Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Finlandand delivering a Council opinionon the updated Stability Programme of Finland, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: Finland, budget deficit, economic policy, employment policy, pension scheme, social rights

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 805 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Finland 

and delivering a Council opinion 

on the updated Stability Programme of Finland, 2011-2014 

{SEC(2011) 734 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Finland 

and delivering a Council opinion 

on the updated Stability Programme of Finland, 2011-2014 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  European  Commission's 
proposal  to  launch  a  new  strategy  for  jobs  and  growth,  Europe  2020,  based  on 
enhanced coordination of economic policies, which will focus on the key areas where 
action 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

On 13 July 2010, the Council adopted a recommendation on the broad guidelines for 
the economic policies of the Member States and the Union (2010 to 2014) and on 21 
October  2010,  adopted  a  decision  on  guidelines  for  the  employment  policies  of  the 
Member States,3 which together form the “integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

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3  

OJ L 209, 2.8.1997, p. 1. 
OJ C , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes. 

On 25 March 2011, the European Council also invited the Member States participating 
in  the  Euro  Plus  Pact  to  present  their  commitments  in  time  to  be  included  in  their 
Stability or Convergence Programmes and their National Reform Programmes.  

On 6 April 2011, Finland submitted its 2011-2014 Stability Programme update and its 
2011  National  Reform  Programme.  In  order  to  take  account  of  the  interlinkages,  the 
two programmes have been assessed at the same time.  

At  the  trough  of  the  global  economic  crisis,  Finland  experienced  a  very  steep  fall  in 
GDP,  given  that  the  Finnish  economy  has  traditionally  been  reliant  on  the  export 
performance  of  its  main  industries.  In  2009,  GDP  contracted  by  8.2%,  driven  by  an 
exceptionally steep fall in exports (20% fall in volume) and related adverse confidence 
effects on investment. The unemployment rate increased by about 2 percentage points, 
rising from 6.4% of the labour force in 2008 to 8.3% in 2010. The economic recovery 
has  been  strong,  with  GDP  expanding  by  3.1%  in  2010,  sustained  by  both  domestic 
demand  and  a  rebound  in  exports.  After  a  brief  dip  in  2009,  real-estate  prices  and 
housing construction volumes rebounded rapidly to above the pre-crisis levels, raising 
some  concern  about  excessive  expansion  of  the  real-estate  market.  Finland  emerged 
from the economic crisis with a general government deficit at 2.5% of GDP in 2010 
and debt at 48.5% of GDP. 

Based  on  the  assessment  of  the  updated  Stability  Programme  pursuant  to  Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underlying  the  programme  is  plausible  for  2011-2012,  but  slightly  too 
favourable thereafter. For 2011-2012, the macroeconomic scenario is in line with the 
Commission services' Spring forecast. For 2013-2015, the programme projects growth 
of  about  2%  of  GDP,  which  is  slightly  above  the  potential  growth  estimate  of  1.5% 
and could therefore be subject to some downside risks. The objective of the budgetary 
strategy  is  to  bring  the  deficit  down  to  0.9%  of  GDP  in  2011  and  0.7%  in  2012, 
reflecting the cyclical improvement in the economy and some consolidation measures 
already  decided  by  the  previous  government.  However,  the  Stability  Programme 
update  does  not  plan  any  further  fiscal  consolidation  over  2013-2015.  Risks  to  the 
budgetary targets appear to be balanced. The most notable risk factor stems from the 
global  macroeconomic  environment,  which  has  traditionally  had  a  strong  impact  on 
the export-reliant Finnish economy. 

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(9) 

The  latest  programme  update  does  not  envisage  making  use  of  the  forecast 
improvement in economic conditions for budgetary consolidation in the medium term. 
While the medium-term objective (MTO), set by the Finnish authorities of a structural 
surplus of 0.5% of GDP, is projected to be achieved in 2011, in the following years, 
the structural balance is set to fall below the target.  

(10)  Taking action to counter the effects of population ageing has been one of the priorities 
of successive Finnish governments. Reflecting these efforts, Finland appears to be at 
medium  risk  with  regard  to  the  long-term  sustainability  of  public  finances. 
Nevertheless,  the  country  faces  a  strong  and  immediate  demographic  shift  and  a 
notable  sustainability  gap  still  exists  in  public  finances.  This  challenge  has 
implications for many policy areas. Population ageing will lead to a significant rise in 
demand for ageing-related services, which are mostly provided by local governments 
in  Finland.  Various  studies  have  found  that  productivity  improvement  in  public 
services has been poor over the past few years. The Finnish authorities have already 
implemented  several  reforms  to  restructure  public  services  and  boost  productivity  at 
both  central  and  local  government  level.  The  relatively  large  investments  in 
information  technology  in  the  public  sector  have  not  yet  shown  up  in  productivity 
improvements,  implying  that  structural  and  administrative  changes  are  needed  to 
accompany investments. Overall, there is still room for additional measures to achieve 
productivity gains and cost savings in public service provision. 

(11)  The current increase in long-term unemployment is a cause for concern. Between 2005 
and  2008,  long-term  unemployment  fell  substantially,  but  it  began  to  rise  again  in 
2009.  At  the  end  of  March  2011,  the  number  of  long-term  unemployed  stood  at 
57 400,  up  12 400  on  the  previous  year.  Many  of  the  long-term  unemployed  are 
currently in the 55–64 age group. Due to retirement patterns, the greatest increase in 
unemployment  will  be  among  45–54  year-olds.  Although 
long-term 
unemployment rate in Finland is below the EU average, the issue should be looked at 
in the context of securing labour supply in the future and social inclusion. Experience 
shows  that  long-term  unemployment,  in  particular,  increases  the  risk  of  poverty  and 
social exclusion. Although the Finnish authorities recognise the increase in long-term 
unemployment  as  a  pressing  issue,  so  far  no  comprehensive  strategy  has  been 
designed  to  combat  it.  Finland  expanded  its  active  labour  market  policy  (ALMP) 
measures efficiently during the crisis to fight youth unemployment. While this helped 
to reduce youth unemployment over 2010-2011, it still remains above the EU average, 
and may warrant new measures. In the same way, reinforcement and better targeting of 
long-term 
ALMP  measures  would  help 
unemployment.. 

the  negative 

to  reverse 

trend 

the 

in 

(12) 

In  view  of  demographic  changes,  raising  the  employment  rate  of  older  workers  is 
important for public finances and crucial to meet the demand for labour in the future. 
The Finnish pension system was reformed in 2005 and pension benefits were linked to 
a life-expectancy coefficient in 2009. However, the statutory pension age is currently 
not linked to life expectancy. Given the continuing increase in life expectancy, such a 
link  would  not  only  contribute  to  labour  supply  but  also  help  to  ensure  adequate 
pensions.  Early  retirement  schemes  have  been  reduced  over  the  last  few  years,  but 
there is still some room for further measures to enhance employment incentives among 
the elderly. For example, the extended unemployment benefit for the elderly functions 
broadly  in  the  same  way  as  the  abolished  unemployment  pension.  Despite 
improvements  over  the  last  decade,  employment  rates  of  older  workers  and  the 

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effective  exit  age  are  low  by  Nordic  standards.  Disability  is  very  often  the  cause  of 
early  retirement.  Increasing  the  effective  retirement  age  requires  measures  that  also 
take  into  account  the  quality  of  working  life,  including  the  well-being  and  health  of 
employees.  This  is  important  in  particular  in  view  of  the  high  number  of  people  on 
disability pensions. Since 2009, Finland has spent about EUR 14 million on projects to 
improve  the  working  environment.  The  impact  of  these  initiatives  merits  to  be 
assessed. Participation in lifelong learning has traditionally been very high in Finland 
and  will  continue  to  be  important  given  emerging  new  skills  requirements  and 
demographic changes.  

(13)  Greater  competition,  particularly  in  the  services  sector,  has  become  increasingly 
relevant for boosting productivity and enhancing potential economic growth. Finland's 
remote location and sparse population density weakens business competition, resulting 
in  relatively  low  productivity  growth  in  non-tradable  sectors.  Existing  business 
structures  are  occasionally  highly  concentrated,  particularly  in  the  food  industry  or 
wholesale and retail trade. This might contribute to the relatively high consumer price 
level, although long transport distances could also play a role. Retail prices are among 
the highest in the EU. Competition in the retail trade continues to be partly hindered 
by regulations, despite some recent loosening, and by barriers to foreign and domestic 
enterprises entering and exiting the market. 

(14)  Specific commitments under the Euro Plus Pact are not explicitly set out in Finland's 
Stability and National Reform Programmes but are expected to be submitted once the 
new government has been formed. 

(15)  The  Commission  has  assessed  the  Stability  Programme  and  National  Reform 
Programme4,  taking  into  account  not  only  their  relevance  for  sustainable  fiscal  and 
socio-economic  policy  in  Finland  but  also  their  conformity  with  EU  rules  and 
guidance,  given  the  need  to  reinforce  the  overall  economic  governance  of  the 
European Union. It considers that consolidation measures should be specified for the 
medium term and that further action is needed to improve the sustainability of public 
finances,  including  by  boosting  public  sector  productivity.  Further  action  is  also 
needed  to  increase  incentives  to  work  and  to  raise  the  effective  exit  age  from  the 
labour market, as well as to enhance productivity and competition in the service sector 
markets. 

(16) 

In  light  of  this  assessment,  also  taking  into  account  the  Council  Recommendation 
under Article 126(7) Treaty on the Functioning of the European Union of 2 June 2010, 
the Council has examined the 2011 update of the Stability Programme of Finland and 
its opinion5 is reflected in particular in its recommendations under (1) and (2) set out 
below. Taking into account the European Council conclusions of 25 March 2011, the 
Council has examined the National Reform Programme of Finland, 

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SEC(2011) 734. 
Foreseen in Article 5(3) of Council Regulation (EC) No 1466/97. 

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HEREBY RECOMMENDS that Finland should take action within the period 2011-2012 to: 

(1) 

(2) 

(3) 

(4) 

(5) 

Continue  the  fiscal  consolidation  using  any  windfall  revenue  to  reduce  the  deficit, 
while taking additional measures to maintain the fiscal position above the medium-
term objective. 

Take  further  measures  to  achieve  productivity  gains  and  cost  savings  in  public 
service provision, including structural changes, in order to respond to the challenges 
arising from population ageing. 

Target active labour market measures better on the long-term unemployed and young 
people. 

Take measures to improve the employability of older workers and their participation 
in  lifelong  learning.  Take  further  steps  to  discourage  early  exit  from  the  labour 
market and further link the statutory retirement age limits to life expectancy. 

Take  further  measures  to  open  up  further  the  service  sector,  by  redesigning  the 
regulatory framework and removing restrictions in order to facilitate new entry into 
service sector markets, especially in the retail sector. 

Done at Brussels, 

For the Council 
The President 

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