1. International Finance Magazine Jul - Sep 2016
ECONOMY
IS FINLAND THE
‘NEW SICK MAN
OF EUROPE’?
Suparna Goswami Bhattacharya
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2. Jul - Sep 2016 International Finance Magazine
ECONOMY
The country of 5 million people has gone from being a highly industrialised
nation to one of the worst performing economies in Europe
B
ack in the late
90s, Finland
was home to
the most valued
company in the mobile
business — Nokia. The rise
of Nokia was accompanied
by a growth in the country’s
economy. And also the
economy’s dependence
on the company. In 2000,
Nokia accounted for 21% of
Finnish exports and 20% of
all corporate tax revenue.
Then the mobile handset
war began. It not only saw
the decline of Nokia but
also the Finnish economy.
Rarely has the world seen
the fortunes of a developed
country so tightly tied to
a single company. And
like Nokia, Finland too is
struggling to get back on its
feet.
Of late, Finland has
turned out to be the worst
performing country in the
Eurozone. Its economy has
been stagnant for the past
five years leading many to
call it the ‘new sick man of
Europe’.
Jan Zilinsky from
Peterson Institute for
International Economics
says during the 10 years
prior to the global financial
crisis, about a quarter
of its rise in GDP could
be attributed to Nokia’s
success. “One lesson we
can take from the crisis is
that private spending on
research and development
is extremely valuable, but
no country should rely
excessively on a single
company.”
Danae Kyriakopoulou,
Senior Economist, Centre
for Economics and Business
Research, says, “The fall of
Nokia has certainly played
a role in the decline of the
Finnish economy. The
case of Nokia is interesting
because it is the decline
of what used to be a very
successful company. Hence,
it is not wise to be so reliant
on one company.”
She says the country has
been hit by a number of
adverse external economic
shocks that partly explain
its dismal performance. “To
start with, the economic and
financial crisis that hit the
Eurozone has had an impact
on Finland as well through
the channel of demand
for exports,” she explains.
The fall in global demand
for pulp and paper, mainly
driven by rise of electronic
media, has adversely
affected the economy.
Slowdown in Russia is
another important factor.
“The collapse of the
Russian economy and
the sanctions imposed on
trade with Russia have hurt
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3. International Finance Magazine Jul - Sep 2016
Finnish exports to Russia,
which used to be a sizeable
source of revenue,” says
Kyriakopoulou.
Christophe Andre,
senior economist at
OECD, says the decline in
manufacturing of wood and
paper started around the
turn of the century and has
cut GDP by around 0.75%
since 2007. The value of
goods exported to Russia
has fallen by roughly half
over the past three years,
subtracting about 1.5% from
the GDP.
Apart from these
external factors, there are
some internals ones that
contribute to the dismal
view of the economy.
Finland has grown highly
Although the country
has been performing
poorly in recent years,
it has many structural
strengths, like a high-
skilled workforce and
a well-functioning
financial system. This
should allow growth to
restart at some point
Christophe Andre,
senior economist at OECD
“
uncompetitive when it
comes to wages as it allowed
fast increase in wages after
adoption of the euro. In the
post-2010 period, wages
grew significantly faster
in Finland than in other
Eurozone economies.
According to estimates
by Statistics Finland, GDP
(adjusted for working days)
was 0.3% lower in the
fourth quarter of 2015 than
a year earlier. GDP has been
broadly flat since mid-2012
and is about 7% below its
late-2007 peak.
Kyriakopoulou says, “We
project growth at around
1% in 2016. However,
there are downside risks
to this projection, notably
related to the international
environment on which
a small open economy
like Finland is highly
dependent.”
Some opine that Finland’s
situation would have been
better had it retained its
currency. But Zilinsky
would like to differ. “It is
not likely that a country like
Finland would dramatically
devalue its own currency
to gain a competitive
advantage over its trading
partners,” he explains.
“Although a comparison
cannot be made between
Finland and other European
countries, Denmark which
did not adopt the euro is
not performing significantly
better. Neither has the
UK managed to use its
ECONOMY
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4. Jul - Sep 2016 International Finance Magazine
The decline in manufacturing of wood and paper
started around the turn of the century and has cut GDP
by around 0.75% since 2007
ECONOMY
currency ‘magic’ to grow at a
reasonably fast rate.”
Another crucial point to
mention is the makeup of
Finland’s exports, which
are mostly raw materials
and capital goods for the
manufacturing industry.
These are exactly the parts
of the global economy that
are slowing most rapidly
right now.
However, the scenario can
be reversed through reforms
to increase productivity in
FORECAST FOR FINLAND
2014 2015 2016
GDP growth (% yoy) -0.4 0.0 0.5
Inflation (%,yoy) 1.2 -0.2 0.1
Unemployment (%) 8.7 9.5 9.4
Public budget balance (% of GDP) -3.3 -3.2 -2.8
Gross public debt (% of GDP) 59.3 62.7 65.0
FORECAST FOR EA
2014 2015 2016 2017
GDP growth (% yoy) 0.9 1.6 1.7 1.9
Inflation (%,yoy) 0.4 0.0 0.5 1.5
Unemployment (%) 11.6 11.0 10.5 10.2
Public budget balance (% of GDP) -2.6 -2.2 -1.9 -1.6
Gross public debt (% of GDP) 94.5 93.5 92.7 91.3
Current account balance (% of GDP) 3.0 3.7 3.6 3.4
both the public and private
sector. A plus point is that
Finland continues to be
one of the few countries
in Europe to get a triple A
rating from Moody’s and
Fitch.
Andre justifies the ratings.
“Although the country has
been performing poorly in
recent years, it has many
structural strengths, like a
high-skilled workforce and
a well-functioning financial
system. This should allow
growth to restart at some
point,” he explains.
Kyriakopoulou feels the
economy needs to rebalance
itself towards growth
sectors. “In that respect, the
knowledge-economy is an
attractive candidate. The
startup economy is already
a big hope for the economy
going forward, supported by
strong fundamentals in that
space.”
Source: European Commission Institutional Papers 20/2016
One lesson we can
take from the crisis
is that private
spending on research
and development is
extremely valuable, but
no country should rely
excessively on a
single company
Jan Zilinsky,
Peterson Institute for
International Economics
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5. International Finance Magazine Jul - Sep 2016
ECONOMY
N
okia’s fall started after
2007, culminating in
the selling of its mobile
business to Microsoft
in 2013. As a result of Nokia’s
misfortune, more than 10,000
jobs were lost in Finland.
Nokia’s trouble has been
visible also in considerably reduced
R&D spending and falling role of
the ICT sector in general in the
Finnish economy.
The loss of high valued added
business is visible also in the
sudden and prolonged slowdown
of productivity growth at the economy
wide level, as well considerable loss of
market share in international trade.
It has taken a surprisingly long time
for Finland to start recovering.
However, the birth of a number of new
ICT companies during the last years
suggests that the sector as a whole has
been able to adapt reasonably well to the
new situation.
Also, Nokia has transformed itself
considerably. It is now a global player in
networks and wireless technology after
divestment of its Devices & Services
business, the sale of HERE and the
acquisition of Alcatel-Lucent.
Juha Kilponen,
Head of Forecasting,
Bank of Finland
‘Finland took a
long time to get
over Nokia’s fall’
LIFE AFTER
NOKIA
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6. Jul - Sep 2016 International Finance Magazine
Tero Ojanpera,
managing partner,
Vision+ Fund
‘Start-ups have
lifted Finland’
T
he best thing to have
happened to Finland after
the Nokia episode has
been the start-up scene.
There have a been lot of positive
developments in the past five years
with more and more entrepreneurs
being active and following the
footsteps of Rovio (maker of
Angry Birds), Supercell (mobile
game development company)
and many others. Finland start-
ups scene is getting very diverse
with companies focusing on
analytics (VertoAnalytics), drones
(SharperShape.com), marketing/
adtech (Kiosked), test automation
(Optofidelity), food delivery (Wolt),
just to name a few, drawing on deep
technology expertise of Finland and
digitalisation as a global trend.
‘Ex-Nokia
employees have
established about
500 startups’
I
n its heydays, Nokia’s effect on Finland
can hardly be overstated. Its employment
in Finland peaked at over 24,000 in 2000
and was nearly 20,000 as recently as 2010.
But it will be in the range of 6,000 by the end of
this year.
Arguably Nokia’s impact was even
greater in ‘spirit’ — it was a global claim to
fame for all Finns in all walks of life.
Needless to say, on both counts, Nokia is
now just like any other large company in
Finland — important and recognised, but not
overwhelmingly so.
Obviously, Nokia released a large number of
people to local labour markets. This was part
of its outplacement programme Bridge, which
provided support ranging from CV writing to
paid employment, loans and IPRs for aspiring
entrepreneurs and their companies. Former
Nokia employees have established about 500
startups.
ECONOMY
Petri Rouvinen,
Research
Director, ELTA
IFM
editor@ifinancemag.com
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