Friday, April 3, 2015

Is Finland A Victim Of Secular Stagnation?

Finland has been a poster child for a successful economy in the Eurozone.  Finland now looks like a nation with a stagnant economy; it may be a victim of secular stagnation.  That is, a period of slow growth despite abnormally low real interest rates. 

There are a couple of explanations for the growth slow down in Finland.  Its demographics are unfavorable, and its wages are not competitive with many of its trading partners.  Finland may have to undergo some difficult structural changes to restore growth. Some politicians believe that it will have to reduce wages to restore growth.  Nokia's success, however, was not based upon cost competitiveness.  Its not clear that Finland can become a net exporter by cutting wage costs.

Finland ran large trade surpluses during its boom years.  That was driven by technology exports by Nokia which has been losing market share and exports over the last several years.  Finland now runs trade deficits which reduce its GDP.  A boom in residential housing cushioned Finland's transition from a surplus nation to a net trade deficit nation, but there does not seem to be anything available to replace the housing boom.  Finland and the Eurozone may be facing an extended period of low growth in which monetary policy has limited leverage.  The decline in the value of the euro may boost exports, but it won't affect trade patterns between nations within the EZ.

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