Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Finland and delivering a Council opinion on the 2016 stability programme of Finland
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Finland, administrative reform, competition policy, economic policy, economic reform, entrepreneurship, investment, labour market, pay policy, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 346 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Finland   and delivering a Council opinion on the 2016 stability programme of Finland  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Finland  

and delivering a Council opinion on the 2016 stability programme of Finland 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on 17-18 March 2016. On 26 November 2015, on the basis of Regulation (EU) No 
1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified Finland as one of the Member States for which an in-depth review would 
be carried out. On the same day, the Commission also adopted a recommendation for 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 346 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

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(2) 

(3) 

(4) 

(5) 

a  Council  recommendation  on  the  economic  policy  of  the  euro  area7.  This 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  among  the  economies  in  the  economic  and 
monetary union, Finland should ensure the full and timely implementation of those 
recommendations. 
The 2016 country report for Finland8 was published on 26 February 2016. It assessed 
Finland's  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 14 July 2015, and Finland's progress towards its national Europe 2020 
targets. It also included the in-depth review under Article 5 of Regulation (EU) No 
1176/2011. On 8 March 2016, the Commission presented the results of the in-depth 
review.9 The Commission’s  analysis led it to  conclude that Finland is experiencing 
macroeconomic  imbalances.  In  particular,  it  is  essential  to  tackle  the  loss  of  cost-
competitiveness  accumulated  over  several  years,  which  is  mainly  due  to  wage 
growth  having  exceeded  that  of  productivity  for  a  protracted  period,  leading  to  a 
sharp deterioration in the current account between 2008 and 2012. The analysis also 
pointed  to  significant  medium-  and  long-term  risks  to  the  sustainability  of  already 
strained public finances.  

On  14  April  2016,  Finland  submitted  its  2016  national  reform  programme  and  its 
2016  stability  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

the 
Relevant  country-specific 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application of the measures linking the effectiveness of the European Structural and 
Investment Funds to sound economic governance10.  

in 

The 2016 stability programme indicates that the budgetary impact of the exceptional 
inflow  of  refugees  is  significant  and  provides  adequate  evidence  of  the  scope  and 
nature of these additional budgetary costs. According to the Commission, the eligible 
additional expenditure amounted to 0.05% of GDP in 2015 and is currently estimated 
at 0.2% of GDP in 2016. The provisions defined in Article 5(1) and Article 6(3) of 
Regulation  (EC)  No  1466/97  allow  catering  for  this  additional  expenditure,  in  that 
the inflow of refugees is an exceptional event, its impact on Finland's public finances 
is  significant  and  sustainability  would  not  be  compromised  by  allowing  for  a 
temporary  deviation  from  the  adjustment  path  towards  the  medium-term  budgetary 
objective.  Therefore,  the  required  adjustment  towards  the  medium-term  budgetary 
objective  for  2015  has  been  reduced  to  take  into  account  these  costs.  Regarding 
2016, a final assessment, including on the eligible amounts, will be made in spring 
2017 on the basis of observed data as provided by Finland's authorities. 

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COM(2015) 692 final. 
SWD(2016) 94 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

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(8) 

Finland  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  On  18 
May  2016,  the  Commission  issued  a  report  under  Article  126(3)  of  the  TFEU,  as 
Finland's  general  government  debt  exceeded  the  60%  of  GDP  reference  value  in 
2015.  The  analysis  concluded  that  the  debt  criterion  should  be  considered  as 
complied  with.  In  its  2016  stability  programme,  the  government  plans  an 
improvement in the headline balance to -2.5% of GDP in 2016 and further to -1.3% 
in  2020.  The  government  plans  to  reach  its  medium-term  budgetary  objective  —  a 
deficit  of  0.5  %  of  GDP  in  structural  terms  –  by  2019.  According  to  the  stability 
programme, the government debt-to-GDP ratio is expected to peak at 67.4% in 2019 
and  to  decline  to  67.2%  in  2020.  The  macroeconomic  scenario  underpinning  these 
budgetary  projections  is  plausible.  The  measures  needed  to  reach  the  medium-term 
budgetary  objective  by  2019  have  not  been  sufficiently  specified.  Based  on  the 
Commission  2016  spring  forecast,  there  is  a  risk  of  some  deviation  from  the 
recommended adjustment in 2016. The conclusion for 2016 would not change in case 
the  budgetary  impact  of  the  exceptional  inflow  of  refugees  was  excluded  from  the 
assessment. Under unchanged policies, there is a risk of a significant deviation from 
the recommended adjustment in 2017. The debt-to-GDP ratio is projected to continue 
its  upward  trend,  reaching  66.9%  in  2017.  Based  on  its  assessment  of  the  stability 
programme  and  taking  into  account  the  Commission  2016  spring  forecast,  the 
Council  is  of  the  opinion  that  there  is  a  risk  that  Finland  will  not  comply  with  the 
provisions  of  the  Stability  and  Growth  Pact.  Therefore,  further  measures  will  be 
needed to ensure compliance in 2016 and 2017. 

Due to ageing of the population and a declining workforce, expenditure on pensions, 
health and long-term care is set to increase from 23.1% in 2013 to 26.9% of GDP by 
203011. In January 2016, Finland enacted a pension reform that will link pensions to 
life  expectancy  as  of  2017.  Social  and  healthcare  services,  provided  by  the 
municipalities,  amount  to  10  %  of  GDP.  Without  reform  of  the  system,  that 
expenditure is forecast to grow by 2.4% annually in nominal terms and increase as a 
share  of  GDP.  The  main  outline  of  a  far-reaching  administrative  reform  and 
restructuring  of  healthcare  and  social  services  has  been  agreed.  The  reform's  main 
aims include the reduction of the sustainability gap in the long run by EUR 3 billion 
through  better  control  of  the  costs.  This  will  be  achieved  through  integration  of 
services, larger arrangers of services and digitalisation. All of the details still need to 
be worked out and change management plans put in place before the reform can be 
implemented from 2019 as planned. The government has announced that measures to 
implement the reform will be presented at the end of 2016. The magnitude and tight 
timetable  of  the  reform  mean  that  implementation  will  be  a  challenge.  Timely 
adoption of the legislative proposals is therefore important.    

To  restore  Finland's  competitiveness,  the  functioning  of  the  labour  market  must  be 
improved  in  several  ways.  On  an  aggregate  level,  wage  increases  have  been 
moderate  since  the  centrally  agreed  wage  deal  was  agreed  in  late  2013.  Under  the 
agreement, the year-on-year increase in negotiated wages slowed from 1.3 % in the 
last quarter of 2013 to 0.5 % in the fourth quarter of 2015. In June 2015, the social 
partners  decided  to  extend  the  agreement  into  2016.  However,  labour  productivity 

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The  2015  Ageing  Report:  Economic  and  budgetary  projections  for  the  28  EU  Member  States  (2013-
2060) European Economy 3. May 2015. Brussels. 

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growth has not yet recovered and therefore nominal unit labour costs are forecast to 
increase,  albeit  more  slowly.  Negotiations  have  been  carried  out  to  restore  cost-
competitiveness. A Competitiveness Pact was agreed between social partners on 29 
February 2016. The agreement needs to be translated into sectoral agreements before 
it  can  be  implemented.  The  Competitiveness  Pact  will  be  complemented  with 
measures agreed between social partners to ensure more labour market flexibility and 
a  new  model  for  wage  growth  by  anchoring  wages  of  other  sectors  to  those  facing 
external  competition.  It  is  important  to  implement  the  labour  market  measures  in  a 
way that fully respects the role of social partners.  

Due  to  declining  size  of  the  working  age  population,  improving  the  labour  market 
participation  rate  is  important.  This  requires  continued  efforts  to  integrate  older 
workers, young people, the long-term unemployed and the low-skilled into the labour 
market.  The  employment  rate  has  decreased  by  more  than  two  percentage  points, 
from a pre-crisis peak of 70.6 % in 2008 to 68.5 % in 2015, while unemployment has 
increased  from  6.4  %  to  9.4  %.  The  employment  rate  of  the  elderly  has  been 
gradually  improving,  but  some  early  exit  pathways  remain  in  the  form  of  extended 
unemployment benefits for older workers until retirement which, if not limited, could 
compromise the positive impact of the pension reform enacted in 2016. The effects 
of the pension reform will be assessed in 2019. Long-term unemployment increased 
considerably between 2008 and 2014 from 1.2 % to 1.9 % of the total labour force, 
despite  many  of  the  long  term  unemployed  eventually  moving  out  of  the  labour 
force. Youth unemployment increased to 22.4% in 2015. The low-skilled are affected 
most  by  the  poor  performance  of  the  labour  market.  Cutting  the  budget  for  active 
labour  market  policies  at  a  time  when  there  is  an  increasing  demand  for  such 
measures  could  harm  opportunities  for  the  above-mentioned  groups  to  return  to 
work. In terms of activation, the complex benefits system with its different types of 
allowances can result in significant inactivity and low wage traps. Addressing these 
traps  and  introducing  positive  incentives  to  accept  work,  such  as  improving  the 
possibility to combine work and benefits, is particularly important in view of the cuts 
to the budget for active labour market policies. The arrival of a comparatively large 
number  of  migrants  and  refugees  in  Finland  in  2015  could  serve  to  counter  the 
effects  of  population  ageing,  but  only  if  they  are  successfully  integrated  into  the 
labour market and the education system. There are matching problems in the labour 
market, partly due to the structural change in the economy, as new jobs are created in 
different  geographical  areas  and  industries  compared  with  those  where  jobs  have 
been  lost.  Measures  that  increase  affordable  housing  in  the  Helsinki  area  and 
effective policies to help people update their skills and find work are needed. 

The business environment in Finland is as good as or better than in other advanced 
economies. However, lack of competition, in particular in services aimed primarily at 
the  domestic  market,  such  as  retail  and  transport  services,  affects  the  overall 
competitiveness  of  the  Finnish  economy.  Businesses  have  identified  excessive 
regulatory requirements as obstacles to entry to and growth in some markets. These 
excessive  requirements  need  to  be  addressed  to  promote  entrepreneurship  and 
investment.  In  the  retail  sector,  the  reform  of  planning  regulations  will  set  more 
flexible  rules  on  the  size  and  location  of  stores.  The  tradable  sector  continues  to 
restructure and would benefit from developing new markets, products and services, 
particularly  those  with  high  value  added.  Structural  change  could  be  facilitated  by 
innovation. 
policies  supporting  company  expansion, 
Legislative  amendments  were  passed  in  autumn  2015,  but  most  are  expected  to  be 

internationalisation  and 

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implemented  only  between  2016  and  2018.  The  government  has  announced  that 
further structural reforms will be made to increase market competition. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Finland’s  economic  policy  and  published  it  in  the  2016 
country report. It has also assessed the stability programme and the national reform 
programme and the follow-up given to the recommendations addressed to Finland in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal and socio-economic policy in Finland but also their compliance with EU rules 
and guidance, given the need to strengthen the EU's overall economic governance by 
providing EU-level input into future national decisions. The recommendations under 
the European Semester are reflected in recommendations 1 to 3 below. 

In  the  light  of  this  assessment,  the  Council  has  examined  the  stability  programme, 
and its opinion12 is reflected in particular in recommendation (1) below. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  stability  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendations 2 and 3 below,  

HEREBY RECOMMENDS that Finland take action in 2016 and 2017 to: 

1. 

2. 

3. 

Achieve an annual fiscal adjustment of at least 0.5 % of GDP towards the medium-
term budgetary objective in 2016 and 0.6 % in 2017. Use windfall gains to accelerate 
the  reduction  of  the  general  government  debt  ratio.  Ensure  timely  adoption  and 
implementation of the administrative reform with a view to better cost-effectiveness 
of social and healthcare services.  

local  wage  bargaining  and 

While  respecting  the  role  of  social  partners,  ensure  that  the  wage  setting  system 
to 
enhances 
competitiveness  and  a  more  export  industry-led  approach.  Increase  incentives  to 
accept  work  and  ensure  targeted  and  sufficient  active  labour  market  measures, 
including  for  people  with  a  migrant  background.  Take  measures  to  reduce  regional 
and skills mismatches.  

rigidities,  contributing 

removes 

Continue  pursuing  efforts  to  increase  competition  in  services,  including  in  retail. 
Promote entrepreneurship and investment, including by reducing administrative and 
regulatory burden, to foster growth of high value added production.  

Done at Brussels, 

For the Council 
The President 

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Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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