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Home , Finns Party, Sampo Terho

Finland: Failure to reform Jan von Gerich should not be an option – but it is Nordea Research, 06 March 2017

A new leader for the second-largest could at worst lead to a fall of the current government and put a stop to the reform process the Finnish economy desperately needs. More extreme policy options could rise also in .

2014 offers uncomfortable precedents

In 2014, two of the then largest parties had internal contests for new leaders, which resulted in new leaders (and a new Prime Minister), when there was still roughly a year left in the term of the parliament. The new leaders did not really speak the same language, and were not committed to the structural reform package negotiated by their predecessors, when forming the government. As a result, the structural reform package collapsed and several years were lost in reforming the Finnish economy.

Similar risks arose over the weekend, when the leader of the second-largest government party, of the , announced he would step down in June after running the party for 20 years. The new leader will be selected in the party meeting on 10 – 11 June.

New leader for the Finns Party could shift the current stance of the party considerably

The leadership campaign to follow Mr Soini, the current Foreign Minister, is only starting. However, Jussi Halla-aho, currently in the , has already said he is very likely to run to lead the party. He belongs to the anti-immigration wing of the party, and his stance deviates considerably from the more moderate line the party has assumed as part of the government.

The Finns Party under his leadership would probably take a turn towards clearly more extreme policy suggestions, including anti- immigration and -scepticism. nexus.nordea.com/research The more moderate stance of the party will be represented by at least in the leadership contest.

Fallen support feeding calls for change

The Finns Party has seen its support in the polls collapse from close to 20% after the 2015 elections to less than 10%. According to the opinion polls, the party has lost its position as the second-largest party to a joint fifth-place. The support will be measured in more detail in the local elections taking place on 9 April.

The lower poll readings increase the chances that many of the supporters of the party would favour a new policy course. While Mr Terho is the front-runner for now, early polling has suggested Mr Halla-aho has good chances of succeeding Mr. Soini. However, the way the new leader is elected makes polls unreliable and thus increases uncertainty over the outcome.

The Finns Party seen its support plunge since joining the government in 2015

Populism to rise in Finland as well?

Ever since the Finns Party moderated its stance in preparations to join the government, Finland has lacked an extreme alternative in a sense most other European countries currently have. This could easily change, if Mr Halla-aho becomes the leader. could yet rise again in Finland as well.

Collapse of government a real possibility nexus.nordea.com/research A collapse of the government and early election are very rare in Finland. However, it would be very difficult for the Finns Party to continue in government under Mr Halla-aho. He would probably demand big changes to the government programme in order to continue as a part of the government. The other two governing parties, the and the , would then have to choose between altering the government programme to include more extreme elements, or letting the government fall, with the latter a more likely outcome.

New elections would not be triggered automatically, even if the Finns Party left the current government. The Social Democratic Party, currently leading the polls, could take their place. However, as they are leading the polls, they would demand big concessions in order to join the government. As a result, the current government programme, including much of the planned structural reforms, would be practically dead.

If a new government would have to be formed, the reform process of Finland would slow down at best, or stall completely at worst.

A triumph of a more moderate candidate in the leadership race for the Finns Party, in turn, would probably not change the programme of the government much.

Economic outlook still worse than it looks

After several years of weak performance, the Finnish economy finally appeared to catch a break last year with growth of 1.6%, not far away from the 1.7% recorded for the Euro area on average. However, the advance was driven by the domestic sector, while net exports made a negative contribution. Finnish growth can hardly be sustainable without a pick-up in exports. To boost the outlook for the export sector, more structural reforms, especially on the labour market, are needed.

Bond market unlikely to be hurt by Finnish political risks – for now

Finnish domestic politics are unlikely become a major driver of Finnish bond spreads any time soon. Markets are concerned about political risks at the moment, but those do not include Finnish developments. Things might change closer to summer, but for now, the recent growth numbers and the stabilized rating outlook should shield Finnish bonds developments in domestic politics. nexus.nordea.com/research Finnish bond spreads largely moved in tandem with Austrian and Dutch developments lately

nexus.nordea.com/research

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