A key figure for Ireland, the EU commissioner can draw on Finland's experience of fighting its way out of a mess, writes FINTAN O'TOOLE
WWFD? WHAT would Finland do?
Olli Rehn, the EU economics commissioner who now has more influence over our fate than any of our own politicians, knows the answer. He was an adviser to the Finnish government in the early 1990s when it faced a horrible crisis.
No two busts are exactly alike, but the Finnish depression of the early 1990s is probably the closest parallel to our current catastrophe. In a small, open economy, there was a similarly lethal cocktail of home-made follies: financial deregulation, a flood of cheap credit, a doubling of private debt in four years, a property and investment bubble. The doubters were shouted down by those who pointed to booming exports and full employment. And then there was an external shock – in Finland’s case, the collapse of one of its crucial trading partners, the Soviet Union.
We don’t need to be told what happened next in Finland, because we’ve just experienced it. The banking system began to sink under the weight of bad debts. The stock market collapsed. House prices fell by 50 per cent. Investment slumped. Gross domestic product fell by 13 per cent in three years. Unemployment rose from 3 to 18 per cent. The national debt increased fivefold in five years.
What did the Finns do? Initially, pretty much what we’re doing. They slashed welfare and the public sector. They rescued their banks (at a cost of €6 billion – regarded at the time as a huge spend). It became clear that neither of these strategies was successful. The cuts in public spending turned the recession into a depression. The deficit, instead of being reduced by austerity, continued to rise. The bank bailout did not lead to the restoration of credit to the economy. Unemployment set in for a very long time – employment in Finland did not recover to pre-crash levels until 2008.
After these mistakes, however, Finland did four other things. One of them is not within our power: it devalued its currency. The other three, however, are entirely relevant to our circumstances.
First, Finland quickly put its delinquent bankers on trial. The trials were slow and did not always produce convictions. But they did help to create a sense of public accountability.
Second, the Finns developed a national strategy for innovation and growth. They learned the hard lesson that a country can’t rely on property bubbles for sustainable wealth. They invested, even during the depression, in innovation and technology and emphasised the development of indigenous companies. (Nokia is the most obvious example.) They gave Finland one of the best broadband infrastructures in the world. Today, every Finn has a legal right to a broadband connection and by 2015 everyone will be connected to a 100 Mbps service. It was economic growth, not slash-and-burn policies, that ultimately got the public finances back in order.
Third, the Finns invested in education. They reckoned a sustainable recovery would be possible only if they made a leap to the top of the global education charts. Finnish 15 year olds are now first in the international rankings for maths and science and second for literacy.
Perhaps as important as what Finland did, is what it did not do. It did not abandon investment in its people. It did not use the depression as an excuse to embrace a right-wing agenda of shrinking the state. It did not use the crisis to abandon the welfare state or to increase inequality by savaging the poor and protecting the rich. The Finns recognised that there could be no “smart economy” – and hence no sustainable recovery – without a smart society that invested in the skills and wellbeing of its people.
So, Ollie Rehn, what should Ireland do? Are you telling Brian Cowen and Brian Lenihan that they should ignore the lessons – both good and bad – of what happened in your own country? That we should face into a lost decade of economic stagnation, bitter social division and imploding systems of national innovation? Or that we should set goals for a vibrant and decent society, a creative economy and an intelligent State and invest in order to achieve them?
The EU has to make up its mind as to which kind of Ireland it prefers to have as a member. We are, as Morgan Kelly put it yesterday, on the way to becoming a “ward of the ECB”. The EU can get some short-term satisfaction from giving its wayward ward a sound thrashing as punishment for its sins. Much as it might like to, however, it can’t expel Ireland – it is stuck with us as one of its awkward children. Is it really in the general interest of Germany, France and the rest of the EU to have a political and economic slum festering on its western fringe?
Rehn knows two things very well from his own country.
One is that it is possible for a small country that has made a mess of its economy to recover and prosper. The other is that a strategy for growth, not a scorched-earth policy, is the way to do it.