Accelerating inflation aggravates bargaining round

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In autumn 2000, high inflation and the weak euro have caused concern as Finland's bargaining round starts. Most of the wage increases agreed in the sector-level bargaining round in spring 2000 have vanished due to increased inflation, and the rise in purchasing power will be lower than forecast. Given this background, the bargaining round is expected to be complicated.

In autumn 2000, high inflation - caused largely by the increase in oil prices and the weak euro single currency, but also by domestic factors - has caused concern prior to the negotiations for Finland's next incomes policy bargaining round, which many parties hope will occur at central level (FI0009157F). Finnish inflation is currently over 3%, above the average for the "euro-zone" countries. At the same time, Gross National Product is growing at a rate of around 6%.

Trade unions will soon be presenting their wage demands for 2001 and beyond, and the scale of these demands is especially problematic. The export sector is benefiting from the weak euro, but the domestic sector is suffering from the low exchange rate. Since the start of the third stage of EU Economic and Monetary Union (EMU), the euro has lost about a quarter of its value - which can be seen as a dramatic devaluation. Also, following the decisions of the European Central Bank (ECB) on interest rate increases, interest rates have doubled since the launch of the single currency, causing accelerated inflation due to factors such as higher mortgage costs. Because of the rise in prices, trade unions have already demanded the introduction of an indexation clause in the coming bargaining round, providing for wages to be increased by a certain amount if inflation is higher than forecast (FI0010164F). The employers have rejected this idea outright as being inappropriate to the EMU era.

EMU buffer funds

Before Finland joined the European single currency, the trade union movement demanded the creation of so-called EMU buffer funds to safeguard against possible future recessions in which foreign exchange policy could no longer be used to stabilise the business cycle. In an agreement concluded in 1997, the social partners decided to create such buffers (FI9711138F).

The basic idea of the buffers is that during good times, employers and employees pay slightly higher social security contributions than necessary - with the result that, during bad times, rises in these contributions can be controlled by using the buffer fund for paying social security costs. The money collected - totalling FIM 7 billion - is deposited in an "unemployment insurance fund", with a board of trustees on which the employers occupy two-thirds of the seats and trade union one-third. This fund is now filling up, and discussions have started as to whether the contributions collected for it should be lowered .

Increases in real wages cut to below 1%

The Labour Institute for Economic Research (Palkansaajien Tutkimuslaitos, PT), which is close to the trade unions, has recently published a forecast predicting that the inflation for 2000 will be 3.3%, while average income will increase by around 4%. The increase in real wages, therefore, is anticipated to be only about 0.7%. The Institute does not expect the rapid growth in Finnish exports so far in 2000 is to slow down during the rest of the year. It has been supported by good price competitiveness, further enhanced by the weakening euro. However, due to accelerating inflation and increasing interest rates, consumer confidence seems to be fading.

According to the Institute, it is clearly evident that the economic trend involves more risks than were anticipated in spring 2000 when the current sectoral collective agreements were signed. In Finland, risks are focused on inflation, which is creating difficulties for the autumn bargaining round. If the increase in inflation arises from the higher world market price level of oil, then wage earners have poor grounds for demanding compensation for their weakened purchasing power. However, the more the accelerating inflation arises from the weak euro, the flimsier is the justification for placing the responsibility for taming inflation on wage earners, asserts PT.

According to a forecast produced by the Research Institute of the Finnish Economy (Elinkeinoelämän Tutkimuslaitos, ETLA), which is close to the employers, exports will increase by about 11% in 2000, rising as high as 30% for the strong Finnish electronics industry. Exports from the paper industry will also increase significantly. Increasing employment, rising income levels and tax cuts will support a real increase in purchasing power, estimated in the forecast as 3.5% in 2000 and 4% in 2001. ETLA expects inflation to ease in the event that the price of oil drops and the euro starts to strengthen. The Institute calls for moderate wage increases, especially in the sectors with weak resources for paying wages. It considers that excessive increases would damage the employment situation.

Commentary

The centralised Finnish labour market model is now being tested for the first time by a factor over which the domestic decision-makers no longer have any influence - the external value of the currency. Concomitant with joining the third stage of EMU, Finland gave up its independent foreign exchange policy and handed it over to the ECB. Although the export sector is benefiting from the decreased exchange rate, domestic sector wage earners are having to accept increased prices. Service sector employers, for example, will have difficulties in granting wage increases to compensate for inflation in the coming bargaining round, without weakening their profitability. This sector, with a large number of employees, has already started to demand social security contributions that are in more reasonable proportion to wages. This would make a hole in the social security system, one that could be difficult to patch up. Previously, devaluations of the Finnish currency were compensated for by wage increases reinforced through indexation clauses. However, this model did not necessarily function well either, leading as it did to a devaluation-inflation circle. (Juha Hietanen, Ministry of Labour)