seppo honkapohja : the current economic situation in finland keynote address by mr seppo honkapohja, member of the board of the bank of finland, at the conference “ reform capacity and macroeconomic performance in the nordic countries ”, copenhagen, 20 september 2013. * * * introduction i first want to thank the organizers of this conference for inviting me to deliver the key note speech this evening. my topic is the current economic situation for finland. finland is the only euro area country with an aaa sovereign credit rating and stable outlook from all major rating agencies. finland is known as a country with strong growth, strong competitiveness, strong fiscal balance, and strong banks. a common perception – until recently, at least – has been that the finnish economy is a success story, though exports are currently suffering from the global financial crisis. among finns, the humble attitudes following the deep depression of the early 1990s have long ago given way to a feeling that we are good in almost everything and that we can even teach others how to do things - even how to run an economy. is there a solid basis for such perceptions and attitudes? perhaps you can already guess that the answer is negative. unfortunately, in some important respects, the finnish economy is not doing well. developments during the past 5 years have revealed vulnerabilities in the economy. since the autumn of 2008, finnish growth performance has been disappointing – weaker than the euro area average. finnish gdp is now 5 % smaller than it was in mid - 2008. developments in exports have been particularly poor, as exports are currently about 1 / 5 smaller than before the financial crisis. the well - being of many finns has, however, not been badly hurt by these developments. unemployment has remained relatively low, and household real incomes have mostly been on an upward trend. recently the future has become much more uncertain. there are big problems that need to be solved, and difficult political decisions than need to be made. current difficulties the economy is facing new challenges : exports have remained weak, and the current account has turned negative. after 2007 the decline in exports has been the deepest among all euro area countries. in addition, there is one challenge which has not come as a surprise : the demographic change. three main reasons for the new challenges are ( 1 ) weakness in the international economy, ( 2 ) problems of electronics and paper industries, and ( 3 ) losses in cost competitiveness. weakness in the international economy has hurt finnish exports

of around 5 to 6 percent, by most estimates. the finnish economy is expected to suffer more from the effects of ageing than most other european countries. old - age dependency ratio will be very high by 2030. this is because of the specific features of the intense post - war baby boom. what economic policies are needed in finland? one element should be low nominal wage growth in order to improve cost competitiveness. as wages have increased significantly compared to trading partners, they should increase less in the coming years. wage increases in the whole economy should be set according to the state of the economy's open sector. the social partners recently signed a centralized wage agreement with relatively low wage increases. provided that the individual unions and employer organizations accept the centralized agreement, wage settlements are likely to lead to some improvement in finnish cost competitiveness during the next two years. given that the problems of the finnish economy are to a large extent structural by nature, structural reforms are needed in addition to improvements in cost competitiveness. the economy needs to make reforms to correct the structural problems. it is important to emphasize that the economy has major strengths - education, infrastructure, effective government, reliable judicial system, etc. these must be preserved so that there is a solid basis for finding new areas of economic activity. however, one must not forget that structural reforms are needed ; these reforms should lead to permanent increases in production potential. perhaps most important area of reform concerns the labour supply. working careers need to start earlier and end later. as the population ages, improving the production and productivity of publicly funded health and care services are a vital area for reform. let me mention a few other areas of reform. competition could be increased in services and construction, with changes in regulations being one part of the possible reforms. supply of housing and especially of land for housing development could be supported by the government policies. this would increase economic welfare by lowering the pace of growth in house prices and rents and facilitate efficiency of the labour market in bigger cities. the government has recently laid out its program for structural reforms with the purpose of improving the long - term sustainability of public finances. the program contains wide - ranging bis central bankers ’ speeches measures, and the goal of the government plans is ambitious. the purpose is to eliminate completely the fiscal sustainability gap. at this point, the detailed contents of this government program still remain mostly to be decided. however, the government plans to act relatively quickly and i certainly hope that the government will be able to agree