COMMISSION STAFF WORKING DOCUMENT Country Report Finland 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Finland, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 224 final  COMMISSION STAFF WORKING DOCUMENT Country Report Finland 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2018) 120 final}   
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Reform priorities 

3.1.  Public finances and taxation 

3.2.  Financial sector 

3.3.  Labour market, education and social policies 

3.4.   Investment 

3.5.   Sectoral policies 

Annex A: Overview Table 

Annex B:  Macroeconomic Imbalance Procedure Scoreboard 

Annex C: Standard Tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic, financial and social indicators - Finland 

Table 2.1: 

Progress with Council's Country Specific Recommendations 

Table 3.2.1: 

Financial soundness indicators, all banks in Finland 

Table 3.3.1: 

Inactivity rates in Finland and the EU in 2008 and 2016 — Stock  in percentage of total 

25-49 age population 

Table B.1: 

The MIP Scoreboard for Finland 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

1 

4 

10 

14 

14 

18 

23 

31 

38 

42 

46 

47 

53 

9 

11 

18 

26 

46 

47 

48 

49 

50 

51 

52 

 
 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

External and domestic demand — Contribution to growth — Finland 

Graph 1.2: 

Contributions to potential growth — Finland 

Graph 1.3:  Quarterly harmonised index of consumer prices, Finland, year-on-year %-change 

Graph 1.4: 

Breakdown of real effective exchange rate (REER), nominal effective exchange rate 

(NEER), relative harmonised index of consumer prices (HICP) — Finland 

Graph 1.5: 

Nominal unit labour costs in total economy — Denmark, Germany, Finland and 

Sweden (2005 = 100) 

Graph 1.6: 

Export market shares (EMS) of goods and services — Finland 

Graph 1.7: 

Breakdown of external position (current and capital accounts) — Finland (to be 

updated) 

Graph 1.8: 

Breakdown of the international investment position (NIIP) in % of GDP — Finland 

Graph 2.1:  Overall multiannual implementation of 2011-2017 CSRs to date 

Graph 3.1.1:  Debt projections according to social and healthcare reform proposals and Debt 

Sustainability Analysis (DSA) 

Graph 3.1.2:  General government consumption, as a share of GDP and as broken down by 

function, 2005, 2010, 2015, Finland and the EU 

Graph 3.1.3: 

Tax revenues from environmental taxes, 2010 and 2015 

Graph 3.2.1:  Lending to the private sector — Change in stock of loans (y-o-y) 

Graph 3.2.2:  Overvaluation gap for price/income, price/rent and fundamental model valuation 

gaps — Finland 

Graph 3.2.3:  Share of dwelling construction in GDP — Annual change in % 

Graph 3.2.4:  Gaps to prudential thresholds and fundamental benchmarks for non-financial 

corporations and households 

Graph 3.2.5:  Leverage of households (households’ debt stock to GDP ratio) (1) 

Graph 3.3.1:  Labour market indicators 

Graph 3.3.2:  Evolution of employment by sector 

Graph 3.3.3:  Labour shortages 

Graph 3.3.4:  Beveridge curve 

Graph 3.4.1:  Export market share growth by type (goods or services) 

Graph 3.4.2:  Breakdown of the balance of trade for goods (fuels included) 2001-2017 — Cost and 

non-cost competitiveness impact 

Graph 3.4.3:  Breakdown of rate of change of nominal ULC in Finland by change in inflation, real 

compensation of employee, productivity contribution), rate of change of nominal 

ULC in EA — Finland 

Graph 3.4.4: 

Total factor productivity (total economy) — EU28, Germany, Finland and Sweden 

Graph 3.4.5: 

Intellectual property product investment in volume — EU (28), Denmark, Germany, 

Estonia, Finland and Sweden 

Graph 3.4.6:  Research and development gross capital formation — Net capital stock by industry 

and year 

Graph 3.4.7:  Non-financial corporations surplus redistribution — Finland 

4 

4 

5 

6 

7 

7 

7 

8 

10 

14 

16 

17 

18 

20 

20 

21 

22 

23 

23 

25 

25 

31 

31 

32 

33 

33 

34 

34 

 
 
Graph 3.4.8:  Share of high, medium-high, medium-low and low technology in total manufacturing 

exports — UK, Denmark, Netherlands, Germany, Sweden, Belgium, Austria, Finland 

35 

LIST OF BOXES 

Box 2.1:  

Tangible results delivered through EU support to structural change in Finland 

Box 3.3.1:  

Monitoring performance in light of the European Pillar of Social Rights 

Box 3.3.2:  

Policy highlight: Ohjaamo: from a pilot project to a structural reform to provide 

support to young people 

Box 3.4.1:  

Investment challenges and reforms in Finland 

13 

24 

29 

37 

 
 
 
 
 
EXECUTIVE SUMMARY 

The  positive  economic  outlook  paves  the  way 
for  further  reforms  which  could  lift  Finland's 
growth  potential  and 
improve  resilience. 
Economic  activity  is  expanding  owing  to  external 
demand and improved cost competitiveness as well 
as  increasing  investment.  Despite  the  recently 
adopted  measures,  the  recovery  in  the  labour 
market could be hampered by skills shortages and 
low 
labour  market  participation.  A  higher 
employment rate and cost efficient public services 
are  key 
long-run 
sustainability  of  public  finances  and  the  welfare 
these  challenges  would 
system.  Addressing 
improve the resilience of the economy. (1)  

securing 

issues 

the 

to 

by 

increasing 

investment, 

Finland  is  emerging  from  a  protracted  crisis. 
The  country  exited  from  economic  recession  in 
2016  as  real  GDP  expanded  robustly  and  in  2017 
economic  activity  is  expected  to  have  increased 
even  more.  In  2016,  the  expansion  was  quick-
initially 
started 
construction,  supported  by  cheap  borrowing  for 
households  and  recovering  profits  for  enterprises. 
In  2017,  higher  demand  from  abroad  led  to  a 
vibrant  revival  in  exports  and  strong  equipment 
investment. The current account was moving close 
to balance and is set to reach positive territory this 
year.  After  a  long  stagnation,  labour  productivity 
started  to  improve,  while  enterprises  consolidated 
profits.  At  the  same  time,  labour  participation 
increased,  and  unemployment  declined  only 
modestly.  

still 

Despite  the  recent  upturn,  the  economy  is  still 
affected  by  the 
legacy  of  the  double-dip 
recession.  Overall  economic  activity  is  poised  to 
pass  its  previous  peak  level  of  2008  only  in  2018 
— four years after the EU as a whole. Employment 
is 
levels,  while 
unemployment  is  still  higher.  Labour  productivity 
declined in Finland between 2008 and 2016, while 
in  the  EU  as  a  whole  it  increased. The volume  of 
Finland's  exports  of  goods  and  services  was  10% 
lower  than  in  2008,  while  total  EU  exports 
increased by a quarter in the same period. Potential 

pre-crisis 

below 

(1)  This  report assesses  Finland’s  economy  in  the  light  of  the 
Commission’s  2018  Annual  Growth  Survey  published  on 
22  November  2017.  In  the  Survey,  the  Commission  calls 
on  EU  Member  States  to  implement  structural  reforms  to 
make the European economy more productive, resilient and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms and ensuring responsible fiscal policies. 

growth has recently accelerated but is not expected 
to  return  to  pre-crisis  growth  rates  in  the  medium 
term.  

Equipment  investment  has  picked  up,  but 
investment  in  R&D  and  intangible  assets  is 
lagging behind. Equipment investment rebounded 
in  early  2017,  as  capacity  utilisation  increased, 
supported by the recovery in external demand, but 
remained one of the lowest in the EU as a share of 
GDP. After several years of decline, investment in 
R&D  and  intangible  assets  was  close  to  the  EU 
average, but, in 2017, started expanding again. The 
electronics  sector  is  expected  to  record  positive 
operating results for the first time since the start of 
the recession, creating scope for new investment in 
intangible  assets.  Finland’s  stock  of  inward  FDI 
remains  low  among  the  EU  Member  States,  but 
recent  developments  in  greenfield  investment  are 
encouraging  and  the  business  environment  is 
generally good. 

Finland's cost competitiveness is recovering, but 
non-cost competitiveness is a concern. In the late 
2000s, cost competitiveness deteriorated as a result 
of  high  wage  increases.  Cost  competitiveness 
relative  to  the  rest  of  the  euro  area  has  improved 
since  2016,  thanks  to  the  Competitiveness  Pact 
agreed in tripartite social dialogue. The wage deals 
which have been concluded for the next two years 
are  quite  moderate.  With  respect  to  non-cost 
competitiveness,  Finland  experienced  a  shift  in 
specialisation  from  higher  value  added  goods 
towards intermediate goods after the setback of its 
electronics  sector.  Exports  of  services  have 
become increasingly high-tech and are expanding.   

the 

about 

economy 

The  labour  market  is  gradually  recovering. 
More people have moved into the labour force, as 
confidence 
increased. 
However,  this  has  not  yet  translated  into  strong 
employment  growth.  Structural  unemployment 
remains high, which could reflect low incentives to 
accept  work,  lack  of  targeted  and  sufficient 
activation  measures,  skills  shortages  and  lack  of 
the  growth  centres. 
in 
affordable  housing 
However,  on  the  back  of  the  positive  economic 
outlook  and 
recently, 
employment  growth  is  expected  to  accelerate  in 
2018.   

implemented 

reforms 

The  overall  private  debt  burden  is  unwinding 
and  the  public  sector  has  started  to  reduce  its 

1 

 
 
                                                           
Executive summary 

2017  were  generally  positive.  Regarding 
the 
employment  rate  of  20-64  year-olds,  Finland’s 
goal is 78 % while in 2016 the rate stood at 74 %, 
improving from previous years. The poverty rate is 
low  compared  to  the  EU  average  and  has  been 
gradually  decreasing  recently.  The  early  school 
leaving rate fell slightly below the target of 8 % for 
the  first  time  in  2016  while  Finland’s  tertiary 
educational attainment rate stayed above the target. 
The very ambitious R&D investment target of 4 % 
of GDP is likely to be missed, as R&D investment 
has decreased in recent years, standing at 2.8 % in 
2016.  Finland  is  broadly  on  track  to  reach  its 
climate and energy targets. 

Finland  performs  relatively  well  on 
the 
indicators  of  the  Social  Scoreboard  supporting 
the  European  Pillar  of  Social  Rights.  Finland 
displays  low  levels  of  income  inequality  and  few 
people  at  risk  of  poverty  or  social  exclusion.  It  is 
recognised  for  its  high  quality  and  inclusive 
education  system.  A  reform  of  the  social  and 
health  care  system  is  being  prepared.  This  reform 
could  have  the  potential  to  address  the  high  self-
declared unmet need for medical care. 

The  main  findings  of  the  analysis  in  this  report, 
and the related policy challenges, are as follows: 

  The public debt-to-GDP ratio is projected to 
start increasing again in the early 2020s. The 
age-related  healthcare  and 
long-term  care 
services  expenditure  are  expected  to  expand 
with  a  knock-on  effect  on  public  finances.  An 
overhaul  of  the  services  accompanied  by  a 
reform of the local and regional administration, 
currently  in  the  Parliament,  is  yet  to  be 
adopted. The reform aims at increasing the role 
of  the  private  sector  in  the  provision  of  social 
and  healthcare  services.  Cost  savings  are 
expected  through  increased  competition  and 
better integrated service provision. The reform 
has  the  potential  to  increase  productivity  of 
social  and  healthcare  services  and  therefore 
lower 
the  expenditure  pressure.  However, 
despite  the  planned  savings,  the  cost  pressure 
from  population  ageing  keeps  medium-term 
debt projections on an increasing path. 

  Despite  a  recent  increase,  the  employment 
rate at 69.7% of 15-64 year-olds remains low 
when  compared  to  Finland's  Nordic  peers. 

debt. Owing to continued consolidation efforts, the 
public  deficit  is  expected  to  remain  below  3 %  of 
GDP in the near future. After a peak at 63.6 % of 
GDP in 2015, the gross public debt ratio has been 
on a decreasing path and is expected to fall below 
62 % of GDP in 2019. The ratio of the private debt 
stock to GDP decreased in 2016. However, unlike 
the non-financial corporations' debt, the household 
debt  has  been  moderately  on  the  rise  and  the 
household  saving  rate  is  expected  to  remain 
exceptionally 
low.  The  Finnish  Financial 
Supervisory  Authority  has  adopted  measures  to 
contain the high indebtedness of households.  

The  banking  sector  remains  sound  overall,  but 
structural  weaknesses  persist.  Finnish  lenders 
remain profitable, well capitalised and have a high 
loss absorption capacity. However, the risk weight 
for  mortgages  in  capital  ratios  calculation  was 
fairly  low.  Also,  banks  rely  heavily  on  wholesale 
funding.  The  Finnish  Financial  Supervisory 
Authority  has  recently  targeted  these  risks.  The 
Parliament  has  strengthened  macro-prudential 
supervision also by adding a Systemic Risk Buffer 
to  the  existing  toolkit.  Nevertheless,  the  banking 
sector remains rather concentrated and refinancing 
risks persist.  

the 

incentives 

to  accept  work, 

Overall, Finland has made some (2) progress in 
addressing 
country-specific 
2017 
recommendations.  Recent  measures  to  reform 
unemployment  benefits  have  already  resulted  in 
though 
greater 
challenges  persist.  Action  has  also  been  taken  to 
facilitate (self-) employment and regional mobility. 
Wage  negotiations  for  2018  and  beyond  are 
ongoing  and  so  far  the  outcomes  are  in  line  with 
productivity developments. The bill for social and 
healthcare  services  reform  is  expected  to  be 
approved by Parliament in spring 2018 so that the 
reform  would  enter 
in  2020. 
Furthermore,  Finland  has  also  made  progress  in 
other areas covered by the 2017 recommendations, 
including  on  reducing  the  administrative  burden; 
improving  the  regulatory  framework;  increasing 
competition in services; and promoting investment.  

force 

into 

As  for  progress  in  reaching  the  national  targets 
under  the  Europe  2020  strategy,  developments  in 

(2)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
CSR is presented in the overview table in the Annex. 

2 

 
 
                                                           
Executive summary 

For  some  unemployed  or  people  outside  the 
labour force, particularly among those aged 25-
49,  taking  up  work  is  still  not  financially 
rewarding  enough  despite  the  action  already 
taken. The efficiency of some of the activation 
measures  are  hampered  by  a  lack  of  service 
integration.  Another  challenge  is  to  ensure  the 
long-term  integration  of  refugees  and  other 
migrants  in  the  Finnish  labour  market  and 
society.  

and  Baltic  countries,  this  calls  for  reinforced 
supervision  and  strong  regional  supervisory 
cooperation.  The  Finnish  Deposit  Guarantee 
Fund will become responsible for deposits also 
at Nordea's foreign branches.  

  Wage  setting  practices  are  changing,  and  it 
is  not  yet  known  how  the  new  model  will 
keep  wages  and  productivity  aligned. 
Cumulated losses of cost competitiveness have 
almost  been  compensated  following  years  of 
wage  moderation.  Wage  setting  appears  to 
move  away  from  the  centralised  agreements 
made  in  2013  and  2016  towards  sectoral  and 
local  level  bargaining.  It  has  given  some  first 
latest  wage 
positive 
agreements,  organized  employers  have  more 
opportunities  to  carry  out  local  bargaining 
while 
for  non-organised  employers  some 
obstacles persist. However, it is yet to be seen 
whether  a  coordinated  model  will  emerge, 
whereby  the  non-tradable  sector  follows  the 
tradable  one  in  keeping  wages  aligned  with 
cost 
productivity 
competitiveness as well as optimal employment 
outcomes. 

results.  Under 

ensuring 

thus 

and 

the 

  The  debt  level  of  households  remains  high 
and rising. Gross household saving rates are at 
half  the  level  prevailing  in  the  euro  area  as  a 
whole  and  active  debt  reduction  is  not  taking 
place.  Several  measures  have  been  introduced 
to strengthen the stability of the financial sector 
and  promote  sustainable  household  lending. 
Despite  the  measures,  and  amid  low  interest 
rates,  a  significant  decline  in  households' 
indebtedness in the coming years is not likely.  

  The 

of 

expected  move 

Nordea's 
headquarters to Finland by end-2018 would 
significantly increase the size of the banking 
sector.  Following  the  expected  relocation,  the 
total  assets  of  the  country's  banking  sector  are 
expected to reach about 420% of GDP and the 
deposit  base  is  expected  to  expand  from  EUR 
50  billion  to  EUR  140  billion.  Due  to  strong 
regional  interconnections  with  other  Nordic 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

Graph 1.2:  Contributions to potential growth — Finland 

in 

business 

Finland’s economic growth accelerated in 2017, 
confirming  the  brisk  recovery  of  2016  (Graph 
1.1). In 2016, the economy grew by 1.9 %. In 2017 
the  Commission  expects  GDP  growth  to  have 
accelerated  to  3.3 %,  supported  by  an  upswing  in 
investment, 
exports  and  sustained  growth 
especially  in  equipment.  Investment  growth  is 
supported  by  favourable  financing  conditions  and 
above-average 
confidence.  Private 
consumption  growth  remained  positive,  supported 
by  high  consumer  confidence  and 
improved 
employment  prospects.  The  economy  is  projected 
to continue expanding by 2.8 % and 2.5 % in 2018 
is 
and  2019  respectively.  Domestic  demand 
expected  to  remain  the  main  growth  driver.  The 
contribution  from  net  exports  to  growth  will 
remain  positive,  as  external  demand  continues  to 
expand  and  Finland  benefits  from  its  recovered 
cost competitiveness. 

Graph 1.1: 

External and domestic demand — 
Contribution to growth — Finland 

Source: European Commission (autumn forecast 2017) 

TFP: total factor productivity 
PF potential growth:  production function potential growth 
Source: European Commission — Directorate-General for 
Economic and Financial Affairs  

Potential GDP growth 

Potential growth has accelerated recently but is 
not expected to return to pre-crisis growth rates 
in  the  medium  term  (see  Graph  1.2).  The  crisis 
years  and  the  setback  faced  by  the  electronics 
sector  have  considerably  reduced  the  expected 
contribution  of  total  factor  productivity  (3)  to 
potential  growth  in  the  years  to  come.  The  low 
resilience to shocks in the recent past can partly be 
attributed  to  (i)  the  then  relatively  rigid  labour 
market practices, although changes are under way 
(see Section 3.3); and (ii) limited diversification in 
higher-tech products (see Section 3.4). In the years 
to  come,  the  decrease  in  the  size  of  the  country’s 
workforce  is  expected  to  keep  growth  potential 
rather  low,  despite  longer  working  hours  and 
2019. 
higher 
2018 
in 
Contributions 
factor 
from  capital  and 
productivity are projected to compensate partly for 
the  loss  in  numbers  of  workers,  as  recovering 
external  demand  and  higher  cost  competitiveness 
are  leading  Finland  to  higher  capacity  utilisation, 
higher 
positive 
factor  productivity. 
developments 

employment 

investment 

and 
total 

further 

total 

and 

in 

(3)  Total  factor  productivity  captures  the  economic  efficiency 
in  the  combination  of  production  factors  and  relates  to 
investment in intangibles. 

4 

-10-8-6-4-202468030405060708091011121314151617181920%, ppsInventories investmentInvestment (GFCF)ConsumptionNet exportsReal GDP growth-1,0-0,50,00,51,01,52,02,53,03,5040506070809101112131415161718192021Rate of change y-o-y (%)Capital Accumulation ContributionTFP ContributionTotal Labour (Hours) ContributionPF Potential Growth 
 
 
 
 
                                                           
1. Economic situation and outlook 

the 

However,  Finland  is  performing  less  well  than  its 
EU  peers  in  most  categories  of  investment  (share 
of  investment  in  GDP).  The  one  exception  is 
least  productive 
is 
construction,  which 
category.  This  is  particularly  true  for  intellectual 
property 
investment,  which  had  constantly 
declined  since  end-2014,  even  though  it  started 
expanding  again  in  2017.  At  the  same  time, 
businesses  are  continuing  to  build  up  sizeable 
precautionary financial buffers, which may act as a 
brake  on  further  investment.  The  economy  risks 
therefore  being  trapped  on  a  rather  low-growth 
path (see Sections 3.4 and 3.5). 

Graph 1.3:  Quarterly harmonised index of consumer 
prices, Finland, year-on-year %-change 

the 

line  with 
rate 

growth.  However,  it  still  responded  rather 
slowly to cyclical upswings. After several years of 
negative  developments, 
in  2016  and  2017 
employment  grew  by  0.5 %  and  is  projected  to 
continue to grow in 2018 and 2019. However, the 
unemployment  rate  only  fell  by  0.2  pps  year-on-
year to 8.7 % in 2017, as labour supply increased, 
with  more  previously  inactive  people  actively 
these 
looking  for  employment.  In 
developments, 
(20-64) 
the  employment 
increased  from  72.9 %  in  2015  to  74 %  in  2017. 
Nevertheless,  skills  shortages  on 
labour 
market,  already  visible  for  some  sectors,  are 
expected  to  intensify,  with  businesses  reporting 
greater  difficulties  in  filling  vacancies  for  certain 
types  of  occupations,  mainly  in  construction, 
health  and  specific  niches  of  the  ICT  sector  (4). 
The  recent  positions  of  the  Beveridge  curve  (5) 
highlight  difficulties  in  matching  the  unemployed 
to job vacancies (see Section 3.3). Similarly, high 
structural  unemployment  (around  7.3 %  in  2017) 
suggests  that  the  labour  market  is  still  some 
distance  away  from  being  flexible  and  efficient. 
Possible reasons for this include low incentives to 
accept  work.  Also,  the  long  distances  and  lack  of 
low-cost housing in the growth centres of Finland 
contribute  to  labour  rigidity  (IMF,  2017a  and 
2017b). 

Source: European Commission 

Inflation 

Inflation  is  expected  to  remain  moderate.  In 
2016,  inflation  recovered  from  its  negative  levels 
of  2015  (see  Graph  1.3)  and  reached  0.8 %  in 
2017.  Looking  forward,  it  is  set  to  increase  only 
slowly in a context of higher price competition on 
the  retail  market  and  modest  increases  in  housing 
expenses  and  fuel  prices.  Nevertheless,  higher 
services  prices,  a  strengthening  US  dollar  and  the 
low,  but  rising,  interest  rate  are  expected  to  pull 
inflation slightly upwards to around 1.4 % in 2018 
and 1.6 % in 2019. 

Labour market 

Employment  reverted  to  growth,  supported  by 
increased demand, rising investment and export 

Social developments 

Like  its  Nordic  peers,  Finland  has  one  of  the 
lowest levels of income inequality in the EU. The 
richest  20  %  of  the  population  had  3.6  times  the 
income  of  the  poorest  20  %  in  2016,  compared 
with  5.2  times  in  the  whole  EU (6).  Owing  to  the 
redistribution  of  incomes  via  taxes  and  benefits, 
income equality has remained stable in Finland in 
recent  years.  Finland's  ranking  among  the  EU 

(4)  Skills shortages in these sectors have been rather recurrent 
in recent years. However, the flow of migrant workers from 
neighbouring Estonia into such sectors appears to be drying 
up,  as  workers  there  are  now  enjoying  rapidly  improving 
economic conditions and rising wages. 

(5)  The  Beveridge  curve  is  a  graphical  representation  of  the 
relationship  between  unemployment  and  the  job  vacancy 
rate (the number of unfilled jobs expressed as a proportion 
of the labour force). 

(6)  The S80/S20 income quintile share ratio refers to the ratio 
of  total  equivalised  disposable  income  received  by  the  20 
% of the country's population with the highest equivalised 
disposable income (top quintile) to that received by the 20 
%  of  the  country's  population  with  the  lowest  equivalised 
disposable income (lowest quintile). 

5 

-1012313141516171819%forecast 
 
                                                           
1. Economic situation and outlook 

income  has 

Competitiveness 

In recent years, moderate labour cost increases 
have  markedly  improved  cost  competitiveness, 
but  non-cost  competitiveness  has  deteriorated 
(see  Section  3.4).  Since  2015,  the  country's  real 
effective  exchange  rate  has  fallen  each  year, 
reflecting the moderate wage increases  reached  in 
the 2013 wage settlement (see Graphs 1.4 and 1.5). 
In  2016  and  2017,  the  Competitiveness  Pact 
enabled  unit  labour  cost  to  decrease  (see  Graphs 
1.5  and  3.4.3).  In  2017,  productivity  was  higher 
than  in  the  year  before.  As  compensation  of 
employees (8) was stable, nominal unit labour costs 
declined by 1.6 %, considerably more than in other 
euro  area  economies.  The  positive 
is 
expected to continue in 2018 and 2019 (9). Overall, 
this has resulted in improved cost competitiveness, 
while the long-term decline in the market share of 
exports has come to an end (see Graph 1.6). At the 
same  time,  following  the  setback  experienced  by 
its  electronics  sector,  Finland  has  experienced  a 
rapid  shift  in  specialisation  towards  intermediate 
goods  and  from  high-tech  industries  towards 
medium-tech. This implies that having competitive 
cost  structures  is  more  important  than  previously 
for Finnish firms. This resulted also in negative or 
stagnating productivity growth, which remains the 
main  challenge  for  competitiveness.  The  small 
number of exporting SMEs is another challenge. 

trend 

(8)  Compensation of employees consists of wages and salaries, 

and of employers' social contributions.  

(9)  In late 2017, the real effective exchange rate was between 0 
and  5%  above  the  level  consistent  with  macroeconomic 
fundamentals 
inflation, 
unemployment, fiscal & monetary policies) (IMF, 2017). 

demand, 

(supply, 

growth, 

countries 
deteriorated slightly since 2010.  

terms  of  market 

in 

Graph 1.4: 

Breakdown of real effective exchange rate 
(REER), nominal effective exchange rate 
(NEER), relative harmonised index of consumer 
prices (HICP) — Finland 

(1) IC-42: with 42 industrial countries; IC-37: with 37 industrial 
countries 
Source: European Commission 

The  risk  of  poverty  has  continued  to  decline 
since its peak in 2011, but inequality in access to 
healthcare  remains  a  challenge.  The 
latest 
information  (7)  on  poverty  and  income  inequality 
indicates  that  for  Finland  no  significant  changes 
are  expected  in  the  at-risk-of-poverty  rate  for 
income  reference  year  2016.  In  2016,  the  at-risk-
of-poverty  rate  after  social  transfers  or  pensions 
was  among  the  lowest  in  the  EU  at  11.6%,  about 
5.5  pps  lower  than  the  EU  average.  However,  the 
economic  downturn  has  led  to  an  increase  in  the 
inactive population and long-term unemployed. In 
addition,  the  the  situation  has  been  worsening  in 
terms of self-reported unmet needs in medical care, 
in  particular  for  low  socio-economic  groups  (see 
Box 3.3.1). 

(7)  In  order  to  monitor  in  a  timelier  manner  the  effectiveness 
of  social  policies  in  the  Member  States,  Eurostat,  on  the 
basis  of  statistical  and  econometric  models,  has  produced 
experimental  flash  estimates  for  income  reference  year 
2016 These complement the EU-SILC data and can be used 
in  preliminary  analysis  until  the  final  EU-SILC  data 
becomes available.  As any estimate, these flash estimates 
should be interpreted with caution – their accuracy depends 
on  various  factors  therefore  they  cannot  be  expected  to 
match perfectly EU-SILC 2017 results. 

6 

-6-4-2024680102030405060708091011121314151617*Rate of change y-o-y (%)NEER IC-42relative HICP (-)REER (HICP) IC-42REER (ULC) IC-37 
 
                                                           
                                                           
1. Economic situation and outlook 

Graph 1.5:  Nominal unit labour costs in total economy — 

Graph 1.6: 

Denmark, Germany, Finland and Sweden 
(2005 = 100) 

Export market shares (EMS) of goods and 
services — Finland 

Source: European Commission 

Current account 

Finland’s  current  account  deficit  narrowed  in 
2017.  The  strengthening  of  external  demand  and 
decline  in  the  country’s  unit  labour  costs  since 
2015 (see Graph 1.4) has enabled the trade balance 
to revert to surpluses in 2017. The latter remained, 
however, largely below those registered before the 
financial  crisis  and  the  2008-2009  crisis  in  the 
electronics sector. In 2017, however, the recovery 
in  exports  was  broad-based,  benefiting  sectors 
such  as  metal  production,  petroleum,  chemicals, 
machinery and equipment. In parallel, high equity 
investment returns and low interest payments kept 
primary  income  in  surplus.  Secondary  income 
balance (contributions to EU — 0.19 % of GDP in 
2015,  overseas  development  and  military  aid) 
remained  largely  negative  (see  Graph  1.7).  As  a 
result,  in  2017  the  current  account  remained  in 
deficit,  but  was  expected  to  narrow  to  0.2  %  of 
GDP.  The  current  account  balance  is  expected  to 
revert to positive values in 2019 and to consolidate 
in  2019,  as  the  external  balance  of  goods  and 
services turns increasingly positive. 

Source: European Commission 

Graph 1.7: 

Breakdown of external position (current and 
capital accounts) — Finland (to be updated) 

Source: European Commission 

Overall external position 

international 

The  net 
investment  position 
(NIIP) was stable and expected to remain close 
to  balance  in  2018-2019.  After  a  few  years  in 
which the NIIP deteriorated somewhat on the back 
of  depreciating  assets  held  abroad  (valuation 
effects), it improved from -6.1 % of GDP in 2015 
to -2.3 % in 2016 as net foreign direct investment 
strengthened.  However, 
in  2017,  with  net 
borrowing  expanding  and  lower  net  investment, 

7 

8090100110120130140050607080910111213141516171819DenmarkGermanyFinlandSweden-40-30-20-10010203007080910111213141516Rate of change y-o-y (%)Contribution: World export growth (neg. Sign)Contribution: Export growthEMS growth rate-6-4-2024681012990001020304050607080910111213141516% of GDPCapital account (KA)Secondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA) 
 
 
 
 
1. Economic situation and outlook 

the NIIP was expected to deteriorate again, but to 
remain very low in an EU comparison (see Graph 
1.8).  Higher  borrowing  and  lower  investment 
abroad are consistent with the present recovery and 
the higher investment levels currently registered in 
the country. Despite the expected improvement in 
the  current  account  balance,  the  NIIP  is  expected 
to remain in deficit in 2018-2019 at around -5 % of 
GDP. 

Graph 1.8: 

Breakdown of the international investment 
position (NIIP) in % of GDP — Finland 

banks  on  wholesale  funding 
vulnerability.  

is  a  structural 

Housing market 

After  negative  growth  in  2014-2015,  real  house 
prices  remained  broadly  stable  in  2016,  but 
housing  cycle  developments  suggest  that  prices 
are  bottoming  out.  The  nominal  and  deflated 
house  price  indices  do  not  show  clear  signs  of 
increases  yet,  and  house  prices  relative  to  rent 
levels  and  relative  to  income  are  still  on  a 
declining  trend.  Nevertheless,  developments  in 
prices point to an upward trend in recent quarters, 
despite 
sizeable  number  of  dwellings 
completed  and  the  rising  number  of  building 
permits  granted.  This  is  particularly  true  for  the 
Helsinki metropolitan area. 

the 

Public finances 

The  government  has  consolidated  public 
finances mainly through expenditure cuts, while 
the improved economic outlook helps to reduce 
debt. The current government agreed in 2015 on a 
consolidation plan  aiming  for  expenditure savings 
of  about  EUR 4 billion  or  2 %  of  GDP  by  2019. 
The  cuts  in  the  taxation  of  personal  income  in 
2016  and  2017  have  mitigated  the  impact  of  the 
in  all, 
expenditure-side  measures,  but  all 
consolidation 
general 
the 
government  balance.  Expanding  employment  and 
higher economic activity are set to improve public 
finances  further.  With  the  agreed  fiscal  measures, 
the  general  government  balance  is  projected  to 
improve further, to 0.8 % of GDP in 2019. 

improved 

has 

The general government debt-to-GDP ratio peaked 
in 2015 and is expected to continue to decrease in 
the  short  run  but  to  start  increasing  again  in  the 
medium  term.  The  Commission  projects  the  debt 
ratio  to  start  increasing  and  reach  about  68 %  of 
GDP  by  2028.  This  points 
to  high  fiscal 
sustainability  risks  over  the  medium  term.  The 
main driver for higher debt is the increase in age-
related  costs,  in  particular  healthcare  and  long-
term  care  expenditure.  Therefore  the  reforms  to 
improve  productivity  in  the  provision  of  these 
the 
services 
important. 
social  and 
implementation  of 
healthcare reform is surrounded by risks that could 
cause further delays. 

the  planned 

However, 

are 

Source: European Commission 

Financial sector 

tax  deductibility  of  mortgage 

High private-sector debt creates vulnerabilities, 
but  the  financial  sector  remains  stable  and 
strong.  In  2016,  loan  flows  to  households  started 
expanding again. Also, the gross household saving 
rate is low and active debt reduction is not taking 
place.  Furthermore,  the  share  of  new  mortgages 
with  variable  rates  is  high.  Fiscal  and  prudential 
measures  are  being  applied,  namely  phasing  out 
interest 
the 
payments,  introducing  a  maximum  loan-to-value 
ratio  for  new  mortgages,  and  having  a  minimum 
risk-weight  level  of  15 %  for  the  average  risk 
weight  on  mortgage  loans  to  credit  institutions. 
However,  amid  persistently  low  interest  rates,  a  
significant decrease in households’ indebtedness is 
not  likely.  Banks  appear  well  capitalised  and 
profitable  despite  the  currently  low  interest  rate 
margins  (see  Section  3.2).  The  high  reliance  of 

8 

-200-150-100-50050100000102030405060708091011121314151617*% of GDPNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet financial derivatives and employee stock optionsNet Int'l investment position (NIIP)Marketable debt (NIIP minus FDI and shares) 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators - Finland 

(1)  NIIP excluding direct investment and portfolio equity shares 
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source:  Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

9 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)4.0-0.8-0.70.01.93.32.82.5Potential growth (y-o-y)2.50.40.00.40.81.51.61.6Private consumption (y-o-y)3.61.10.21.71.8...Public consumption (y-o-y)1.50.70.30.01.2...Gross fixed capital formation (y-o-y)4.7-2.0-3.80.77.2...Exports of goods and services (y-o-y)8.7-1.4-0.80.81.3...Imports of goods and services (y-o-y) 8.30.6-0.43.24.4...Contribution to GDP growth:Domestic demand (y-o-y)3.20.3-0.71.12.8...Inventories (y-o-y)0.3-0.20.10.2-0.2...Net exports (y-o-y)0.6-0.8-0.1-0.9-1.2...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)0.5-0.1-0.10.10.30.60.50.4Capital accumulation (y-o-y)0.70.50.20.20.30.50.60.6Total factor productivity (y-o-y)1.30.0-0.10.00.20.40.50.6Output gap1.4-1.2-2.8-3.5-2.4-0.70.41.1Unemployment rate8.07.78.59.48.88.68.38.0GDP deflator (y-o-y)1.32.22.12.00.90.51.71.7Harmonised index of consumer prices (HICP, y-o-y)0.92.71.7-0.20.40.81.41.6Nominal compensation per employee (y-o-y)3.43.01.21.41.0-1.11.31.7Labour productivity (real, person employed, y-o-y)2.4-1.0-0.10.11.4...Unit labour costs (ULC, whole economy, y-o-y)1.04.01.31.3-0.4-3.8-0.70.1Real unit labour costs (y-o-y)-0.31.8-0.8-0.7-1.3-4.3-2.4-1.6Real effective exchange rate (ULC, y-o-y)0.21.22.3-2.5-1.0-3.50.0-1.8Real effective exchange rate (HICP, y-o-y)-1.4-0.82.6-2.91.3-1.22.0.Savings rate of households (net saving as percentage of net disposable income)0.81.70.7-0.5-1.7...Private credit flow, consolidated (% of GDP)10.37.22.26.92.2...Private sector debt, consolidated (% of GDP)116.6143.7148.7152.9149.3...of which household debt, consolidated (% of GDP)47.359.664.766.767.1...of which non-financial corporate debt, consolidated (% of GDP)69.384.084.086.282.2...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)0.60.91.11.31.3...Corporations, net lending (+) or net borrowing (-) (% of GDP)3.83.23.13.93.74.04.54.6Corporations, gross operating surplus (% of GDP)27.323.821.622.522.624.626.027.0Households, net lending (+) or net borrowing (-) (% of GDP)-2.9-1.7-1.7-2.0-3.3-3.6-3.6-3.4Deflated house price index (y-o-y)6.00.3-1.5-0.3-0.3...Residential investment (% of GDP)6.46.05.85.66.1...Current account balance (% of GDP), balance of payments4.10.3-1.4-1.0-1.4-1.1-0.30.4Trade balance (% of GDP), balance of payments4.91.1-0.6-0.5-1.2...Terms of trade of goods and services (y-o-y)-2.2-1.11.03.41.0-1.20.60.0Capital account balance (% of GDP)0.10.10.10.00.0...Net international investment position (% of GDP)-16.48.40.3-6.1-2.3...Net marketable external debt (% of GDP) (1)13.28.6-1.84.7-0.9...Gross marketable external debt (% of GDP) (1)117.6225.9248.9243.8231.1...Export performance vs. advanced countries (% change over 5 years)3.9-10.4-23.5-20.0-16.5...Export market share, goods and services (y-o-y)-1.1-7.2-2.3-6.11.9...Net FDI flows (% of GDP)-1.41.8-3.6-8.39.2...General government balance (% of GDP)3.5-0.8-2.9-2.7-1.7-1.4-1.2-0.8Structural budget balance (% of GDP).-1.0-1.3-0.7-0.4-1.0-1.4-1.4General government gross debt (% of GDP)38.744.858.363.663.162.762.161.6Tax-to-GDP ratio (%)42.041.743.844.144.343.141.941.3Tax rate for a single person earning the average wage (%)30.929.630.430.930.8...Tax rate for a single person earning 50% of the average wage (%)20.118.619.019.318.7...forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

implementing 

the  Council 
Progress  with 
recommendations  addressed  to  Finland 
in 
2017 (10)  has  to  be  seen  as  part  of  a  process 
which  started  with  the  introduction  of  the 
European Semester process in 2011. Looking at 
the multi-annual assessment of the implementation 
of the CSRs since these were adopted, 90 % of all 
the  CSRs  addressed  to  Finland  recorded  at  least 
'some  progress'.  10  %  of  these  CSRs  recorded 
limited  progress,  but  none  of  them  recorded  "no 
progress" (Graph 2.1). Over the past years, Finland 
has  been  addressing  the  challenges  in  the  area  of 
the  long-run  sustainability  of  public  finances  by 
adopting a pension reform that came into force in 
2017.  External  sector  challenges  have  abated  and 
cost  competitiveness  has  improved,  in  particular 
owing to the measures in the Competitiveness Pact 
of  2016. Finland has  also  taken  action  to  increase 
incentives to accept work and to strengthen active 
labour market policies. 

Graph 2.1:  Overall multiannual implementation of 2011-

2017 CSRs to date 

Notes: The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact.  
2011-2012: Different CSR assessment categories.  
The multiannual CSR assessment looks at the 
implementation since the CSRs were first adopted until the 
2018 Country Report. 
Source: European Commission 

Finland  has  been  given  recommendations  to 
improve  the  long-run  sustainability  of  public 
finances.  In  particular,  the  challenges  for  Finland 
have been the sustainability of the pension system 
and 
long-term 
expenditure 
healthcare given the aging population. On the one 
hand,  the  reform  of  the  earnings  related  pension 
system,  which  linked  statutory  retirement  age  to 

increasing 

on 

life  expectancy,  was  legislated  in  late  2015.  In 
accordance  with  the  reform,  the  lowest  statutory 
retirement  age  has  gradually  started  to  rise  as  of 
2018  from  63  to  65.  This  should  consequently 
raise the actual retirement age, which was 61.1 in 
2016,  towards  the  target  of  62.5  years.  On  the 
other  hand,  efforts  to  improve  cost-efficiency  of 
the provision of public healthcare services are still 
ongoing.  

of 

cost 

gradual 

improvement 

competitiveness 

The 
cost 
competitiveness  has  been  supported  by  the 
implementation  of 
the  CSRs  since  2014. 
Progress  has  been  made  in  aligning  wage  growth 
with productivity developments which has resulted 
in  a  slower  increase  of  unit  labour  costs  and 
improved 
to 
competitor economies. In 2016 the social partners 
agreed on measures that would reduce labour costs 
further  in  2017.  This  so-called  Competitiveness 
Pact 
time  without 
additional  compensation,  included  a  wage  freeze 
of  12  months  and  shifted  social  security 
contributions  partly  towards  the  employees.  In 
addition,  policy  action 
to  boost  non-cost 
competitiveness,  such  as  export  and  investment 
promotion under Team Finland, has been taken. 

increased  annual  working 

relative 

Reforms  in  the  labour  market  have  been 
advanced. In order to increase incentives to work, 
the  earnings-related  unemployment  insurance  has 
been  shortened.  Also  several  measures  to  activate 
unemployed  job  seekers,  such  as  increasing  the 
conditionality  of 
the  benefits,  have  been 
introduced.  Measures  to  increase  entrepreneurship 
were also introduced. 

also 

have 

including 

services  market 

Several measures to improve the functioning of 
the 
been 
implemented.  The  rules  governing  retail  trade 
regional 
establishment, 
planning and zoning, have been amended. Opening 
hours  of  retail  outlets  were  liberalised.  Taxi 
services  regulation  has  been  streamlined  and 
modernised,  and  a  regulatory  framework  for 
collaborative  economy  service  providers  is  in 
place. 

local  and 

(10)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see in particular Section 3. 

10 

10%62%28%No ProgressLimited ProgressSome ProgressSubstantial ProgressFull Implementation 
 
 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Progress with Council's Country Specific Recommendations 

(1) This does not include an assessment of compliance with the Stability and Growth Pact. 
Source: European Commission 

services  continued 

To address the Council recommendations 2017, 
Finland  has  taken  measures  in  several  policy 
areas.  To  improve  the  long-run  sustainability  of 
public  finances,  work  to  reform  the  social  and 
in  2017  as 
healthcare 
Parliament  started  to  discuss  the  reform  bills. 
However,  formal  adoption  is  expected  in  2018.  If 
into 
legislated, 
the 
the 
temporary 
implementation 
administration  of  future  counties  is  expected  to 
start working in July 2018. 

reform  moves 
phase 

and 

labour  market  and  social 
On  addressing 
challenges,  new  measures  to  activate  jobseekers 
and  to  introduce  incentives  to  work  have  been 
introduced  as  of  2018:  a  wider  scope  of  the 

financial 

sanctions 

for 
mobility  allowance, 
jobseekers who do not demonstrate "being active". 
Childcare  fees  were  lowered  for  low  and  middle 
income  families  from  2018.  The  government  has 
allocated more resources to the public employment 
service  (PES)  to  support  the  above-mentioned 
measures  and  to  facilitate  employment  in  South-
West Finland where shipbuilding and car assembly 
The 
labour 
are 
unemployed 
receive 
unemployment  benefits  during 
the  first  four 
months  when  starting  a  business.  In  addition, 
jobseekers  now  have  the  possibility  of  enhancing 
their  skills  during  a  period  of  six  months  without 
losing  unemployment  benefits  and  some  changes 
have been made to the rules of housing allowance. 

experiencing 

are  now 

shortages. 

allowed 

to 

11 

Finland Overall assessment of progress with 2017 CSRs: Some progress CSR 1: Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails achieving its medium-term budgetary objective in 2018, taking into account the allowances linked to unusual events, the implementation of the structural reforms and investments for which a temporary deviation is granted.  Ensure timely adoption and implementation of the administrative reform to improve cost-effectiveness of social and healthcare services. Finland has made limited progress in addressing the fiscal-structural part of CSR 1 (1):  The government has presented the majority of the reform bills in Parliament, but the formal adoption of the reform has not taken place yet.  The effective implementation of the reform has been delayed by one year (January 2020).  In other areas of the reform, the government has advanced development of ICT systems which are thought to enable more efficient provision of services. CSR 2: Promote the further alignment of wages with productivity developments, fully respecting the role of social partners.   Take targeted active labour market policy measures to address employment and social challenges,   provide incentives to accept work and   promote entrepreneurship. Finland has made some progress in addressing CSR 2:  Some progress has been made in promoting cost competitiveness during the labour market negotiations.   Some progress has been made in addressing the employment and social challenges.  Some progress was made in providing incentives to accept work.   Some progress was also made in promoting entrepreneurship.   CSR 3: Continue to improve the regulatory framework and reduce the administrative burden   to increase competition in services and  to promote investment. Finland has made substantial progress in addressing CSR 3:  Substantial progress has been made regarding administrative burden reduction and regulatory framework improvements.  Substantial progress has been made regarding competition in services.   Some progress has been made on the promotion of investment.    
 
 
 
2. Progress with country-specific recommendations 

The wage  negotiations  concluded  in  autumn 2017 
and  early  2018  indicate  that  cost  competitiveness 
is  maintained  or  marginally  improved  in  2018. 
Addressing CSR 2 is in line with Recommendation 
3 on the labour market for the euro area.  

Substantial progress has been made in reducing 
the administrative burden and in improving the 
regulatory framework. Competition in services is 
expected  to  increase  on  the  back  of  revised  rules 
for  retail  establishments.  The  first  phase  of  the 
regulation  of  transport  services  has  been  adopted 
with higher regulatory support for the collaborative 
economy.  The  government  has 
implemented 
measures  to  promote  entrepreneurship  and  start-
ups  and  it  has  also  improved  the  availability  of 
loans and export guarantees for small and medium-

state 

support 

sized  enterprises  which  should  also  promote 
investment.  The 
for 
innovations  and  exports  are  being  merged  for 
synergies.  In  addressing  CSR  3,  the  Finnish 
authorities  are  also  solving  issues  highlighted  in 
the 2018 Recommendation 1 on the Single Market 
for the euro area. 

systems 

important 

ESI  Funds  are 
in  addressing  key 
challenges to inclusive growth and convergence in 
Finland,  notably  by  supporting  competitiveness 
and  boosting  research  and  innovation,  creating 
facilitating  education  and 
employment  and 
training.  ESI  Funds  also  contribute  to  enhancing 
labour  market  access  for  migrants  and  other 
vulnerable groups. 

12 

 
2. Progress with country-specific recommendations 

Box 2.1: Tangible results delivered through EU support to structural change in Finland 

Finland is a beneficiary of European Structural and Investment Funds (ESI Funds) support and can 
receive  up  to  EUR 3.7 billion  until  2020.  This  represents  around  5 %  of  public  investment (1)  annually 
over  the  period  2014-2018.  By  31  December  2017,  an  estimated  EUR  2.1  billion  (57 %  of  the  total)  was 
allocated to projects on the ground. Some 1 900 enterprises have been supported, with over 630 enterprises 
to  introduce  new  products  to  the  markets;  840  start-ups  were  supported;  enterprises  are  supported  for  the 
creation  of  8 900  new  jobs;  the  access  for  over  11 000  long-term  unemployed  to  labour  market  has  been 
facilitated or they have been helped to gain a qualification; people at risk of poverty or social exclusion have 
been provided assistance; over 2 200 agricultural investment projects have received support, over 1.8 million 
ha farmland was under measures improving water protection, 2.7 million people in the countryside benefit 
from better infrastructures and services and over 40 broadband projects are being realised. Finland adopted a 
new  financing  instrument  under  ESI  Funds:  the  SME  Initiative,  which  started  its  operation  in  2017.  This 
instrument addresses the gap in SME finance opportunities and it has already provided over 240 guarantees 
for SME loans. 

implement  country-specific 
structural  policy  challenges  and 
ESI  Funds  help  address 
recommendations. The ESI Funds support competitiveness and boost research and innovation. They create 
employment and facilitate education and training. ESI Funds contribute to making use of the full potential of 
the workforce by enhancing labour market access for the unemployed and inactive as well as migrants and 
other vulnerable groups. Operations funded by ESI funds promote social inclusion and bring people furthest 
from  the  labour  market  back  to  activity  and  employment.  The  implementation  of  the  youth  guarantee  is 
partly funded by the ESI Funds through one-stop guidance centres. In the area of research and innovation 
ESIF support has helped 900 enterprises to launch R&D&I activities with research institutes in their areas of 
excellence. 

Reforms  were  undertaken  already  as  precondition  for  ESI  Funds  support (2).  Smart  Specialisation 
Strategies for research and innovation were developed to focus efforts on specialisation with strong market 
potential. This has also helped improve cooperation between enterprises and public research institutions and 
encouraged regions to participate in European smart specialisation platforms. 

Finland  is  advancing  the  take  up  of  the  European  Fund  for  Strategic  Investments  (EFSI).  As  of 
December  2017,  the  overall  financing  volume  of  operations  approved  under  the  EFSI  amounted  to 
EUR 1.4 billion, which is expected to trigger total private and public investment of EUR 5.6 billion. More 
specifically, 26 projects involving Finland have been approved so far under the Infrastructure and Innovation 
Window  (including  13  multi-country  projects),  amounting  to  EUR  1.3 billion  in  EIB  financing  under  the 
EFSI.  This  is  expected  to  trigger  about  EUR  5.2  billion  in  investments.  Under  the  SME  Window,  two 
agreements with  financial  intermediaries have  been  approved  so far. European  Investment  Fund financing 
enabled  by  the  EFSI  amounts  to  EUR  35 million,  which  is  expected  to  mobilise  approximatively 
EUR 369 million  in  total  investment.  Energy  ranks  first  in  terms  of  operations  and  volume  approved, 
followed by RDI.  

(1)  Public investment is defined as gross fixed capital formation + investment grants + national expenditure on agriculture 

and fisheries 

(2)  Before  programmes  are  adopted,  Member  States  are  required  to  comply  with  a  number  of  so-called  ex-ante 

conditionalities, which aim at improving conditions for the majority of public investments areas. 

13 

 
 
3.  REFORM PRIORITIES 

3.1.  PUBLIC FINANCES AND TAXATION 

3.1.1.  SUSTAINABILITY OF PUBLIC FINANCES 

indicator (11) 

Sustainability  risks  have  diminished  as  the 
economic outlook has improved. In the short run, 
there  are  no  fiscal  or  competitiveness-financial 
risks to the sustainability of public finances. In the 
long run, the risks are assessed as ‘medium’ as the 
S2 
is  estimated  at  2.8 %.  The 
estimate  has  improved  by  0.4  percentage  points 
from  a  year  earlier,  owing  to  an  improved  initial 
budgetary  position  and  a  more 
favourable 
estimated  contribution  from  pension  expenditure. 
The  medium-term  risk  assessment  has  improved 
too. The objective of the assessment scenario is to 
reach  a  60 %  of  GDP  debt  ratio  by  2032  (taking 
into  account  the  increasing  costs  of  ageing)  by 
adjusting the general government primary balance 
over  5  post-forecast  years,  i.e.  2020-2024.  As  the 
short-run  economic  outlook  has  improved,  the 
estimated  additional  cumulative  adjustment  has 
also  declined  from  2.8 %  to  1.5 %.  However,  due 
to the increase in the government debt ratio in the 
baseline  projections,  the  overall  fiscal  risk  in  the 
medium-run is still assessed as ‘high’.  

forecast 

commonly 

The  costs  of  ageing  will  continue  to  weigh  on 
public  finances  in  the  medium  term  and  the 
long  run.  On  the  basis  of  the  Commission  2017 
agreed 
and 
autumn 
assumptions on debt sustainability analysis (12), the 
debt ratio is first projected to decline to about 61 % 
of  GDP  (around  2021)  and  then  to  rise  to  about 
68 %  of  GDP  by  2028.  If  the  costs  of  ageing 
(pensions,  long-term  care  and  health  expenditure) 
were left out of the debt projections, the debt ratio 
would gradually decline to about 57 % of GDP by 
2028  (Graph  3.1.1).  Under  the  2017  pension 
reform,  the  lowest  old-age  retirement  age  will 
gradually rise from 63 years in 2017 to 65 years in 
2027.  Over  the  same  period,  the  upper  age  limit 
until which people can continue working will rise 
from  68  to  70.  These  changes  are  expected  to 

(11)  S2  indicates  the  long-run  sustainability  gap  and  measures 
the  required  adjustment  as  %  of  GDP  to  balance  public 
finances.  

(12)  A  mechanical  projection  based  on  the  current  primary 
balance  and  assumptions  on  nominal  growth  and  interest 
rates.  Subsequently  an  equilibrium  debt 
level  and 
equilibrium interest services can be calculated. 

reduce  the  large  impact  of  the  strongly  ageing 
population  by  2030.  However,  according  to  the 
Economic  Policy  Committee's  Ageing  Working 
Group (EPC-AWG) projections, pension and other 
age-related  costs  expenditure  are  expected  to 
increase steadily through to the end of the 2020s. 

Graph 3.1.1:  Debt projections according to social and 

healthcare reform proposals and Debt 
Sustainability Analysis (DSA) 

(1) Planned reform savings as projected in the government 
proposal. 
Source: European Commission 

Social  and  healthcare  services  reform  and 
administrative reform 

if  measured  as 

Finnish  healthcare  and  social  care  systems 
perform  relatively  well.  The  health  status  of  the 
population  ranks  in  the  highest  third  among  EU 
countries 
life  expectancy. 
Moreover,  70 %  of  the  population  report  being  in 
good  health,  a  slightly  higher  percentage  than  the 
EU  average  (of  67 %).  As  for  expenditure,  at 
9.4 %  of  GDP  in  2015,  Finland  is  just  below  the 
EU  average  of  9.9 %  of  GDP  while  per  capita 
expenditure is slightly above the EU average.  

stemming 

Weaknesses 
from  decentralised 
primary  healthcare  service  provision  and 
uneven  access  to  services  are  visible.  The 
healthcare  system  has  three  parallel  providers: 
occupational,  private  and  public  healthcare. 
Finland's  300+  municipalities  fund  and  organise 

14 

505560657075181920212223242526272860% of GDPDSA baseline without ageing costsDSA baseline with planned  reform savingsDSA baseline% of GDP 
 
                                                           
 
3.1. Public finances and taxation 

and  specialised  healthcare  as  well  as  healthcare 
and  social  care  should  be  more  effective  in  the 
hands  of  a  larger  organiser.  In  addition,  increased 
use  of  digital  and  electronic  services  should  also 
increase productivity and improve cost efficiency. 
From  2021,  social  care  and  primary  healthcare 
services  would  be  available  from  a  county  or 
private  social  and  health  centre.  This  would  give 
patients  increased  freedom  of  choice  between  the 
service  providers  operating  in  their  region.  The 
competition between service providers is expected 
to yield savings for the tax-payers.  

Most  of  the  measures  are  expected  to  increase 
productivity  in  healthcare  services  possibly 
reducing  waiting  times.  However,  making  sure 
that  this  objective  is  reached  will  require  careful 
monitoring  in  the  implementation  phase  of  the 
reform.  The  possible  efficiency  gains 
from 
improved  integration  of  primary  and  higher  level 
healthcare  services  and  integration  of  service 
chains  that  involve  both  social  and  healthcare 
services  could  be  compromised  if  the  increased 
freedom  to  choose  is  not  implemented  carefully. 
This  is  particularly  the  case  for  the  incentives  to 
provide  services  also  in  remote  areas,  and  also  to 
avoid  that  some  service  providers  ‘cherry-pick’ 
patients with better health status.  

An  effectively  implemented  budget  framework 
for  the  counties  should  slow  down  the  increase 
in public debt. On a projected baseline, healthcare 
expenditure  is  projected  to  grow  by  2.4 %  in  real 
terms  per  year  but  the  reform  would  reduce  the 
growth  rate  to  0.9 %.  The  target  for  reducing 
expenditure  growth  is  ambitious  given  Finland’s 
past  performance.  Sustaining  such  a  real  growth 
rate  for  a  longer  period  would  also  be  an 
achievement  (compared  with  the  rest  of  the  EU), 
but  not  necessarily  exceptional.  If  taken  at  face 
value, the planned savings would result in a 3 pps 
lower debt-to-GDP ratio by 2028 compared to the 
Debt Sustainability Monitor baseline scenario (see 
graph  3.1.1)  (European  Commission  2018b). 
Therefore, 
implemented 
successfully,  it  also  has  the  potential  to  improve 
fiscal  sustainability  in  the  medium  run.  However, 
there is a risk that the actual savings will fall short 
of expectations as they seem to have been derived 
using  a  top-down  approach  rather  than  from 
specific  efficiency-increasing  actions.  In  addition, 
some  municipalities  in  more  remote  areas  of  the 
country  have  recently  become  afraid  of  services 

reform 

the 

is 

if 

the  provision  of  primary  healthcare,  and  form  20 
hospital  districts  to  fund  and  provide  (secondary) 
hospital  care.  The  most  demanding  treatment  is 
five  university  hospitals.  The 
provided  by 
occupational  healthcare  and  private  services  exist 
alongside the public services. However, the system 
appears not to treat residents equally. First, people 
who  are  not  employed  have  no  access  to  the 
occupational healthcare system which offers quick 
access  to  primary  healthcare  services  in  private 
hospitals.  Secondly,  private  clinics  might  require 
high  out-of-pocket  payments  or  private  insurance, 
excluding lower income households. Therefore for 
some  patients,  such  as  most  of  the  retirees,  the 
public  primary  healthcare  is  the  only  option.  Due 
to  long  waiting  times (13),  Finns,  especially  low-
income  patients,  report  more  unmet  needs  of 
healthcare services than in the rest of the EU (see 
Box 3.3.1). 

The parliament is expected to adopt this spring 
a  legislative  reform  package  for  the  social  and 
healthcare  services  with  a  reform  of  local  and 
regional administration. Under the reform, a new 
level of regional public administration, to be called 
counties, will be set up. The plan is that these will 
take care of the social and healthcare services from 
2020.  Responsibility  for  the  organisation  of  these 
services,  public  healthcare  facilities  and  staff 
would  be  moved  to  the  counties.  The  amount 
municipal  taxes  and  central  government  transfers 
to  municipalities  would  be  reduced  accordingly 
given  their  reduced  responsibilities.  Instead,  the 
central  government  would  collect  more  taxes  and 
finance the counties via a ‘county transfer system’. 
In  parallel,  emergency  services  and  specialised 
medical  care  are  undergoing  structural  reform. 
Under  this  reform,  the  division  of  tasks  between 
the  hospitals  at  secondary  and  tertiary  healthcare 
levels will be reviewed. At the secondary level, the 
reform  will  reduce 
the  number  of  hospitals 
emergency 
the  most 
offering 
healthcare  services,  from  19  to  12.  At  the  tertiary 
level, university hospital profiles are reviewed and 
some fields of medicine centralised. 

demanding 

The  main  aim  of  the  reforms  is to  improve  the 
sustainability  of  public  finances  through  more 
cost-effective service provision. The reform pools 
resources  that  can  be  used  more  effectively  at 
county  level  in  future.  The  integration  of  primary 

(13)  Other reasons could be financial or geographical barriers. 

15 

 
                                                           
3.1. Public finances and taxation 

moving  to  a handful  of  central  cities  in  the  future 
counties.  To  prevent  this,  they  have  started  to 
outsource  their  healthcare  services  to  private 
hospitals  under  multiannual  service  contracts. 
These 
the 
could 
agreements 
implementation of the reform. 

complicate 

competitiveness  of  non-innovative,  established, 
business  structures  and  activities  are  particularly 
inefficient  in  supporting  long  term  productivity 
growth.  In  addition,  they  do  not  contribute  to 
economic  renewal  and  tend  to  distort  resource 
allocation 
labour) 
(Maliranta et al., 2016, Rauhanen et al., 2015). 

finance  and 

(investment, 

3.1.2.  QUALITY OF PUBLIC FINANCES AND 

TAXATION  

Graph 3.1.2:  General government consumption, as a share 
of GDP and as broken down by function, 2005, 
2010, 2015, Finland and the EU 

Total 

other 

spending. 

Increased  social  protection  expenditure  has 
driven  public  expenditure  in  Finland  to  one  of 
the  highest  levels  in  the  EU  and  has  crowded 
out 
government 
expenditure  was  56.9 %  of  GDP  in  2015,  nearly 
8 pps higher than 10 years earlier. About 6 pps of 
this  increase  is  driven  by  higher  social  protection 
spending, including on old-age pensions (14) as the 
number  of  old-age  pensioners  increased  by  one-
third  from  2005  to  2015.  Adequate  pension 
insurance  guarantees  a  decent  quality  of  life  after 
retirement  and  brings  stability  to  households’ 
disposable  income  and  consumption,  both  of 
which  have  increased  constantly  since  2005.  The 
relative  shares  of  other  government  consumption 
categories  have  remained  broadly  stable.  In  2016, 
the tax-burden was 44.3 % of GDP, up by 1.8 pps 
of  GDP  from  2005.  Since  2009,  the  general 
government  has 
recorded  primary  deficits. 
Consequently,  Finland's  gross  debt-to-GDP  ratio 
increased from 40 % in 2005 to 63.6 % in 2015.  

to 

state  aid.  According 

Finland spends 50 % more than the average EU 
country  on 
the 
Commission  State  Aid  Monitor,  Finland  allocated 
about 1 % of GDP to State aid whereas the average 
EU Member State used 0.7 % of GDP in 2015. In a 
recent  study  by  the  Ministry  of  Economic  Affairs 
and  Employment  (Rothovius  2017)  the  annual 
expenditure on business subsidies was estimated at 
this 
EUR 4 billion  (about  2 %  of  GDP).  Of 
expenditure  about  EUR 2.9 billion 
is  granted 
through  the  tax  system  in  the  form  of  tax 
deductions,  exemptions  and  reduced  rates  on 
specific  industrial  activities  and  fuels.  Subsidies 
cost 
solely 

supporting 

aimed 

the 

at 

(14)  General  government  gross  total  pension  expenditure  was 
10.7 % of GDP in 2005 and 13.1 % of GDP in 2015, with 
old-age pension expenditure alone increasing from 6.7 % to 
10.1 %  of  GDP  during  the  same  period.  Total  old-age 
related  social  protection  benefit  spending  increased  from 
8.3 % of GDP in 2005 to 12.4 % of GPD in 2015. 

(1) The classes of the functions of government (COFOG) are 
1 General public services, 2 Defence, 3 Public order and 
safety, 4 Economic affairs, 5 Environment protection, 
6 Housing and community amenities, 7 Health, 8 Recreation, 
culture and religion, 9 Education and 10 Social protection.  
(2) Share of GDP on the right-hand axis 
Source: European Commission 

Finland  remains  a  relatively  high-taxation 
country. In 2016, the total tax burden amounted to 
44.3 %  of  GDP.  The  gradual  easing  of  personal 
income  taxation  while increasing  indirect  taxation 
has contributed to a tax shift from labour towards 
other  tax  bases.  This  has  improved  the  growth-
friendliness  of  the  tax  structure.  Nonetheless,  the 
level of personal income taxation (13.3 % of GDP) 
remains  among  the  highest  in  the  EU.  The  high 
personal income taxation is accompanied by social 
contributions, accounting for almost 13 % of GDP 
in  2015  (mainly  paid  by  the  employers).  These 
were  recently  driven  up  by  increases  in  pension 
contributions.  When 
the  Finnish  government 
presented  its  latest  pension  reform,  which  came 
into  force  in  2017,  it  was  indicated  that  there 
would be no need to increase the contribution rates 
further  to  safeguard  the  sustainability  of  the 
earnings-related pension system. According to the 

16 

0%10%20%30%40%50%60%0%10%20%30%40%50%60%70%80%90%100%051015051015FinlandEU28COFOG 10COFOG 9COFOG 8COFOG 7COFOG 6COFOG 5COFOG 4COFOG 3COFOG 2COFOG 1% of GDP 
                                                           
 
3.1. Public finances and taxation 

taxation, 

of 
economic growth (Järvikare et al. 2017).  

thus  boosting  productivity  and 

low, 
is 
While  recurrent  property  taxation 
environmental  taxation 
is  high 
in  Finland 
compared  to  other  EU  countries  and  continues 
to  increase.  In  2015,  at  0.8  %  of  GDP,  revenues 
from  recurrent  immovable  property  taxation,  one 
of  the  least  distortive  taxes  to  economic  growth, 
were considerably below the EU average of 1.7 % 
of GDP. By contrast, at 2.9 % of GDP, the revenue 
from  environmental  taxation  was  above  the  EU 
average  of  2.4 %  (see  graph  3.1.3).  The  share  of 
environmental  taxes  in  tax  revenues  has  also 
gradually  increased,  while  the  composition  has 
changed: taxes on CO2 from heating, power plants 
and  machinery  gradually  increased  as  well  as  the 
waste tax.  

Fiscal framework  

is 

the  Ministry 

independent 
in 

Finland is the only euro area country where the 
the 
macroeconomic 
forecasts  underpinning 
budgetary  planning  are  prepared  by 
the 
Ministry  of  Finance.  The  management  of  the 
Economics  Department  of 
is 
separated  from 
the  Budget  Department  and 
according  to  the  law  adopted  in  spring  2015,  the 
its 
Economics  Department 
in 
forecasting  activities.  However, 
the  2017 
stability 
the  macroeconomic 
programme 
projections  for  2018-2020  were  based  on  the 
‘development  according  to  the  targets  of  the 
government  programme’.  Thus,  it  appeared  that 
instead  of  proposing  concrete  measures  enabling 
the  government  to  achieve  its  fiscal  targets,  the 
macroeconomic  scenario  underlying  the  stability 
the 
programme  was 
government's  fiscal  targets  were  met.  This  raised 
questions about the realistic and unbiased nature of 
the  macroeconomic  scenario,  and 
the 
compliance  of  the  latter  with  the  Two-Pack 
Regulation (15)  to  prepare  medium-term  fiscal 
plans on  the  basis of  independent  macroeconomic 
forecasts.  

calibrated 

thus 

that 

so 

(15)  In  May  2013, 

the  Two-Pack  regulations 

introduced 
common  budgetary  rules  for  euro  area  Member  States 
strengthening  the  budgetary  surveillance  cycle  and  further 
improving the economic governance of the euro area. 

latest  projections  endorsed  by  the  EPC-AWG, 
contributions  to  pension  insurance  are  forecast  to 
increase in the future to guarantee the financing of 
the  pension  system.  These  would  push  the  tax 
burden higher.  

Graph 3.1.3:  Tax revenues from environmental taxes, 2010 

and 2015 

(1) Energy taxes include taxes on energy products used for 
both transport and stationary purposes. (2) Transport taxes 
include taxes related to the ownership and use of motor 
vehicles. They also include taxes on other transport 
equipment such as planes and on related transport services. 
(3) Pollution taxes include taxes on measured or estimated 
emissions to air (except taxes on carbon dioxide emissions) 
and water, on the management of waste and on noise. (4) 
Resource taxes include any taxes linked to the extraction or 
use of a natural resource. 
Source: European Commission 

Finland  faces  the  challenge  of  supporting 
investment  that  meets  the  long-term  needs  of 
the  economy.  While  investment  levels  in  Finland 
remain  slightly  above  the  EU  average,  they  have 
been  declining  during  the  past  few  years.  The 
share of private investment is lower than elsewhere 
in  the  EU,  on  average (European  Commission, 
2017a).  The  design  of  the  tax  system  can  help  to 
stimulate  productive  investment.  However,  an 
expert group set  up  by  the Ministry of  Finance  to 
level  and  structure  of  corporate 
review 
the 
taxation,  concluded 
in 
in  early  2017, 
international  comparison  the  corporate  tax  system 
was  competitive  as  it  is.  Substantial  reform  has 
therefore  not  been  planned.  The  group  proposed 
certain changes to the taxation of dividends (from 
unlisted  companies)  and  earned  income.  These 
changes aim to increase the efficacy and neutrality 

that 

17 

01234EU28DKITNLFILVPLUKPTNOSEBECZDEIEESLT20102015 
 
                                                           
3.2.  FINANCIAL SECTOR 

3.2.1.  BANKING SECTOR 

The  financial  soundness  indicators  show  that 
the banking sector is overall in good condition. 
Finnish lenders remain remarkably well capitalised 
and  have  high  loss  absorption  capacity.  At  end-
2016,  the  average  Tier  1  capital  ratio  (16)  was 
23.1 %, one of the highest in the EU (Table 3.2.1) 
and  Tier-1  instruments  accounted for  the  majority 
of  capital.  Also,  the  largest  banks  achieved  good 
results  in  the  2016  European  Banking  Authority 
stress  test,  with  resilient  capital  levels  in  both 
baseline  and  stress  scenarios.  Furthermore,  the 
ratio  of  non-performing  loans  to  gross  loans 
remained  low  (17).  The  sector  also  performs 
generally well in terms of profitability, albeit with 
some  variation  among  banks  (18),  with  return  on 
equity  hovering  around  9 %.  In  the  current  low 
interest  rate  environment,  net  interest  income  fell 
about 4 %, while the operating costs of the sector, 
increased. 
particularly 
Nonetheless,  the  system’s  cost-to-income  ratio 
remained  fairly  stable  and  well  below  the  EU 
average (19). The banking sector is large (10 banks 
in  total),  but  rather  concentrated,  with  the  three 
largest  banks  controlling  a  combined  72.2 %  of 
lending and 77.7 % of deposits. 

investments, 

IT 

to  expand 

merchant  banks,  so-called  wholesale  funding, 
albeit  extensively  in  the  form  of  covered  bonds 
with  average  maturities  above  one  year.  As  a 
result, the banking system’s loan-to-deposit ratio is 
rather  high,  at  close  to  140 %  (2016).  However, 
given  the  low  interest  rate  environment  and 
Finnish  households’  low  saving  rate,  there  is 
the  deposits  base. 
limited  room 
Therefore,  banks  maintain  large  portfolios  of 
liquid  assets  available  for  sale 
to  generate 
emergency  cash.  Also,  as  wholesale  funding 
remains  a  volatile  funding  source,  the  Finnish 
Financial  Supervisory  Authority  has  recently 
recommended 
funding 
maturities,  reduce  short-term  funding  and  prepare 
adequate  contingency  plans.  Nevertheless,  many 
lenders  remain  exposed  to  the  risk  of  a  freeze  in 
unsecured  wholesale  funding.  This  could  still 
generate funding gaps in the event of major market 
stress. 

extend 

banks 

that 

Graph 3.2.1:  Lending to the private sector — Change in 

stock of loans (y-o-y) 

Table 3.2.1: 

Financial soundness indicators, all banks in 
Finland 

(*) European Central Bank aggregated balance sheet: 
loans excluding to government and MFI / deposits excluding 
from government and MFI 
Source: ECB CBD 

The  high  reliance  on  wholesale  funding  has 
recently been targeted by the Finnish Financial 
Supervisory  Authority,  but  refinancing  risks 
persist. The share of private-sector deposits in the 
domestic banking system remains low (20). Instead, 
Finnish  banks  rely  heavily  on  borrowing  from 

(16)  The tier 1 capital ratio is the comparison between a bank's 

core equity capital and its total risk-weighted assets. 

(17)  1.3 %  in  December  2016,  against  5 %  on  average  in  the 

EU. 

(18)  In 2016, the return on equity was 8.7% against an average 

of 3.3 % in the EU. 

(19)  54 %  in  2016  against  51 %  in  2015.  The  EU  average  was 

66 %. 

(20)  33 % of total liabilities, against 54 % in the euro area. 

Source: European Central Bank 

Strong  interconnections  with  other  Nordic  and 
Baltic countries create a risk of spillover effects 
through  the  financial  system  (see  European 
Commission,  2018a).  Sweden  faces  sources  of 
imbalances  in  the  form  of  high  private  debt  and 
overvalued  house  prices.  The  elevated  private 
indebtedness,  in  particular  of  households,  makes 
the economy vulnerable to macroeconomic shocks. 
In the event of a large, disorderly downturn in the 
housing market, there is a risk of negative spillover 

18 

(%)201120122013201420152016Non-performing loans0,80,80,71,41,31,3Coverage ratio---36,037,936,3Loan to deposit ratio*142,3139,9139,2139,6136,7139,1Tier 1 ratio13,716,315,516,622,423,1Capital adequacy ratio14,417,216,317,523,824,6Return on equity7,68,98,19,18,38,7Return on assets0,30,30,40,40,50,5-2024681012121314151617Private Non-financial corporationsHouseholdsMortgage credity-o-y % ch. 
 
 
 
 
                                                           
 
3.2. Financial sector 

Banks play a key role in financing the economy. 
In general, businesses and retail clients can afford 
bank  lending,  since  the  banking  system  rapidly 
passes  the  record  low  interest  rates  on  to  the  real 
economy. Large firms are able to obtain financing 
through  equity  and  debt  issuers,  whereas  bank 
lending is the main source of funding for small and 
medium-sized businesses. 

Access  of  SMEs  to  finance  has  remained  easy 
compared  with  most  other  EU  countries.  In 
2016,  SMEs  in  Finland  did  not  face  restricted 
access to bank financing and obstacles to financing 
appeared limited. Banks appeared more willing to 
lend,  particularly  thanks  to  the  improving  general 
economic outlook. That said, the cost of borrowing 
was rising and the presence of collateral most often 
required.  On  the  face  of  it,  bank  financing 
appeared less attractive for SMEs than other forms 
of  financing  such  as  crowdfunding,  peer-to-peer 
lending  or  business  angels  funding  (ECB,  2017), 
but  more  easily  accessible.  In  2015,  the  total 
amount  of  annual  venture  capital  investments  in 
Finnish  companies  was  stable  at  0.05 %  of  GDP 
and  remained  the  second  highest  in  the  EU  after 
Luxembourg (0.08 % of GDP). 

3.2.3.  HOUSING MARKET 

Real house prices have bottomed out. Real house 
prices  recovered  slightly  in  the  first  half  of  2017 
(+0.8 %),  after  negative  growth  in  2015-2016  and 
a  somewhat  more  rapid  decline  in  2013-2014. 
Also, the valuation gap appears to have closed (see 
Graph  3.2.2),  even  though  prices  in  the  Helsinki 
region continue to increase. There are no signs of a 
price overvaluation overall at national level.  

effects  to  other  Nordic  countries  through  the 
financial system, including Finland. 

In  September  2017,  the  board  of  Nordea  took 
the  decision  to  move  its  headquarters  from 
Sweden  to  Finland  by  end-2018.  The  decision 
still  needs 
the  bank's 
to  be  confirmed  by 
shareholders. While Nordea's operations in Finland 
are  not  expected  to  markedly  change  in  terms  of 
size  and  interconnectedness,  the  move  will  have 
implications for the supervisory and the resolution 
framework.  It  puts  Nordea,  the  Nordic  region’s 
only  globally  systemically  important  bank,  under 
the  supervision  of  the  European  Central  Bank 
(ECB)  and  the  Single  Supervisory  Mechanism 
(SSM)  and  on  a  level  playing  field  with  its  peers 
(21).  For  Finland,  given  the  size  of  the  bank, 
hosting  Nordea’s  headquarters  creates  both 
opportunities  and  risks.  Following  the  move,  the 
total  assets  of  Finland’s  banking  sector  are 
expected  to  reach  about  420  %  of  GDP,  and  by 
assets  Nordea  will  be 
the  biggest  company 
operating  out  of  Finland.  If  the  move  of  Nordea's 
headquarters  to  Finland  materialises,  a  buffer 
requirement  for  global  systematically-important 
institutions  (G-SII)  will  automatically  come  into 
play.  Also,  a  systemic  risk  buffer  has  been  added 
to the Finnish regulator's toolbox.    

3.2.2.  ACCESS TO FINANCE 

Credit  has  continued  to  expand  modestly  in 
Finland.  Lending  to  the  economy  is  on  a  stable 
upward  trend,  along  with  GDP.  By  September 
2017  lending  to  firms  (loans  stock  —  moving 
annual  average)  was  growing  by  5.4 %  year-on-
year,  while  the  mortgage  loans  segment  kept 
increasing  by  2.0 %  year-on-year  (Graph  3.2.1). 
Changes  in  loan  flows  to  households  were  even 
stronger  (6.9  %  in  September  2017  —  moving 
annual average), suggesting an acceleration. These 
developments  reflect  the  low  interest  rates  and 
improving  consumer  confidence, 
in  particular 
consumers’  increasingly  favourable  view  of  their 
personal finances. 

(21)  UK  banks  are  outside  the  euro  area  and  under  the 
supervision  of 
the  Prudential  Regulation  Authority, 
established  in  2012.  It  is  a  United  Kingdom  financial 
regulatory  body  structured  as  a  limited  company  wholly 
owned by the Bank of England.  

19 

 
                                                           
3.2. Financial sector 

Graph 3.2.2:  Overvaluation gap for price/income, 

Graph 3.2.3:  Share of dwelling construction in GDP — 

price/rent and fundamental model valuation 
gaps — Finland 

Annual change in % 

Source: European Commission  

Overvaluation gap estimated as an average of the 
price/income, price/rent and fundamental model valuation 
gaps. See Philiponnet and Turini (2017) for methodology.  
Source: European Commission calculations 

The  Finnish  housing  market  has  very  large 
regional  disparities.  In  the  greater  Helsinki  area, 
the  average  price  per  square  metre  in  2017  was 
twice  the  level  registered  elsewhere.  Most  new 
jobs  are  created  in  the  greater  Helsinki  area.  The 
move  from  the  countryside  to  urban  areas  is 
continuing.  Housing  demand  is  therefore  large  in 
the  greater  Helsinki  area  and  housing  supply  in 
Finland  does  not  always  keep  up  with  increasing 
demand  (Marrez  et  al.,  2013).  As  a  result,  house 
prices  are  increasing  faster  than  income  there.  In 
many  other  areas,  prices  have  actually  dropped 
relative  to  income  and  market  rents,  as  the 
population  migrates  to  urban  centres  and  declines 
(Nordea, 2017). This appears to be an impediment 
to  labour  mobility,  especially  for  lower-skilled 
workers and families with limited revenues. 

Since  2015,  dwelling  construction  has  been  on 
the  rise.  In  the  three  Nordic  countries  (Denmark, 
Finland and Sweden), dwelling construction has a 
strong  cyclical  character.  It  is  closely  linked  to 
interest rates and so evolves in line with the ECB’s 
monetary  policy  decisions  and  the  EU  business 
cycle  (22).  Along  the  cycle,  the  share  of  dwelling 
construction  in  GDP  oscillates  between  5 %  and 
6.7 % in Finland (23). In 2017, construction growth 
seemed  to  be  levelling  off,  with  the  share  of 
dwelling  construction 
the  country’s  GDP 
in 
nearing its peak (see Graph 3.2.3). However, more 
residential  building  permits  (in  m²  of  useful  floor 
area) were still granted in the first three quarters of 
2017,  suggesting  that  a  larger  supply  of  new 
dwellings  can  be  expected  in  2018.  At  the  same 
time,  policies  that  push  households’  preferences 
towards  house  purchases,  most  notably 
tax 
incentives on mortgages, are being phased out (see 
Section  3.2.1).  In  parallel,  from  2018  the  ECB’s 
monetary  policy 
to  become 
progressively less accommodative with a negative 
impact  expected  on  household  investment  and 
thereby  on  dwelling  construction  in  Finland  and 
elsewhere. 

expected 

is 

(22)  The respective impact of the business cycle and of regional 
migration  on  housing  demand  and  prices  in  Finland’s 
growth  centres  will  be  examined  more  in  detail  in  a 
separate publication. 

(23)  By contrast, in Sweden, the share oscillated between 2.5 % 
and 6 %, with a clear upward trend across the recent cycles 
(2001-2017). 

20 

-40-30-20-1001020309597990103050709111315Model-based valuations gapPrice to income vs. hist. avg.Price to rent vs. hist. avg.-25%-20%-15%-10%-5%0%5%10%15%20%02030405060708091011121314151617*change in %FISEDK 
 
 
                                                           
3.2. Financial sector 

3.2.4.  PRIVATE-SECTOR DEBT 

Graph 3.2.4:  Gaps to prudential thresholds and 

The  overall  private  debt  burden  is  unwinding, 
but household  debt may  slowly  be  building up. 
In  2016,  the  private  consolidated  debt  stock  in 
Finland declined by 3.6 pps. At 149.3 % of GDP, it 
remained  significantly  above  the  macroeconomic 
imbalance procedure (MIP) indicative threshold of 
133 %.  On  the  other  hand,  credit  growth  to  the 
private sector slowed to 2.2 % of GDP, far below 
the  MIP  threshold  of  14  %.  Nevertheless,  the 
slowly  rising  household  debt  deserved  closer 
monitoring (see section 3.2.6). 

3.2.5.  NON-FINANCIAL CORPORATIONS’ (NFC) 

DEBT AND FINANCING 

Risks  related  to  the  NFCs  debt  appear  limited 
and  decreasing.  At  82.1 %  of  GDP  in  2016,  the 
consolidated  debt  of  the  NFCs  remained  quite 
high,  but  stable  and  even  slowly  contracting.  As 
for  the  new  benchmarks  developed  by  the  LIME 
working group (24) (European Commission, 2017b, 
the  non-financial 
Philiponnet  et  al.  2017), 
corporations’ debt was slightly above its prudential 
threshold  (75 %  of  GDP),  but  largely  below  its 
fundamentals-based benchmarks (99.4 % of GDP) 
(25). Moreover, in recent years, the positive gap to 
rapidly 
the  prudential 
decreasing,  while 
the 
to 
fundamentals-based benchmark has been widening 
(see Graph 3.2.4). 

threshold  has  been 
the  negative  gap 

(24)  The  Lisbon  methodology  working  group  (LIME)  is  the 
technical  and  methodological  group  of  the  Economic 
Policy Committee.  

(25)  Fundamentals-based  benchmarks 

are  derived 

from 
regressions  capturing  the  main  determinants  of  credit 
growth and taking into account a given initial stock of debt. 
Prudential  thresholds  represent  the  debt  threshold  beyond 
which 
is  high, 
minimising the possibility of missed crisis and that of false 
alerts. 

the  probability  of  a  banking  crisis 

fundamental benchmarks for non-financial 
corporations and households 

Source: European Commission 

3.2.6.  HOUSEHOLD DEBT 

At  67.1 %  of  GDP  in  2016,  the  debt  level  of 
Finnish households was high and moderately on 
the rise (26) (see Graph 3.2.5). In terms of debt-to-
gross  disposable  income  ratio,  in  Q1-2017  (three-
year average) Finland ranked eighth in the EU-28 
(27).  However,  households’  assets,  both  financial 
and non-financial (mainly real estate assets), were 
also sizeable, at 138 % of GDP and 205 % of GDP 
respectively. Household debt stock increased only 
moderately (2.5 %) in 2017. 

of  debt 

active  process 

The household savings rate is low, and there is 
no 
reduction. 
Consumption  has  risen  faster  than  disposable 
income  in  recent  years,  supported  by  higher 
consumer  confidence  and  low  interest  rates.  As  a 
result,  consumer  credit  is  growing  rapidly,  and  a 
large  share  of  mortgage  loans  is  held  by  highly 
indebted  borrowers.  That  said,  in  2016  the  non-
performing  loan  ratio  remained  one  of  the  lowest 
in  the  EU,  even  though  slightly  on  the  rise.  The 
gross  household  saving  rate  is  low  at  about  6 % 
only, half the level prevailing in the euro area. 

(26)  Corresponding figures for Finland’s Nordic peers, Sweden 

and Denmark, were comparatively higher. 

(27)  Lower  than  Denmark,  the  Netherlands,  Cyprus,  Sweden, 

Ireland, Luxembourg and the UK. 

21 

-30-20-1001020309698000204060810121416% of GDPGap to prudential threshold - HHGap to fundamental benchmark - HHGap to prudential threshold - NFCGap to fundamental benchmark - NFC 
                                                           
 
                                                           
3.2. Financial sector 

exists,  especially  as,  recently,  only  27%  of  new 
mortgage  loan  contracts  with  variable  rates  are 
loans with fixed instalments, while, for the others, 
monthly payments would increase. 

Several  measures  have  been  introduced  to 
contain  risks  related  to  the  high  and  rising 
household  indebtedness.  In  November  2016,  the 
European  Systemic  Risk  Board  published  a  set  of 
warnings  on  medium-term  vulnerabilities  in  the 
residential  real  estate  sector  for  eight  Member 
States,  including  Finland.  The  key  vulnerabilities 
in  the  country  include  the  uneven  distribution  of 
mortgage-related risks among households, the high 
loan-to-value  ratios  and  the  low  risk  weight  of 
mortgages in bank balance sheets (29). The Finnish 
government is phasing out the tax deductibility of 
mortgage interest payments, with the deductibility 
limited  to  35  %  of  the  interest  rate  payments  in 
2018 and to 25 % in 2019. Also, since July 2016 a 
law imposes that banks apply a maximum loan-to-
value ratio for new mortgages (90%, 95% for first 
home  buyers).  In  addition,  from  January  2018  an 
institution-specific  minimum  level  of  15 %  shall 
be applied for the average risk weight on mortgage 
loans to credit institutions that have adopted what 
is  called  the  internal  ratings-based  approach. 
However,  amid  persistently  low  interest  rates,  a 
significant decrease in households' indebtedness in 
the  coming  years  is  not  likely.  Consumer  lending 
practices are a source of concern. A rising share of 
this lending is granted by banks or companies that 
are  not  registered  as  banks  in  Finland  (banks 
registered  abroad,  non-financial  companies  e.g. 
those  selling  consumer  goods  and  peer-to-peer 
lending,  and  crowdfunding).  In  this  respect,  the 
lack  of  a  comprehensive  credit  registry  collecting 
both positive  and  negative  information on debtors 
could prevent banks from having a clear overview 
of households’ actual indebtedness (IMF, 2017a). 

(29)  As a result, the overall equity-to-asset ratio was one of the 

lowest in the OECD (OECD, 2016a). 

Graph 3.2.5:  Leverage of households (households’ debt 

stock to GDP ratio) (1) 

(1) ESA 2010 
Source: European Commission 

debt 

their 

Households  seem  to  be  moving  slowly  away 
from 
fundamentals-related 
benchmark.  According  to  the  benchmarks  for 
assessing  private  debt,  Finland’s  household  debt 
appears slightly above both its prudential threshold 
(59.1 %  of  GDP  in  2016)  and  its  fundamentals-
based  benchmarks  (63.1 %  of  GDP  in  2016).  In 
2016,  the  positive  gap  to  the  prudential  threshold 
was rapidly contracting, but the positive gap to the 
fundamentals-based  benchmark  appeared  to  be 
widening  (see  Graph  3.2.4).  Also,  the  rather  high 
medium-term  and  long-term  debt  sustainability 
indicators  (respectively  S1  and  S2)  (28)  highlight 
that the excessive households' indebtedness derives 
from  a  low  savings  rate  (S1)  and  could  be 
aggravated  in  the  long-term  due  to  demographic 
changes and other long-term factors (S2).  

Variable-rate mortgage lending to households is 
the  dominant  category  of  credit  in  Finland. 
Mortgage lending accounted for 75.3 % of the total 
household  credit.  The  share  of  new  mortgage 
lending  with  variable  rates  was  very  high  (97%). 
In  June  2017  the  average  interest  rate  on  housing 
loans  was  low  at  1.54  %,  with  an  average  rate  of 
1.07  %  for  new  housing  loans.  However,  interest 
rates  can  be  expected  to  rise  in  the  medium term. 
A  risk  for  households  and  for  banks  therefore 

(28)  Debt sustainability indicators correspond to the permanent 
adjustment in the savings rate to (i) reach the fundamental 
benchmark  for  debt  within  15  years  (S1)  and  (ii)  ensure 
that net financial liabilities are eventually reimbursed (S2).  

22 

020406080100120140160000102030405060708091011121314151617*% of GDPDEDKEEFISE 
 
                                                           
                                                           
3.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

are  observed  in  manufacturing  and  non-tradable 
service  sectors,  including  business  services  and 
construction  (Graph  3.3.2) while  tradable  services 
have lost some jobs. Among the growing regions, 
South-West  Finland  especially  is  currently  doing 
particularly well thanks to its shipbuilding and car 
assembly  industries.  To  alleviate  specific  skill 
a  new 
in  South-West  Finland, 
shortages 
cooperative  university  education  venture  for  the 
manufacturing  sector  called  FITech 
is  being 
established, which will provide tailored support for 
industrial growth in the region. In addition, there is 
a  need  to  ensure  sufficient  housing  and  transport 
links  in  that  part  of  the  country  (Aho,  2017)  (see 
also Section 3.2.3). 

Graph 3.3.2:  Evolution of employment by sector 

3.3.1.  LABOUR MARKET 

Labour market 

labour  market 

The 
situation  has  been 
improving  since  2016.  The  number  of  people  in 
employment grew by 0.5 % in both 2016 and 2017 
and  is  expected  to  continue  to  rise  in  2018  and 
2019  (Graph  3.3.1).  Increasingly  confident  about 
economic  expansion,  more  inactive  people  have 
started looking for work and move back to labour 
force.  This  explains  the  slow  decrease  in  the 
headline  unemployment  rate,  from  8.8 %  in  2016 
to  8.7 %  in  2017.  The  employment  rate  has 
gradually  increased  from  68.5 %  in  2015  to  close 
to  70 %  in  2017,  still  below  Nordic  peers,  and 
mainly  driven  by  older  workers (30).  In  2016,  the 
youth  unemployment  rate  contracted  markedly  by 
2.3 pps to 20.1 %, approaching the EU average of 
18.8 %.  The  rates  of  15-24  year  olds  not  in 
employment,  education  or  training  started  to 
improve as well, at 9.9 % after 10.6 % in 2015. 

Graph 3.3.1:  Labour market indicators 

Source: European Commission 

Source: European Commission 

Labour market trends and matching 

The moderate rate of job creation since 2016 is 
increasing  regional  and 
characterised  by 
sectoral  differences.  Recently 
the  biggest 
increases in the share of employment year-on-year 

(30)  The  employment  rate  of  older  workers  (55-64)  has 
increased in recent years, reaching 74.0 % in Q2-2017. 

in 

especially 

While  the  job  vacancy  rate  continues  to 
increase,  recent  survey  data  point  to  labour 
shortages 
construction  and 
services.  Companies  are  increasingly  looking  for 
new workers as indicated by an increasing number 
of  vacancies  registered  at  the  public  employment 
service (Graph 3.3.3). In 2017 the job vacancy rate 
continued to increase to 1.8 %, just slightly below 
the  EU  average  of  2 %.  The  competition  for  jobs 
should have  eased,  as recently  there were about 7 
unemployed  job  seekers  per  open  vacancy,  down 
from about 10 job seekers 2 years ago. 

23 

77.57878.57979.58080.5051015202501020304050607080910111213141516Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs)-150-100-500501002000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q12013Q12014Q12015Q12016Q12017Q1thsFIAgricultureIndustryConstructionTradable servicesNon-tradable servicesPublic sectorTotal 
 
 
                                                           
 
3.3. Labour market, education and social policies 

Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by the European  Parliament,  the 
Council and the European Commission, sets out 20 key principles and rights to benefit citizens in the EU. In 
light  of  the  legacy  of  the  crisis  and  changes  in  our  societies  driven  by  population  ageing,  technological 
change  and  new  ways  of  working,  the  Pillar  serves  as  a  compass  for  a  renewed  process  of  convergence 
towards better working and living conditions. 

the  Social  Scoreboard 

Finland  performs  relatively  well  on  the 
(1) 
indicators  of 
supporting  the  European  Pillar  of  Social 
Rights.  76 %  of  the  population  have  basic  or 
transfers 
above  basic  digital  skills,  Social 
effectively address poverty.  

Self-reported  unmet  needs  for  medical  care 
suggest  challenges.  Access  to  services  in  the 
healthcare  system  is  currently  uneven  and  the 
proportion  of  people  reporting  unmet  medical 
care  needs  due  to  the  waiting  time  is  relatively 
high,  4 %.  The  current  organisation  of  the 
healthcare  system  results  in  a  strong  contrast 
between occupational healthcare with fast access 
and  public  healthcare  with  long  queues.  At  the 
same time the need for social and health services 
is  growing  as  the  population  is  aging.  The 
upcoming  social  and  health  care  reform  (see 
section  3.1.3)  aims  to  address  some  of  the 
reasons for uneven access to healthcare.  

Finland  has  a  generally  well  performing 
education  system.  The  quality  of  education  is 
shown  by  particularly  good 
educational 
outcomes, even if they have seen some decline in 
in  science  and  mathematics  (OECD  2016b). 
There is a high degree of equity as the influence 
of socioeconomic background on educational outcomes is relatively weaker. The system benefits from well-
educated and motivated teachers as well as a high level cooperation among all the relevant stakeholders.  

1   The  Social  Scoreboard  includes  14  headline  indicators,  of  which  12  are  currently  used  to  compare  Member  States 
performance.  The  indicators  "participants  in  active  labour  market  policies  per  100  persons  wanting  to  work"  and 
"compensation  of  employees  per  hour  worked  (in  EUR)"  are  not  used  due  to  technical  concerns  by  Member  States. 
Possible alternatives will be discussed in the relevant Committees.. Abbreviation: GDHI – gross disposable household 
income. 

However, in 2017, approximately one construction 
or service sector company in four said that labour 
shortage limited their production. In manufacturing 
also  labour  shortages  are  on  an  increasing  trend, 
although  the  level  is  still  relatively  low.  In 
addition,  since 
reduction  of 
unemployment  has  almost  come  to  a  standstill 
while more jobs are vacant (Graph 3.3.4), implying 
that vacancies are more difficult to fill than before. 
According  to  the  Beveridge  curve,  matching 
problems  increased  until  2015.  Matching  has 

late  2016 

the 

remained  broadly  unchanged  since  then.  To  some 
extent  this  could  also  either  reflect  the  fact  that 
typically  previously 
inactive  workers  started 
looking for work after the recession, resulting in a 
gradually  decreasing  unemployment  rate.  Another 
possible  explanation  is  that  the  structure  of  the 
economy has changed meaning that some workers’ 
skills  would 
improve 
need 
employment prospects.  

updating 

to 

24 

Early leavers from education and training (% of population aged 18-24)On averageGender employment gapGood but to monitorIncome quintile ratio (S80/S20)Best performersAt risk of poverty or social exclusion (in %)Best performersYouth NEET (% of total population aged 15-24)On averageEmployment rate (% population aged 20-64)On averageUnemployment rate (% population aged 15-74)On averageGDHI per capita growth On averageImpact of social transfers (other than pensions) on poverty reductionBest performersChildren aged less than 3 years in formal childcareOn averageSelf-reported unmet need for medical care To watchIndividuals' level of digital skillsBest performersSocial protection and inclusionDynamic labour markets and fair working conditionsEqual opportunities and access to the labour marketFINLANDMembersStates'areclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaverages,andclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituations").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,please consult the draft Joint Employment Report 2018, COM (2017) 674 final. 
 
3.3. Labour market, education and social policies 

Graph 3.3.3:  Labour shortages 

(1) Vacancies/FTE and vacancies/unemployed refer to the 
ratio of vacancies registered at the PES to registered 
employment (in full-time units) and unemployment, 
respectively. Vacancies/jobs refer to the standard enterprise 
survey-based job vacancy rate. Labour shortage is 
measured as percentage of firms reporting labour shortage 
as a factor limiting production (annual average of 
seasonally adjusted quarterly data) 
Source: Calculations based on Eurostat data and European 
Commission data of business surveys for Business Climate 
Indicators 

Graph 3.3.4:  Beveridge curve 

(1) Vacancies as registered at the State Employment 
Agency 
Source: European Commission 

could  ensure  that  the  competitiveness  gains  made 
in the context of the Competitiveness Pact are not 
lost,  while  securing  a  potential  increase  in  the 
purchasing  power  of  households.  It  remains  to  be 
seen whether the sectors that will negotiate in early 
2018 will limit their wage increases to the anchor 
set by the exporting sectors.  

Under  sectoral  agreements  concluded  in  late 
2017  and  early  2018,  certain  industries  were 
given  the  opportunity  to  carry  out 
local 
bargaining 
collectively  agreed  wage 
for 
the  main  exporting  sector 
increases.  Under 
agreements,  a  part  of  the  agreed  total  wage 
increase takes the form of a general increase to all 
workers  of  the  sector,  while  part  of  the  increase 
can  be  agreed  locally  at  the  firm-level (31).  The 
exact  share  of  the  part  subject  to  local  bargaining 
varies  by  industry (32).  In  some  sectors,  this  local 
allocation of part of the wage increases has been in 
place for some time (Tulo- ja kustannuskehityksen 
selvitystoimikunta,  2014).  To  some  extent,  the 
possibilities for local bargaining were opened up in 
the  context  of  the  Competitiveness  Pact  in  2016 
(European Commission, 2017c). 

Companies  that  are  not  members  of  employer 
organisations  cannot  use  some  of  the  available 
local  bargaining  possibilities.  These  employers 
(mostly SMEs) are bound by the sectoral collective 
agreements.  Currently, 
some  75 %  of  all 
employees  work  for  organised  employers,  and 
these  collective 
some  89 %  are  covered  by 
agreements  (Ahtiainen,  2016).  Non–organized 
employers  are  currently  prohibited  from  using 
certain  possibilities  (e.g.  on  working  time)  for 
local  bargaining 
the  collective 
included 
agreements.  This  may  make  it  harder  for  such 
firms  to  ensure  that  real  labour  cost  increases  are 
aligned with their productivity growth. In general, 
capacity  building  of  employees  and  employers, 
especially in non-organized companies, appears as 
a prerequisite for successful local bargaining.  

in 

Wage 
bargaining 

developments 

and 

collective 

Labour supply 

Wage  negotiations  are  ongoing  for  the  year 
2018  and  beyond,  and  the  first  results  are 
promising.  The  sectoral  collective  agreements  in 
the  largest  exporting  sectors  (technology,  forest 
industries,  chemical)  concluded  so  far  point  to 
continued  moderate  wage  increases  in  2018-2019 
(see  section  3.4).  The  wage  level  agreed  so  far 

The  shrinking  of  the  labour  force  and  the 
in  prime  working  age 
decline 

in  activity 

(31)  Most  increases  have  a  fall-back  option  where  the  whole 
wage  increase  is  allocated  as  a  general  increase  if  no 
agreement is reached locally. 

(32)  These are included in all the agreements concluded so far, 
but are particularly significant for the technology sector. 

25 

0.0%0.4%0.8%1.2%1.6%2.0%0%10%20%30%40%50%060708091011121314151617Vacancies/employed (rhs)Industry labour shortageConstruction labour shortageServices labour shortageVacancies/unemployedJob vacancy rate (rhs)2008-Q12008-Q42009-Q12009-Q42010-Q22012-Q12013-Q12014-Q12016-Q12017-Q12017-Q32000 Q1 2002 Q3 2006 Q32007 Q310152025303540455055155175195215235255275Vacancies(ths)Unemployment (ths) 
 
 
 
                                                           
3.3. Labour market, education and social policies 

Table 3.3.1: 

Inactivity rates in Finland and the EU in 2008 
and 2016 — Stock  in percentage of total 25-
49 age population 

Source: European Commission 

Labour  market  outcomes  of  the  non-EU  born 
people  are  worse  than  for  natives.  In  2016,  the 
employment rate gap was one of the highest in the 
EU  (at  20.9 pps)  and  particularly  high  for  women 
(27.6 pps),  mainly  due  to  the  low  activity  rate 
among  non-EU  born  women.  There  is  also  an 
above average difference in school performance of 
natives  and  non-EU  born,  which  affects  second 
generation  pupils  as  well.  This  translates  into  a 
high at-risk-of-poverty or social exclusion gap (36).  

Incentives  to  accept  work  and  activation 
measures 

While  some  inactivity  traps  remain,  Finland 
took  considerable  action  in  2016  and  2017  to 
encourage  jobseekers  to  accept  work.  Reforms 
of  unemployment  benefits  were  implemented  as 
from  2017,  shortening  the  duration  of  earnings-
related  unemployment  benefits  and  tightening  the 
conditions  for  granting  unemployment  benefits. 
Currently,  as  for  unemployment  benefits,  Finland 
is  above  EU  average  regarding  the  coverage, 
adequacy  and 
length  (European  Commission, 
2018c).  From  the  beginning  of  2018,  a  revised 
benefit  scheme  with  financial  sanctions  for  those 
jobseekers who do not demonstrate "being active" 
for  18  hours  in  a  3-month  period  (i.e.  working  or 
being  self-employed)  or 
in 
employment services entered into force. The scope 
of the mobility allowance is also widened to better 
cover  part-time  work  There  are  plans  to  enable 
jobseekers  to  enhance  their  skills  related  to 
entrepreneurship or areas with high labour demand 
during  six  months  without  losing  unemployment 
benefits. However, there has been less progress to 
address 
traps,  which  cause 
uncertainty regarding both the level of benefits and 
the duration of waiting times before the reinstating 
of  benefits.  A  real-time  income  register,  which 

the  bureaucratic 

five  days 

for 

population  (30-44)  presents  challenges  to  the 
Finnish labour market policies. The working age 
population (15-64) has been shrinking since 2010. 
This  phenomenon,  coupled  with  inactivity  rates 
among  the  prime  working  age  population  (30-44) 
which have increased faster than in the rest of the 
EU,  could  challenge  the  sustainability  of  the 
Finnish welfare state.  

While  activity  rates  have  been  improving  for 
the  general  population  20-64,  they  have  been 
deteriorating  for  specific  age  groups.  The 
phenomenon  is  not  limited  to  Finland,  as  the 
activity rate among prime age workers of category 
30-44  across  the  EU  has  gone  down  from  94.1 % 
to  93.3 %  between  2008  and  2016.  However,  the 
fall  was  sharper  in  Finland  (from  93.6 %  to 
90.8 %) and continued in 2017 (90.3 %), resulting 
in the fourth lowest activity rate in the EU in this 
age  group.  While  the  activity  rate  for  the  higher 
skilled  appears  constant  across  time,  it  declines 
markedly  for  the  low  and  medium  skilled (33).The 
economic  dependency  ratio  is  thus  at  risk  to 
increase in the medium and long term. 

The  reasons  for  the  increase  in  the  inactivity 
rate  of  the  prime  working  age  group  are 
multiple (see Table 3.3.1). The main drivers seem 
to  be  education  and  training,  especially  for  the 
medium  skilled.  Disability  and  illness  are  also 
reasons  for  inactivity.  Moreover,  the  share  of 
discouraged  workers  has  increased  from  2008  to 
2016. 

Women  have  moved  from  employment  into 
inactivity  even  more  than  men,  due  mainly  to 
family  duties  and  caring  responsibilities. 
However,  education  and  training  as  a  reason  for 
inactivity  increased  over  the  same  period (34). 
Overall,  women  in  Finland  are  more  likely  to  be 
present  on  the  labour  market  than  in  other  EU 
countries (35),  as  they  tend  to  return  to  work  after 
the  inactivity  period  related  to  family  duties. 
However,  the  recent  trend  has  been  for  women’s 
participation  in  the  workforce  to  decrease  more. 
This  explains  the  increased  gender  employment 
rate gap (see Box 3.3.1). 

(33)  Cumulated  activity  rates  for  low  and  medium  skilled  of 

58.7 % in 2008 decreasing to 51.9 % in 2016. 

(34)  From  16.22 %  in  2008  to  20.03 %  in  2016  for  the  30-44 

female population. 

(35)  Activity  rate  (ages  20-64)  in  2016:  Finland  77.7 %,  EU 

(36)  27.4 pps: the fifth highest in the EU. 

average 71.4 %. 

26 

20082016200820162008201620082016Education1,62,92,93,92,33,41,31,5Own illness, disability3,232,332,832,42,7Looking after children:0,36,26,63,13,43,63,9No work available0,30,70,30,50,30,60,81,1Others1,82,58,49,65,269,79,5Total7,610,214,718,311,114,414,414FinlandEU28MenWomenTotal Total  
                                                           
 
 
 
                                                           
may  address  some  of  the  bureaucratic  traps,  is 
expected be in place in 2019.  

The  activation  measures  could  have  a  positive 
impact  if  coupled  with  good  and  sufficient 
activation  services.  The  measures  introduced  so 
far  include  interviews  with  all  unemployed  as  of 
2017.  The  impact  of  the  interviews  has  been 
deemed  to  be  positive,  but  may  be  limited  to 
updating 
the  statistics  as  many  unemployed 
registered as jobseekers have been found no longer 
to  be  looking  for  work.  Furthermore,  not  all 
jobseekers  have  yet  been  interviewed  at  all,  and 
the  target  of  interviews  every  3  months  is  not 
reached.  This  measure  may  also  be  diverting 
public  employment  services  resources  away  from 
catering the services to those who need them most. 
The  public  employment  services  offices  do  not 
currently appear to have sufficient staff to provide 
adequate  activation  services  to  all  unemployed. 
The  requirement  to  "demonstrate  being  active" 
aims  at  active  job  search  during  the  whole  period 
of  unemployment 
insurance  but  could  direct 
jobseekers to accept even very short-term work or 
some 
training 
EUR 10 million  in  the  budget  for  active  labour 
market policies are planned to accommodate these 
requirements,  but  it  is  unclear  whether  this  is 
sufficient to ensure activation measures to all those 
who  need  them.  This  could  reduce  the  income  of 
the most vulnerable jobseekers in regions where no 
work  or  active 
labour  market  measures  are 
available. 

Increases 

courses. 

of 

the 

improving 

the 
services 

important.  Many  of 

increasing  employment, 
In  view  of 
inactive  and 
for 
integrated 
unemployed  are 
the 
currently  existing  integrated  services  are  aimed  at 
certain  groups  only,  such  as  young  people  or  the 
long-term  unemployed.  The  services  could  be 
combined  with  measures 
the 
employability  of  the  unemployed,  paying  special 
attention to vulnerable groups (e.g. rehabilitation). 
The  range  of  services  is  appropriate  but  the 
services are dispersed among a number of separate 
providers and the coordination is not good enough 
to  produce  a  seamless  services  chain.  Therefore, 
the  vulnerable  claimants  are  falling  between 
different  measures.  Services  for  certain  groups 
(young,  long-term  unemployed)  appear  to  be 
adequate.  

3.3. Labour market, education and social policies 

Some recent policy decisions may have negative 
effects on women's earnings. The gender pay gap 
in  Finland  is  higher  than  the  EU  average:  17.3 % 
in  2015,  while  the  EU  average  is  16.3 %.  Long 
family  leaves,  mainly  taken  by  women,  together 
with a gender segregated labour market, contribute 
to this. A reform of the parental leave system was 
explored  to  increase  the  employment  rate  of 
women and to promote gender equality (European 
Commission,  2017)  but  no  reform  is  expected  to 
take  place  during  this  parliamentary  term.  The 
Competitiveness  Pact,  which entered  into  force  in 
the  30 % 
2017,  contains  measures  such  as 
reduction  in  holiday  bonuses  only  for  the  female-
dominated public sector. This is likely to increase 
the pay gap further.  

The  migrant  population  could  contribute  to  a 
more  balanced  economic  dependency  ratio  in 
the  long  run,  provided  that  migrants  are  well 
integrated  into  the  labour  market.  As  the 
number of asylum seekers has fallen since the peak 
in  2015,  the  key  challenge  now  is  to  ensure  the 
long-term integration of not only the refugees, but 
of  all  migrants  in  the  Finnish  labour  market  and 
society. Previously, integration policies have been 
focused on language trainings, with little emphasis 
on  early  labour  market  integration.  Finland  has 
made  some  efforts  to  take  a  more  comprehensive 
approach  to  integration,  through  faster  and  more 
flexible  study  paths  and  recognition  of  existing 
qualifications.  Nevertheless,  in  practice,  it  often 
takes  years  from  arrival  to  move  into  the  labour 
market.  The  Social  Impact  Bond  model  and  the 
Skills Centre of the City of Helsinki are good pilot 
examples  of  a  more  comprehensive  approach  to 
integrating migrants. Integrated services that make 
it  possible  to  follow  appropriate  education  and 
training  paths  while  also  developing  language 
skills alongside other studies could be helpful. The 
government  is  also  trying  to  attract  more  highly 
skilled  migrants  and  better  utilise  the  skills  of 
those  already  in  the  country  through  the  Talent 
Boost programme. 

Self-employment and social protection 

entrepreneurship 

There  are  some  weaknesses 
in  the  social 
protection  of  entrepreneurs  and  self-employed 
not 
and 
considered  an  attractive  career  choice.  In 
Finland  self-employment  rates  and  the  number  of 
self-employed  people  were  significantly  above 

generally 

is 

27 

 
3.3. Labour market, education and social policies 

Finnish  income  transfer  system  consists  of  three 
different  parts:  income-related  social  insurance, 
flat-rate basic security benefits administered by the 
Social  Insurance  Institution  and  additional  and 
preventive  assistance  benefits  delivered  by 
municipalities To qualify for social assistance, the 
claimant  is  required  to  apply  for  all  other  social 
benefits.  The  risk  of  poverty  has  continued  its 
declining trend since its peak in 2011. The risk of 
poverty and social exclusion is one of the lowest in 
the EU and Finland has one of the lowest income 
inequalities  (measured  by  the  income  quintile 
ratio).  However,  the  national  Europe  2020  target, 
of no more than 770 000 people at risk of poverty 
or  social  exclusion,  seems  unlikely  to  be  reached. 
In 2016, the corresponding number in Finland was 
896 000,  a  decrease  of  14 000  since  2008.  Recent 
policy  decisions  to  freeze  certain  benefits  could 
have an impact on the very good performance. It is 
expected  that  the  government  budgetary  plan  and 
freezes on certain benefits will have a detrimental 
impact  on  equality  in  the  coming  years  (2017-
2019) (Mukkila et al, 2017).  

Inactivity traps and social benefits 

The high  inactivity traps  constitute an  obstacle 
to  a  more  extensive  use  of  the  labour  force. 
Nearly  half  of  the  inactivity  trap  consists  of  the 
social assistance, with housing allowance forming 
a  substantial  component  thereof.  Despite  the 
design of the social assistance as a temporary ‘last 
resort’, an increasing share of the population relies 
on  it  as  income  support  on  a  regular  basis.  The 
number  of  recipients  with  no  other 
income 
(excluding  housing  allowances)  almost  doubled 
during  the  first  half  of  2017  (Kela,  2017).  Two 
recent  decisions  have  likely  contributed  to  this 
trend:  i) the  transfer  of  the  administration  of  this 
assistance 
the 
municipalities to the Social Security Institution (or 
KELA),  reducing  its  stigma  and  ii) the  cuts  and 
freezing  of  most  other  social  benefits,  which  is 
likely  to  encourage  recipients  to  seek  social 
assistance 
income.  The 
phasing out of the social assistance in particular is 
currently problematic, as this heavily means-tested 
benefit is fully phased out as the income increases.  

social  office  of 

to  supplement 

from 

their 

the 

to  self-employment 

pre-crisis levels in 2016, although recent trends are 
pointing  downwards  (OECD,  2017a).  Necessity-
driven entrepreneurship is relatively low in Finland 
(15 %  of  all  entrepreneurs),  as  is  transition  from 
unemployment 
(European 
Commission,  2015).  However  entrepreneurship  is 
considered  a  good  career  choice  only  by  40 %  of 
people in Finland, one of the lowest ratings in the 
65  countries  surveyed  (Global  Entrepreneurship 
Monitor, 2016). The relative risk of poverty for the 
self-employed  in  Finland  is  seven  times  higher 
than that of employees. This is the second highest 
poverty  risk  gap  in  the  EU  (Eurostat,  2015).  In 
some  cases,  the  self-employed  are  inadequately 
insured to cover old-age, sickness, work accidents, 
pregnancy  and  unemployment  (Suomen  Yrittäjät, 
2016).  

entrepreneurship  measures 

The  Finnish  government  has  introduced  new 
inclusive 
to 
encourage  the  unemployed  to  start  businesses. 
As of 2018 it will be possible for the unemployed 
to receive their unemployment benefit in the first 4 
months  after  starting  a  business.  This  scheme  is 
most  likely  to  be  successful  if  combined  with 
training and coaching (EEPO, 2014), but the short 
duration can limit its impact. Furthermore, a recent 
working group has been evaluating possibilities of 
those 
combined  unemployment  benefits 
combining 
part-time 
part-time  work  with 
entrepreneurship,  enabling  them  to  ensure  that 
both 
self-
employment  contribute  to  their  unemployment 
benefits.  There  are  also  plans  to  prepare  a  new 
bankruptcy law, to enable a new start for bankrupt 
entrepreneurs.  

their  wages  and 

income 

from 

for 

3.3.2.  SOCIAL POLICIES 

Income equality 

to 

reducing  poverty  and 

in  Finland 
In  general,  social  safety  nets 
contribute 
to 
guaranteeing adequate social protection for all. 
Finland  has  a  strong  legislative  basis  under  the 
Constitution.  Those  who  cannot  obtain  the  means 
necessary  for  a  life  of  dignity  have  the  right  to 
receive  indispensable  subsistence  and  care.  The 

28 

 
3.3. Labour market, education and social policies 

Box 3.3.2: Policy highlight: Ohjaamo: from a pilot project to a structural reform to provide 
support to young people 

A few years ago the Public Employment Services of the City of Vantaa launched a pilot project funded by 
the  European  Social  Fund  to  bring  employment,  educational,  social  and  health  services  under  one  roof  to 
help young people between 17 and 24 years to find a job, a place to study or to provide assistance in social 
and  health  issues.  The  project  supported  over  4000  people  out  of  whom  approximately  1800  found  a  job, 
internship  or  a  place  to  study.  Numerous  people  were  directed  to  health,  mental  health  or  social  services. 
The  pilot  project  prepared  the  ground  for  a  nationwide  project  to  launch  one-stop  guidance  centres 
throughout Finland. Approximately 40 one-stop guidance centres called Ohjaamo are currently operating in 
different  parts  of  Finland  and  a  majority  of  them  received  support  from  the  ESF  until  February  2018. 
Currently aggregated data on national level is not available on the number of clients received by Ohjaamos. 
However, the Ohjaamo in Helsinki received almost 4000 clients in 2016, 75% of whom found employment, 
a  place  to  study  or  other  service.  In  2017  the  government  decided  to  grant  national  funding  for  Ohjaamo 
services,  thus  securing  their  continuation  and  making  them  as  permanent  structure  for  implementing  the 
youth guarantee in Finland. The approach of this successful reform could also be used to provide tailored 
services to support jobseekers through integrated service chains.  

Reforms  are  being  planned  to  address  some 
aspects  of  the  inactivity  traps.  Housing  benefit 
reform  is  being  planned  for  2018,  with  partial 
changes  in  the  capping  and  indexation  of  the 
benefit.  Lower  childcare  fees  for  low  and  middle 
income  families  will  enter  into  force  in  2018 
freeing  more  than  6  000  families  from  childcare 
fees.  However,  these  planned  changes  in  benefits 
are  expected  to  precede  a  more  comprehensive 
reform  of  the  social  security  system  (Ministry  of 
Finance,  2017).  The  basic  income  experiment, 
running  2017-2018  with  first  results  expected  in 
2019,  could  provide  some  information  for  the 
revision  of  the  social  security  system  (European 
Commission 2017c). 

3.3.3.  EDUCATION 

Finland  has  a  generally  well  performing 
education system, although there has been some 
decline  in  the  performance  and  divergence 
between  different  groups  has  been  detected. 
Early  school  leaving  rates  have  declined  from 
about  9 %  in  2012  to  7.9 %  in  2016,  but  foreign-
born  young  people  have  much  higher  rates  than 
natives  (15.1  %  against  7.6  %).  This  is  combined 
the  worsening  performance  of  second 
with 
generation  pupils (37).  This  points 
to  deep 

(37)  The  OECD  PISA  2015  share  of  low  performing  students 
among 15-year-old students in science was 10.2 % among 
pupils  without  a  migration  background  vs  40.2 %  among 
foreign-born  pupils  and  31.4 %  among  second  generation 
pupils  with  foreign-born  parents.  However,  the  proportion 

integration  challenges  likely  to  impact  on  labour 
market  integration.  At  the  same  time,  slowly 
increasing  differentiation  is  observable  between 
regions  and  between  schools.  The  causes  for  this 
increasing  inequality  in  education  are  yet  to  be 
fully understood (European Commission 2017c).  

Education  outcomes  in  Finland  remain  among 
the  best  in  the  EU  but  declined  slightly  in 
science  and  mathematics.  International  IEA-
PIRLS  testing  in  reading  confirmed  the  important 
performance  gap  between  boys  and  girls  (IEA, 
2017).  According  to  the  2015  OECD  programme 
for  international  student  assessment  tests,  Finland 
continued to remain among the countries with the 
in  basic 
smallest  number  of 
competences.  However, 
low 
performance 
increased  and  high  performance 
declined  (European  Commission,  2017c).  The 
2012  Survey  of  Adult  Skills  (PIAAC)  test  placed 
the  numeracy  and  literacy  skills  of  Finnish  adults 
among  the  best  of  all  participating  countries. 
participants (38), 
Nevertheless 
some  Finnish 
showed markedly lower results.  

low  achievers 
in 

science, 

The  education  system  has  been  subject  to 
considerable  public  spending  cuts,  but  the 
to 
is 
government 
promote  equality.  Recently, 
the  government 
allocated  EUR 105 million  additional  funds  for 

taking  some  measures 

of  people  with  a  migrant  background  is  extremely  low  so 
the results are not statistically significant (OECD, 2016a). 
(38)  Older  than  55  years,  who  did  not  attend  comprehensive 
schools reformed in the 70s and Vocational education and 
training (VET) students. 

29 

 
                                                           
                                                                                   
3.3. Labour market, education and social policies 

University  of  Helsinki,  with  its  ‘Big  Wheel’ 
reform is an example for this.  

is 

become 

implementing  a  comprehensive 
Finland 
reform  of  its vocational  education and training 
system as of 2018. This is a key reform to address 
the  need  for  new  skills  and  strengthen  provisions 
for  life-long  learning.  It  has  the  potential  to 
address  existing  problems  of  skills  shortages  in 
some industries. VET for young people and adults 
will be consolidated, forming a single system with 
its  own  steering,  regulation  and  financing  model. 
and 
VET  will 
customer-oriented: each student will be offered the 
possibility  to  follow  an  individually  appropriate 
path  towards  finishing  an  entire  qualification  or 
supplementary  skill  modules  for  re-skilling  and 
upskilling.  Digital  and  workplace  learning  will 
also  be  increased.  The  new  funding  model  will 
the 
encourage  VET  providers 
If 
effectiveness 
implemented  successfully, 
reform  could 
contribute to reduce skills mismatches and increase 
the employment rate. 

to 
and  quality  of 
the 

improve 
learning. 

competence-based 

the 

target  of 

The success of the VET reform in guaranteeing 
access  to  education  is  crucial.  This  is  the  case 
especially  in  the  context  of  the  relatively  high 
inactivity  rate  of  the  working  age  population  and 
the low employment rates of the low-skilled, who 
are 
the  Upskilling  Pathways 
Recommendation.  Ensuring  sufficient  access  and 
study place in VET for each cohort is particularly 
important. However, successful implementation of 
the  reform  could  be  challenging  due  to  the 
significant  cuts  in  the  VET  budget.  It  will  be 
essential  to  monitor  the  reform  and  have  the 
possibility  to  take  corrective  action  on  several 
aspects  of  it  (41).  Additional  funding  of  EUR  60 
million  is  allocated  for  the  reform  for  the  period 
2017-2020. 

(41)  These aspects are discontinuation of studies, the impact on 
the  regional  availability  and  linguistic  accessibility  of 
education,  the  increase  in  the  number  of  places  for 
apprenticeship training and training agreement, the quality 
of training places. 

longer 

funding 

term  downward 

education  and  research  for  the  financial  period 
2017-2019.  However,  this  did  not  really  reverse 
the 
trend 
(European  Commission  2017c).  A  continued 
negative 
risks 
undermining competitiveness, reducing equity and 
education  outcomes.  Reducing  the  number  of 
education  outlets  particularly  in  VET,  can  reduce 
easy  access  to  and  even  the  provision  for  all  in  a 
country of the size of Finland.   

in  education  spending 

trend 

in 

terms  of, 

Finnish  universities  perform  as  well  as  their 
for  example, 
Nordic  peers 
completion  rates  (OECD,  2016c),  skills  of 
tertiary  graduates (Kivinen  et  al.,  2016a)  and 
student  satisfaction (Eurostudent,  2017).  The 
employment  rate  of  recent  graduates  has  been 
below  the  EU  average  during  the  last  few  years, 
which might be due to the unfavourable economic 
conditions. When adjusted for the small size of the 
country,  the  number  of  international  publications 
by  researchers  based  in  Finnish  universities  is 
significant  (39),  but  not  higher  than  in  other  well 
performing Nordic countries (Academy of Finland, 
2016;  Kivinen  et  al.  2016b).  Collaboration  on 
innovation between firms and universities is one of 
the  highest  in  OECD  countries  (OECD  2015).  In 
recent  years,  Finnish  universities  have  become 
more  international  (Vipunen,  2017).  The  new 
vision  for  higher  education  and  research  in  2030 
aims at raising tertiary attainment to 50 %.   

The  government’s  new  funding  model  since 
2017  encourages  higher  education  institutions 
to become more productive and internationally-
oriented.  The  financial  pressure  caused  by  the 
funding  cuts  from  2015  onwards  had  an  initial 
positive  effect  by  facilitating  the  sharpening  of 
research and teaching profiles of higher education 
and  fostering  cooperation  between  institutions. 
However,  some  universities  had  to  reduce  their 
staff (40), which arguably diminishes the breadth of 
the  academic  offer,  and  may  have  an  important 
impact  on  drop-outs  and  study  quality.  Bachelor-
level  studies  are  being  made  more  generic  and 
suitable  for  several  careers  and  specialisation 
should, increasingly, happen at master’s level. The 

(39) Vipunen (2017) - Education Statistics Finland shows a 4 % 
decrease  in  university  staff  between  2015  and  2016 
resulting in increasing student-to-staff ratios. 

30 

 
                                                           
 
                                                           
3.4. INVESTMENT 

3.4.1.  COMPETITIVENESS DEVELOPMENTS 

Market share developments 

Over the 2008-2015 period, Finland experienced 
a sharp decrease in its export market shares for 
goods  and  services  (Graph  3.4.1).  In  addition  to 
the  global  economic  slowdown,  the  country  was 
hit  by  several  severe  external  shocks:  electronics 
exports  and  demand  for  paper  shrank.  Also, 
exports  to  Russia  fell  dramatically  as  the  Russian 
rouble  depreciated  sharply  and  a  set  of  sanctions 
and  countersanctions  affected  EU  trade  with  that 
country.  Finland’s  exports  of  goods  fell  sharply, 
whereas  exports  of  services,  although  affected  as 
well,  behaved  comparatively  better.  Also,  from 
2007,  ill-timed  wage  increases  enforced  by  broad 
collective  agreements  prevented  companies  from 
adjusting  swiftly,  while  productivity  fell.  In  this 
context, 
non-cost 
competitiveness deteriorated (see Graph 3.4.2). As 
a result, in the past 10 years, Finland has registered 
a  40 %  cumulative  decrease  in  its  share  of  the 
global export markets for goods and services.     

overall 

both 

cost 

and 

fuels 

trade 

taking 

flows  of 

in  cost-competitiveness  conditions (42) 
(Graph 
3.4.2).  The 
improvement  appeared  relatively 
strong  in  the  equipment  sector  and  in  textiles. 
into 
Without 
account (43)  as  fuel  prices  are  generally  volatile 
and  their  weight  in  trade  is  rather  large,  the 
improvement  of  the  trade  balance  originating  in 
cost  competitiveness  appeared  even  clearer.  In 
2017,  Finland’s  trade  balance  is  expected  to  have 
reverted  to  positive  values,  especially  as  wage 
moderation and recent productivity gains have led 
to a fall in unit labour costs. 

Graph 3.4.2:  Breakdown of the balance of trade for goods 

(fuels included) 2001-2017 — Cost and non-
cost competitiveness impact 

Graph 3.4.1:  Export market share growth by type (goods or 

services) 

(1) Values for 2017 are based on the first 5 months of the 
year and annualised ((sum/5)*12)  
(2) Only goods for which both imports and exports, as well as 
volumes, are registered are taken into account 
Source: European Commission calculations 

By contrast, non-cost competitiveness remains a 
source  of  concern.  The  trade  balance  surplus 

(42)  Cost and non-cost competitiveness are defined in the report 
by  comparing  the  unit  values  of  exports  (UVX)  and 
imports (UVM) and the trade balance for each category of 
goods (four digits categories). If UVX > UVM, and if the 
trade balance for the particular category of goods TB > 0, 
we have a case of non-cost competitiveness. Another case 
of non-cost competitiveness is when UVX < UVM and TB 
<  0.  When  UVX  <  UVM  and  TB  >  0  or  when  UVX  > 
UVM  and  TB  <  0),  we  again  have  cost  competitiveness. 
Where  there  is  strong  non-cost  competitiveness  in  a 
category of goods, there is a trade surplus, and where non-
cost competitiveness in a category of goods is weak there is 
a  trade  deficit.  The  same  applies  to  cost  competitiveness 
(ECB, 2012). 

(43)  Finland  is  a  refiner  of  Russian  oil  and  exporter  of 

petroleum products. 

Source: European Commission 

In 2016, the long-term decline in export market 
shares  seems  to  have  come  to  an  end.  This  was 
largely on the back of a progressive improvement 

31 

-14-12-10-8-6-4-20246020304050607080910111213141516Rate of change y-o-y (%)Contribution to EMS: goodsContribution to EMS: servicesExport market share growth yoy-15-10-5051015200102030405060708091011121314151617*US$ billioncostnon-costPoly. (cost)Poly. (non-cost) 
 
 
 
                                                           
3.4. Investment 

negotiations  points  to  an  outcome  with  a  broadly 
neutral  impact.  Major  agreements  have  been 
reached  in  the  technology,  forest  and  chemical 
industries  (1.6 %  annually  over  the  2018-2019 
period) (see Section 3.3). 

Graph 3.4.3:  Breakdown of rate of change of nominal ULC 

in Finland by change in inflation, real 
compensation of employee, productivity 
contribution), rate of change of nominal ULC in 
EA — Finland 

Source: European Commission 

Productivity 

After  several  years  of  decline,  total  factor 
productivity  growth  has  eventually  turned 
positive. Unit labour cost growth can be mitigated 
through  productivity  gains,  but  in  Finland,  these 
have  been  slow  or  even  negative  in  recent  years. 
Beyond the fall in exported volumes, the shift from 
high-tech  goods 
towards  medium-tech  goods 
reduced market power and mark-ups. Value added, 
and  thereby  productivity,  was  further  affected. 
Wage  moderation  and 
level  of 
technology embedded in the lower tech output also 
contributed  to  the  fall.  In  2015,  Finland  remained 
among  the  strongest  EU  performers  in  labour 
productivity  in  the  manufacturing  sector  (45). 
However,  it  ranked  ninth  instead  of  fifth  in  2008. 
In  particular,  total  factor  productivity  had  been 
severely affected, but in 2015 it bottomed out (see 
Graph 3.4.4).  

lower 

the 

originating  in  non-cost  competitiveness  has  been 
declining rapidly since 2009 (see Graph 3.4.2) and 
is  now  close  to  balance.  This  both  reflects  and 
explains  the  negative  or  stagnating  productivity 
growth  over  the  last  decade,  which  remains  the 
main challenge for Finland’s competitiveness (see 
below). 

Wage trends and cost competitiveness 

Cost  competitiveness  has  become  of  particular 
relevance  to  Finland.  After  the  setback  faced  by 
its  electronics  sector,  the  country  has  increasingly 
specialised in intermediate goods (Ali-Yrkkö et al. 
2016). As exporters of intermediate goods tend to 
compete  chiefly  on  price,  Finnish  firms  need  to 
than 
have  competitive  cost  structures  more 
previously  in order  to  remain  part  of  global  value 
chains and to capture value added (Ali-Yrkkö et al. 
2016). Similarly, more rapidly rising service prices 
than in the rest of the euro area may be a cause for 
concern (Bank of Finland, 2015).  

the 

In 
late  2000s,  high  multi-year  wage 
increases  deteriorated  cost  competitiveness. 
Wages  continued  to  progress  steadily  after  the 
onset  of  the  2008  global  crisis,  even  when 
productivity growth fell sharply (see Graph 3.4.3). 
This pushed Finland’s unit labour costs growth far 
above  that  of  the  euro  area,  Denmark,  Germany 
and  Sweden  (see  Graph  1.5).  As  a  result,  cost 
competitiveness declined sharply. This had a clear 
negative  impact  on  the  trade  balance  (see  Graph 
3.4.2). 

policy  measures 

However,  more  recent  wage  agreements  and 
labour  market 
have 
progressively  reversed  the  trend.  The  wage 
agreement reached in 2013 led to negative growth 
in  real  compensation  per  employee  (see  Graph 
3.4.3), and wage moderation continued: in summer 
2016,  the  government  and  social  partners  signed 
the  ‘Competitiveness  Pact’,  which  is  intended  to 
improve 
the  cost  competitiveness  of  Finnish 
economy (44).  It  has  been  agreed  that  collective 
agreements  will  increase  opportunities  for  local 
the  wage 
agreements.  The  current  status  of 

(44)  To  monitor 

the 

the 
implementation  and 
Competitiveness Pact, the Information Committee on Cost 
and  Income  Developments  reports  regularly  on  the  labour 
market and wage formation, consumer prices, productivity 
and  unit  labour  costs.  Its  latest  report  was  in  01/2018 
(Valtioneuvosto Kanslia, 2018). 

impact  of 

(45)  In  EUR  thousands  per  person  employed  (not  adjusted  for 
differences 
(103.5), 
Denmark  (89.3),  Germany  (73.6),  the  Netherlands  (93.1), 
Austria (82.6), Finland (74), Sweden (90.1), the UK (89). 

in  purchasing  power):  Belgium 

32 

-6-4-2024681008091011121314151617*18*Rate of change y-o-y (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal Compensation per EmployeeNominal unit labour cost in FinlandULC in Euro Area 
                                                           
 
                                                           
3.4. Investment 

total 

12.8 % of GDP, the highest proportion in the EU, 
and  on  a  rising  trend.  In  particular,  dwelling 
construction was high, with very limited impact on 
total factor productivity. At around 5.7 % of GDP 
and  25.3  %  of 
investment,  equipment 
investment (gross) in Finland remained one of the 
lowest  in  the  EU  and  far  lower  than  the  level  for 
the  share  of  industry  and  major  market  services 
(retail, 
food 
transport,  accommodation  and 
services,  information  and  communication)  in  the 
country’s  GDP.  However,  equipment  investment 
rebounded  as  capacity  utilisation  by  businesses 
increased.  It  was  nearing  the  EU  average,  with  a 
likely higher impact on total factor productivity. 

Graph 3.4.5:  Intellectual property product investment in 

volume — EU (28), Denmark, Germany, 
Estonia, Finland and Sweden 

Graph 3.4.4:  Total factor productivity (total economy) — 

EU28, Germany, Finland and Sweden 

Source: European Commission 

in 

robust  gains 

recovery,  with 

In  parallel,  productivity  growth  has  become 
increasingly polarised, with large differences in 
patterns  from  firm  to  firm.  Before  the  crisis 
years,  the  most  productive  firms,  and  to  a  lesser 
extent  the  least  productive,  experienced  a  process 
of 
labour 
productivity, notably in manufacturing. Moreover, 
since  the  start  of  the  crisis,  the  vast  majority  of 
firms  in  the  middle  of  the  distribution  have  had 
meagre  growth  rates  or  even  negative  rates  in  the 
case of services (Criscuolo, 2018). This has led to 
an 
labour 
productivity  performance  of  Finnish  firms.  This 
highlights a relative lack of policies for increasing 
the  speed  of  structural  change.  These  would 
include policies on spreading innovation, including 
those that target higher public investment in R&D 
and  other  intangible  assets  and  stronger  science-
business  links.  Such  policies  ensure  the  wider 
participation  of  companies  in  innovation  and 
sustain  upwards  convergence 
towards  higher-
productivity activities (see also Section 3.5.1). 

increasing  polarisation  of 

the 

Investment 

Overall  investment  in  Finland  remained  above 
the EU average, but was predominantly devoted 
to  construction.  At  around  23  %  of  GDP  in  the 
first  three  quarters  of  2017,  overall  investment 
remained  among  the  highest  in  the  EU,  and  was 
increasing.  However,  construction  accounted  for 
56.4 % of overall investment and was equivalent to 

Source: European Commission 

in 

intellectual  property (46) 

Investment 
in 
Finland  reflects  the  increased  specialisation  in 
lower value-added industries. At around 4.2% of 
GDP in the first three quarters of 2017, investment 
in  intellectual  property  bottomed  out,  slightly 
above  the  EU  average  (3.8  %  of  GDP).  Over  the 
2009-2016  period, 
intellectual 
property  product  by  non-financial  corporations 
increased  by  almost  25 %  in  the  EU  as  a  whole, 
and  especially  in  Estonia,  Sweden  and  Germany 

investment 

in 

(46)  Intellectual property products is a national account concept 
(NA.117)  that  comprises  research  and  development  (NA. 
1171), mineral exploration and evaluation (cost of drilling, 
aerial  or  other  surveys,  transportation,  etc.)  (NA.1172), 
computer  software  and  large  databases  (NA.1173)  and 
entertainment,  literary  or  artistic  originals  of  manuscripts, 
models, films, sound recordings, etc. (NA.1174). 

33 

9092949698100102104106108110000102030405060708091011121314151617Index (2010 = 100)DEFISEEU-280204060801001201401601800102030405060708091011121314151617index (2010 = 100)EU-28DEEEFISEDK 
 
 
                                                           
3.4. Investment 

sizeable  precautionary  financial  buffers.  This 
practice  seems  to  date  back  from  the  financial 
crisis of the early 1990s. More recently, companies 
were  likely  more  motivated  by  the  weak  external 
demand  and  uncertain  external  environment  after 
the 2009-2010 crisis years. 

Graph 3.4.7:  Non-financial corporations surplus 

redistribution — Finland 

(see  Graph  3.4.5).  Finland’s  negative  growth  in 
this  respect  almost  exclusively  reflected  Nokia’s 
major  setback  in  its  electronics/phone  businesses, 
in  which  the  R&D  capital  stock  declined  sharply 
over  the  period  (see  Graph  3.4.6).  The  share  of 
business  R&D  investment  declined from  2.7 %  of 
GDP in 2009 to 1.8 % of GDP in 2016. In parallel, 
after  peaking  at  1.11 %  of  GDP  in  2010,  public 
R&D expenditure (47) also declined, by almost 1 % 
annually,  after  annual  5 %  increases  on  average 
from  the  early  2000s  to  2010  (Section  3.5.1). 
Preliminary signals indicate that the negative trend 
might  be  reversing  in  both  the  public  and  private 
sectors (see also Section 3.5). 

Graph 3.4.6:  Research and development gross capital 

formation — Net capital stock by industry and 
year 

Source: European Commission 

Recurrent losses made by the electronics sector 
heavily affected the overall profits of firms and 
affected  R&D  investment.  This  highlights  how 
much  Finland’s  electronics  industry  has  been  one 
of  the  main  determinants  of  changes  in  the 
country’s economy. In 2016, however, and despite 
delays  in  the  development  and  expansion  of 
advanced  telecommunications  networks  (48),  the 
manufacture  of  computer,  electronics  and  optical 
products  recorded  a  positive  operating  result  for 
the  first  time  since  2009.  Business  profits  are  a 
major  determinant  of  investment  in  intangible 
assets, and the electronics sector is one of the most 
important sectors in this respect (see Graph 3.4.6). 
Banks  are  often  reluctant  to  finance  R&D  and 
innovation  activities,  as 
these  are  generally 
considered risky operations. 

(48)  The  fourth  and  fifth  generations  of  broadband  cellular 
network  or  wireless  technology.  The  commercial  goal 
seems to remain 5G for all by 2020. 

Source: European Commission 

less  room 

Lower 
retained  profits  by  non-financial 
for 
corporations  have  meant 
equipment and intellectual property investment 
in recent years. In 2009, the operating surplus of 
non-financial corporations had declined by almost 
40 %  compared  to  2007  and  is  only  slowly 
recovering (+1 % each year on average). Dividend 
payments declined even more (-50 %) and are still 
20 % below their 2007 level. Over the 2009-2016 
non-financial 
profits 
period, 
corporations  were  only  half  their  level  in  2001-
2008.  This  resulted  notably  in  a  fall  in  net 
investment in that period (see Graph 3.4.7). At the 
same  time,  businesses  continued  to  build  up 

retained 

by 

(47)  Government,  private  non-profit  and  higher  education 

sectors. 

34 

05,00010,00015,00020,00025,00001020304050607080910111213141516EUR millionManufacturing as a wholeElectronics industryManufacturing without electronics sector-2024681012141618020304050607080910111213141516%of GDPnet equity paymentsother current transactionsdirect taxes & contribnet other incomenet interest paymentscapital transfersnet lending/borrowingnet investmentnet operating surplusretained profits (=NLB + inv) 
 
                                                           
 
                                                           
3.4. Investment 

Foreign direct investment (FDI) 

stock  of 

Finland’s 
inward  FDI  remains 
relatively  low,  but  greenfield  investment  (49)  is 
expanding  very  fast.  Despite  Finland’s  generally 
favourable  climate  for  investment,  the  country’s 
stock  of  FDI  (in  2015  about  40 %  of  GDP)  has 
been  low,  and  stable,  since  2011.  This  may  limit 
sources  for  financing  growth  ambitions  and  can 
also lead to less technology transfer. That said, in 
2016  greenfield  FDI  inflows  increased  by  50 % 
and  reached  EUR 4  billion,  with  manufacturing 
(especially  forest  industry)  absorbing  the  lion’s 
share  (54 %)  (50).  This 
the 
expanding  trade  with  China,  and  may  also  reflect 
the  country's  cost-competitiveness  gains  in  recent 
years. However, projects might be delayed as prior 
compliance  with  environmental 
is 
required. 

largely  reflects 

legislation 

Non-cost competitiveness developments 

is 

Finland's rank as one of the best EU performers 
in  quality  of  products 
increasingly 
challenged.  The  relative  demise  of  the  country’s 
electronics  sector  (specifically  the  mobile  phone 
industry)  has  had  a  strong  negative  impact  on  the 
volumes  of  high-tech  products  it  exports.  Among 
the  best  EU  performers  in  productivity  terms  (see 
above), Finland currently has the lowest proportion 
of high-tech exports. At the same  time, a sizeable 
increase  in  exports  of  medium-  and  medium-to-
high 
to  a  certain  extent 
compensated  for  this  (see  Graph  3.4.8).  Also, 
contrary  to  export  quality  indices,  the  country's 
export  sophistication 
to  have 
improved  over  the  same  period  (Hausmann’s 
export sophistication index) (IMF, 2017b). This at 
least partly attenuates worries about losses of non-
cost competitiveness. 

tech  exports  has 

index  seemed 

Exports of services by Finland are increasingly 
sophisticated and expanding. The country’s trade 
balance  in  services  has  been  negative  for  some 
time,  but  the  deficit  is  slowly  closing.  In  2012, 
Finland accounted for 4.4 % of the total exports of 
IT services by the EU, slightly less than Sweden’s 
share  (6 %).  This  is  noteworthy  as  Finland’s 

(49)  A  greenfield  investment  is  a  form  of  foreign  direct 
its 
investment  where  a  parent  company  builds  up 
operations from scratch. 

(50)  17 projects originating in Canada, China, Germany, Japan, 
Russia, Sweden, Switzerland, UAE, the UK and the US. 

computer 

(telecommunications, 

overall  weight  in  the  EU  economy  is  only  about 
1.5 % (Sweden’s is 3.1 %). In 2016, exports of IT 
services 
and 
information  services)  from  Finland  to  the  rest  of 
the  world  were  equivalent 
the 
country’s GDP and represented almost one third of 
its total exports of services. That said, the balance 
slowly 
services  exports  might  be 
of 
deteriorating,  but  this  is  compensated  for  by  a 
swift rise in other business services. 

to  3.1 %  of 

IT 

Graph 3.4.8:  Share of high, medium-high, medium-low and 
low technology in total manufacturing exports 
— UK, Denmark, Netherlands, Germany, 
Sweden, Belgium, Austria, Finland 

Source: European Commission 

Outlook 

After 
several  years  of  decline,  non-cost 
competitiveness has become a concern, but cost 
competitiveness  has  almost  recovered.  The 
Finnish  economy  is  immersed  in  a  process  of 
economic renewal, with a declining share of high-
tech  manufacturing  in  total  value  added  and  a 
growing  share  of  high-tech  knowledge-intensive 
services (51).  However,  the  negative  trend  in  total 
factor  productivity  growth  in  the  past  decade  is 
worrisome  for  the  sustainability  of  economic 
growth  and  highlights  an  insufficient  level  of 
innovation. Also, productivity increases are crucial 
to  a  more  diversified 
to  foster  a 
cost 
economy (OECD,  2017b).  As 

transition 

regards 

(51)  The share of high-tech manufacturing in total value added 
declined from 6.7% in 2008 to 3.0% in 2015. The share of 
high-tech knowledge-intensive services grew from 4.7% in 
2008 to 5.9% in 2015. 

35 

0%10%20%30%40%50%60%70%80%90%100%05150515051505150515051505150515UKDKNLDESEBEATFIHigh-techMedium High-techMedium Low-techLow-tech 
                                                           
 
                                                           
3.4. Investment 

reflected 

OECD  Members  countries  plus  several  emerging 
economies  (OECD,  2017c).  Cutting  red  tape  and 
reducing  the  regulatory  burden  on  businesses,  in 
the 
particular  SMEs,  are  priority  areas  for 
government.  These 
the 
in 
are 
government’s  key  projects  on  deregulation, 
streamlining  legal  provisions  and  on  improved 
conditions for businesses and entrepreneurs (Prime 
Minister’s  Office,  2017).  Regular  reports  on 
progress  made  are  published  every  6  months 
(Ministry  of  Transport  and  Communications, 
2018). The Council of Regulatory Impact Analysis 
was  set  up  in  2016  to  ensure  the  quality  of 
legislative proposals and impact assessments. 

leader 

Despite  its  electronics  sector  setback,  Finland 
in  digital 
has  become  a  world 
transformation.  After  Denmark,  Finland  is  the 
second most digital country in the EU and among 
the  most  digital  countries  in  the  world  (European 
Commission,  2017d).  Despite  a  lack  of  specific 
skills in several ICT niches, Finland’s performance 
is particularly strong in digital skills, digital public 
services  and  integration  of  digital  technologies. 
Strong e-leadership in combination with advanced 
digital  infrastructure  ensures  that  digitisation  is 
well  embedded  in  the  overall  entrepreneurial 
environment  (European  Commission,  2017d-e). 
Although  the  digital  divide  between  urban  and 
rural areas is still an issue, a decision in principle 
has  been  adopted  to  improve  rural  digitalisation. 
This  will  promote  service  provision  and  facilitate 
in  rural  areas  (Ministry  of 
entrepreneurship 
Transport and Communications, 2017c). 

3.4.3.  INFRASTRUCTURE  INVESTMENT 

The  quality  of  infrastructure  investment  has 
declined.  The  quality  of  roads,  the  rail  network, 
ports,  airports  and  energy  networks  remains  high 
by  EU  standards  (WEF  2017).  In  the  past,  this 
underpinned the competitiveness of Finnish firms, 
including  in rural  and remote  locations. However, 
the  recession  has  put  public  finances  under 
pressure and led to some regular maintenance and 
upgrading  of  infrastructure  having  to  be  scaled 
down  or  postponed,  especially  with  respect  to 
roads and railways. This has caused a gradual and 
relative  decline  in  quality  compared  with  other 
economies.  

ongoing 

competitiveness, 
be 
undermined if the current bargaining round were to 
set  wage  growth  ahead  of  labour  productivity 
growth for the remaining sectors (see Section 3.3). 

could 

gains 

3.4.2.  BUSINESS ENVIRONMENT 

to 

and 

judicial 

efficiency 

Finland’s  institutional  performance  remains 
outstanding.  In  areas  such  as  institutions,  rule  of 
independence, 
law, 
transparency  of  policies  and  public 
trust  of 
politicians,  Finland  is  still  a  world  leader  and 
continues  to  benefit  from  competitive  advantages. 
According 
the  World  Bank’s  Worldwide 
Governance  Indicators  (WGI),  Finland  is  a  world 
leader,  or  very  close  behind  the  leader,  in  all  six 
WGI  areas:  voice  and  accountability;  political 
stability  and  absence  of  violence  and  terrorism; 
government  effectiveness;  regulatory  quality;  rule 
of law; control of corruption. Its leading position is 
also  generally  stable  over  time  (World  Bank 
Group,  2017).  Similar  strengths  are  identified  in 
the  World 
Forum’s  Global 
Competitiveness  Index,  where  Finland  ranks  very 
high  on  all  institutional  aspects  except  investor 
protection (World Economic Forum - WEF, 2017). 

Economic 

In  Finland  there  are  no  explicit  national  rules 
and  procedures  for  companies  to  directly 
transfer  their  registered  offices  into  and  out  of 
the country. This lack makes it more difficult and 
costly  for  companies  to  take  advantage  of  cross-
border  business  opportunities.  Finnish  Company 
Law  contains  specific  rules  only  on  transfers  of 
registered  office 
the  case  of  societates 
Europaeae  (SEs)  (i.e.  public  limited  liability 
companies  registered  in  accordance  with  EU 
corporate law). 

in 

and 

regulatory 

Administrative 
burden 
reduction is a priority. The country is benefiting 
from  recent  reforms  to  boost  job  creation  and 
diminish  regulatory  burdens,  e.g.  the  amended 
Postal Act and Decree, which entered into force in 
2017 (Ministry of Transport and Communications, 
2017a). Also, the Land Use and Building Act and 
building 
regulations  have  been  modernised. 
However,  Finland’s  performance  on  product 
market regulations remains below the EU average, 
even  though  it  ranks  quite  high  among  the  35 

36 

 
3.4. Investment 

Box 3.4.1: Investment challenges and reforms in Finland 

Section 1: Macroeconomic perspective  

At around 23% of GDP in the first three quarters of 2017, overall investment in Finland remained above EU 
average. Construction, the least productive thereof, accounted for about 13 % of GDP. This was the highest 
proportion  in  the  EU,  and  on  a  rising  trend.  Investment  in  machinery  and  equipment  remained  below  EU 
average, but has been catching up. Since 2009, investment in intellectual property had constantly declined, 
reflecting the major setback suffered by Finland's electronics industry. However, in the first three quarters of 
2017, it bottomed out at around 4.2% of GDP, slightly above the EU average (3.8 % of GDP). 

Section 

2: 

Assessment 

of 

barriers 

to 

investment 

and 

ongoing 

reforms 

Finland  has  maintained  a  good  environment  for  doing  business  and  cost  competitiveness  has  clearly 
improved. The new wage setting practices in accordance with the Competitiveness Pact are under discussion 
between  the  social  partners  (see  section  3.3).  The  government  is  working  on  improving  the  business 
environment further. 

Main barriers to investment and priority actions under way 

1/ The main barriers to investment are the cumulated loss of cost competitiveness and continued challenges 
in non-cost competitiveness. Wages have been frozen or even cut in the past few years, and the deals which 
have already been concluded for the next 2 years are rather moderate (see section 3.4). However, cumulated 
losses of cost-competitiveness have not yet been fully compensated. Also, it is not yet fully clear that wages 
agreed  by  export-oriented  sectors  will  set  the  trend  for  the  other  sectors  this  year  and  in  the  future.  The 
chronology of sectoral wage negotiations has some importance. Finally, certain obstacles to local bargaining 
persist  for  unorganised  employers,  mostly  SMEs  and  start-ups  (see  section  3.3).  Nevertheless,  non-cost 
competitiveness,  together  with  stagnating  productivity  growth  has  become  the  more  fundamental  issue. 
Economic  activity  has  rebounded  in  key  export  markets,  and  higher  capacity  utilisation  is  prompting  a 
rebound  in  equipment  investment.  However,  after  the  setback  of  its  electronics  sector,  Finland  is 
experiencing  a  shift  in  specialisation  towards  intermediate  goods  and  from  high-tech  industrial  sectors  to 
medium-tech industrial sectors. The decline in total factor productivity in the past decade is worrisome in 
this respect: it highlights an insufficient level of R&D and innovation investment to kick-start growth and 
diversify  exports towards higher-tech  goods.  There  is  potential  for  further increasing  cooperation  between 
academia and businesses as an incentive to investment (see section 3.5). 

2/ The regulatory environment continues to improve, as cutting red tape and reducing the regulatory burden 
on  businesses,  in  particular  SMEs,  remain  priority  areas  for  the  government.  A  lack  of  national  rules  and 
procedures  for companies  to  directly  transfer  their  registered  offices  into  and  out  of  Finland is  among the 
country's weak points (see section 3.4).  

37 

Regulatory/ administrative burdenCSREPL & framework for labour contracts Business services / Regulated professionsPublic administrationCSRWages & wage settingCSRRetailCSRPublic procurement /PPPsEducation ConstructionJudicial systemTaxationDigital Economy / TelecomInsolvency frameworkAccess to financeEnergyCompetition and regulatory frameworkCooperation btw academia, research and businessTransportFinancing of R&D&INo barrier to investment identifiedNot assessed yetSome progressCSRInvestment barriers that are also subject to a CSRNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentLabour market/ EducationSector specific regulationFinancial Sector / TaxationR&D&I 
 
 
 
 
3.5. SECTORAL POLICIES 

3.5.1.  INNOVATION AND R&D POLICIES 

the 

innovation 

Its  strong  points  are 

leadership 
the  European 

is  being 
Finland’s 
Innovation 
challenged.  On 
Scoreboard, Finland is classified as an ‘innovation 
leader’.  However, 
its  performance  declined 
between  2010  and  2014  and  has  been  static  since 
favourable 
then. 
framework conditions such as high-quality human 
resources, attractive R&D systems, an innovation-
friendly  environment,  public  and  private  funding 
of  R&D  and  innovation,  and  intellectual  assets. 
in 
However,  Finland 
investment with the onset of the economic crisis in 
2009.  This  led  to  a  strong  decrease  in  GDP, 
including 
and 
in 
competitiveness. 

experienced  a  drop 

productivity 

R&D, 

is 

linked 

to  disruptive 

Between 2009 and 2015, business R&D intensity 
sharply  declined.  One  of  the  reasons  for  the 
technological 
decline 
change,  which  impacted  on  Nokia,  by  far  the 
country’s largest private spender on R&D (see also 
Section 3.4 on ‘Investment’). Business expenditure 
on R&D decreased from 2.7 % of GDP in 2009 to 
1.8 %  in  2016,  the  steepest  drop  among  EU 
countries  (see  Section  3.4).  Public  R&D  intensity 
also  fell  sharply,  from  1.1 %  in  2009  to  0.9 %  in 
2016.  However,  Finland’s  improved  economic 
outlook  provides  fiscal  space  for  enhancing 
investment, including in R&D. The proposed 2018 
budget  includes  an  increase  in  grant  and  loan 
funding  for  research  and  innovation  activities  of 
over 10 %. 

increase 

research 
scientific 

Finland’s scientific performance, although good 
in overall terms, does not yet match in all areas 
the high level of public spending. On the positive 
side,  Finland  has  witnessed  an 
in 
cooperation (52),  with 
international 
improved 
and 
internationalisation. Measures to improve financial 
incentives in the research system were initiated in 
2013  and  are  being  pursued,  including  through  a 
new  university  funding  model.  However,  despite 
being third among Member States for public R&D 
intensity,  Finland 
for  scientific 
publications  within  the  top  10 %  most  cited 
worldwide  as  a  percentage  of  the  country’s  total 

ranks  11th 

openness 

(52)  International  co-publications  as  a  percentage  of  total 
scientific  publications  increased  from  48.5%  in  2007  to 
64.2% in 2016. 

publications,  posting  a  score  of  10.7 %  (2014 
results,  EU  average:  11.1 %)(53).  Basic  research, 
including  programmes  to  tackle  grand  societal 
challenges  (Reale,  2017),  still  receive  strong 
funding  from  the  government,  and  the  funding  of 
applied research is expected to increase as of 2018. 
Indeed,  Business  Finland,  a  new  organisation 
created  from  the  merger  of  Tekes  and  Finpro  (54) 
to  provide  funding  for 
the 
internationalisation  of  firms  has  received  a  larger 
budget than its predecessor organisations (55). 

innovation  and 

The proportion of fast-growing innovative firms 
remains  below  the  EU  average  (56).  Despite 
activities  fostering  start-ups  (57),  start-up  rates 
remain  relatively  low  and  there  is  potential  for 
more  targeted  policy  action.  At  the  same  time, 
Finland’s policy focus is currently shifting towards 
creating 
innovation 
environment and increasing the diversification and 
competitiveness of the country’s economy. Recent 
action  includes  the  identification  of  priority  areas 
(cleantech, bioeconomy, digital ICT and health) to 
focus  investment  on  technology-intensive  sectors 
with the potential for upscaling. 

attractive  business 

an 

innovation 

Despite  the  increased  focus  on  building  a  well-
functioning 
ecosystem,  public 
support  remains  low.  Public-sector  funding  of 
business  R&D  stood  at  only  0.08 %  of  GDP  in 
2015,  a  modest  proportion  compared  to  other 
innovation  leaders,  and  has  been  stagnating  since 
2011.  At  the  same  time,  private  co-financing  of 
public  research,  which  is  an  important  basis  for 
knowledge  transfer  and  an  indicator  for  science-
business  cooperation,  is  below  the  EU  average 

(53)  The  proportion  of  highly-cited  publications  relative  to 
public R&D intensity provides a measure of the efficiency 
of the Finnish research and innovation system. 

(54)  Tekes was the funding agency for innovation, while Finpro 
was 
the 
responsible 
internationalisation of Finnish SMEs. The Act on Business 
Finland entered into force on 1 January 2018. 

supporting 

agency 

the 

for 

(55)  Grant  authorisations  of  Business  Finland  are  proposed  to 
reach  EUR 271  million  in  2018  (+12.4%  compared  to 
2017)  and  loan  authorisations  EUR 157  million  (+6.8%), 
while  key  project  funding  is  due  to reach  EUR 49  million 
(+12.2%)  In  addition,  the  budget  of  the  VTT  Technical 
Research  Centre  will  receive  an  extra  EUR 2  million  to 
support  SMEs  and  help  firms  enter  growing  export 
markets. 

(56)  The  share  of  employment  in  high-growth  enterprises  is 
10.1% in 2015, down from 11.7% in 2013 and ranking 17th 
in the EU. 

(57)  Including  schemes  such  as  Aalto  University's  ‘Start-Up 

Sauna’. 

38 

 
 
                                                           
                                                           
3.5. Sectoral policies 

forests (60). For comparison, the annual average of 
the  EU-28  accounted  for  removals  of  -119.0  Mt 
CO2-eq. 

The  share  of  renewable  energy  in  gross  final 
energy  consumption  reached  38.7 %  in  2016, 
already  exceeding  its  2020  target  of  38 %.  This 
recent decrease needs to be put in perspective with 
a constant increase in the longer term, and reflects 
the fact that companies have flexibility concerning 
the  amount  of  biofuels  to  be  allocated  to  each 
year..  The  renewable  energy  share  is  more  than 
50 % in the heating and cooling sector and about a 
third in electricity generation. Finland has recently 
announced  the  testing  of  a  premium  scheme  to 
look 
support 
renewable electricity by inviting tenders for a total 
of  2  TWh  of  annual  electricity  production.  The 
intention  is  to  open  up  the  different  forms  of 
renewable  energy  production  to  competition,  but 
the specific design of this instrument is still under 
discussion. 

for  cost-effective  options 

to 

a  quarter  of  Finland’s 

Finland’s  2016  primary  and  final  energy 
consumption  figures  were  already  below  their 
2020  targets.  The  economy's  energy  intensity  is 
high and above the EU average. That can be partly 
explained  by  climatic  and  structural  factors:  the 
energy-intensive pulp and paper sector on its own 
represents 
energy 
consumption.  This  is  the  case  even  if  Finland’s 
industries  are  progressive  in  comparison  to  their 
global  competitors.  Energy  efficiency  agreements 
(voluntary agreements) are used to promote energy 
savings  in  a  broad  range  of  industrial  sectors  and 
local communities. New agreements for the period 
2017-2025  have  been  signed  and  are  expected  to 
contribute  about  half  of  Finland’s  energy  savings 
obligations linked to the implementation of the EU 
Energy Efficiency Directive. 

including 

Finnish  industry  shows  strong  leadership  in 
clean  energy  innovation  and  private  R&D 
spending, 
the  development  of 
bioenergy  from  by-products.  It  is  also  the  EU 
country investing the most in public R&D in areas 
related 
the 
government  has  reduced  energy-related  R&D 
expenditure sharply, from around EUR 270 million 
in 2010 to EUR 153 million in 2017. The number 
of  patents  in  Energy  Union  areas  per  million 

the  Energy  Union.  However, 

to 

(2015,  Finland:  0.047 %  of  GDP,  EU  0.049 %  of 
GDP).  There  is  also  still  potential  for  further 
boosting knowledge transfer (OECD, 2017b). In its 
national  reform  programme  released  in  spring 
2017,  the  government  declared  science-industry 
collaboration  as  one  of  its  priorities  for  raising 
entrepreneurial  activity  and  the  commercialisation 
of scientific output. However, the programme does 
not  directly  address:  (i)  investment  in  R&D  and 
other  intangibles;  (ii)  the  obstacles  that  hamper 
innovation  and 
technology  diffusion  between 
firms;  and  (iii)  the  issue  of  disruptive  or  radical 
innovations.  

for 

and 

research 

The  Research  and  Innovation  Council  chaired 
by  the  Prime  Minister  has  published  a  joint 
2030  vision  to  make  Finland  an  attractive 
system 
innovation 
(Valtioneuvosto,  2017).  The  vision  includes  a 
target to achieve an R&D intensity of 4 % of GDP 
by 2020. Additional public R&D funding schemes 
to  support  skills  developments  and  training  are 
being considered by the government. Of particular 
note is the plan to boost the number of science and 
engineering graduates. 

3.5.2.  CLIMATE AND ENERGY 

Finland  is  projected  to  only  slightly  miss  its 
2020  greenhouse  gas  emission  reduction  target 
in  the  non-emissions  trading  system  (non-ETS) 
sectors.  In  fact,  it  is  expected  to  miss  it  by  less 
than  1  percentage  point.  However,  according  to 
preliminary estimates, Finland has missed its 2016 
interim target by 3 pps. To comply with the Effort 
Sharing  Decision  (58),  Finland  will  need  to  make 
flexibility  mechanisms:  surplus 
use  of 
allocations  accumulated  over  2013-2015  when 
Finland  over-achieved  its  target  should  suffice  to 
cover  deficits  in  some  of  the  later  years  of  the 
period.  In  the  land  use,  land  use  change  and 
forestry sector, Finland only has a slight accounted 
CO2 emission (59) (+0.7 Mt CO2-eq. on average in 
the  period  2013-2015),  despite  the  size  of  its 

the 

(58)  The  Effort  Sharing  Decision  establishes  binding  annual 
greenhouse gas emission targets for Member States for the 
period  2013–2020.  These  targets  concern  emissions  from 
most  sectors  not  included  in  the  EU  Emissions  Trading 
System (EU ETS), such as transport, buildings, agriculture 
and waste. 

39 

 
                                                           
 
                                                           
 
3.5. Sectoral policies 

Particular  attention  is  paid  to  the  transport  sector 
for  meeting  Finland's  non-ETS  greenhouse  gas 
emission reduction target for 2030. 

3.5.3.  COMPETITION IN SERVICES 

The regulatory environment for the retail sector 
continues to improve thanks to recent reforms. 
Amendments  to  the  Land  Use  and  Building  Act 
came  into force  in  May 2017 (61). As  a result,  the 
size threshold for large stores, which have to meet 
additional requirements when setting up, has been 
raised  from  2 000  to  4 000 m2.  Also,  the  level  of 
detail  in  local  plans  has  been  decreased  for  the 
retail sector, which should allow stores to develop 
their  concepts  more  freely  without  limitations  on 
their  location.  The  government  also  intends  to 
publish new national land-use guidelines based on 
the  reformed  Land  Use  and  Building  Act.  This 
would  allow  for  the  establishment  of  significant 
retail  units  outside  built-up  areas.  In  the  longer 
term,  there  is  an  intention  to  propose  a  fully 
modernised legislative framework on planning. 

Reform  of  the  Alcohol  Act  is  under  way.  The 
comprehensive  reform  of  the  Alcohol  Act  was 
approved  by  Parliament  in  December  2017.  Most 
provisions  entered  into  force  on  1  March  2018, 
some  on  1  January  2018.  The  reform  shifts  the 
balance  somewhat  away  from  preventing  the 
negative  impact  of  alcohol  use  and  closer  to  the 
legitimate  interests  of  Finnish  businesses  and 
industry. At the same time, it modernises the rules 
and  does  away  with  outdated,  cumbersome  and 
unnecessary regulation. 

Reform  pressure  in  the  pharmacy  sector  is 
building.  Regulations  governing  entry,  conduct 
and  transfer  of  ownership  of  pharmacies  are 
relatively  strict  from  an  EU  perspective  (Ecorys 
the  Finnish  Competition  and 
2007).  Also, 
Consumer  Authority 
received 
complaints  about  the  sector,  for  instance  on  the 
pricing  of  pharmaceuticals,  and  has  carried  out 
sector  investigations  (FCCA,  2012).  In  its  mid-
term  review,  the  government  announced  that 
towards  the  end  of  its  term  it  would  focus  on 
reforming  the  pharmacy  system  and  medicine 
services (Prime Minister’s Office, 2017).  

(FCCA)  has 

(61)  Act  230/2017  amending  Act  132/1999  on  land  use  and 

building. 

inhabitants  is  also  significantly  above  the  EU 
average.  Based  on  a  long  history  of  promoting  a 
sustainable  management  of  its  forests,  Finland 
aims  to  develop  further  bio-economy  activities, 
although  it  will  have  to  take  account  of  the 
potential  implications  of  future  EU  legislation  on 
climate policies post-2020. 

The  electricity  market  is  competitive.  In  2017, 
the electricity interconnection level of Finland was 
29 %, well above the 2020 target of 10 %. Finland 
has  a  very  dynamic  electricity  market.  There  is 
widespread  deployment  of  smart  meters  and  high 
annual  switching  rates  by  consumers  from  one 
electricity supplier to another. However, wholesale 
electricity  prices  in  Finland  remain  higher  than  in 
its  Nordic  neighbours  because  of  insufficient 
capacity  in  the  transmission  interconnections  in 
periods 
additional 
interconnection  with  Sweden  is  planned,  and  the 
European  Commission  granted  it  the  status  of 
project  of  common  interest  in  November  2017. 
The Olkiluoto-3 new nuclear power plant project is 
experiencing  significant  delays,  but  could  be 
operational in 2019.  

demand.  An 

high 

of 

Until  recently,  Finland  imported  all  its  natural 
gas from Russia, by pipeline. Since 2016, a new 
import 
liquefied  natural  gas  (LNG) 
floating 
terminal has been opened in Pori and two more are 
under construction for industrial use. A third LNG 
import terminal will be connected to the grid. The 
Baltic Connector gas infrastructure project linking 
the  Finnish  gas  grid  to  the  Baltic  states  will  also 
help diversify sources of imports. Once this project 
is  operational,  the  gas  markets  will  be  open  to 
competition  (by  2020).  However,  additional  steps 
are needed to create a regional gas market with the 
Baltic states and to ensure effective competition.  

Finland  has  adopted  concrete  targets  and 
objectives  to  contribute  to  the  EU’s  medium- 
and long-term climate and energy objectives. In 
2016,  the  government  adopted  a  report  on  its 
national energy and climate strategy for 2030 and, 
in  2017,  a  report  on  its  medium-term  climate 
change plan for 2030. Finland notably plans to: (i) 
phase  out  the  use  of  coal  for  energy by  2030; (ii) 
have  renewable  energy  sources  account  for  over 
50 %  of  energy  consumption  by  2030;  and  (iii) 
increase  the  share  of  biofuels  in  road  transport  to 
30 %  by  2030.  The  design  of  the  policies  and 
measures to implement such objectives is ongoing. 

40 

 
                                                           
3.5. Sectoral policies 

offered  by  the  collaborative  economy.  The 
preparation  and  adoption  of  the  new  Act  on 
transport services (see section 3.5.3) did, however, 
prompt  intense  political  debates.  With  the  new 
Act,  the  government  aims  to  modernise  the 
provision  of  transport  services  and  enable  new 
business  models  (Ministry  of  Transport  and 
intense 
Communications,  2017e).  Following 
debates and political opposition, the law omits core 
aspects  initially intended  to promote  collaborative 
transport  services.  Nevertheless,  to  encourage 
competition  and  new  business  models,  the  law 
includes  rules  on  opening  up  transport  registers 
and data, as well as rules on the interoperability of 
ticketing and payment systems. 

A recent Supreme Court ruling sets a precedent 
for  all  platform-based  ride-hailing  services  in 
Finland.  In  2017,  the  Supreme  Court  upheld  an 
earlier  ruling  in  lower  courts  to  the  effect  that  a 
taxi licence is needed for drivers offering platform-
based  ride-hailing  services  on  a  professional 
basis (Supreme Court, 2017). 

Regulations  are  supportive  of  peer-to-peer 
accommodation.  Collaborative  accommodation 
services are widely used in Finland, facilitated by a 
regulatory  framework  that  enables  citizens  to  rent 
out  their  properties  short-term.  Income  is  taxable 
as  capital  income  from  the  first  euro.  However, 
incurred  costs  can  be  deducted  (pro  rata),  except 
for the value of any own work carried out, which is 
not deductible (Vero, 2015; Ministry of Economic 
Affairs and Employment, 2016). 

are 

less 

Upstream  distributors 
strictly 
regulated. There are three wholesalers serving all 
private  pharmacies.  All  three  are  single-channel 
distributors who have exclusivity agreements with 
the pharmacies so that each private pharmacy buys 
its  full  range  of  pharmaceuticals  from  one 
wholesaler.  The  advantage  of  a  single-channel 
system,  which  is  not  unique  to  Finland  but  less 
common in the EU than multichannel distribution, 
is  that  counterfeit  medicines  are  unlikely  to  enter 
the  pharmacy  system  whereas  the  use  of  generic 
medicines 
is  promoted  (OECD,  2014).  The 
disadvantage  —  as  witnessed  in  2017  —  is 
exposure  to  operational  problems  at  either  of  the 
two wholesalers, as pharmacies are unable in such 
a  situation  to  source  their  supplies  from  the  other 
wholesaler (FCCA, 2017). 

The reform of taxi services will enter into force 
in 2018. As part of the government’s key projects 
(Prime Minister’s Office, 2017), an overhaul of all 
legislation governing land, water and air transport 
is under way. The intention is to bring modernised 
transport market legislation together under a single 
framework  that  will  be  implemented  in  three 
phases. In the first phase, the new Act on transport 
services will replace the previous Taxi Act as well 
as 
the  professional 
qualifications of taxi drivers. The new rules on the 
taxi  sector  will  enter  into  force  on  1 July  2018 
(Ministry  of  Transport  and  Communications, 
2017e). 

the  Act  and  Decree  on 

3.5.4.  COLLABORATIVE ECONOMY 

The  collaborative  economy  is  a  small  but 
rapidly  growing  segment  of  the  economy.  It  is 
estimated  that  the  value  of  transactions  in  the 
Finnish  collaborative  economy  accounted  for  a 
little over EUR 100 million in 2016. The market is 
expected to grow more than tenfold in value until 
(Ministry  of  Economic  Affairs  and 
2020 
Employment,  2017d).  Collaborative 
financing 
(crowdfunding — see also section 3.2) represented 
around 65 % of the total peer-to-peer value in 2016 
and is expected to remain the most important form, 
while the fastest growth is expected in peer-to-peer 
transportation  and  car-sharing  services  (Ministry 
of Economic Affairs and Employment, 2017). 

Finland  is  generally  keen  to  promote  the 
entrepreneurship  and  innovation  opportunities 

41 

 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (62)  

2017 Country-specific recommendations (CSRs)  

CSR  1:  Pursue  its  fiscal  policy  in  line  with  the 
requirements  of  the  preventive  arm  of  the  Stability 
and  Growth  Pact,  which  entails  achieving  its 
medium-term  budgetary  objective  in  2018,  taking 
into  account  the  allowances  linked  to  unusual 
events, the implementation of the structural reforms 
and investments for which a temporary deviation is 
granted. Ensure timely adoption and implementation 
of  the  administrative  reform  to  improve  cost-
effectiveness of social and healthcare services.  

Finland  has  made  Limited  Progress  in  addressing 
CSR 1.  

This  overall  assessment  of  CSR  1  does  not  include 
an  assessment  of  compliance  with  the  Stability  and 
Growth Pact.  

  Pursue 

in 

line  with 

its  fiscal  policy 

the 
requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  which  entails 
achieving  its  medium-term  budgetary  objective 
in  2018,  taking  into  account  the  allowances 
linked  to  unusual  events,  the  implementation  of 
the structural reforms and investments for which 
a temporary deviation is granted.  

  The compliance assessment with the Stability 
and  Growth  Pact  will  be  included  in  Spring 
when final data for 2017 will be available. 

  Ensure  timely  adoption  and  implementation  of 
improve  cost-

the  administrative  reform 

to 

  Limited Progress has been achieved in ensuring 
the  adoption  and  implementation  of  the  social 
and  health  care  reform.  The  government  has 

(62)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 

No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations,  to  be  interpreted  on  a  case-by-case  basis  taking  into  account  country-specific  conditions.  They 
include the following: 

no legal, administrative, or budgetary measures have been announced  
in the national reform programme, 
in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission,  
publicly (e.g. in a press statement or on the government's website);  
no non-legislative acts have been presented by the governing or legislative body;   
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has: 
announced certain measures but these address the CSR only to a limited extent; and/or 
presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial  further,  non-

legislative work is needed before the CSR is implemented;  

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 

Some progress: The Member State has adopted measures  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the measures have been 
implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision, but 
no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of them 

have been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

42 

 
 
                                                           
 
 
 
 
 
 
A. Overview Table 

effectiveness of social and healthcare services.  

presented  large  parts  of  the  draft  legislation  on 
the  reform  of  the  social  and  healthcare  services 
in the Parliament. However, the formal adoption 
of  the  reform  has  not  taken  place  yet  and  the 
effective implementation of the reform has been 
delayed  by  one  year  (January  2020).  The 
'Freedom of Choice' legislation was subject to a 
second public consultation round which finished 
in  the  end  of  2017.  The  government's  proposal 
for  the  law  is  expected  to  be  presented  in  the 
Parliament during the first half of 2018. 

CSR  2:  Promote  the  further  alignment  of  wages 
with productivity developments, fully respecting the 
role  of  social  partners.  Take  targeted  active  labour 
market policy measures to address employment and 
social challenges, provide incentives to accept work 
and promote entrepreneurship.  

Finland  has  made  Some  Progress  in  addressing 
CSR 2.  

  Promote  the  further  alignment  of  wages  with 
productivity  developments,  fully  respecting  the 
role of social partners.  

  Some  Progress  has  been  made  since 

the 
importance  of  preserving  cost  competitiveness 
has  been  widely  recognised.  The  first  results 
from  the  wage  negotiations  are  promising,  and 
the  proposed  wage  increases  do  not  appear  to 
competitiveness,  while 
compromise 
simultaneously guaranteeing some improvement 
in  purchasing  power.  It  remains  to  be  seen 
whether  a  coordinated  wage-setting  model, 
which  would  ensure  favourable  employment 
outcomes, emerges. 

cost 

  Take 

targeted  active 

labour  market  policy 
measures  to  address  employment  and  social 
challenges,  

  Some  Progress  has  been  made  as  some 
activation  measures  have  been  introduced,  such 
as  the  interviews  to  all  registered  unemployed 
jobseekers  every  3  months.  Financing  for  the 
public employment service has been increased in 
2018. 

  provide incentives to accept work  

  Some  Progress 

in 

is  observed 

increasing 
incentives  to  accept  work:  The  active  model  of 
unemployment  benefits  is  expected  to  increase 
incentives  to  take  up  a  job.  Reduced  childcare 
fees  in particular  for  small and  medium  income 
families,  should  encourage  working.  These 
actions entered into force in early 2018. 

  and promote entrepreneurship.  

  Some  Progress  has  been  made  as  some 
measures  have  been  introduced  to  prompt  the 
unemployed to start a company: the unemployed 
can  continue  receiving  unemployment  benefit 
during  four  months  after  starting  a  company. 

43 

 
A. Overview Table 

This change was implemented in 2018. 

to 

improve 

CSR  3:  Continue 
the  regulatory 
framework  and  reduce  the  administrative  burden  to 
increase  competition  in  services  and  to  promote 
investment.  

Finland  has  made  Substantial  Progress 
addressing CSR 3  

in 

  Continue  to  improve  the  regulatory  framework 
and reduce the administrative burden to increase 
competition in services and  

the 

the 

regulatory 

  Substantial  Progress  has  been  made 

in 
framework  and 
improving 
reducing 
administrative  burden.  The 
amended Land Use and Building Act has entered 
into force and the new Alcohol Act and the first 
phase of the new transport code were adopted in 
late 2017 simplifying earlier regulation. Progress 
has also been made on the framework governing 
collaborative economy service providers. 

 

to promote investment.  

  Some  Progress  has  been  made  as 

the 
availability  of  loans  and  export  guarantees  for 
improved.  In  addition,  a  new 
SMEs  has 
government 
exports, 
to  promote 
agency 
innovation  and  FDI  -  Business  Finland  -  has 
been created by merging Finpro and Tekes. 

Europe 2020 (national targets and progress)  

Employment rate target set in the NRP: 78 %.  

The  employment  rate  in  Finland  in  2017  increased 
to  74 %  (based  on  the  average  of  first  three 
quarters),  an  improvement  of  0.9  %  points  since 
2016.  

R&D target: 4 % of GDP 

2.75% (2016) 

No  progress  towards  the  target.  While  public  R&D 
intensity  has  grown  by  0.1 %  per  year  over  the 
2007-2016 period, business expenditure on R&D as 
a  percentage  of  GDP  decreased  by  3.2 %  per  year 
over the same period, resulting in an annual decline 
of  total R&D intensity by 2.2% since 2007. Finland 
will not reach its national target for 2020 unless the 
trend in business expenditure can be reversed 

Greenhouse 
Non-ETS target for 2020: -16 % compared to 2005 

emissions, 

national 

gas 

target:  

Projected emissions in 2020: -15 % compared to 
2005 

to 

the 

According 
latest  national  projections 
submitted  to  the  Commission,  and  taking  into 
account  existing  measures,  Finland  is  expected  to 

44 

 
 
 
 
A. Overview Table 

reduce  its  emissions  by  15  %  in  2020  compared  to 
2005.  Finland  will  consequently  fall  short  of  its 
target by 1 pp. 

Non-ETS  interim  target  for  2016:  -11  %  compared 
to 2005 

Non-ETS emissions in 2016: -8 % 

2020 renewable energy target: 38%  

Finland went short of its interim target for 2016 by a 
3 pps. 

Despite  a  significantly  lower  contribution  from 
biofuels  use  in  transport  compared  to  2015,  the 
share  of  renewable  energy  in  gross  final  energy 
consumption  reached  38.7% 
in  2016,  already 
exceeding  the  2020  target.  The  contribution  of 
heating  and  cooling,  with  almost  a  54%  RES-share 
for that sector, is significant. 

Energy  efficiency,  2020  energy  consumption 
targets:  

35.9 Mtoe (primary energy consumption);  

26.7 Mtoe (final energy consumption).  

Early school leaving (ESL) target: 8  %.  

Finland  increased  its  primary  energy  consumption 
by  4  %  from  31.8  Mtoe  in  2015  to  33.1  Mtoe  in 
2016.  Final  energy  consumption  increased  by  4  % 
from 24.2 Mtoe in 2015 to 25.2 Mtoe in 2016.  

Even  if  Finland  has  already  achieved  levels  of 
primary  and  final  energy  consumption  which  are 
below the indicative national 2020 targets, it would 
need  to  make  an  effort  to  keep  these  levels  until 
2020. 

Finland  reduced  early  school  leaving  in  2016  to 
7.9%  a  sizeable  reduction  of  1.3  pps  compared  to 
the previous year. 

Tertiary  education  target:  42 %  of  population  aged 
30-34.  

Finland  increased  tertiary  attainment  by  0.6 pps  to 
46.1% in 2016. 

Target for reducing the number of people at risk of 
poverty or social exclusion, expressed as an absolute 
number  of  people:  770 000  (base  year  2010: 
911 000).  

In 2016, the number of people in Finland at risk of 
poverty or social inclusion was 896 000, a decrease 
of 14 000 since 2008 and a decrease of 7 000 since 
2015. 

45 

 
 
 
ANNEX B:  MACROECONOMIC IMBALANCE PROCEDURE 

SCOREBOARD 

Table B.1: 

The MIP Scoreboard for Finland 

(1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. 
Please note that figures reported in this table may therefore differ from more recent data elsewhere in this document.. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

46 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%0.5 -0.8 -1.8 -1.6 -1.3 -1.2 Net international investment position% of GDP-35%15.1 11.7 3.9 -3.2 -6.1 -2.3 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-2.8 -8.3 0.2 2.7 2.2 0.5 Export market share - % of world exports5 year % change-6%-23.6 -31.0 -31.0 -26.1 -21.1 -14.1 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)9.4 6.0 9.1 7.8 3.9 2.1 House price index (2015=100), deflated 1 year % change6%0.0 -0.4 -1.3 -1.6 -0.3 -0.3 Private sector credit flow, consolidated% of GDP14%3.6 7.4 2.8 1.5 6.9 2.2 Private sector debt, consolidated% of GDP133%145.4 148.6 147.7 149.6 152.9 149.3 General government gross debt% of GDP60%48.5 53.9 56.5 60.2 63.6 63.1 Unemployment rate3 year average10%8.1 8.0 7.9 8.2 8.8 9.0 Total financial sector liabilities, non-consolidated1 year % change16.5%28.7 -1.1 -11.7 8.9 1.2 4.5 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp-1.1 0.2 0.7 0.5 0.6 0.7 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp0.5 0.2 -0.3 0.2 0.7 0.6 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp3.6 -2.5 -1.5 0.4 3.4 0.2 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2017 
(3) As per ECB definition of gross non-performing debt instruments 
(4) Quarterly values are not annualised 
* Measured in basis points. 
Source: European Commission (long-term interest rates, private debt); World Bank (gross external debt); ECB (all other 
indicators). 

47 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)300.5258.3281.9265.3253.8207.4Share of assets of the five largest banks (% of total assets)79.084.179.875.066.5-Foreign ownership of banking system (% of total assets)(2)75.271.271.667.565.556.2Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)0.80.71.41.31.31.3              - capital adequacy ratio (%)17.216.317.523.824.622.6              - return on equity (%)(4)8.98.19.18.38.74.6Bank loans to the private sector (year-on-year % change)(1)7.16.33.80.21.62.5Lending for house purchase (year-on-year % change)(1)5.62.31.72.52.32.2Loan to deposit ratio(1)139.9139.2139.6136.7139.1135.4Central Bank liquidity as % of liabilities--0.40.31.92.4Private debt (% of GDP)148.6147.7149.6152.9149.3-Gross external debt (% of GDP)(2) - public47.845.953.952.048.744.8    - private43.743.743.948.444.450.8Long-term interest rate spread versus Bund (basis points)*39.129.228.622.427.523.3Credit default swap spreads for sovereign securities (5-year)*56.425.124.020.624.419.0 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5) Average of first three quarters of 2017 for the employment rate and gender employment gap. 
Source: European Commission  

48 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)8.99.39.59.27.9:Gender employment gap (pps)3.02.81.92.13.33.5Income inequality, measured as quintile share ratio (S80/S20)3.73.63.63.63.6:At-risk-of-poverty or social exclusion rate1 (AROPE)17.216.017.316.816.6:Young people neither in employment nor in education and training (% of population aged 15-24)8.69.310.210.69.9:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)74.073.373.172.973.474.0Unemployment rate2 (15-74 years)7.78.28.79.48.88.6Gross disposable income of households in real terms per capita3 (Index 2008=100) ::101.4102.5103.1:Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction450.955.353.653.757.0:Children aged less than 3 years in formal childcare29.028.033.232.532.7:Self-reported unmet need for medical care4.64.33.34.34.1:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::74.073.076.0 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.  
(5) Average of first three quarters of 2017, unless for the youth unemployment rate (annual figure).   
Source: European Commission, OECD 

49 

Labour market indicators201220132014201520162017 5Activity rate (15-64)75.275.275.475.875.9:Employment in current job by durationFrom 0 to 11 months17.016.516.116.017.6:From 12 to 23 months9.79.69.18.48.6:From 24 to 59 months14.715.316.716.414.9:60 months or over58.358.457.958.958.7:Employment growth* (% change from previous year)0.9-0.7-0.5-0.10.30.5Employment rate of women(% of female population aged 20-64)72.571.972.171.871.772.2Employment rate of men (% of male population aged 20-64)75.574.774.073.975.075.7Employment rate of older workers* (% of population aged 55-64)58.258.559.160.061.462.2Part-time employment* (% of total employment, aged 15-64)14.114.014.114.114.915.1Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)15.515.315.415.115.616.1Transition rate from temporary to permanent employment(3-year average)36.131.431.128.8::Long-term unemployment rate1 (% of labour force)1.61.71.92.32.32.1Youth unemployment rate (% active population aged 15-24)19.019.920.522.420.120.1Gender gap in part-time employment10.310.610.19.010.210.7Gender pay gap2 (in undadjusted form)19.218.818.417.3::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)24.524.925.125.426.4:Underachievement in education312.3::13.6::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)45.845.145.345.546.1:Variation in performance explained by students' socio-economic status49.4::10.0:: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

*  Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
(5) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.Source: European Commission, OECD 

50 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare7.47.57.57.2::Disability3.43.43.43.2::Old age and survivors11.912.513.013.2::Family/children3.23.33.23.2::Unemployment2.02.32.62.7::Housing0.50.60.60.7::Social exclusion n.e.c.0.90.90.90.9::Total29.330.331.131.1::of which: means-tested benefits1.51.61.81.9::General government expenditure by function (% of GDP, COFOG)Social protection23.824.825.425.6::Health8.28.38.37.2::Education6.46.46.46.2::Out-of-pocket expenditure on healthcare (% of total health expenditure)18.719.019.019.9::Children at risk of poverty or social exclusion (% of people aged 0-17)*14.913.015.614.914.7:At-risk-of-poverty  rate1 (% of total population)13.211.812.812.411.6:In-work at-risk-of-poverty rate (% of persons employed)3.83.73.73.53.1:Severe material deprivation rate2  (% of total population)2.92.52.82.22.2:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan0.30.10.20.20.1:Tenant, rent at market price3.02.02.41.82.4:Proportion of people living in low work intensity households4 (% of people aged 0-59)9.39.010.010.811.4:Poverty thresholds, expressed in national currency at constant prices*1208212009119651185211815:Healthy life years (at the age of 65)Females9.0:9.39.0::Males8.4:8.89.3::Aggregate replacement ratio for pensions5 (at the age of 65)0.50.50.50.50.5:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::56.161.061.764.5GINI coefficient before taxes and transfers*48.248.549.149.250.3:GINI coefficient after taxes and transfers*25.925.425.625.225.4: 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.  
(2) Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing 
over the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if 
received most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the 
application is still pending or don't know. 
(3)  Percentage population aged 15-64 having completed tertiary education. 
(4) Percentage population aged 20-24 having attained at least upper secondary education. 
(5) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm 
(6) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). 
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation 
indicators); SAFE (for outcome of SMEs' applications for bank loans). 

51 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry9.61-2.11-8.024.692.950.022.08Labour productivity in Construction5.73-1.22-4.340.38-2.091.94-0.07Labour productivity in Market Services3.183.991.20-1.93-0.320.210.85Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry-9.534.6511.11-2.85-0.962.41-0.71ULC in Construction-5.324.758.122.982.20-0.721.05ULC in Market Services-1.021.312.124.580.840.860.96Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)375.0375.0375.0375.0375.0375.0375.0Time needed to start a business(1) (days)14.014.014.014.014.014.014.0Outcome of applications by SMEs for bank loans(2)0.310.060.230.410.570.230.26Research and innovation2010201120122013201420152016R&D intensity3.733.643.423.293.172.902.75General government expenditure on education as % of GDP6.606.506.406.406.406.20naPersons with tertiary education and/or employed in science and technology as % of total employment49495051525253Population having completed tertiary education(3)32333334353636Young people with upper secondary level education(4)84858686868788Trade balance of high technology products as % of GDP-0.33-0.74-0.87-1.02-0.98-1.22naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overall1.491.341.29OECD (PMR)(5), retail2.862.892.86OECD (PMR)(5), professional services0.610.710.62OECD (PMR)(5), network industries(6)2.722.612.47 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions 
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk. 
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment AgencySource: European Commission and European Environment 
Agency (Share of GHG emissions covered by ETS); European Commission (Environmental taxes over labour taxes and GDP); 
Eurostat (all other indicators) 

52 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.190.180.180.190.180.18Carbon intensity kg / €0.350.330.340.320.30-Resource intensity (reciprocal of resource productivity)kg / €0.970.951.080.910.900.95Waste intensity kg / €-0.49-0.51--Energy balance of trade % GDP-3.8-2.6-2.5-2.3-1.5-1.2Weighting of energy in HICP%7.528.378.127.847.637.09Difference between energy price change and inflation %17.2-3.2-1.6-2.6-2.3-1.3Real unit of energy cost% of value added16.917.216.715.8--Ratio of environmental taxes to labour taxesratio0.140.130.130.130.13-Environmental taxes% GDP3.03.02.92.92.93.1Sectoral Industry energy intensity kgoe / € 0.290.310.310.310.310.32Real unit energy cost for manufacturing industry excl. refining% of value added19.822.721.821.8--Share of energy-intensive industries in the economy% GDP11.5011.5911.6511.6111.3011.19Electricity prices for medium-sized industrial users€ / kWh0.080.070.070.070.070.07Gas prices for medium-sized industrial users€ / kWh0.040.050.050.050.040.04Public R&D for energy % GDP0.100.080.080.080.080.06Public R&D for environmental protection% GDP0.020.020.010.010.010.01Municipal waste recycling rate%34.833.332.532.540.642.0Share of GHG emissions covered by ETS*%52.748.549.948.845.846.4Transport energy intensitykgoe / €0.550.530.530.550.560.58Transport carbon intensitykg / €1.401.341.341.271.29-Security of energy supplyEnergy import dependency%52.846.348.648.947.445.3Aggregated supplier concentration indexHHI80.068.168.367.467.6-Diversification of energy mixHHI0.210.210.210.220.220.22 
 
 
 
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