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Finland dodges EU disciplinary action over growing govt debt

The European Commission has given Finland a passing grade for the government’s efforts boost economic growth and put the brakes on growing government debt. Issued Monday, the Commission’s assessment essentially means that Finland has avoided disciplinary measures over its elevated debt to GDP ratio.

Euro raha kolikko.
Image: Ismo Pekkarinen / AOP

Although Finland’s government debt is growing and will reach 64.7 percent of GDP this year in violation of EU guidelines, the European Commission ruled on Monday that Finland should be considered as having complied with the debt requirement set out for all EU member states. 

The Commission had previously flagged Finnish government debt as exceeding the 60 percent of GDP limit laid out in the EU’s Stability and Growth Pact, which seeks to harmonise member states’ fiscal management. Finland first exceeded the threshold back in 2014.

In its country-specific recommendations on the Finnish economy, the Commission agreed to grant Finland the flexibility it requested in meeting the debt target based on a series of major structural reforms implemented to restore balance to public finances. 

Labour market reforms win over Brussels

The report listed labour market reform as one of the key factors driving the assessment. It pointed in particular to the so-called competitiveness pact, which freezes wages for 12 months, permanently increases annual working time by 24 hours without compensation and hikes employee contributions to social security.

Meanwhile pension reform will raise the lowest retirement age from 63 to 65 by the year 2027. The government is expecting that these measures will expand employment by nearly two percent over the period 2018 to 2019.

The Brussels decision-makers accepted the government’s projections that the competitiveness pact will boost employment and exports and result in economic growth on the order of 1.2 to two percent, according to its 2017 draft budget.

Finland sidesteps deadline, fines

If Brussels had pressed ahead with corrective measures to rein in debt growth, Finland would have faced a strict deadline to bring debt in line with EU guidelines; failure to meet the deadline would in turn have resulted in a heavy fine. However so far, no member state has been fined for violating the targets set out in the EU’s Stability and Growth Pact.

In its spring economic forecast, government debt in Finland is projected to grow from 63.6 percent of GDP in 2016 to 66.2 percent of GDP in 2018. The structural budget deficit is expected to grow from 0.9 percent this year to 1.4 percent in 2018.

Brussels called on the administration to continue to pursue fiscal policy in accordance with the pact, seek further alignment of wages with productivity, address employment and social challenges including rolling out incentives to accept work and promote entrepreneurship and to improve the regulatory framework to increase competition in services and promote investment.

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