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Antti Suvanto interviewed by Jan Smoleński
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26.08.2009 |
Jan Smoleński, Krytyka Polityczna: Did financial crisis hit Finland hard?
Antti Suvanto, Head of Monetary Policy and Research Department, Bank of Finland: The financial crisis has hit Finland very severely but through indirect channels. Unlike in the early 1990s the Finnish banking sector was - and still is - in good shape. They were not exposed to „toxic” assets. Firms and households had avoided excessive indebtedness. The house price increases were relatively minor compared to most other countries.
The Finnish exports were affected strongly by the sharp decline in world trade in October-November last year. The suddenness of the collapse of world trade was due to the discontinuity in the functioning of the financial market. Firms were frightened and postponed or cancelled investment plans. Investment slump affected Finland especially badly because the dominance of investment goods (and related intermediate products) in our exports.
The firms themselves were in good shape and were not particularly indebted. They were, nevertheless, dependent on the global financial market and less on domestic banks. When the global markets ceased to function, these large exporters of capital goods turned to domestic banks implying that availability of credit to SMEs was tightened.
How has Finnish government responded to crisis? Was it Obama-style intervention into economy?
The Finnish government was one of the first movers in promoting a coordinated EU-wide response to banking problems in October last year. The purpose was to reduce the systemic risk of a major collapse of the European financial sector. The government has acted accordingly. The state guarantee scheme for banks’ refinancing is in place, although no bank has used it as yet. Legislation on bank recapitalization is pending for parliamentary approval. At present it does not look likely that banks need to recourse to it. Financial markets have improved worldwide which has helped Finnish banks’ refinancing as well.
The government intervened quickly by widening the powers of a state-owned financial institution FINVERA to extend credit and grant guarantees. FINVERA is specializing in co-financing SMEs as well as in guaranteeing export credit.
Tax cuts and targeted spending increases make fiscal policy expansionary. In addition, automatic stabilizers are allowed to work through fully. Automatic stabilizers are important in a country such as Finland with comparatively high taxes and extensive social safety-nets. In this respect, Finland is not comparable to the US.
The pass-through of the ECB monetary policy has been more significant in Finland than in any other country belonging to the euro area. The bank lending rates have declined sharply. This is true for both housing loans and loans to no-financial corporations. Due to the predominance of variable-rate housing mortgages the lower interest rates have boosted disposable income of home-owners. The rates on new loans have also declined significantly despite widened lending margins. Without monetary stimulus house prices probably would have declined sharply and construction activity would be even lower than it is today.
Did Finnish government cut social spending?
Social spending is in fact increasing because of automatic stabilizers. There are no plans to cut social spending, but there are no plans to make discretionary increases either. Aging population will automatically increase spending on pensions and old-age health care.
The strategy to respond to this challenge is to lengthen the working time over the whole life-cycle by creating incentives to retire later and to shorten the average time of study. The pension reform effective as of the beginning of 2005 is an important step in that direction. After the reform an individual can raise the future pension benefits by working one year longer. Those who retire at the age of 68 years can enjoy much higher pension compared to those who retire at the age of 63 years.
Does Finnish government have a recovery plan?
The Finnish government has no measures to push up the world trade and world investment. The measures taken linked with automatic stabilizers help reduce the damage, but they cannot compensate for the decline in exports. Efforts to increase training and to maintain R&D will help once the global recovery begins.
Increase in central government debt is acceptable at the present juncture, but there is a need for an exit strategy in order to keep government finances in a sustainable path. It seems unavoidable that some taxes will be needed in near future at the same time as the growth of public spending need to be controlled. In addition, there should be ample possibilities to improve the productivity of the public sector.
Has the unemployment rate risen? Do ordinary people suffer from the crisis?
Yes, unemployment has started to rise. It is expected to rise more rapidly during the autumn and early next years with rate of unemployment probably exceeding 10 per cent.
So far the increase in unemployment has been dampened by the extensive use temporary lay-offs by exporting firms especially in the engineering sector. Persons temporarily laid-off are entitled to earnings-related unemployment benefits. Temporary lay-offs have been preferred by firms because of the uncertainty about the duration of the global recession linked with the prospective shortage of skilled labour. There is a risk, however, that some of these temporary lay-offs turn out to become permanent lay-offs if the recovery does not materialize soon.
Polish companies fire people. The excuse is crisis, although they admit the crisis hasn’t hit them at all. Do Finnish firms do the same?
There is no evidence that the crises had been used as an excuse for firing workers, at least not to any large extent. As mentioned above, the prospective shortage of skilled labour due to the aging of population makes firms rather reluctant to fire people.
There are sectors, such as the paper and pulp industry, which suffer from structural problems which have been intensified by the crisis. The capacity has already been cut down and further capacity reductions are in the pipeline. That capacity will never return. Something new has to be invented.
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