Introduction

Stiftung Wissenschaft und Politik German Institute for International and Security Affairs

Comments

New Centre-Right Government in WP Economic and European Challenges and Perspectives

Tobias Etzold and Paweł Tokarski S

Finland is directly affected by two of the biggest crises in the history of : the troubles of the and the Russia-Ukraine conflict. The new , formed by the liberal Centre Party, the populist and the con- servative , faces major economic, foreign policy and security challenges, but fundamental change in its policy towards the EU and the eurozone is not to be expected. The coalition’s stability will depend not least on whether it embarks upon urgent structural reforms, and whether or not they are successful. The outcome of the reform process will also affect Finland’s political influence within the and the situation of the German-led coalition of the most competitive eurozone members.

Juha Sipilä’s liberal Centre Party emerged which had put Finland in the elite circle of the winner of the Finnish parliamentary financially strong EU states. elections held on 19 April 2015, with the conservative National Coalition Party of outgoing Prime Minister Finland’s EU Policy: Pragmatically and ’s populist Finns Party close Firm and Constructive behind. It is these three parties that have Since joining the European Union in 1995, formed the new centre-right coalition. The Finland has been regarded as the most pro- main issue in the election campaign was EU and integration-friendly of the Nordic the precarious state of the Finnish economy, states. has never demanded opt- which finds itself in its weakest phase since outs, and participates fully in all EU policies. the severe structural crisis of the early 1990s. It introduced the euro in 2002, as the only Thanks to its model economy, Finland Nordic country yet to do so. Overall, Fin- was long regarded as a poster child of the land’s EU policy can be characterised as Union and became one of Germany’s closest flexible, pragmatic and constructive. Despite partners in the euro crisis. But massive eco- its peripheral situation in north-eastern nomic problems now threaten the country’s Europe, the country has worked to gain influence and standing, especially after it acceptance in the inner circle of the Euro- lost its AAA credit rating in October 2014 – pean Union. In particular, its accession to

Dr. Tobias Etzold and Dr. Paweł Tokarski are Associates in SWP’s EU / Europe Division. This paper is published SWP Comments 35 in the framework of the “Research Centre Norden” project, which is funded by the Nordic Council of Ministers. June 2015

1 the third stage of Economic and Monetary Helsinki also vehemently rejected any Union in 2002 was driven by that wish, moves towards communitisation of euro- alongside economic rationale. Finland’s zone debt, fearing that this would blunt political elite believed that the best channel the will to carry through reforms in the through which to pursue national interests crisis countries. was active and constructive participation in As well as observing that Finland is “more EU decision-making processes. EU member- German than the Germans” on fiscal con- ship also contributed to economic recovery solidation and reforms, another aspect of after the recession of the early 1990s. particular interest to Berlin should not be Finland was quick to introduce its own underestimated. The Finns have successively initiatives in the EU framework. Through earned a reputation as credible and stable the policy of the Northern Dimension, partners who clearly articulate their politi- Helsinki sought to build bridges between cal preferences in talks and adroitly place the EU member states, the then accession their own candidates behind the levers of candidates (the Baltic states and Poland), economic power in . For example, and Russia, and to embed its interest in Olli Rehn became one of the key figures good neighbourly relations with Russia in in the euro crisis as Commissioner for Eco- a European context. Its pragmatic bilateral nomic and Monetary Affairs between 2010 relationship with Moscow makes Helsinki a and 2014. central actor in matters concerning Russia. But Finland’s relations with Russia have also darkened in the course of the Ukraine Fraught Economic Situation crisis. Although the Finnish economy is di- But now Finland requires crisis therapy of rectly affected by the EU sanctions imposed its own. The decline of traditional motors on Russia and Russia’s counter-sanctions, of growth – Nokia and the timber and paper Helsinki backed the EU sanctions after ini- sectors – has hit the Finnish economy hard, tial doubts. The latest developments con- with the sanctions imposed on Russia by cerning Ukraine have set new accents in the European Union and Russia’s counter- the debate over Finland’s national security sanctions exacerbating economic woes. Ger- and defence capability. In its defence policy many is now the largest market for Finnish Finland is seeking to close ranks with its exports, with Russia dropping from first Nordic neighbours, the European Union to third place after the volume of imports and NATO, and is openly discussing the from Finland fell by 14 percent in 2014. The option of joining NATO (see SWP Comment severe structural problems of the Finnish 25/2015). economy demand deep reforms; tinkering Since 2011, the European economic will not suffice. But to date none of the par- and financial crisis and the influence of the ties has presented a convincing concept. A populist Finns Party have injected a more package of social and healthcare reforms EU-sceptical tone into the debate on Europe introduced by the old government was de- – even in Finland. This growing scepticism feated in parliament in March 2015. In May has had immediate effects on Finnish 2015 the ruled that Europe policy and Helsinki’s stance in EU Finland had exceeded the deficit and debt negotiations. criteria of the EU Treaty. The Commission During the euro crisis, Finland often sees Finland’s public finances endangered adopted more radical positions than Ger- by a “high sustainability risk in the medium many, and pressed hard for action on reform term” due to the “budgetary impact of the and budget consolidation. Helsinki’s image cost of ageing”. Price competitiveness has as a “Euro-hawk” was underlined in 2011 also been weakened by unit labour costs and 2012, when it made participation in rising more quickly than in many other bailout packages conditional on collateral. European countries since 1999.

SWP Comments 35 June 2015

2 The new Finnish government thus of the positions of the Euro-sceptic Finns faces numerous difficult decisions. It must Party are miles apart from those of their reduce public spending, which as a pro- considerably more EU- and euro-friendly portion of GDP is among the highest in the coalition partners, the Centre Party and OECD. But this may be difficult to accom- the National Coalition Party. plish, because the governing parties hold different positions. There is also a danger of budget consolidation having a negative Finnish-German Cooperation effect on growth. On the other hand, the To date Berlin and Helsinki have shared Finnish economy possesses a string of loca- similar ideas about the reforms that need tional advantages in comparison to other to be made in the Economic and Monetary members of the currency union. In inter- Union. And as far as national responsibility national rankings of the innovativeness and for domestic economic policy is concerned, quality of tertiary education and vocational the Finnish position is very similar to the training Finland occupies top places. In 2013 German. Both countries also share the same Finland’s level of investment in research scepticism towards a mutualisation of and development was the highest of any EU national debt. member state (3.3 percent of GDP). But there are also differences. Helsinki These economic difficulties, and com- would like to simplify EU fiscal rules and parisons with the flourishing economy in narrow the latitude enjoyed by the Euro- neighbouring Sweden, regularly stoke pub- pean Commission. After France and lic discussion about whether to remain in received mild treatment from the European the eurozone. But the risk of Finland leav- Commission with Berlin’s tacit approval, ing is presently small. On the other hand, Helsinki fears unequal treatment of smaller a Greek exit or default would burden all the eurozone members. The new Finnish govern- members of the eurozone with additional ment stresses national accountability for costs. Opposition to the euro in Finland economic and budget policy and favours could grow, as could scepticism towards reinstating a strict “no-bailouts” principle. future rescue packages or deeper economic Helsinki also rejects treaty reforms, which integration. it regards as unnecessary and politically Instead of Timo Soini, who questions risky, more clearly than does Germany. Fin- current EU bailout policies and had been land’s line is that a new legal and institu- tipped for the post, Alexander Stubb was tional framework is not needed; the exist- appointed finance minister. He is an ex- ing rules suffice, and merely need to be perienced pro-European, but his latitude observed properly. is constrained by the new government’s But on other economic matters within announcement of cuts in state spending the EU, Germany can count on Helsinki, of €4 billion by 2019, which will hit social especially when it comes to preserving the programmes especially hard. Given that “four freedoms” and deepening the internal Sipilä may have to agree compromises that market. This will be important in the fore- are unpopular at home, the new govern- seeably tough talks with the British. Fin- ment is likely to take a harder line in new land explicitly supports the new free trade negotiations with Greece. The opposition agreement with the United States (TTIP). of both the Centre Party and the Finns Party Germany in turn hopes for support from to negotiations over a new rescue package Finland, as a fellow net payer, in the up- increases the complexity of the ongoing coming negotiations over a new EU multi- talks with Athens. Altogether, conflicts annual financial framework (2021–2027). between the three governing parties can be expected over Finland’s future eco- nomic, EU and eurozone policies. Some

SWP Comments 25 June 2015

3 Union Needs Finnish Influence The new Finnish government will have to make difficult political decisions, and faces a litmus test that will determine its cred- ibility within the eurozone. Finland has always demanded its partners make deep structural adjustments when they have needed financial support. Should Helsinki prove incapable of carrying through similar reforms of its own, this would not only harm its reputation in the eurozone but also weaken the German-led coalition pressing for structural reforms. The other EU mem- ber states should observe closely what eco-

© Stiftung Wissenschaft und nomic reforms Finland pursues and whether Politik, 2015 they turn out to be successful. Many of the All rights reserved challenges facing the Finnish economy are These Comments reflect also replicated elsewhere: declining competi- solely the authors’ views. tiveness, lack of growth impulses, an over- SWP dimensioned public sector, comparatively Stiftung Wissenschaft und high labour costs, and population ageing. Politik German Institute for Consequently, Finland’s reform process International and can supply useful insights for reforms in Security Affairs other eurozone countries. If Finland’s eco- Ludwigkirchplatz 3­4 nomic reforms turn out to be successful, 10719 Berlin that will strengthen its position and influ- Telephone +49 30 880 07-0 Fax +49 30 880 07-100 ence in the European Union. Its influence www.swp-berlin.org would increase still further if the new gov- [email protected] ernment upheld the country’s constructive ISSN 1861-1761 approach in EU and eurozone negotiations. Translation by Meredith Dale With respect to pragmatic dealings with Russia, the Union can also continue to profit (English version of SWP-Aktuell 57/2015) from Finland’s experience. The new govern- ment, for its part, has stated that it will abide by the Union’s policy towards Russia, but will also seek to maintain diverse bilat- eral relations with its eastern neighbour. It remains to be seen what role the new foreign minister and avowed eurosceptic Timo Soini will play in future Finnish policy. After his nomination, Soini said that Fin- land was committed to membership, but the Union must reform. He will, he said, remain a critical friend of the European Union. While there may be uncertainties about the new government in Helsinki, a strong supporting voice from Finland is of great importance in a phase of European inte- gration that will be decisive for the future of the eurozone and EU-Russia relations.

SWP Comments 35 June 2015

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