News Analysis: Experts call failure of social contract negotiations setback to Finnish economy

The failure of reaching agreement on the social contract and its aftermath will harm not only the Finnish economy but also consumers and employees, experts have warned.

The so-called social contract is a key part of the Finnish government's program, aiming to reduce production costs and improve the competitiveness of the Finnish companies.

Finnish Prime Minister Juha Sipila announced on Thursday that the government failed to reach an agreement with the employers and workers' unions on the issue.

Sipila's cabinet warned earlier that if no agreement is reached, it will implement additional austerity measures to the tune of some 1.5 billion euros and withhold one billion euros of tax reliefs.

Reijo Heiskanen, chief economist of OP Financial Group, told the Finnish News Agency STT that spending cuts always have a dampening effect on the economy and a negative impact on growth and employment.

Janne Huovari, economist of the Pellervo Economic Research Institute, estimated that if the spending cuts and tax increases reach 1.5 billion euros, the impact on Finland's GDP might be nearly one percent and employment would fall by the same percentage.

In addition to the economy, Vesa Vihriala, director of the research Institute of the Finnish Economy ETLA, noted that consumers and employees will also suffer from pain caused by the failure of Sipila's efforts to bolster the labor market.

Vihriala told the Finnish national broadcaster Yle that the crash of the social contract means that government must now return to the drawing board and find ways to improve business competitiveness by reducing employers' costs.

He believed that consumers would feel the greatest pain from such measures, as the government may be considering measures such as increasing Value Added Tax, which would result in higher consumer prices.

Furthermore, workers would also experience suffering, because they could possibly pay higher pension contributions to safeguard the future.

Vihriala pointed out that the government should look for ways to improve competitiveness without relying on massive spending cuts.

To promote exports and create more industrial jobs would be positive means to generate more corporate tax revenues for the government to pay for public services, he suggested.

Former Swedish Finance Minister Anders Borg, who is visiting Helsinki, also believed that the defeat of the social contract negotiations will be a serious setback for the Finnish economy.

Borg told the Finnish daily Helsingin Sanomat that the situation in Finland is very serious, as Finland is the only member state in the EU with negative economic growth, according to the European Statistical Office Eurostat.

He called on Finnish government to begin thinking immediately about alternative ways to improve the company's cost competitiveness.

Borg said Finland will achieve success in all aspects if its economic structural reforms will soon be implemented. Endit