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News, 3/15/2009

Breathing more life into the economy

The government's stimulus package includes broadband and movies. Will it have a large enough impact to make a difference?

The Finnish recession of the 1990s was a trying ordeal, but out of the strife emerged a very valuable lesson: a high level of unemployment is costly for the nation. This time around, when it came to fighting unemployment in Finland, political consensus was found with little difficulty.

 In February, Prime Minister Matti Vanhanen proclaimed, "According to the European Commission, the resuscitating effect of the 2009 budget and supplementary budget after the final resolution, at 1.7 percent of GDP or approximately three billion euros, is the third largest among the 27 EU member states."

Included in the stimulus package are the renovation and refurbishment of airports, railroads and schools plagued with mould problems. Unemployed workers will be able to obtain training more easily than before, and entrepreneurs will be granted start-up funding for launching new businesses. 

Broadband use at homeThe government promises free or affordable broadband connections for everyone in Finland as part of its economic stimulus package. © Tekes/Anton Kalland

The government will offer stimulus funding for the production of domestic movies. The budget also promises free or affordable broadband connections for everyone in Finland, a programme amounting to 3,000 man-years of work between 2009 and 2015. How the broadband network will be built without compromising free competition is an issue that will be resolved later.

Entrepreneurialism and innovation

 In 1992, Nokia decided to discontinue all its other activities, such as manufacturing car tyres, rubber boots and cables, in order to focus solely on the mobile phone market. Over the years, Nokia and various technology research programmes have received abundant funding assistance from the government. The new stimulus package promises to continue this type of funding for technology projects.

Minister of Finance Jyrki Katainen has underlined the importance of supporting entrepreneurialism and innovation: "I have especially admired one detail of how the recession of the early 1990s was managed. While the government was forced to carry out difficult but necessary spending cuts and tax increases, they were able to lower corporate taxes and initiate resolute investments in research and development activities."

 Criticism from well-known economists

 Sixten Korkman, one of Finland's leading economists and currently managing director of the Research Institute of the Finnish Economy, maintains that the government's stimulus package is, by any measure, only a marginal tool in affecting the nation's overall economic development. International economists have been singing the same song about both the US and European economies.

According to these critics, politicians are trying to buy a clear conscience with their small budgetary endeavours and have no real chance of reviving the economy. The world is no longer living in a closed system like Finland in the 1990s. Today's economy is dependent on international trade.

According to Björn Wahlroos, CEO of Sampo Group and the number one name in the Finnish financial industry, governmental budget politics play only a small role in battling recession. Wahlroos believes that real results come from fiscal policy, which is led by the European Central Bank in Frankfurt, and that relief can be found by actively lowering interest rates, a need the ECB has not understood as well as the Fed on the other side of the Atlantic. 

Markets believe in Finland

A comparison of credit risk premiums paid by various nations  reveals a lot of trust in Finland, while government bond yields show that Ireland, Greece and Portugal are paying a high price for incurring government debt. These statistics also demonstrate the market's belief that Germany and France, like Finland, have the ability to remain strong and survive in all economic conditions.

According to forecasts made by the European Commission  Finland's budget will remain in surplus until at least 2010, which is not the case in most other European countries.

 Katainen estimates that Finland's national debt will grow in three years by as much as 30 billion euros. The reason for this increase is not only the cost associated with stimulus efforts but also the need for the state to lower taxes. Experience has shown that with a recession comes a drop in tax income, and this increases the need to take on debt.

For Finland, the worst component of the current crisis is the sharp drop in exports, since one-third of the nation's GDP comes from sales to foreign countries. Of greatest concern is Russia, which forms a significant export country for Finland. 

Temporary layoffs in hard times

 The Finnish government wants to avoid a rapid increase in long-term unemployment like the one seen in the 1990s. During the previous recession, when GDP dropped more than 10 percent in only a few years, the unemployment rate climbed from less than 4 percent to a record 16.6 percent.

The earlier experience demonstrated that unemployment is at its peak when the economy has made an upturn and the rise in the unemployment rate has slowed. Last year, Finland experienced the lowest level of unemployment in a decade, 6.4 percent, although this is still far from the level before the previous recession. In a comparison of European unemployment statistics, Finland is coping well, with an unemployment rate below the European average.

Finnish firms have announced many temporary production halts and layoffs in recent months. Finland's employment legislation permits putting workers on temporary unpaid leave. For example, a factory might put its workers on one month unpaid leave in order to avoid permanent layoffs. Faced with the difficulties of the current economic climate, the Finnish labour market has applauded this peculiarity, thanking both management and employees. Compared to a permanent dismissal, a temporary layoff offers hope that the company will soon resume normal operations and that workers will be needed for business as usual.

 Eljas Repo is editor-in-chief of Arvopaperi, Finland's leading magazine for stock market investors.

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Updated 3/15/2009

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