level). But not bad at all.

Unemployment then. Finland has a union-managed system of unemployment funds, which means there is a large incentive to belong to a union (you get up to 500 days of a certain percentage of your last salary, more or less). This does not affect the level of unemployment, but it does reduces the human suffering.

Source: Eurostat

As can be seen, in the early 1990s the unemployment rate reached very high levels, not unlike what is seen in Spain or Greece (although those are worse in the present time). But although the unemployment rate has dropped since then, it is still quite high and seems to have stabilized around 7-8 %. Furthermore, the present crisis has again sent the rate upwards, at least temporarily. Behind this relatively high unemployment rate lies a complex story of economic restructuring which has to be told elsewhere, but basically it is from manufacturing to high-tech services (think Nokia, F-Secure). This has led to a large proportion of long-term unemployed, that is unable to find work since their jobs don’t exist anymore.

Source: Eurostat

This graph, which also shows the seasonal variation, shows that in Finland, even nowadays some 20% of unemployment is long-term unemployment. This is a potential problem in terms of the welfare-state but also politically, because these people are not so likely to have confidence in the current political parties, which, after all, haven’t managed to create policies that get them back to work.