COMMISSION STAFF WORKING DOCUMENT In-depth review for FINLAND in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances
Date: 2013-04-10
Institutions: European Commission
Subjects: Finland, balance of payments, competitiveness, economic growth, economic recession, economic reform, indebtedness, industrial restructuring, macroeconomics, pay scale, population ageing, property market, public debt

EUROPEAN 
COMMISSION 

Brussels, 10.4.2013  
SWD(2013) 123 final 

COMMISSION STAFF WORKING DOCUMENT 

In-depth review for FINLAND 

in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP 

Results of in-depth reviews under Regulation (EU) No 1176/2011 on the prevention and 
correction of macroeconomic imbalances 

{COM(2013) 199 final} 
{SWD(2013) 113 final} 
{SWD(2013) 114 final} 
{SWD(2013) 115 final} 
{SWD(2013) 116 final} 
{SWD(2013) 117 final} 
{SWD(2013) 118 final} 
{SWD(2013) 119 final} 
{SWD(2013) 120 final} 
{SWD(2013) 121 final} 
{SWD(2013) 122 final} 
{SWD(2013) 124 final} 
{SWD(2013) 125 final}

EN 

  EN 

 
 
 
 
 
  
 
 
 
 
 
Contents 

EXECUTIVE SUMMARY AND CONCLUSIONS ................................................................. 3 

1. 

Introduction......................................................................................................................... 5 

2.  Macroeconomic situation and potential imbalances ........................................................... 5 

2.1  Macroeconomic scene setter........................................................................................ 5 

2.2 

2.3 

Sustainability of external positions.............................................................................. 6 

The anatomy of sectorial balance sheets ..................................................................... 7 

2.4  Housing market developments .................................................................................. 12 

3. 

In-depth analysis of selected topics .................................................................................. 15 

3.1  Competitiveness and export performance ................................................................. 15 

3.1.1 

Export market shares.......................................................................................... 15 

3.1.2  Decomposition of the export market share loss ................................................. 17 

3.1.3  Non-cost competitiveness of Finnish exports .................................................... 19 

3.1.4 

The importance of ICT products for the Finnish economy ................................ 22 

3.1.5 

Cost competitiveness and productivity .............................................................. 24 

3.1.6 

Energy intensity of the Finnish economy........................................................... 27 

3.2 

Private sector debt ..................................................................................................... 29 

3.2.1  Household debt................................................................................................... 29 

3.2.2 

Corporate debt .................................................................................................... 31 

3.2.3  Health of the financial sector ............................................................................. 34 

3.3  Growth of financial sector liabilities ......................................................................... 35 

3.3.1  Nordea derivatives.............................................................................................. 36 

3.3.2  MFI deposits....................................................................................................... 37 

3.3.3  Other liabilities................................................................................................... 38 

3.3.4  Assessment ......................................................................................................... 39 

4.  Policy challenges .............................................................................................................. 40 

References ................................................................................................................................ 43 

2 

 
 
 
 
 
 
EXECUTIVE SUMMARY AND CONCLUSIONS  

In May 2012, the Commission concluded that Finland was experiencing macroeconomic 
imbalances,  in  particular  as  regards  developments  related  to  competitiveness.  In  the 
Alert Mechanism Report (AMR) published on 28 November 2012, The Commission found it 
useful, also taking into account the identification of an imbalance in May, to examine further 
the  persistence  of  imbalances  or  their  unwinding.  To  this  end,  this  In-Depth  Review  (IDR) 
takes a broad view of the Finnish economy in line with the scope of the surveillance under the 
Macroeconomic  Imbalance  Procedure  (MIP).  The  main  observations  and  findings  from  the 
analysis are: 

•  The  loss  in  competitiveness  is  one  of  Finland's  main  policy  challenges.  Over  a 
decade,  Finland's  current  account  turned  from  a  surplus  into  a  deficit.  The  country 
experienced a loss of 23% in world export market shares over the past five years, and 
saw  its  unit  labour  cost  increase  significantly  in  2008  and  2009.  Unit  labour  costs 
continued to increase  over the last few years  as wage increases continued to outpace 
productivity growth. 

•  The loss of export market shares is partly due to the on-going restructuring of the 
electronics  and  forestry  industries.  In  electronics,  Nokia  lost  its  dominant  position 
and  closed  down  all  assembly  factories  in  Finland,  which  affects  both  its  own 
employees and its subcontractors. The forest industry is relocating its paper and pulp 
manufacturing  business  to  Asia  and  Latin  America,  where  demand  is  growing  and 
resources  are  available.  The  other  main  industries  (metals,  machinery  and  minerals) 
were  not  able  to  make  up  for  the  loss  in  exports  from  the  electronics  and  forestry 
industries.  These  developments  demonstrate  Finland's  vulnerability  to  structural 
shocks in the specific product markets in which its exports are concentrated. 

•  High energy dependence will continue to affect Finland's current account balance 
through oil and gas price movements. Energy imports, mostly crude oil, accounted 
for as much as 20% of Finland's total imports 2011, partly on the back of the increased 
oil  price.  The  overall  high  energy  intensity  stems  from  the  dominance  of  energy-
intensive industries in Finland. Improved energy efficiency would help to reduce costs 
and energy imports. 

•  Finland's declining competitiveness is also related to a relatively low translation 
of R&D into marketable products. Despite high R&D spending and a well-educated 
workforce,  the  forestry  and  electronics  industry  still  account  for  a  large  part  of  the 
business structure and the number of high-growth companies remains low. 

•  The loss in cost competitiveness is another factor at play. The wage increases over 
the  past  five  years  have  been  excessive  and  have  tarnished  Finland's  competitive 
position,  especially  compared  to  Germany  and  Sweden,  Finland's  main  benchmarks. 
The employers see the need for minimal wage growth for 2013 and 2014 whereas the 
employee organizations see solutions in additional public investments into workforce 
training and active labour market policy measures. At the same time, the non-tradable 
sectors,  whose  goods  and  services  are  partly  used  as  inputs  for  the  tradable  sector, 
experienced lower productivity growth than the tradable sectors. 

•  Debt  levels  have  increased  over  the  last  decade.  The  private  sector,  excluding  the 
financial  sector,  has  been  accumulating  debt  up  to  179%  of  GDP  in  2011  (non-
consolidated). While exceeding the scoreboard threshold of 160% of GDP, it remains 

3 

 
 
 
lower  than  in  other  Nordic  countries.  Non-financial  corporations  account  for  almost 
two-thirds  of  this  private  debt,  the  remainder  being  held  by  households.  Public  debt 
remains modest, despite having increased over the last decade, and is expected to stay 
below the 60% ceiling, at least until 2014. 

•  The  level  of  household  debt  is  a  source  for  concern,  although  no  sudden 
deleveraging or instability of the financial sector is in sight. Household debt grew 
steadily from 65% of disposable income to 118%, and is now close to the European 
Union average. Household debt (both as a share of disposable income and as a share of 
GDP)  remains,  however,  far  below  the  unsustainable  levels  observed  in  some  other 
European countries. Based on the current health of the financial sector and on the still 
rather low housing cost overburden rates for households,1 no sudden deleveraging is 
expected in the near future. 

•  The  year-on-year  growth  of  the  non-consolidated  financial  liabilities  of  the 
financial  sector  stood  at  30.8%  in  2011,  far  above  the  threshold  of  16.5%.  To  a 
large  extent,  this  high  growth  resulted  from  the  market  movements  reflected  in  the 
value  of  Nordea's  derivatives  portfolio,  the  safe-haven  effect  leading  to  inflows  of 
foreign  MFI  deposits  and  the  double  counting  of  MFI  deposits  at  the  central  bank. 
While these developments do not constitute a direct threat to financial stability, they 
warrant close monitoring going forward. Other potential risks for the Finnish financial 
sector  stem  from  the  high  concentration  and  the  funding  structure.  Heavy 
concentration  in  the  banking  sector  implies  contagion  risk  from  the  main  systemic 
bank;  the  reliance  on  foreign  sources  and  wholesale  markets  implies  risks  for  bank 
financing.  

The IDR also discusses the policy challenges stemming from these developments and possible 
policy responses. A number of elements can be considered: 

•  Measures aimed at fuelling innovation, rising product quality and facilitating existing 
firms  and  products  to  grow  and  export  would  be  highly  beneficial  to  the  Finnish 
economy, leveraging the country's high R&D intensity. This would help diversify the 
business  structure  and  soften  the  impact  of  the  on-going  restructuring  in  the 
electronics  and  forest  industries.  Wage  agreements could  explicitly  take  productivity 
growth  into  account,  in  order  to  curb  labour  cost  growth.  In  addition,  productivity 
increases  could  be  achieved  through  the  enhancement  of  competition  in  product  and 
service  markets,  and  measures  to  achieve  efficiency  gains  in  public  services  such  as 
healthcare and education. In order to counter the decline in the working age population 
due  to  ageing,  the  activation  of  young  people,  the  long-term  unemployed  and  older 
workers, as well as an increase of the effective and statutory retirement age could be 
envisaged. 

•  Measures  to  curb  household  debt  growth  would  soften  the  risks  with  regards  to  the 
financial position of households. Such measures could include a cap on loan-to-value 
ratios  for  mortgage  loans  and  the  abolition  of  tax  deductibility  for  mortgage  interest 
payments. 

1  The  housing  cost  overburden  rate  is  the  percentage  of  the  population  living  in  households  where  the  total 
housing  costs  ('net'  of  housing  allowances)  represent  more  than  40  %  of  disposable  income  ('net'  of  housing 
allowances). 

4 

 
 
                                                 
 
1.  Introduction 

On  28  November  2012,  the  European  Commission  presented  its  second  Alert  Mechanism 
Report (AMR), prepared in accordance with Article 3 of Regulation (EU) No. 1176/2011 on 
the  prevention  and  correction  of  macroeconomic  imbalances.  The  AMR  serves  as  an  initial 
screening device helping to identify Member States that warrant further in-depth analysis to 
determine  whether  imbalances  exist  or  risk  emerging.  According  to  Article  5  of  Regulation 
No. 1176/2011, these country-specific “in-depth reviews” (IDR) should examine the nature, 
origin and severity of macroeconomic developments in the Member  State concerned, which 
constitute,  or  could  lead  to,  imbalances.  On  the  basis  of  this  analysis,  the  Commission  will 
establish  whether  it  considers  that  an  imbalance  exists  and  what  type  of  follow-up  it  will 
recommend to the Council. 

This  is  the  second  IDR  for  Finland.  The  previous  IDR,  published  on  30  May  2012,  led  the 
Commission  to  conclude  that  Finland  was  experiencing  macroeconomic  imbalances,  in 
particular  as  regards  developments  related  to  competitiveness.  Overall,  in  the  AMR  the 
Commission  found  it  useful,  also  taking  into  account  the  identification  of  an  imbalance  in 
May,  to  examine  further  the  persistence  of  imbalances  or  their  unwinding.  To  this  end  this 
IDR  takes  a  broad  view  of  the  Finnish  economy  in  line  with  the  scope  of  the  surveillance 
under the Macroeconomic Imbalance Procedure (MIP). 

2.  Macroeconomic situation and potential imbalances 

2.1  Macroeconomic scene setter 

Finland's  economy  proved  highly  sensitive  to  the  collapse  in  global  demand  in  2009,  with 
GDP  falling  by  an  unprecedented  8.5%  in  that  year.  In  the  following  two  years  GDP 
rebounded,  growing  by  3.3 %  in  2010  and  2.8 %  in  2011,  driven  by  domestic  demand,  but 
declined again slightly by -0.2% in 2012. Slow growth is expected for 2013 and 2014, with 
exports  only  gradually  picking  up  as  the  world  economy  recovers.  Sensitivity  to  the  global 
environment is connected to the export structure; 80 % of exports consist of capital goods and 
intermediate  goods  for  which  demand  is  typically  more  volatile  and  influenced  by  the 
business cycle. 

The Finnish economy faces strong headwinds from the ageing population. The working-age 
population  has  started  to  shrink.  Productivity  and  living  standards  rank  high  among  the 
developed  countries,  but  erstwhile  strong  industries  such  as  electronics  and  forestry  are  in 
difficulty and, in general, the share of manufacturing in GDP is declining. Although Finnish 
labour  productivity  has  traditionally  been  high  in  manufacturing,  this  is  less  the  case  in  the 
services sector. 

Public finances have been managed prudently and the current account was in steady surplus 
over  the  last  decade.  However,  unit  labour  costs  increased  strongly  and  the  current  account 
surplus continuously fell since 2007 and turned into a deficit in 2011, the first time in nearly 
two decades. Simultaneously, the private sector became increasingly indebted. This raises the 
question as to whether external imbalances are building up and if the increasing private sector 
debt burden is sustainable. 

5 

 
 
 
 
2.2  Sustainability of external positions 

Finland's  Net  International  Investment  position  has  undergone  substantial  changes  in 
recent years. The country's net international investment position (NIIP) experienced a huge 
drop  in  the  late  nineties,  recovered  in  the  early  2000s  to  its  previous  levels  and  remained 
fluctuating below zero up to 2008, as shown in Graph 1. As of 2009, Finland's NIIP became 
slightly positive. Net external debt, on the contrary, increased from a close-to-zero position in 
2008  to  a  more  significant  negative  position  in  subsequent  years.  The  main  component 
driving the changes in the NIIP is net portfolio investments. As described in the previous in-
depth review, Nokia's share price evolution had a large influence on Finland's NIIP through 
these  net  portfolio  investments.  With  about  75%  of  Nokia  shares  held  by  foreigners  and  its 
total  market  capitalization  being  sizeable  compared  to  Finland's  GDP,  valuation  effects 
triggered large swings in Finland's net international investment position. The recent decline of 
Nokia's  market  capitalization  dampened  its  influence  on  Finland's  NIIP,  allowing  for  other 
factors  to  gain  importance  again.  Especially  net  direct  investments  remained  positive 
throughout  the  years;  Finland  thus  attracts  more  inward  investment  than  its  residents  and 
corporations invest abroad through foreign direct investments. 

Finland's  trade  performance  has  weakened  over  the  past  years.  The  current  account 
balance declined steadily from an 8% of GDP surplus in 2002 to a 1% deficit in 2011. The 
current account is forecast to remain in deficit in the coming years. Graph 2 depicts how the 
declining trade balance of goods, itself turning into deficit as well in 2011, is the main driver 
of  this  evolution.  The  declining  trade  balance  of  goods  is  caused  by  a  restructuring  of  the 
electronics and forestry industries and by a loss of competitiveness. These developments have 
resulted in a 23% loss of world export market share over the past five years. Finland's weak 
trade performance can be partly explained by wage developments, with nominal unit labour 
costs  increasing  sharply  during  the  crisis  years.  Although  the  current  wage  agreements  set 
lower  wage  increases  for  2012  and  2013,  wage  growth  still  exceeds  productivity  growth. 
Another  factor  at  play  is  the  decline  in  the  2000s  of  Finland's  electronics  exports.  A  third 
element is the relocation of the pulp and paper industry to Asia and Latin America. Given that 
exports are  forecast  to grow  slower  than  imports  in  2013  and  2014,  causing  a  deficit  in  the 
trade balance of goods, these developments warrant an in-depth analysis. 

The  transition  towards  a  current  account  deficit  weakens  Finland's  economic  position. 
Current account deficits and surpluses are not necessarily macroeconomic imbalances, as they 
can  be  seen  as  a  natural  consequence  of  economic  interactions  between  countries. 
Nevertheless, countries with a rapidly ageing population may find it opportune to save today 
(i.e. run surpluses) to smooth consumption over time (European Commission, 2012b). At the 
moment  the  current  account  deficit  is  still  small,  as  is  the  level  of  external  debt.  While 
Finland's external sustainability is still strong, it is weakening. Instead of building up reserves, 
Finland is now gradually eating up its reserves from the past, while in the light of the ageing 
population, the country would be better off by further building up reserves for the future. 

6 

 
 
 
 
Graph 1: Composition of Net IIP (% of GDP) 

Graph  2:  Trade  balance  and  current  account 
balance (% of GDP) 

50

0

-50

P
D
G

-100

f
o
%

-150

-200

-250

12

10

8

6

4

2

0

-2

-4

-6

-8

P
D
G

f
o
%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112*

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Net portfolio investment
Reserve changes (net)
Other investment (net)
Net direct investment
Net financial derivatives
Net external debt (neg. sign)
Net int'l investment position
Marketable debt (portfolio debt instr. and other investment, net)

Capital account
Current transfers
Income balance
  Trade balance - services
  Trade balance - goods
Trade balance
Current account balance (CA)
Net lending/borrowing (CA+KA)

Source: Commission Services 

Source: Commission Services 

2.3  The anatomy of sectorial balance sheets 

Net  lending/borrowing  of  the  total  economy  deteriorated,  moving  from  a  sizeable  net 
lending to a net borrowing position of 1% of GDP in 2011. This decline, shown in Graph 
3,  limits  the  domestically-available  means  which  forces  the  country  to  borrow  externally  to 
cover investments. As the net lending/borrowing position of an economy reflects the saving 
and  investment  decisions  of  the  domestic  institutional  sectors,  Graph  4  splits  these  out  by 
sector.  Most  of  the  decline  in  savings  is  due  to  the  drop  in  government  saving  since  2009, 
induced by the crisis through decreases in tax revenues and increases in expenditure through 
automatic stabilizers; as well as increases in discretionary spending to mitigate the effects of 
the crisis on the Finnish economy. Households reinforce again their position as net borrower, 
after slightly deleveraging in 2009.  

7 

 
 
 
 
 
 
 
Graph  3:  Net  lending/Borrowing  by  sector  (%  of 
GDP) 

Graph 4: Savings and investments by sector (% of 
GDP) 

12

10

8

6

4

2

0

P
D
G

f

o
%

-2

-4

-6

P
D
G

f

o
%

35

30

25

20

15

10

5

0

-5

99 00 01 02 03 04 05 06 07 08 09 10 11

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Government saving

Government investment

Households
Financial corporations
Total Economy

General government
Non-Financial corporations

Financial corporates saving

Financial corporates investment

Non financial corporates saving

Non financial corporates investment

Households saving

Households investment

Source: Commission Services 

Source: Commission Services 

Fiscal consolidation is on-going and the government has proclaimed the reduction of the 
debt ratio by 2015 as one of its most important goals. The budget balance of the Finnish 
general government turned from a surplus of 4.4% of GDP in 2008 into a deficit of -2.5% of 
GDP in 2010. Fiscal consolidation led to a narrowing of the public deficit to -0.6% of GDP in 
2011,  but  the  deficit  is  expected  to  have  widened  to  -2.2%  in  2012.  The  central  and  local 
government  deficit  has  been  offset  by  the  surplus  of  social  security  funds  of  2.5-  2.8%  in 
these years. A small general government deficit target can therefore still imply a substantial 
deficit at the central government, which would entail general government debt level increases. 
In 2013, the central government deficit is likely to widen further, even based on the optimistic 
government  forecast  of  still  1%  GDP  growth  in  2012  and  2013  underlying  the  budget 
proposal.  In  light  of  fiscal  measures  decided  in  2012  that  took  effect  in  2013,  public  net 
borrowing is expected to be on a declining path in 2013 and 2014. The general government 
net assets are sizeable (54% of GDP, shown on Graph 5) because these include the assets of 
the social security funds. 

The  continuous  accumulation  of  debt  by  households  is  worrying.  Over  the  past  decade, 
apart  from  a  small  deleveraging  episode  in  2009,  households  had  a  net  borrowing  position, 
leading  to  an  accumulation  of  household  debt.  Although  households  deleveraged  slightly  in 
2009, they re-accumulated debt in 2010 and 2011. The household savings rate jumped during 
the crisis from 7.8% of gross disposable income in 2008 to 11.7% in 2009, before declining 
again  to  about  8%  in  2012.  Over  the  coming  years  a  stabilization  of  the  household  savings 
rate is expected. In the context of an ageing population, the net borrowing of households over 
the  last  decade  and  the  declining  savings  rate  translate  into  a  declining  ability  to  cover  the 
future  costs  of  ageing.  A  deleveraging  of  households,  combined  with  fiscal  consolidation, 
would  bring  Finland  back  to  a  net  lending  position.  Despite  the  accumulation  of  debt,  net 
assets of households remain positive (Graph 5). 

Both the financial and non-financial corporate sector consistently saved more than they 
invested, resulting in a net lending position. While the financial corporate sector posts a net 
lending position of 0.8% of GDP in 2011, the non-financial corporate sector's share in the net 
lending/borrowing position of the Finnish economy is more important, as well as its share in 

8 

 
 
 
 
 
 
total  savings  and  investments.  The  net  lending  position  of  non-financial  corporations  was 
reduced  to  almost  zero  in  2008,  after  which  it  jumped  back  to  sizable  levels,  partly 
compensating the net borrowing position of households and the general government.  

Debt levels have increased over the last decade. The private sector, excluding the financial 
sector, has been accumulating debt up to 179% of GDP (non-consolidated) in 2011, illustrated 
by Graph 6. While exceeding the scoreboard threshold of 160% of GDP, it remains lower than 
in  other  Nordic  countries.  Non-financial  corporations  account  for  almost  two-thirds  of  this 
private  debt,  the  remainder  being  held  by  households.  Public  debt  in  %  of  GDP  remains 
modest, despite having increased over the last decade, and is expected to stay below the 60% 
ceiling, at least until 2014. Risks of derailing public debt levels are seen as low as the Finnish 
government prepares for the rising ageing-related expenditures in the near future by keeping 
the budget under tight control. 

Graph 5: Net assets by sector 

Graph 6: Decomposition of debt (% of GDP) 

200

150

100

50

0

P
D
G

-50

f
o
%
-100

-150

-200

-250

-300

-350

P
D
G

f
o
%

400

350

300

250

200

150

100

50

0

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Financial corporations
Households
Private sector EA17

Government
Non financial corporations
Private sector

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Financial corporations
Household
Private sector EA17
Private sector

Government
Non financial corporations
MIP Threshold

Source: Commission Services 

Source: Commission Services 

The financial sector remains strong relative to many other national financial sectors of 
the euro area. The banking sector did not need government support during the crisis and has 
been  seen  as  stable  (the  'safe  haven'  phenomenon).  Exposure  to  Greece,  Portugal,  Italy  and 
Spain is limited as are non-performing loans (Table 1). Furthermore, the banking system has 
remained  overall  profitable;  the  average  return  on  equity  is  around  10 %.  This  has  allowed 
improving solvency with the average capital adequacy ratio of around 14 %.2 The main banks 
operating in Finland; Nordea Bank, Danske Bank and OP-Pohjola Group; were not required 
to take measures in order to comply with the 9% minimum core Tier 1 capital ratio following 

2 However, the equity ratio has been decreasing in recent years. Equity ratio relates total capital to total assets. It 
is  a  non-risk  weighted  capital  adequacy  measure,  which  is  used  as  a  complementary  measure  by  the  Bank  of 
Finland (Financial Stability Report, May 2012) 

9 

 
 
 
 
 
 
 
 
                                                 
 
the EBA EU Capital Exercise of December 2011. Still, OP-Pohjola Group3 strengthened its 
Core Tier 1 ratio from 14% at the end of 2011 to 15.1% in June 2012.   

Table 1: Selected macro-financial stability indicators 

Total assets of the banking sector (% of GDP)

Share of assets of the five largest banks

Foreign ownership of banking system

Financial soundness indicators:

      non-performing loans (%)

      capital adquacy ratio (%)

      profitability - return on equity (%)

Private credit growth (y-o-y)

Lending for house purchase (y-o-y)

Loan to deposit ratio

CB liquidity as % of liabilities

Exposure to macro-financially vulnerable countries* (% of GDP)

Private debt (% of GDP)

Gross external debt (% of GDP)

Public

Private

Long term interest rates spread versus DE

Credit default spreads

*Peripheral euro area countries:IE, EL, PT, as well as RO, LV and HU.

Source: ECB, Eurostat, BIS, IMF, WB, CB.

2007

170.4

81.2

65.3

…

15.1

18.0

12.3

12.5

2008

213.4

82.8

69.5

0.8

13.6

12.2

11.7

8.7

2009

231.8

82.6

67.1

1.1

14.6

10.0

0.6

6.4

2010

268.7

83.8

…

0.9

14.4

9.2

5.4

6.7

2011

340.3

…

…

0.8

14.2

10.1

8.3

6.6

2012

308.4

…

…

0.9

15.0

12.1

7.0

5.5

144.7

143.7

142.9

139.4

142.3

140.1

0.2

0.0

88.7

29.8
42.3
0.1
…

1.1

0.0

93.5

28.8
51.6
0.3
28.7

0.8

0.0

0.1

0.5

0.4

0.3

0.7

0.2

104.0

105.2

106.9

113.8

37.9
52.5
0.5
38.3

43.3
52.0
0.3
29.5

45.9
47.1
0.4
49.2

48.5
51.4
0.4
56.6

Nevertheless, the year-on-year growth of the non-consolidated financial liabilities of the 
financial sector amounted to 30.8%, by far the highest growth rate among EU Member 
States.  The  second-largest  growth  recorded  in  the  EU  was  only  11.3%,  with  all  other 
countries  recording  changes  between  -5%  and  9%.  The  extraordinary  growth  of  the  non-
consolidated  financial  liabilities  of  the  Finnish  financial  sector  therefore  warrants  a  closer 
examination. The financial sector's assets and liabilities have continuously grown as from the 
late nineties (Graph 7). This is analysed in detail in section 3.3. 

3  The  only  Finnish  banking  group  which  participated  in  the  EBA  exercise,  as  Nordea  Bank  is  a  Swedish 
institution and Danske Bank a Danish one. 

10 

 
 
 
                                                 
 
Graph 7: assets and liabilities of the financial sector  

1000

P
D
G

f
o
%

,
s
e
i
t
i
l
i
b
a
i
l

&
s
t
e
s
s
A

500

0

-500

6

4

2

0

-2

P
D
G

f
o
%

,
s
t
e
s
s
a
l
a
i
c
n
a
n
i
f

t
e
N

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112*

L, currency and deposits (F2)
L, other accounts (F7)
L, insurance & TR (F6)
L, shares and other equity (F5)
L, loans (F4)
L, securities OTS (F3)
Net financial assets (right axis)

A, currency and deposits (F2)
A, F7 (other accounts)
A, insurance & TR (F6)
A, shares and other equity (F5)
A, loans (F4)
A, securities OTS (F3)

Source: Commission Services 

11 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.4  Housing market developments 

Since the mid-1990s, housing became significantly more expensive in inflation-adjusted 
terms. Real house prices increased by 92% in Finland over the years 1993-2007 (from trough 
in 1993 to peak in 2007), indicating a relative increase in housing costs vis-à-vis consumption 
prices. This cumulated increase and the continuous upward path might signal concerns with 
regard  to  the  sustainability  of  the  housing  market.  In  most  countries  however,  this  increase 
exceeded 100%.  

The housing market could represent a risk to the Finnish economy, as certain structural 
features of the Finnish housing market tend to amplify price volatility. Cuerpo Caballero 
and Mordonu (2011) discuss the effect of various policies on a possible build-up of housing 
imbalances.  Firstly,  policies  aimed  at  encouraging  home  ownership,  especially  for  the  low-
income  population,  may  have  a  negative  impact  on  house  price  stability.  Fostering  a  stable 
and  properly  functioning  rental  market  instead,  particularly  focusing  on  lower-income 
households, might reduce the occurrence of housing imbalances. Secondly, variable mortgage 
interest rates appear to increase the risk of housing market imbalances. Thirdly, high loan-to-
value  ratios  play  a  role.  Finally  tax  incentives  for  house  purchase  may  come  at  the  cost  of 
lower  market  stability.  The  Finnish  government  focuses  efforts  on  providing  social  housing 
and  granting  housing  allowances to  low-income  households,  irrespective  of  renter  or  home-
owner status (Vartia, 2006). Because of this equal treatment of low-income tenants and low-
income home-owners, the Finnish institutional setting does not seem to excessively encourage 
home  ownership  for  low-income  households.  On  the  other  hand,  other  factors  prevail  in 
Finland, with virtually all mortgage loans being on variable interest rates, high loan-to-value 
ratios  for  first-time  buyers,  tax  deductibility  of  mortgage  interest  payments,  low  property 
taxation and the absence of taxation applied on capital gains from selling the owner-occupied 
property (if the property has been held for more than two years). 

Analysis  suggests  that  the  Finnish  valuation  gap  is  still  somewhat  above  the  long-term 
average. The European Commission (2012a) discusses a range of valuation methods. These 
indicate that house prices for Finland are above, but close to, the long-term average (Graph 8). 

12 

 
 
 
Graph  8:  House  price  valuation  gap  based  on 
imputed rents, selected euro area economies (%) 

LT average

80

60

40

20

0

-20

-40

-60

BE

FR

FI

IE

ES

NL

Current  date  is  2011 Q4  and  the  starting point  differs 
across countries: BE 1976Q4, IE 1987Q1, ES 1981Q1, 
FR  1973Q3,  NL  1974Q2,  FI  1980Q3.  Sample  max. 
and min. values are depicted by the blue bars. 

Source: Commission Services, ECFIN calculations 

However,  a  levelling  off  of  the  house  price  increase  is  in  sight.  Although  still  rising  in 
2010, deflated house prices slightly receded in 2011 and remained stable  in the first half of 
2012, reflected in Graph 9. This change is accompanied by much smaller increases in the total 
amount of loans for house purchases in 2011 compared to previous years. Graph 10 illustrates 
how  building  permits  and  residential  investment  are  stabilizing.  Data  on  the  first  three 
quarters  of  2012  indicates  that  new  construction  activity  has  been  decreasing,  while  we 
forecast it to remain below its recent peak trough 2013. 

Graph  9:  House  price  index  and  MFI  loans  for 
house purchase 

Graph  10:  Residential  investment  and  building 
permits 

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f

o
e
a
R

t

6.0

5.0

4.0

3.0

2.0

1.0

0.0

140

120

100

80

60

40

20

0

99Q4 01Q4 03Q4 05Q4 07Q4 09Q4 11Q4

MFI loans for house purchase (% GDP, yoy)
Real House Price Index (2005=100), right axis
Nominal House Price Index (2005=100), right axis

0
0
1
=
5
0
0
2

0
0
1
=
5
0
0
2

120

100

80

60

40

20

0

95

97

99

01

03

05

07

09

11

Building Permits (2005=100)

Residential Investment (% of GDP, right axis)

P
D
G

f
o
%

8

7

6

5

4

3

2

1

0

Source: Commission Services 

Source: Commission Services 

All  in  all,  the  Finnish  housing  market  seems  to  respond  to  structural  changes  in 
underlying  supply  and  demand  factors.  Low  mortgage  interest  rates  result  in  higher  total 

13 

 
 
 
 
 
 
 
 
 
 
lending  amounts  for  the  same  level  of  monthly  repayments.  Hence  the  increase  in  prices 
relative to income is partly driven by the feed-through of higher lending amounts into prices, 
as  well  as  by  limitations  to  housing  supply.  New  construction  activity  decreased  from  its 
recent  peaks  and  is  expected  to  remain  below  it  throughout  2013.  The  phasing-out  of 
incentives encouraging debt-financed house purchase should help to reduce upward pressures 
on housing prices. 

14 

 
 
3.  In-depth analysis of selected topics 

3.1  Competitiveness and export performance 

At first sight, the Finnish economy remains one of the most competitive of the EU. The 
European Commission's Innovation Union Scoreboard ranks Finland fourth, within the group 
of  four  'innovators'  together  with  Germany,  Denmark  and  Sweden  (top  position).  Finland's 
national competitiveness4 ranks third in the World Competitiveness Index of 2012. As noted 
in  the  report  by  the  World  Economic  Forum  (2012),  Finland  is  considered  to  be  the  world 
leader  in  health  and  education  and  the  country  is  in  the  top  five  regarding  innovation, 
financial  markets  and  institutional  setup.  Weaker  points  listed  are  the  macroeconomic 
environment,  labour  market  efficiency  and  product  market  efficiency.  Finland  occupies  the 
eleventh place in the ease of doing business index of The World Bank (2012). 

3.1.1  Export market shares 

Over the period 2007-2011, Finland recorded a loss of 23% in its export market share. 
Graph 11 shows how Finland's exports managed to keep up with world export growth in value 
terms in 2007 and 2008, resulting in a stable export market share. In 2009 the crisis caused 
world exports to decline by 16% compared to 2008. Unfortunately the downturn hit Finland 
hard, causing the country's exports to decline by more than one fourth. This caused Finland to 
experience  a  loss  of  11.6%  in  export  market  share.  In  2010,  world  exports  recovered  and 
Finnish  exports  as  well,  albeit  to  a  lesser  extent,  again  resulting  in  a  large  loss  in  export 
market  share.  The  recovery  of  world  exports  continued  in  2011,  but  Finnish  export  growth 
continued to trail behind world export growth, resulting again in a loss of export market share, 
although much smaller than the previous years. Graph 12 depicts the negative contribution of 
goods  to  Finland's  export  market  share  during  the  crisis  years,  while  services  delivered  a 
positive contribution in 2007-2008 followed by a small negative contribution in 2009-2010. 
The  increase  in  services  exports  might  also  reflect  increased  outsourcing  of  auxiliary 
activities.  Many  activities  that  were  earlier  handled  by  companies  themselves,  such  as 
logistics, have been outsourced and are currently recorded as business services. Given the still 
smaller share of services in Finnish exports, Finland could only regain export market share in 
the  near  future  by  strengthening  its  goods  exports,  whereas  an  increase  in  services  exports 
would gain influence over the overall trade balance over the medium term. 

4 A concept defined by the World Economic Forum as the set of institutions, policies, and factors that determine 
the level of productivity of a country. 

15 

 
 
 
                                                 
 
Graph  11:  Export  market  shares  (EMS)  in  goods 
and services (in value terms) 

Graph  12:  Contribution  to  the  change  in  export 
market shares (in value terms) 

40

30

20

10

0

-10

)

%

(
e

t

t

a
r
h
w
o
r
G

-20

-30

-40

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Denominator: World Export growth (neg. sign)
Numerator: Export growth
EMS growth rate

8

6

4

2

0

-2

-4

-6

-8

-10

-12

-14

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f

o
e

t

a
R

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Contribution to EMS: goods
Contribution to EMS: services
Export market share growth yoy

Source: Commission services 

Source: Commission services 

Declining exports are also reflected in the trade balance, which turned into deficit due to 
negative contributions from fuel and consumer goods. Throughout the late nineties and the 
early 2000s the trade balance surplus fluctuated between 9 and 10% of GDP, before shrinking 
towards zero and turning into a small deficit in 2011. Graph 13 splits out the contribution to 
the trade balance by four broad categories of goods. The overall surplus in the early 2000s can 
mainly be attributed to intermediate and capital goods. These two categories lost ground by 
the end of the same decade, accompanied by deficits for fuel and consumer goods. Finland is 
highly dependent on energy imports (mostly crude oil), accounting for 22% of total imports in 
2011.  The  increase  in  oil  and  gas  prices  therefore  has  a  large  impact  on  Finland's  energy 
imports,  although  the  net  effect  on  Finland's  trade  balance  is  lessened  by  the  increases  in 
prices  of  refined  oil  exports.  Imports  of  consumer  goods  largely  exceeded  exports  in  2009-
2010,  reflecting  Finnish  households'  increased  appetite  for  imported  consumer  goods  while 
exports of consumer goods in absolute terms increased less than imports. 

16 

 
 
 
 
 
 
 
 
Graph  13:  Trade  balance  contribution  by  broad 
category 

Total goods

Intermediate goods

Fuel

Consumer goods

Capital goods

-5.0

0.0

5.0

10.0

15.0

Trade in goods, % GDP

2000-2001

2010-2011

Source: Comtrade, ECFIN calculations 

Contrary  to  goods,  the  trade  balance  of  services  was  much  smaller  and  moved  in  the 
opposite direction, from a deficit of about 1.5% of GDP in the late nineties to a small surplus 
in 2011. If continued, this evolution could support the current account balance in the future. 
Services imports and exports are, however, difficult to measure and tend to be more volatile 
than imports and exports of goods, especially with the presence of multinational companies. 
The headquarters of these companies charge headquarter services to their subsidiaries abroad, 
which are recorded as services exports and imports in the respective countries. These services 
include overarching activities such as for example IT, marketing and accounting services, for 
which the company itself can set the level of the internal pricing according to the tax regimes 
of the different countries in which it operates. 

3.1.2  Decomposition of the export market share loss 

To a large extent the export market share loss reflects competitiveness losses. In Graph 
14 the loss in export market share for goods is broken down into four components. Part of the 
change in export market share can be attributed to the geographical destination composition, 
reflecting growth (decline) if the change in export demand in Finland's destination countries is 
more positive (more negative) than the world average. Secondly, change can partly be due to 
product composition, reflecting growth (decline) if the change in export demand in Finland's 
product  markets  is  more  positive  (more  negative)  than  the  average  of  all  product  markets 
combined. Both of these merely reflect a presence in expanding or shrinking geographical and 
product markets. For Finland these had only a small influence on the country's export market 
share.  The  negative  effect  from  Finland's  product  composition  can  be  attributed  to  the  fact 
that  global  investments  have  declined  more  than  consumption,  because  capital  goods 
represent a relatively large share of Finnish exports. The largest contribution comes from the 
competitiveness  change  in  geographical  destinations,  meaning  that  within  Finland's  export 
destinations  demand  for  Finnish  exports  has  been  losing  ground  vis-à-vis  total  demand  for 
foreign  goods.  Additionally,  Finland  also  records  a  decline  in  competitiveness  in  products, 
representing a demand for Finnish products lagging behind total demand for the same types of 

17 

 
 
products.  To  summarise,  Finnish  exported  goods  are  losing  ground  within  their  respective 
product markets and geographical destinations, reflecting losses in competitiveness. 

Graph  14:  Growth  in  nominal  exports  of  goods 
relative  to  global  growth  in  exports  of  goods 
(constant-market share analysis) 

n
i
(

h
t
w
o
r
g

t
r
o
p
x
e

l

i

a
n
m
o
n

l

a
u
n
n
a
f
o
s
t
n
o
p
-
%

i

h
t
w
o
r
g

l

l

a
b
o
g
e
h
t

f
o

t
e
n
)

D
S
U

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

-10.0

-12.0

Pre-crisis

Post-crisis

Finland

Market share gains in product markets
Market share gains in geographical destinations
Initial product specialisation
Intial geographical specialisation

Source: Commission services 

The product composition of Finland's exports had only a small influence on the export 
market  share  loss.  It  is  worth  noting  though  that  the  concentration  of  Finland's  exports  in 
terms  of  products  makes  the  country  vulnerable  to  structural  shocks.  Finland's  main  export 
products  are  wood  and  paper  products,  chemicals  and  oil  products,  metals,  machinery  and 
electrical products. Together these accounted for 79% of total Finnish exports in 2011 (Graph 
15). Over the last few years, the pick-up of growth in metals, chemicals and machinery has 
only  partly  compensated  for  the  decline  in  electronics  and  forestry.  Finland  exports  mainly 
intermediate  goods  (around  50%  of  exports  of  goods)  and  capital  goods  (around  30%  of 
exports of goods).  

The  geographical  destination  composition  also  accounted  only  for  a  small  part  of  the 
export market share loss. The European Union is Finland's main export destination for both 
goods and services, accounting for over half of total exports with one third of Finnish exports 
sent to euro area countries and about one quarter to the remaining Member States (Graph 16). 
Of  all  euro  area  countries,  Finland  has  the  highest  share  of  trade  with  countries  outside  the 
euro area. In 2011 about 70% of Finnish exports went outside the euro area, whereas for the 
total  euro  area  this  is  about  50%.  Finland's  main  non-euro  area  export  destinations  on  the 
European  continent  are  Sweden  (12%  of  total  exports  in  2011)  and  Russia  (9%).  Finland's 
main export destinations, apart from Russia, are not high-growth markets. All in all, only 16% 
of goods and services were exported to developing economies in 2011. A later-than-expected 
recovery in Europe would be a drag on Finnish exports, especially if Germany and Sweden 
would  maintain  low  capacity-utilization  rates.  On  the  positive  side,  Russia  represents  a 
promising and growing market for Finnish exports. 

18 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Graph  15:  Composition  of  goods  exports  from 
Finland (current prices) 

Graph 16: Main export markets for Finland, goods 
and services combined (2012) 

30%

25%

20%

15%

10%

5%

Other 
countries, 
7.8%

North 
America, 
7.4%

Asia,
14.0 %

Eurozone, 
29.9%

d
n
a
n
F

i

l

f
o

s
t
r
o
p
x
e

l

a
t
o
t

f
o
%

00 01 02 03 04 05 06 07 08 09 10 11

Electrical
Wood & Paper Products
Other goods

Machinery
Metals
Chemicals & Oil

Rest of 
Europe, 
17.2%

Other EU 
countries, 
23.7%

Source: Commission services 

Source: Tulli Customs 

3.1.3  Non-cost competitiveness of Finnish exports 

Finland's  strongest  export  industries  have  been  losing  ground  between  2000  and  2010. 
Wood  and  wood  products,  metals,  machinery  and  electrical  products,  but  also  raw  hides, 
skins,  leather  and  furs  each  have  a  world  market  share  above  Finland's  average  of  0.6%  in 
2009-2010,  henceforth  representing  Finland's  main  export  industries.  These  four  categories 
are  the  only  categories  for  which  the  Finnish  economy  boasts  a  positive  comparative 
advantage. Compared to 2000-2001 however, Finland heavily lost market share in wood and 
wood products as can be observed in Graph 17. Machinery and electrical goods lost a large 
part  of  their  market  share  over  the  same  period,  while  the  metal  industry  managed  to  limit 
market share losses. Despite the losses in market share, three of these industries maintain their 
comparative  advantage,  illustrated  by  the  Symmetric  Revealed  Comparative  Advantage 
Index5  shown  on  Graph  18.  The  comparative  advantage  in  wood  and  wood  products  has 
remained  stable  over  the  2000-2010  decade  and  improved  for  metals  and  raw  hides,  skins, 
leather  and  furs;  while  it  declined  for  machinery  and  electrical  products.  In  services,  the 
market  share  of  the  broad  category  of  other  services6  lies  above  the  market  share  of  total 
services, while travel and transportation lag behind (Graph 19). The 'Other services' category 
is the only services category in Finland enjoying a comparative advantage vis-à-vis the rest of 

5 RCAci = (Xci/ΣiXci) / (Xbi/ΣiXbi). The numerator represents the share of a given sector (i) in national exports 
(Xci are exports of sector i from country c). The denominator represents the share of a given sector (i) in the total 
exports of a benchmark economy (b) (in our case the rest of the world). RCA can be in the range between 0 and 
infinity; with levels below 1 indicating a comparative disadvantage and above 1 an advantage (or specialisation. 
The symmetric RCA (SRCA), which is more convenient to interpret, equals (RCA − 1)/(RCA + 1) and ranges 
from  −1  to  +1.  Positive  values  of  SRCA  represent  a  comparative  advantage  while  negative  values  reflect  a 
disadvantage. 
6  Other  services  includes  services  in  the  domains  of  communication,  construction,  insurance,  finance,  and 
computer and information, as well as royalties and license fees, other business services, personal, cultural and 
recreational services and government services. 

19 

 
 
 
 
 
 
 
                                                 
 
the  world,  shown  on  Graph  20.  The  comparative  disadvantage  in  travel  services  and 
transportation services increased even further, the latter partly reflecting the stricter emission 
rules for water transportation on the Baltic Sea coming into force in 2015. 

Finland  should  work  on  effectively  translating  its  high  R&D  intensity  into  the 
development of new products. This is reflected in the Innovation Union Scoreboard, where 
of  all  sub  dimensions  Finland's  score  is  lowest  (15th  place,  barely  above  EU27  average)  on 
"innovators",  encompassing  SMEs  introducing  product  or  process  innovations  and  SMEs 
introducing marketing or organisational innovations. The Finnish government is in this matter 
initiating  or  strengthening  several  measures  encouraging  entrepreneurship  and  innovation. 
Finnvera,  a  specialized  financing  state-owned  company,  has  been  given  increasing  risk 
financing abilities targeted at homeland financing purposes. Through this law active up to end 
of 2015, Finnvera can cover corporate losses up to 58-60% of programme-companies. The so-
called business-angel law is targeted at investing in small companies with a turnover below 10 
million  euros  or  maximum  50  employees.  The  law  allows  an  individual  investor  to  deduct 
50%  of  his  capital  income  after  investing  in  a  limited  company  in  2013-2015.  Another 
measure allows additional deductions on R&D costs for companies between 2013-2015. A tax 
deduction on revenue from licensing intellectual property rights is still under discussion. 

Export market shares could be gained in certain niche sectors. The market share loss of 
the  forest  industry  reflects  the  on-going  move  to  close  down  production  plants  in  Finland, 
moving  them  to  lower-cost  countries  and  closer  to  growing  demand.  In  the  medium  term 
however, the Finnish forest industry might be able to reorient itself towards clean-tech, with 
high value-added products. Other sectors in which Finland could gain export market share are 
mining products, off-shore related machines and equipment and ICT products and services.  

20 

 
 
Graph  17:  Sectoral  export  market  shares  in  goods 
(in value terms) 

Graph 18: Revealed comparative advantage across 
product categories 

Total goods
Miscellaneous
Transportation
Machinery / electrical
Metals
Stone / glass
Footwear / headgear
Textiles
Wood and wood products
Raw hides, skins, leather…

Plastics / rubbers
Chemicals and allied…
Mineral products
Foodstuffs
Vegetable products
Animal and animal products

0.0

2.0

4.0

6.0

8.0

Total goods
Miscellaneous
Transportation
Machinery / Electrical
Metals
Stone / Glass
Footwear / Headgear
Textiles
Wood & Wood Products
Raw Hides, Skins, Leather,…

Plastics / Rubbers
Chemicals & Allied Industries
Mineral Products
Foodstuffs
Vegetable Products
Animal & Animal Products

-1.00

-0.50

0.00

0.50

1.00

Trade in goods: Symmetric Revealed Comparative 
Advantage Index

2000-2001

2009-2010

World market share (%)

2000-2001

2009-2010

Source: Commission services 

Source: Commission services 

Graph  19:  Sectoral  export  market  shares 
services (in value terms) 

in 

Graph 20: Revealed comparative advantage across 
services categories 

Other services

Travel

Transportation

Services

Other services

Travel

Transportation

Services

0.0

0.2

0.4

0.6

0.8

1.0

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

Trade in services: Symmetric Revealed 
Comparative Advantage Index

2000-2001

2010-2011

Share in total World exports (%)

2000-2001

2010-2011

Source: Commission services 

Source: Commission services 

21 

 
 
 
 
 
3.1.4  The importance of ICT products for the Finnish economy 

Nokia  provided  a  large  contribution  to  Finland's  Gross  Value  Added  growth,  exports 
performance  and  employment  in  the  early  2000s.  The  company  became  leader  in  its 
industry and Finnish subcontractors thrived on its success. In 1995 the ICT cluster produced 
5% of Finland's total gross value added, which increased to 11% in 2000 (Graph 21). Up to 
half of the growth in gross value added during 1998-2000 can be contributed to the ICT sector 
(Graph  22).  Nokia  itself  accounted  for  4%  of  GDP  in  2000  and  contributed  2%  points  to 
growth in GDP (ETLA, 2012). When competition to Nokia intensified, the company struggled 
to  maintain  its  leading  position.  As  a  consequence,  the  importance  of  the  ICT  cluster  in 
(growth of) Finland's gross value added diminished. 

Graph  21:  Share  of  ICT7  in  total  GVA,  current 
prices 

Graph  22:  Contribution  of  ICT  to  GVA  growth

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

88 90 92 94 96 98 00 02 04 06 08 10

GVA ICT
GVA all sectors excl. ICT
Share of ICT sector in total GVA (rhs)

14%

12%

10%

8%

6%

4%

2%

0%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

88 90 92 94 96 98 00 02 04 06 08 10

Contribution to GVA growth ICT sector

Contribution to GVA growth all sectors
excl. ICT
Vol change GVA

Source: Commission services, ECFIN calculations 

Source: Commission services, ECFIN calculations 

The share of ICT products8 in Finnish exports has declined compared to its heydays in 
2000. Expressed as a share of exports of goods, ICT products went from 31% in 2000 to only 
13%  in  2011.  This  is  not  surprising,  taking  into  account  the  on-going  relocation  of  Nokia's 
production outside of Finland. By end-2012 the company closed its last manufacturing line in 
Finland,  effectively  bringing  the  amount  of  mobile  phones  exported  to  zero  as  of  2013. 
Within  Finland,  Nokia  now  has  the  role  of  an  exporter  of  services,  namely  R&D  and 
headquarters services. 

The  ICT  sector  is  expected  to  emerge  much  smaller  from  restructuring,  based  on 
smaller companies and a strong focus on R&D. Companies such as Samsung and Lenovo 
announced the planned setup of R&D centres in Finland, presumably leveraging the presence 

7 The ICT industry comprises C26 (computer, electronic and optical products), C27 (electrical equipment), J61 
(Telecommunications) and J62-J63 (Computer programming, consultancy, and information service activities)  
8 Referring to goods only, i.e. C26 (computer, electronic and optical products) and C27 (electrical equipment) 

22 

 
 
 
 
                                                 
 
of  well-trained  and  experienced  engineers  in  Finland.  International  success  has  been 
encountered by the emerging smartphone and tablet game industry. The government-funded 
Tekes foundation is providing funding and support for several new start-ups in the ICT sector. 

The government is looking into ways to support the on-going restructuring process. The 
ICT 2015 working group recently identified 4 critical directions that should be followed to re-
establish  Finnish  technological  lead  in  ICT.  These  are:  i) fast  development  of  common 
architecture for all public services; ii) establishment of a 10 year programme on ICT related 
research, development and innovation; iii) establishment of funding programme to secure the 
funding for high-growth enterprises; and iv)  establishment of a governmental expert group to 
ensure long-term development. 

23 

 
 
3.1.5  Cost competitiveness and productivity 

Recent  improvements  in  cost  competitiveness  are  driven  by  exchange  rate  movements. 
Between  2007  and  2009  the  real  effective  exchange  rate  (REER)9  increased  sharply, 
especially  with  the  unit  labour  cost  as  deflator  (shown  in  Graph  23).  The  subsequent  large 
drop in 2010 was followed by a negative or close-to-zero real effective exchange rate growth 
in 2011 and 2012, indicating an improvement of Finland's cost competitiveness. However, the 
nominal unit labour cost depicted in Graph 24 increased over the same period and is forecast 
to continue rising. The improvement in cost competitiveness was thus mostly due to exchange 
rate  movements  vis-à-vis  Finland's  main  trading  partners,  such  as  Sweden,  Denmark  and 
Russia.  The  large  decline  in  2010  was  partly  induced  by  the  appreciation  of  the  Swedish 
Krona. 

Graph 23: Nominal and real effective exchange rate 
(HICP- and ULC-based) 

Graph 24: Growth in nominal unit labour cost and 
its components vis-à-vis IC36 

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

8

6

4

2

0

-2

-4

-6

-8

)

%

(

y
-
o
-
y
e
g
n
a
h
c

f
o
e
t
a
R

10

8

6

4

2

0

-2

-4

-6

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

NEER
REER (HICP)

relative HICP (-)
REER (ULC)

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Inflation (GDP deflator growth)
Real Compensation per Employee
Productivity Contribution (negative sign)
Nominal unit labour cost
ULC in 36 industrial competitors of Finland

Source: Commission services 

Source: Commission services 

Low  productivity  growth  causes  the  nominal  unit  labour  cost  to  increase.  Finland's 
nominal unit labour cost consistently grows faster than the average for Finland's main trading 
partners (IC36). Although not shown in Graph 24, nominal unit labour cost growth in Finland 
exceeded  both  the  Eurozone's  and  the  EU27  average  growth.  While  in  most  years  between 
1998  and  2007,  productivity  and  wage  developments  were  closely  linked  and  real 
compensation  per  employee  and  inflation  were  largely  offset  by  productivity  increases,  this 
does  not  hold  anymore  for  2008  and  2009.  In  2007  new  sectoral  wage  agreements  were 
negotiated  providing  for  high  wage  growth,  as  a  severe  impact  from  the  crisis  was  not 
expected at the time. In 2008 and 2009 productivity growth turned negative, due to less hours 

9  Real  effective  exchange rates  (REER)  are aggregate  relative  price  and cost  indicators  which  may  be  used  to 
assess  a  country's  price  or  cost  competitiveness  relative  to  its  principal  competitors  in  international  markets. 
They correspond to the nominal effective exchange rate deflated by selected relative price or cost deflators, here 
the harmonized index of consumer prices (HICP) and the unit labour cost (ULC). 

24 

 
 
 
 
 
 
 
 
 
 
 
                                                 
 
worked  and  labour  hoarding,  resulting  in  a  jump  in  ULC  far  above  previous  Finnish  levels 
and  the  euro  area  average.  In  2010,  productivity  growth  outpaced  inflation  and  real 
compensation  per  employee,  offsetting  only  partly  the  ULC  increases  of  the  years  before, 
again followed by low productivity growth in 2011 and 2012. As a result, productivity growth 
dropped below that of Finland's trading partners during the crisis. Over the period 2000-2007, 
the  Finnish  manufacturing  sector  enjoyed  high  productivity  growth  of  7%  on  the  back  of  a 
strong  productivity  growth  in  the  ICT  sector,  compared  to  4.2%  in  Germany  and  6.6%  in 
Sweden. Afterwards this reversed to -2.9% over 2007-2011, compared to -1.9% in Germany 
and  0.9%  in  Sweden  (Ministry  of  Finance,  2012).  Without  measures  to  spur  productivity 
growth  or  wage  moderation,  compensation  per  employee  is  forecast  to  continue  outpacing 
productivity growth in 2013 and 2014, resulting in further increases in the nominal unit labour 
cost. 

Unit labour costs are increasing for market services, but decreasing for manufacturing. 
These opposite movements, shown in Graph 25, reflect diverging developments in labour cost 
sectors.  Labour  cost  developments  outpaced  productivity 
competitiveness  across 
developments in market services, which are less traded than manufactured products, and thus 
in  general  experience  less  competition.  If  productivity  in  manufacturing  increases  while 
stalling in market services, and the centralized wage agreement framework ensures an equal 
wage evolution in all industries, this will lead to higher unit labour costs in market services. 
Productivity  differences  have,  however,  lately  been  shrinking,  as  a  result  of  the  declining 
share of the electronics industry. 

Wage  growth  in  the  non-tradable  sector  puts  pressure  on  the  tradable  sector.  As 
illustrated by Graph 26, prices in the non-tradable sector are rising faster than in the tradable 
sector. The same is true for the compensation of employees. Hence, the non-tradable sector 
now accounts for a larger part of compensation of employees, to be covered fully by domestic 
demand. This in turn hurts the tradable sector, as it increases the cost of intermediate goods 
purchased domestically, such as business services and construction. It also increases the cost 
of ageing, since ageing-related services, such as healthcare, are included in the non-tradable 
sector.  The  fastest  rise  in  the  hourly  compensation  of  employees  within  the  non-tradable 
sector has been in construction and private healthcare services (Ministry of finance, 2012). 

25 

 
 
Graph 25: Sectoral unit labour costs 

Graph 26: Tradable versus non-tradable shares 

140

120

100

0
0
1
=
5
0
0
2

80

60

40

20

0

&
d
e
d
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s
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.
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v
(

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R

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60

50

40

30

20

10

0

160

140

120

100

80

60

40

20

0

)

%

(

.
d
a
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t

n
o
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,
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l

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g
.
l
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c
i
r

P

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Manufacturing

Market services

Total - all NACE activities

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Share of tradable sectors in constant gross value added
Share of tradable sectors in compensation of employees
EA17: Share of tradable sectors in compensation of employees
Price deflator gross value added, tradable (in % of non-trad. defl., rhs)

Source: Commission services 

Source: Commission services 
Note: Based on data according to the nomenclature of 
economic activities Nace Rev1. Market services 
include industries G_K.  
The  latest  wage  agreement  10  still  resulted  in  wage  growth  above  productivity  growth. 
The recent Tripartite Agreement negotiated end of 201111 and valid for two years sets wage 
growth  at  a  moderate  pace.  However,  in  light  of  the  stagnating  labour  market,  ULC  have 
increased by 3.6% in 2012 and are forecast to increase by 2.7% in 2013. On top of inflation, 
this nominal ULC growth includes a growth of real compensation per employee that outstrips 
productivity  growth.  Nominal  unit  labour  cost  growth  is  expected  to  remain  above  other 
countries' ULC growth. 

Population ageing affects labour supply. The working age population is expected to decline 
as  of  2013  due  to  ageing  of  the  Finnish  population. Over the near future activation policies 
and  immigration  can  still  offset  the  effects  of  ageing,  keeping  the  total  labour  force  stable. 
However,  companies  are  expected  to  experience  labour  shortages,  especially  for  highly 
qualified  or  specific  profiles,  which  in  turn  could  affect  wage  developments  or  productivity 
levels. An increase in the effective and the statutory retirement age would result in a slower 

10 The Finnish labour market is highly organised. The majority of both employers and employees are members of 
the organizations that participate in collective bargaining. These negotiations are facilitated by the government, 
who could lend its support to the agreement by agreeing to modify a tax level or increase certain types of support 
to enterprises or households. As an example, corporate income tax was lowered to facilitate the 2011 agreement. 
Whereas  national  legislation  forms  the  basis  for  regulating  the  labour  market,  specific  employment  terms  are 
determined according to collective agreements within each branch. If the parties to a collective agreement cover 
at least half of the employees within a specific branch, the collective agreement has general applicability for all 
companies within that branch. 
11  The  latest  agreement  was  reached  in  October  2011.  The  agreement  sets  the  framework  for  pay  and  cost 
increases  in  branch-level  collective  agreements  for  a  period  of  25  months.  According  to  the  framework 
agreement,  the  total  cost  effect  of  the  sectoral  agreements  shall  not  exceed  2.4 %  for  the  first  13  months, 
followed by 1.9 % for the next 12 months. The numbers include the rise in payroll costs and the cost effects of 
changes made in the terms and conditions of employment. The annual cost effect is calculated to be about 2 %. 

26 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
 
decline in the working age population. Currently there is a large spike in the number of people 
who draw their pension as soon as they are allowed to. In addition, there is no evidence of any 
delay in taking pension since the 2005 reforms took effect. These outcomes are in line with 
international  experience  and  consistent  with  the  findings  of  behavioural  economics  (Barr, 
2013).  Linking  the  statutory  retirement  age  to  life  expectancy  would  therefore  be  more 
effective than the current link between monthly pension benefits and life expectancy through 
the life-expectancy coefficient. 

The next wage agreement should aim for lower wage growth, in line with productivity 
growth. Negotiations between the employer associations 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 for 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. 

3.1.6  Energy intensity of the Finnish economy 

Finland's energy intensity is high compared to its Nordic neighbours and the euro area 
members,  as  shown  on  Graph  27.  The  industry  covers  almost  half  of  the  final  energy 
consumption, within the manufacturing sector the forest industry is by far the largest energy 
consumer, followed by the metal and the chemical industry (Graph 28). 

A  high  energy  intensity  combined  with  energy  imports  affects  the  industries'  cost 
competitiveness and Finland's trade balance. Through a high energy intensity rising energy 
prices  translate  into  increasing  production  costs  for  the  Finnish  industries.  Although  the 
overall  high  energy  intensity  stems  from  the  dominance  of  energy-intensive  industries  in 
Finland, a focus on energy efficiency could provide these industries with a competitive edge 
vis-à-vis  competing  industries  in  other  countries.  Finland  cannot  fully  cover  energy 
consumption  by  domestic  production;  more  than  half  of  the  consumed  energy  is  imported 
(Graph  29),  mostly  from  Russia.  The  high  dependency  on  Russia  for  energy  imports  partly 
originates from the structure of the existing infrastructure. Finland is an "energy island" and 
could  benefit  from  the  cooperation  with  the  Baltic  States  in  linking  electricity  and  gas 
networks. 

Already more than one fourth of the consumed energy originates from renewables. Most 
of  the  energy  from  renewables  is  produced  through  by-products  of  the  forestry  industry, 
indicated  as  wood  fuels  on  Graph  30,  complemented  by  hydro  and  wind  power.  The  high 
share  of  renewables  reduces  the  impact  of  energy  prices  on  Finland's  trade  balance  as  less 
fossil fuel needs to be imported.  

27 

 
 
 
 
 
 
 
 
Graph 27: Energy Intensity (2011) 

Graph 28: Energy consumption by sector (2011) 

o
r
u
e

0
0
0
1
r
e
p
t
n
e
a
v
u
q
e

l

i

l
i

o
f
o
m
a
r
g
o

l
i

K

800

700

600

500

400

300

200

100

0

6%

7%

26%

Forest Industry

Metal Industry

Chemical Industry

Other industries

25%

Transport

7%

5%

6%

19%

Households and
agriculture
Services

Non-specified

G
B

E
E

O
R

Z
C

K
S

V
L

L
P

T
L

I

US
H

I

F

E
B

Y
C

T
M

E
S

L
N

T
P

R
F

L
E

E
D

U
L

S
E

T
A

T

I

K
U

K
D

E

I

7
2
U
E

7
1
A
E

Source: Commission Services 

Source: Commission Services 

Graph  29:  Total  energy  consumption  in  Finland 
(2011) 

Graph  30:  Total  energy  consumption  by  source 
(2011) 

Total gross inland energy 
consumption: 35,745 kTOE

50,000

40,000

30,000

25,773

)
1
1
0
2
(

E
O
T
k

20,000

10,000

0

-10,000

17,272

-7,582

2011

3%4%

3%

6%

24%

Exports

Imports

Primary production

9%

11%

23%

17%

Oil

Wood fuels

Nuclear Energy

Coal

Natural Gas

Peat

Hydro and Wind
Power

Others

Net Imports of
Electricity

Source: Commission Services 

Source: Statistics Finland 

28 

 
 
 
 
 
 
 
 
 
 
 
 
 
3.2  Private sector debt 

In  nominal  terms,  both  non-financial  corporations  and  households  piled  up  debt  over 
the  past  ten  years,  with  households  accumulating  at  a  faster  pace.  Non-financial 
corporations experienced a big increase from 2007 to 2008 which cannot be explained by an 
increase  in  domestic  intercompany  lending,  as  consolidated  data  show  the  same  jump.  The 
rise  in  non-consolidated  private  debt  of  non-financial  corporations  was  in  line  with  GDP 
growth until the jump in 2008, maintaining a level of around 100% of GDP up to 2007 (Graph 
31). The level reached in 2011, 116% of GDP for non-financial corporations, sits above the 
EU  average  of  around  100%  of  GDP,  but  below  the  150%  of  GDP  attained  in  Sweden. 
Household  debt  increased  much  faster,  nearly  doubling  over  the  last  decade  from  33%  of 
GDP  in  2000  to  63%  of  GDP  in  2011.  It  has  to  be  noted  that  in  Finland  a  special  kind  of 
structure – housing corporations – exists, that although statistically classified in the corporate 
sector, is more akin to household borrowing. This increases non-financial corporations' debt, 
while decreasing total household debt. 

Graph 31: Private debt in % GDP 

% GDP

 140

 120

 100

 80

 60

 40

 20

 -

00 01 02 03 04 05 06 07 08 09 10 11

Non-Financial Corporations (Consolidated)

Non-Financial Corporations (Non-consolidated)

Households (Non-consolidated)

Source: Commission services 

3.2.1  Household debt 

Finnish household debt has nearly doubled over the last decade from 65% to 118% of 
disposable income. The increase is almost fully due to an increase in mortgage loans, with 
consumption loans for other purposes remaining more or less constant around 5-7% of GDP 
(Graph  32).  Apart  from  the  household  debt  level,  currently  at  the  euro  area  average,  its 
distribution among households warrants to be monitored. The share of households with debt 
levels exceeding 500% of their disposable income lies only at 4.5% (Statistics Finland).  

Lenient  loan  conditions  and  policies  facilitating  home  ownership  encouraged  debt 
accumulation and real house price increases. Over the past years decreasing interest rates 
and lengthening of the average maturities enabled larger loan amounts for the same level of 
monthly payments. In this context, it is important to note that virtually all mortgage loans in 
Finland  are  tied  to  variable  interest  rates.  In  addition,  loan-to-value  ratios  of  100%  or  even 

29 

 
 
 
above were not uncommon, especially for first-time buyers. The tax deductibility of mortgage 
interest rate payments is meant to encourage home ownership, but may by reducing the cost 
of financing contribute to an upward pressure on house prices that reduces the affordability of 
houses.12  Property  taxation  on  home  ownership  is  low  and  capital  gains  from  selling  the 
owner-occupied  property  are  not  taxed  (if  the  property  has  been  held  for  more  than  two 
years). 

Graph 32: Real house prices and housing and 
consumption loans of households 

Graph 33: Composite indicator on deleveraging 
pressures for EU27 member states, households 
(2011)

P
D
G

f
o
%

60

50

40

30

20

10

0

03

04

06

05

07

08
Loans for house purchase
Loans for consumption
Deflated housing prices (2005=100, r.a.)

09

10

12

11

10

90

80

70

60

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

s
t

e
s
s
a

o

t

t

b
e
D

:
I
I

e

t
i

s
o
p
m
o
C

0
0.1

11

LV

EE

ES

CY

SE

PT

UK

IE

NL

DK

SK
LT

PL

FI
EL

HU

CZ

BG

RO

SI

AT

EA17

FR

DE

BE
IT

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Composite I: Debt to capacity to repay

Source: Commission services 

Source: Commission services 

Households do not face excessive deleveraging pressures. Two composite indicators have 
been  constructed13  to  assess  deleveraging  pressures  according  to,  on  the  one  hand,  the 
capacity to repay and, on the other hand, leverage (debt to assets). These are shown in Graph 
33. Finnish households have a higher capacity to repay than the last third of the distribution 
(the  66th  percentile  line),  while  in  terms  of  the  leverage  indicator  deleveraging  pressures  on 
Finnish  household  are  a  bit  more  pronounced.  Despite  weaker  consumer  expectations, 
mortgage debt was still growing in the first three quarters of 2012. This may have been partly 
attributable  to  household  wanting  to  take  advantage  of  the  old  rules  before  more  restrictive 
conditions  on  mortgage  loans  are  being  phased  in  in  the  near  future  and  the  increase  in  the 
transfer tax from 1.6% to 2% in March 2013. 

12 Mortgage interest rate payments are deductible from capital income. Beyond that, 28% of the deficit due to 
interest  on  owner  occupied  dwellings  up  to  EUR  1400  can  be  credited  against  taxes  paid  on  earned  income. 
(European Commission, 2012e)  
13 The composite indicators were derived using clustering techniques in combination with Principal Component 
analysis  (PCA).  Data  on  the  following  variables  –  debt-to-GDP  ratio,  debt-to-gross  operating  surplus  (or 
disposable income for households) ratio, debt-to-financial assets, and debt-to-deflated financial assets - for the 
"accumulation  phase"  2000  to  2008  and  for  2011  were  collected  for  all  27  Member  States.  In  a  first  step, 
clustering techniques were used to reveal underlying similarities or mathematical distances between the multi-
dimensional  data  vectors  (in  order  to  classify  countries  into  different  categories).  Subsequently,  PCA  analysis 
was carried out to reduce the dimensionality of the data and to create composite indicators that account for the 
highest  possible  variation  in  the  underlying  variables  set  using  the  smallest  possible  number  of  factors.  
Non-consolidated figures. Debt includes loans and securities other than shares. The methodology is described in 
detail in Cuerpo et.al., 2013.   

30 

 
 
 
 
 
 
 
 
 
 
                                                 
 
Although prevailing debt levels are currently not considered a major risk to the stability 
of the Finnish economy, measures to curb debt growth are most welcome. The net overall 
borrowing position of Finnish households and their low savings rate is a cause for concern. 
The  Finnish  Financial  Supervisory  Authority's  recommendation  on  maximum  loan-to-value 
ratios of 90% is not always followed up by financial institutions and might therefore have to 
become binding. Talks are indeed on-going to turn the recommendation into a regulation, in 
which  the  Finnish  Financial  Supervisory  Authority  would  decide  on  the  maximum  loan-to-
value  ratio  for  mortgage  loans,  which  at  it  tightest  could  be  even  set  at  80%.  The  tax 
deductibility of mortgage interest payments should be phased out. A first step has been taken, 
reducing the tax deductibility from 100% to 85% in 2012, 80% in 2013 and 75% in 2014. A 
ceiling  on  the  maximum  deductible  amount  was  already  in  place,  in  order  to  prevent  the 
government  from  supporting  excessive  lending.  In  addition,  banks  are  urged  to  maintain  a  
cautious approach towards amortisation-free housing loans, which at the moment account for 
no more than 1% of all mortgage loans in Finland. 

3.2.2  Corporate debt 

The high level of corporate debt with respect to Finland's GDP need not be a problem as 
it might be due to the high degree of internationalisation and the lowering interest rates, 
which could lead to an overestimation of the risks associated with non-financial corporation 
debt. 

The  international  character  of  the  non-financial  corporate  sector  could  play  an 
important  role.  First  of  all,  gross  debt  levels  can  be  inflated  by  a  large  share  of  domestic 
intercompany loans. Netting out of domestic intercompany loans which represent around one 
fifth of corporate debt in Finland, results in a still elevated consolidated debt level of 90% of 
GDP.  Secondly,  contrary  to  domestic  intercompany  loans,  cross-border  intercompany  loans 
are not cancelled out when consolidating the debt of non-financial corporations. Cross-border 
intercompany  loans  and  multinational  companies  concentrating  part  of  their  debt  in  Finland 
therefore  increase  the  degree  of  indebtedness  of  Finnish  non-financial  corporations.  As 
multinationals service their debt with revenues from global sales, the debt sustainability is not 
directly linked to Finland's GDP. In that case, the debt-to-equity and debt-to-assets ratios of 
the  sector  of  non-financial  corporations  provide  a  more  accurate  view;  these  are  given  in 
Graph  34  and  Graph  35.  Still,  even  by  these  measures  Finland's  corporate  sector  is 
characterised by  still high debt levels, contrary to, for example, Sweden where despite  high 
debt-to-GDP  levels  the  debt-to-equity  and  debt-to-assets  ratios  are  much  lower.  Ideally,  the 
share  of  cross-border  intercompany  lending  should  be  consolidated  before  calculating  these 
ratios on a sectorial level by country; unfortunately this is not possible due to data constraints. 
Depending  on  the  share  of  cross-border  intercompany  lending,  the  debt  ratio  of  companies 
residing in Finland might be overestimated compared to companies in other countries. This is 
especially  the  case  when  imperfections  in  local  capital  markets  and  tax  systems  favour 
allocation of lending within a group in such a way that disproportionally high levels of debt 
are accounted for in Finland. 

Furthermore,  the  increase  in  non-financial  corporation  debt  potentially  reflects  an 
increased  appetite  for  loans  linked  to  the  historically-low  level  of  interest  rates.  The 
interest rate dropped from an average of 5.7% in 2007 to 4.4% in 2008, which might partly 
explain the higher debt-to-GDP levels in the period 2008-2011, compared to the years before. 
Nevertheless, the biggest drop actually occurred from 2008 towards 2009, falling from a level 
of  over  4%  to  barely  2.5%;  this  was  not  accompanied  by  further  increasing  debt  levels. 
Presumably,  the  further  drop  in  interest  rates  reflected  a  'safe  haven'  effect,  while  the  crisis 
context did not encourage the companies to leverage further. 

31 

 
 
Graph  34:  Debt-to-equity  ratio  of  non-financial 
corporations (2011) 

Graph  35:  Debt-to-assets  ratio  of  non-financial 
corporations (2011) 

250%

200%

150%

100%

50%

0%

L
E

V
L

O
N

S
E

E

I

L
S

E
D

R
H

T

I

I

TF
M

T
A

T
P

K
U

U
E

G
B

L
N

K
S

Y
C

E
E

L
P

O
R

E
S

K
D

R
F

E
B

U
H

T
L

Z
C

U
L

a
e
r
a
o
r
u
E

250%

200%

150%

100%

50%

0%

L
E

V
L

R
H

T

I

L
S

E
E

K
U

O
N

S
E

I

TF
A

T
P

U
E

L
P

G
B

T
M

T
L

E

I

E
D

K
S

E
S

K
D

O
R

Y
C

L
N

R
F

E
B

U
H

Z
C

U
L

a
e
r
a
o
r
u
E

Source: Commission services 

Source: Commission services 

Even  when  taking  these  factors  into  account,  Finnish  non-financial  corporations  are 
highly indebted; but risks are limited. Given that companies are currently net lenders to the 
rest of the economy, access to financing remains good and deleveraging is not pressing at the 
moment;  corporate  indebtedness  is  not  seen  as  a  major  issue  in  the  Finnish  economy.  The 
assessment is confirmed by the constructed composite indicators14 along the capacity to repay 
dimension  and  the  leverage  dimension,  shown  in  Graph  36.  Finland's  non-financial 
corporations score below the last third of the distribution on both dimensions. 

14 The composite indicators were derived using clustering techniques in combination with Principal Component 
analysis  (PCA).  Data  on  the  following  variables  –  debt-to-GDP  ratio,  debt-to-gross  operating  surplus  (or 
disposable income for households) ratio, debt-to-financial assets, and debt-to-deflated financial assets - for the 
"accumulation  phase"  2000  to  2008  and  for  2011  were  collected  for  all  27  Member  States.  In  a  first  step, 
clustering techniques were used to reveal underlying similarities or mathematical distances between the multi-
dimensional  data  vectors  (in  order  to  classify  countries  into  different  categories).  Subsequently,  PCA  analysis 
was carried out to reduce the dimensionality of the data and to create composite indicators that account for the 
highest  possible  variation  in  the  underlying  variables  set  using  the  smallest  possible  number  of  factors.  
Non-consolidated figures. Debt includes loans and securities other than shares. The methodology is described in 
detail in Cuerpo et.al., 2013.  

32 

 
 
 
 
                                                 
 
Graph 36: Composite indicator on deleveraging 
pressures for EU27 member states, non-financial 
corporations (2011) 

EL

LT

PL

DE

NL

SK

CZ

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

s
t
e
s
s
A

/
t
b
e
D

:
I
I

e
t
i

s
o
p
m
o
C

0

0

0.1

0.2

LV

IT

RO

FI
EA17

SI

EE

DK

FR

AT

BG

ES

PT

BE

CY

UK

SE

HU

IE

0.3

0.7
0.5
Composite I: Debt/Capacity to repay

0.4

0.6

0.8

0.9

1

Source: Commission services, ECFIN calculations 

33 

 
 
 
 
 
 
3.2.3  Health of the financial sector 

Credit supply and demand conditions remain solid. Graph 37 and Graph 38 compare the 
credit supply and demand conditions in Finland with the European Union average.15 Finland's 
financial corporations score above the average on all financial soundness indicators, such as 
the  increase  in  non-performing  loans  and  the  tier  1  capital  ratio.  On  the  demand  side, 
consumer confidence and SME loan demand are slightly below average, indicating the impact 
of  the  crisis  on  consumer  confidence  and  the  Finnish  economy  as  a  whole.  The  indicators 
illustrate  how  the  financial  position  of  the  Finnish  banking  sector  has  remained  solid 
throughout the crisis. Based on these fundamentals, no sudden credit crunch or deleveraging 
is expected in the near future. 

Graph 37: Stress map of credit supply conditions 

Graph 38: Stress map of credit demand conditions 

NPL increase (vs.
2007)

Unemployment rate

SME lending tightness
(SME survey)

Corporate lending
tightness (bank
survey)

Mortgage lending
tightness (bank
survey)

Tier 1 ratio (inv. scale)

Bank profitability -
ROE (inv. scale)

Banks' high-risk
foreign claims

Sovereign CDS

FI

Average

House-purchase loan
demand (bank survey,
inv. scale)

SME loan demand
(SME survey, inv.
scale)

Consumer confidence
(inv. scale)

Economic sentiment
(inv. scale)

Corporate loan
demand (bank survey,
inv. scale)

House price change
(vs. 2007Q4)

FI

Average

Source: Commission services 

Source: Commission services 

15  The  charts  present  stress  maps  of  credit  supply  and  demand  conditions.  For  each  variable  the  range  of  the 
graph is given by the maximum and minimum observation among all Member States (MS) with available data. A 
weighted average of all available EU27 Member States is provided as a visual reference. Variables are plotted on 
a  regular  or  inverted  scale  ensuring  that  a  larger  map  corresponds  to  more  adverse  conditions.  Credit  supply-
related indicators include the change in overall non-performing loans relative to 2007, the banks' Tier 1 capital 
ratio,  banks'  return  on  equity,    banks'  exposure  to  high  risk  foreign  claims  as  %  of  GDP,  the  sovereign  CDS 
spread, the Bank Lending Survey (BLS) tightening of credit standards for: (i) loans to enterprises; and (ii) house 
purchase  loans  (trailing  4-quarter  average),  and  the  Survey  on  the  access  to  finance  of  SMEs  (SAFE)  loan 
request  failure  rate  (percentage  of  requests  that  did  not  receive  all  or  most  of  the  amount  requested).  Credit 
demand-related  data  include  the  EC  Consumer  Confidence  Indicator,  the  Economic  Sentiment  Indicator,  the 
unemployment  rate,  the  house  price  evolution  relative  to  2007Q4,  the  BLS  changes  in  demand  for: 
(i) enterprises; and (ii) house purchase loans, and the SAFE variable on External financing needs. Most recent 
available data are presented (2012 Q2, Q3 or Q4). 

34 

 
 
 
 
                                                 
 
3.3  Growth of financial sector liabilities 

The  year-on-year  growth  of  the  non-consolidated  financial  liabilities  of  the  financial 
sector  stood  at  30.8%  in  2011,  far  above  the  threshold  of  16.5%.  In  fact,  the  non-
consolidated financial liabilities of the financial sector have increased substantially over time 
and  were  mostly  concentrated  in  the  subsector S122 – other monetary financial institutions, 
with a part of that growth originating from the central bank, as can be observed in Graph 39.  

Graph  39:  Non-consolidated  financial  liabilities  by 
subsector 

Graph  40:  Non-consolidated  financial  liabilities  of 
S122 (Other monetary financial institutions) 

 1,000,000

 900,000

 800,000

 700,000

 600,000

M

 500,000

 400,000

 300,000

 200,000

 100,000

 -

S125 - Insurance
corporations and
pension funds

S124 - Financial
auxiliaries

S123 - Other
financial
intermediaries,
except insurance
corporations and
pension funds
S122 - Other
monetary financial
institutions

 700,000

 600,000

 500,000

 400,000

M

 300,000

 200,000

 100,000

 -

02 03 04 05 06 07 08 09 10 11

02 03 04 05 06 07 08 09 10 11

Source: Commission services 

Source: Commission services 

F7 - Other accounts
receivable/payable

F6 - Insurance
technical reserves

F5 - Shares and
other equity

F4 - Loans

F3 - Securities other
than shares

F2 - Currency and
deposits

F1 - Monetary gold
and special drawing
rights

Regarding  the  expansion  of  the  commercial  banks'  liabilities,  it  was  driven  mainly  by 
currency  and  deposits  (F2)  and  securities  other  than  shares  (F3),  as  demonstrated  by 
Graph 40. The former category includes deposits from all sectors, including other MFIs. The 
latter one encompasses debt securities (short- and long-term) as well as derivatives. Although 
not  visible  in  the  presented  charts,  more  than  a  quarter  of  total  bank  liabilities  is  towards 
counterparties outside the euro area.16 

The Finnish banking sector is highly concentrated, with Nordea Bank Finland holding 
two thirds of the total assets. Data of the Finnish Financial Supervisory Authority allow for 
splitting  out  the  movements  in  Nordea  Bank's  liabilities  (Table  2).  Nordea  Bank  Finland, 
subsidiary of Swedish Nordea Group, accounts for over half of the growth in total financial 
liabilities of the entire financial sector. 

16 According to ECB data, it amounted to 28% in October 2012. 

35 

 
 
 
€
€
                                                 
 
Table 2: Non-consolidated financial liabilities by subsector  

Total Financial liabilities
      Of which: 
S121 - Central Bank
S122 - Other monetary financial institutions
        Of which Nordea Bank Finland
        Of which S122 excl Nordea Bank Finland
S123 - Other financial intermediaries
S124 - Financial auxiliaries
S125 - Insurance corporations and pension funds

Source: Commission Services 

3.3.1  Nordea derivatives 

2010 (M€)
657,422

2011 (M€)
859,840

38,639
479,904
286,086
193,818
77,147
5,455
56,277

90,029
638,830
399,287
239,543
70,964
5,936
54,081

10-11 
change (M€)
202,418

10-11 
change (%)
31%

Share of total 
financial 
liabilities change
100%

51,390
158,926
113,201
45,725
6,183
481
2,196

-            

-            

133%
33%

40%
24%

-8%
9%
-4%

56%
23%

25%
79%

-3%
0%
-1%  

The growth of the Nordea derivative portfolio accounts for more than one third of the 
growth in total financial liabilities of the Finnish financial sector. According to a decision 
at group level, all Nordea derivatives were to be concentrated in the Finnish subsidiary. The  
expansion  of  Nordea  Finland  liabilities  by  EUR  113  billion  in  2011  was  largely  due  to  the 
increase in value of Nordea's derivatives portfolio by EUR 73 billion.17 At the end of 2011, 
the  gross  value  of  Nordea's  derivative  portfolio  stood  at  EUR  166  billion.  The  values  of 
derivatives on the assets and liabilities sides were balanced. 

According  to  corporate  information,  Nordea  hedges  its  derivative  portfolios  by  the 
corresponding contracts and use of collateral. The most common risk-mitigation technique 
is  the  use  of  closeout  netting  agreements,  which  allow  to  net  positive  and  negative 
replacement  values  of  contracts  under  the  agreement  in  the  event  of  default  of  the 
counterparty.  In  addition,  Nordea  mitigates  the  exposure  towards  large  banks,  hedge  funds 
and institutional counterparties by an increasing use of financial collateral agreements, where 
collateral (mainly cash and government bonds) is placed or received on a daily basis to cover 
the  current  exposure.  After  reductions  from  closeout  netting  agreements  (EUR  150  billion) 
and  held  collateral  (EUR  5  billion),  Nordea's  net  derivative  exposure  at  the  end  of  2011 
amounted to only EUR 11 billion, compared to a gross exposure of EUR 166 billion. 

The  steep  growth  in  the  derivatives  portfolio  in  2011  resulted  mainly  from  the 
significant  fall  in  interest  rates  and  the  appreciation  of  the  dollar  in  that  year,  which 
pushed  up  value  of  the  contracts.18  The  bulk  of  derivatives  in  Nordea's  portfolio  reflects 
client business while proprietary trade is very limited. The contracts include mainly interest-
rate  swaps  and  options  and  currency  swaps,  whose  fair  value  changes  according  to  market 
volatility.19  High  value  swings  are  typical  for  this  portfolio,  reflecting  volatility  of  the 
underlying  markets.  After  having  expanded  by  as  much  as  173%  in  2008  and  declined  by 

17 Fitch data 
18 The average maturity of an interest rate derivative contract is 5 years, so a number of contracts was concluded 
at  the  time  when  interest  rates  were  higher.  The  fall  in  interest  rates  in  2011  automatically  increased  the  fair 
value of these contracts reflected on the balance sheet.  
19 Bank of Finland. 2012 "Financial Statistics Annual Review 2011". 

36 

 
 
      
      
        
        
        
          
      
      
        
      
      
       
      
      
         
        
        
          
          
               
        
        
                                                 
 
16% in 2009, the value of Nordea's derivative portfolio increased by 76% in 2011. In the first 
two quarters of 2012, it fell slightly again (8% since end 2011).  

It can be concluded that the increase of the value of derivatives portfolio in the Finnish 
banking sector did not lead to a proportional increase in the risk level, but resulted to a 
large  extent  from  the  underlying  market  developments  (i.e.  interest  rate  falls  and  US  dollar 
appreciation), consistently with the nature of derivative contracts. Nevertheless, the business 
volumes also increased in 2011 (by 22%) measured as notional volumes of newly-concluded 
contracts. Overall, the sizeable derivatives portfolio concentrated in Nordea Finland features 
specific  risks  (counterparty  credit  risk  and  settlement  risk,  portfolio  risk).20  Therefore, 
Nordea's  relevant  risk  mitigation  techniques  and  practices  should  be  carefully  monitored  by 
the competent supervisory authorities. 

3.3.2  MFI deposits 

Apart  from  Nordea's  derivatives  portfolio,  the  growth  of  the  financial  sector  liabilities 
resulted mainly from the increase in foreign deposits at Finnish MFIs. This phenomenon 
concerned  all  commercial  banks  as  well  as  the  central  bank.  In  2011,  total  currency  and 
deposits at Finnish MFI, excluding the central bank, increased by EUR 67 billion (Table 3), or 
one  third  of  the  growth  in  total  financial  liabilities  of  the  Finnish  financial  sector.  MFI 
deposits at the central bank increased by EUR 50 billion.  

The foreign deposits flew in through a specific channel. Directly, they came mostly from 
the banks based in the Nordic non-euro area countries: Sweden, Norway, Denmark and also 
the UK. Indirectly, according to information received during the IDR mission, they originated 
from banks established in the crisis-hit euro-area countries. The deposits of banks from euro 
area  countries,  mainly  Southern  peripherals,  increased  substantially  in  2011  in  Northern 
Europe due to its 'safe haven' reputation. Faced with the substantial deposit inflows, Swedish, 
Norwegian  or  Danish  banks  transferred  their  excess  euro-denominated  liquidity  to  their 
Finnish  branches  or  subsidiaries  in  order  to  subsequently  place  them  with  the  Bank  of 
Finland; the only central bank in the region belonging to the Eurosystem. 

The above-mentioned developments are reflected in the aggregated balance sheets of the 
Finnish  banking  sector.  In  2011,  total  interbank  lending  in  Finland  increased  by  EUR  57 
billion,  while  interbank  borrowing  increased  by  EUR  4  billion.21  Thus,  the  net  interbank 
lending  by  Finnish  commercial  banks  amounted  to  EUR  53  billion.  Their  EUR  50  billion 
deposits  at  the  central  bank  made  up  the  bulk  of  this  sum.22  In  the  same  period,  external 
liabilities  of  Finnish  commercial  banks  increased  by  EUR  58  billion.  This  includes  intra-
group fund transfers from non-euro area banks to their Finnish branches and subsidiaries. The 
analysis of the aggregated accounts of the Finnish banking sector indicates that a large share 
of these external funds was transformed into interbank lending, i.e. mainly commercial bank 
deposits at the central bank as described above. 

20 Counterparty credit risk is the risk that a counterpart in a FX, interest, commodity, equity or credit derivative 
contract defaults prior to maturity of the contract. Settlement risk is the risk of losing the principal on a financial 
contract,  due  to  a  counterpart’s  default  during  the  settlement  process.  Portfolio  risk  is  the  risk  that  balancing 
market risks by cross-hedging the positions does not bring the expected results. 
21 ECB data 
22 The remaining EUR 3 billion were lent to other euro area MFIs 

37 

 
 
                                                 
 
Bank deposits at the central bank are double-counted in total non-consolidated liabilities 
of the financial sector. For example, a deposit received from Sweden by Nordea Finland and 
subsequently  placed  at  the  Bank  of  Finland  is  recorded  among  the  commercial  banks' 
liabilities and also on the liability side of the central bank balance sheet. The EUR 50 billion 
increase  in  deposits  of  monetary  and  financial  institutions  (MFIs)at  the  Bank  of  Finland  in 
2011 led to the double counting effect amounting to 8 percentage points within the total 31 
per cent financial sector liabilities increase. The double counting, however, is also taken into 
account  in  setting  the  relatively  high  threshold  for  the  growth  of  non-consolidated  financial 
sector liabilities indicator in the MIP Scoreboard. 

Table 3: Split of financial liabilities of S122 

Split of financial liabilities of S122 - Other 
monetary financial institutions:
S122 - Other monetary financial institutions
F1 - Monetary gold and special drawing rights (SDRs)
F2 - Currency and deposits
F3 - Securities other than shares
F4 - Loans
F5 - Shares and other equity
F6 - Insurance technical reserves
F7 - Other accounts receivable/payable
Source: Commission Services, FinFSA23 

:

2010 (M€)
479,904

2011 (M€)
638,830

:

240,094
169,321
8,022
35,076
-
27,391

306,780
256,544
12,012
36,133
-
27,361

10-11 
change (M€)
158,926
-
66,686
87,223
3,990
1,057
-
-                 

30

3.3.3  Other liabilities 

10-11 change 
'assigned' to 
Nordea Bank 
Finland

113,201
-
28,258
84,547
-
396
-
-

Remaining 
10-11 
change
45,725
-
38,428
2,676
3,990
661
-
-             

30

Share of change in 
financial liabilities 
excl. Nordea Bank 
Finland

100%
0%
84%
6%
9%
1%
0%
0%

Abstracting  from  the  impact  of  derivatives  and  MFI  deposits,  other  liabilities  of  the 
financial sector also increased, although at a more moderate pace. Both non-MFI deposits 
and  wholesale  funding,  as  well  as  an  increase  in  the  own  funds,  contributed  to  the  overall 
growth. In Finland, loans and deposits account for a relatively small part (less than a half) of 
the  total  banking  sector  balance  sheet.  In  2011,  deposits  of  households  and  non-financial 
corporations increased by 6% (EUR 7 billion). It was below the growth of credit to the private 
sector,  which  amounted  to  8 %  in  2011  (EUR  14  billion),  up  from  1 %  in  2009  when  the 
economy  was  deeply  in  recession.  At  around  140 %,  the  loan-to-deposit  ratio  in  Finland  is 
relatively  high  and  the  structural  liquidity  position  of  the  banking  sector  could  benefit  from 
further  enhancement.  However,  banks  have  currently  no  difficulties  in  financing  their 
operations  as  access  to  the  wholesale  market  is  open  at  advantageous  conditions,  reflecting 
the  Nordic  countries'  'safe  haven'  status.  As  a  consequence,  there  are  no  credit  supply 
constraints  and  surveys  show  that  enterprises  do  not  see  lack  of  credit  among  their  most 
serious problems. 

The wholesale funding market is supported by the highest credit rating for the Finnish 
sovereign, which ensures the value of collateral. In 2011, the issuance of debt securities by 
Finnish  banks  increased  by  17%,  especially  in  the  segment  of  maturities  above  2  years  (by 
EUR 10.5 billion). The increase of average bond maturity (currently at 7 years for bonds with 
maturities  above  1  year)  enhanced  funding  stability.  Simultaneously,  the  role  of  covered 

23 The amounts assigned to Nordea Bank Finland are based on statistics from the Finnish financial supervisory 
authority. 

38 

 
 
 
      
      
        
           
      
                
                   
            
      
      
          
             
      
      
      
          
             
        
          
        
            
                   
        
        
        
            
                  
           
              
              
                
                   
            
        
        
                   
                                                 
 
bonds  was  increasing  in  the  pool  of  bonds  issued  by  Finnish  banks.  By  end  2011,  covered 
bonds accounted for 35% of total bond portfolio.24 

3.3.4  Assessment 

The  strong  growth  of  financial  sector  liabilities,  while  not  raising  undue  concern, 
requires careful monitoring. To a large extent, the high growth of financial sector liabilities 
resulted from the market movements reflected in the value of Nordea's derivatives portfolio, 
the 'safe haven' effect leading to inflows of foreign MFI deposits and the double counting of 
MFI deposits at the central bank. The change of fair value of interest rate or currency swaps 
on  the  Nordea's  balance  sheet  did  not  change  the  risk  level  of  its  derivatives  portfolio.  The 
inflow of foreign deposits did not stimulate a lending boom by Finish banks (be it domestic or 
foreign),  but  were  rather  deposited  at  the  central  bank.  Nevertheless,  the  situation  warrants 
close  supervision.  As  explained  above,  the  derivatives  business  features  inherent  risks. 
Secondly,  the  hitherto  prudent  treatment  of  foreign  deposits  by  banks  does  not  guarantee 
prudence in the future. Excessive liquidity should not lead to excessive risk taking. 

Potential risks for the Finnish financial sector stem also from its high concentration and 
its  funding  structure.  Nordea  Bank  holds  67%  of  total  banking  assets  in  Finland.  Such  a 
strong position of one banking group is exceptional in the euro area. The second player in the 
market,  OP-Pohjola  Group,  holds  15%  of  the  assets.  The  insurance  market  is  highly 
concentrated as well, closely intertwined with the banking sector and currently suffering from 
adverse  economic  conditions.  This  heavy  concentration  in  the  banking  sector  implies 
contagion  risk  from  the  systemic  bank.  Next,  the  reliance  on  foreign  funding  sources  and 
wholesale  markets  imply  risks  for  bank  financing.  So  far  Finnish  banks  are  seen  as  solid, 
characterised  by  high  capital  adequacy  and  high  profitability  ratios  as  well  as  by  low  non-
performing loans and low exposure to troubled economies. They are mainly increasing their 
long-term  bond  issuance,  benefitting  from  the  advantageous  market  terms.  However,  a  tail 
event in Finland or an external shock could abruptly reverse the flow of foreign funds. 

24 Data by the Federation of Finnish Financial Services. 

39 

 
 
                                                 
 
4.  Policy challenges 

The analysis in sections 2 and 3 indicates that macroeconomic developments in the areas of 
competitiveness,  the  high  level  of  private  debt  and  the  structure  of  the  financial  sector  are 
among the main challenges in Finland. 

It should be recalled that these challenges were identified under the MIP in the first IDR and 
relevant  policy  responses  to  improve  competitiveness  were  reflected  and  integrated  in  the 
country-specific  recommendations  issued  for  Finland  in  July  2012.  The  assessment  of 
progress in the implementation of those recommendations will take place in the context of the 
assessment  of  the  Finnish  national  reform  programme  and  stability  programme  under  the 
European  Semester.  Against  this  background,  this  section  discusses  different  avenues  that 
could be envisaged to address the challenges identified in this IDR. 

Concerning the challenge of improving competitiveness a number of different avenues can 
be considered:  

Measures  aimed  at  increasing  Finland's  non-price  competitiveness  would  be  highly 
beneficial.  Leveraging  the  country's  high  R&D  intensity,  this  should  be  more  effectively 
translated  into  the  development  of  new  products.  Encouraging  companies  to  introduce 
product, process, marketing or organisational-related innovations would be highly beneficial 
for the Finnish economy in terms of increasing exports and in terms of the diversification of 
exports  beyond  forestry  and  electronics.  It  should  be  recalled  that  country-specific 
recommendation nr 5 from 2012 called for a continuation of efforts to diversify the business 
structure,  in  particular  by  hastening  the  introduction  of  planned  measures  to  broaden  the 
innovation  base.  Measures  aimed  at  fuelling  innovation  and  rising  product  quality 
unfortunately typically take a long time to produce effects, while an improvement would be 
most welcome already in the medium term. Measures facilitating already existing firms and 
products to grow and export could generate quicker effects on non-price competitiveness for 
Finland.  One  example  would  be  the  facilitation  of  the  access  to  foreign  export  markets  by 
small- and medium-sized enterprises. This is tackled in Finland through Finnvera, the credit 
guarantee  and  lending  agency.  With  regards  to  the  longer  term,  the  Finnish  government  is 
providing additional support for R&D through the Tekes foundation; it provides support for 
research  activities  and  it  aims  to  foster  a  more  entrepreneurial  and  risk-taking  attitude.  In 
addition,  the  Finnish  government  set  up  the  ICT  2015  working  group,  which  recently 
identified 4 critical directions that should be followed to re-establish Finland's technological 
lead  in  ICT.  These  are:  i) the  fast  development  of  a  common  architecture  for  all  public 
services; ii) the establishment of a 10-year programme for ICT-related research, development 
and  innovation;  iii) the  establishment  of  a  funding  programme  to  secure  funding  for  high-
growth enterprises; and iv) the establishment of a governmental expert group to ensure long-
term development.  

Measures to improve the energy infrastructure and lower the country's energy intensity 
would have a positive impact on Finland's trade balance and cost competitiveness. Given 
its  structure,  Finnish  industry  is  relatively  energy  intensive.  Its  growth  and  productivity 
potential will therefore also depend on meeting the climate change challenges and improving 
energy efficiency. Related to this, Finland could improve its energy infrastructure. Finland is 
an  "energy  island"  and  could  benefit  from  the  cooperation  with  the  Baltic  States  in  linking 
electricity and gas networks. 

40 

 
 
 
Labour  cost  growth  could  be  moderated  through  wage  moderation,  productivity 
increases, or both. The current wage formation system implies that those industry branches, 
which show below-average productivity growth, have come under additional pressure due to 
relatively higher growth in their unit labour costs. It would therefore be important to increase 
the  responsiveness  of  the  wage  formation  system  to  sectoral  productivity  developments.  In 
particular,  productivity  developments  should  be  considered  explicitly  in  each  wage 
negotiation  round,  as  included  in  the  country-specific  recommendation  nr  5  from  2012. 
Productivity  increases  should  not  only  be  focused  on  tradable  sectors,  but  also  on  non-
tradable  industries,  especially  those  serving  as  inputs  to  the  tradable industries.  Increases  in 
productivity  would  also  attenuate  the  labour  force  decline  due  to  ageing.  In  this  respect 
efficiency gains in public services such as healthcare and education (through cutting down the 
length of studies and speeding up graduation in higher education) would be most welcome. It 
should be recalled that the country-specific recommendation nr 2 from 2012 included the need 
to  take  further  measures  to  achieve  productivity  gains  and  cost  savings  in  public  service 
provision. The country-specific recommendation nr 4 from 2012 called for the enhancement 
of competition in product and service markets.  

Measures are needed to increase labour supply. It would be important to take measures to 
increase  labour  supply  in  the  longer  term,  in  order  to  counter  the  negative  effects  on  the 
labour market from population ageing and the related decline in the working age population. 
An increase in the effective and the statutory retirement age would result in a slower decline 
in  the  working  age  population  as  well  as  soften  the  cost  pressure  of  pensions  for  the 
government. The country-specific recommendation nr 3 from 2012 urged for the activation of 
young  people,  the  long-term  unemployed  and  older  workers,  as  well  as  an  increase  of  the 
effective retirement age taking into account improved life expectancy.  

Concerning the challenges linked to the high level of private debt, a number of measures 
can be considered as regards: 

Although prevailing private debt levels are currently not considered a major risk to the 
stability of the Finnish economy, measures to curb debt growth are most welcome. The 
Finnish government is aware of the increase in household debt, accompanied by lower saving 
rates, and takes measures to reduce incentives for taking on and holding debt. A proposal to 
make the recommendation by the Finnish Financial Supervisory Authority, on a cap on loan-
to-value ratios for mortgage loans, binding is currently being studied. The tax deductibility of 
mortgage interest payments is currently being decreased.  

Concerning the challenges linked to the financial sector, close monitoring is required: 

Close monitoring of the Finnish financial sector is required, as potential risks stem from 
its high concentration and its funding structure. Heavy concentration in the banking sector 
implies  contagion  risk  from  the  systemic  bank;  the  reliance  on  foreign  funding  sources  and 
wholesale markets imply risks for bank financing. The large derivatives portfolio of Nordea 
Group  concentrated  in  Finland  requires  strong  supervisory  oversight.  Finally,  the  recent 
liquidity  inflows  related  to  the  euro  area  crisis,  so  far  largely  absorbed  by  the  central  bank, 
should not lead to risky investments. All these developments require close monitoring by the 

41 

 
 
Finnish  FSA,  both  at  the  micro-prudential  and  the  macro-prudential  level25,  in  cooperation 
with its Nordic counterparts. 

25  Macroprudential  supervision  in  Finland  will  be  in  the  remit  of  the  Finnish  FSA  Board,  with  the  Bank  of 
Finland  contributing  through  the  provision  of  analytical  underpinnings  and  advice,  according  to  a  draft  law 
currently in consultation. 

42 

 
 
                                                 
 
References 

Bank of Finland, 'External balance and competitiveness of the Finnish Economy', Presentation 
during our visit, 19 December 2012. 

Bank  of  Finland,  'Growth  in  financial  sector  liabilities',  Presentation  during  our  visit,  19 
December 2012. 

Barr,  N.  'Evaluation  of  the  Finnish  pension  system  part  I:  The  pension  system  in  Finland: 
Adequacy,  sustainability  and  system  design',  for  Eläkturvakeskus  (Finnish  Centre  for 
Pensions),  2013. 

Cuerpo Caballero C. and A. Mordonu, 'House Price imbalances and structural features of the 
housing markets' in European Commission (Directorate General for Economic and Financial 
Affairs), 'Quarterly report on the euro area', Volume 10 n°3, 2011. 

Cuerpo,  C.,  I.  Drumond,  J.  Lendvai,  P.  Pontuch,  and  R.  Raciborski,  ‘Indebtedness, 
deleveraging  dynamics  and  macroeconomic  adjustment,’  European  Economy  Economic 
Papers, 2013 (forthcoming). 

ETLA (The Research Institute of the Finnish Economy), 'EU Commission visit to Finland – 
discussion topics', Presentation during our visit, 20 December 2012. 

European Commission (2012a), 'Assessing the dynamics of house prices in the euro area', in 
Quarterly Report on the euro area vol.11 n°4 

European  Commission  (2012b),  'Current  account  surpluses  in  the  EU',  European  Economy 
9/2012. 

European Commission (2012d), 'Innovation Union Scoreboard 2011', 2012.  

European Commission (2012e), 'Tax reforms in EU member states', 2012. 

Federation  of  Finnish  Financial  Services,  'Private  indebtedness  and  state  of  the  banking 
sector', Presentation during our visit, 20 December 2012. 

Federation  of  Finnish  Financial  Services,  'Saving,  borrowing  and  paying  in  Finland',  2012 
(http://www.fkl.fi).   

Federation of Finnish Technology Industries, 'Industrial trends and outlook – the technology 
industry', Presentation during our visit, 20 December 2012. 

Federation  of  Finnish  Technology  Industries,  'Economic  situation  and  outlook  4/2012',  1 
November 2012 (http://www.techind.fi).  

Finnish Financial Supervisory Authority, Statistics, 2012 (http://www.fin-fsa.fi). 

Kajanoja, L. 'Suomen vaihtotaseen heikkeneminen', Bank Of Finland Online 12/2012 

Ministry  of  Finance,  'EU  Commission  visit  to  Finland  –  discussion  topics',  Presentation 
during our visit, 19 December 2012. 

The World Bank, Doing business, 2012 (http://www.doingbusiness.org).  

Tulli Customs, Uljas statistical database, 2012 (http://uljas.tulli.fi/).  

Vartia,  L.,  'Finland's  housing  market:  Reducing  risks  and  improving  policies',  OECD 
Economics Department Working Papers, No 514, OECD Publishing, 2006. 

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World Economic Forum, 'The global competitiveness report 2012-2013', 2012. 

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