[pavlov]

"Cost of labour falls in Finland at the highest rate in the European Union"

It should be noted that this is a very intentional policy. Finland's current right-wing government has been working hard (and in many quite confused ways too) to bring down cost of labour.

When elected, the Prime Minister's stated goal was a reduction of 5% across all salaries. (The name for this plan was kilpailukykysopimus, "the competitiveness agreement".) Due to expected resistance from unions, it has been watered down to various benefit cuts, promises of raise freezes, etc. But the atmosphere among the country's economic decision makers is very much one that pushes for salary reductions by any means possible.

Another name for this salary reduction plan is "internal devaluation". As a member of the Euro zone, Finland can't simply devaluate its currency to increase the competitiveness of its exports. So the other way to achieve the same goal is to reduce the internal cost of producing those goods.

(If you ask me, this whole thing is chasing a 1980s recipe for a 21st century problem. The problem with Finland's exports is not cost of goods or even quality; it's a combination of wrong industries and lack of global marketing savvy. The pipe dream of a 5% reduction in production costs won't solve any of that.)

[indyaah]

This 5% internal devaluation part sounds bit crazy. A few days back I was trying to understand what was major blunders during Wiemar republic and one of them IMHO was Heinrich Brüning's attempt at 'internal devaluation' in response to allies' 20% devaluation of their currencies.

[blibble]

is leaving the euro and devaluing the currency, rather than 'internal devaluation' (aka cutting salaries) on the Finnish political agenda?

[pavlov]

Nobody is seriously talking about leaving the Euro... Primarily because the internal impact could be crushing. Large export industries would benefit, but private citizens would stand to lose greatly and in unpredictable ways.

Finns have quite a lot of housing debt, and spend a disproportionate amount of their income on housing compared to most other European countries. That debt load could become a huge problem for people when their salaries are converted to a new local currency but the debt remains.

If I have a 300k EUR mortgage, what happens to it? If it remains EUR-denominated while my salary is converted into a reborn FIM currency which then depreciates by 30%, suddenly my debt has effectively become 30% larger too. (Alternatively, if the debts were converted to FIM, the lender banks will still have a lot of EUR liabilities. Could they swallow that? One of the large banks, Nordea, isn't even Finnish. How could the government force a Swedish bank to convert loans into another currency?)

At the same time, the interest rate on those debts would skyrocket: right now it's close to zero, but an independent Finnish central bank would probably have to raise rates by multiple percentage points at once.

This combination would destroy many families' finances. Any government that did this would get a very negative windfall in the next election.

A "FinEuroExit" would be a huge transfer of money and future income from private citizens' pockets to the country's existing established big industries which have been unable to compete in a global market on their own. That doesn't sound like the kind of thing a modern government should be contemplating as their first choice.

[fsloth]

Finland leaving euro is among the least likely political scenarios in the near future. Well, I would have said that of Russia invading Ukraine or UK's brexit as well before those happened.

[yummyfajitas]

Weird, a "right-wing government" pushing a left wing (i.e. explicitly Keynesian) economic plan. It's awesome that your politicians can get past petty partisanship!

Keynesian theory says that to improve the economy (read: put prideful workers back to work and increase outputs), you need to lower real wages. It also postulates that nominal wages are sticky - hence the standard solution for Keynesians is creating inflation to reduce the real value of the same nominal wages. I.e., instead of workers getting 5% fewer Euros, they instead get the same number of Euros but the value of each Euro is reduced by 5%.

For countries on the Euro, inflation isn't possible, so the only solution is to fix nominal wage stickiness.