Beware of EMU

There are emotional feelings connected to the Finnish markka, which became in 1860, the first national symbol, on the long road to independence. There are also strong doubts as to whether Finland's circumstances allows the possibility for it to adapt itself to the Economic and Monetary Union.

Finland might be more exposed to external shocks

Finland's monetary history since World War II has been one of cycles of inflation and currency instability - all in all there have been eleven devaluations, three revaluations and one period of floating. Finland's industrial structural base, the heavy dependence on pulp and paper, the trade patterns and also the cyclical rhythms differ from those of the "core" EU-Member States. This, plus our location on the periphery of Europe, might make Finland more exposed to external, asymmetric shocks than most of the other EU-Member States. And Finland have indeed experienced such shocks. The Russian market accounted for almost a quarter of Finland's total merchandise exports in the early 80īs, however this market collapsed in 1990. In addition, the timing of the monetary and exchange rate policies by the European Central Bank may even make the cyclical changes in Finland more volatile.

Wages and employment the only flexible elements in EMU?

Employers and many economists have repeatedly stated that following membership of EMU, employment and nominal wages must fluctuate in response to external shocks. According to them, employers must have the right to unilaterally lower agreed wages and that the negotiating structures and systems which exist in Finland must be dismantled.

In December 1995, SAK attempted to initiate a debate concerning how to deal with the cyclical disturbances, if Finland were to join the EMU as the Government and employers wish.

In SAK's Congress, held in June 1996, it was stated that SAK will oppose joining EMU if it is linked to demands for the dismantling of the bargaining structures or nominal wage fluctuations. SAK also demanded the development of buffer funds and the development of agreed rules for dealing with economic disturbances.

Normally, state budgets, i.e. fiscal policies, are used as buffers. However, the strict limitations agreed upon in Dublin means, that fiscal policies alone are an inadequate method for dealing with major economic disturbances.

'Mad wood disease'

According to the analysis, carried out by SAK, of the effects, that membership of the EMU will have, the possible economic risks can be tackled - if there is a social consensus to do so. The loss of important markets, a possible "mad wood disease" or other unexpected problems must be anticipated. This can be done without cutting wages and domestic demand, which would deepen the crisis.

In Finland, as in most EU-Member States, labour costs are considerably higher than the direct wage costs, because of the so called, non-wage labour costs. The most important of these are the employers' pension contributions which are equivalent to about 17 per cent of the wage bill. Together with the other (statutory or by agreement) contributions, they add some 30 per cent to the wage cost. This create a possibility to influence the total labour costs without touching the nominal wages at all. According to the latest estimates, the lowering of total labour costs by 3 per cent - an "internal devaluation" - gives the same advantages as a 10 per cent exchange rate devaluation - without creating inflationary pressures.

Buffer funds the answer?

In order not to endanger the social security system's capabilities to meet future pension payments, a buffer fund must be established. In fact one already exists. There is about FIM 180 billion ( ECU 32 billion)in the pension funds at the present time, this is equivalent to about 30 per cent of GDP. SAK proposes that other buffer funds should be established.

In 1990, the unemployment benefit contribution paid by employers was 0.6 per cent of total wages. In 1994 the figure was 6.0 per cent. If there had been a buffer fund, the resulting increase in total labour costs, in the middle of the most severe economic crisis in modern times in Finland, could have been softened.

Concerning education and training, usually companies have no time to train or re-train their personnel during the good times. And when the times change and there is nothing but time, the companies have no money for training and education and have to resort to compulsory redundancies. Would it not be better, to build buffer funds - national, sectoral or even company based - to enable companies to take care of their "most important asset" - their personnel and their personnel's skills, also during the bad times ? These funds could be maintained outside the public sector and thus be used without restricting the latitude for fiscal policy manoeuvring.

According to SAK, external shocks can be softened by creating buffers and other "shock absorbers", but there must be consensus concerning their use. The Government and the social partners must agree on how to utilise them. They must also agree to build up the funds during the good years so that there will be money available when the bad times come.

Wage formation and low inflation

External difficulties are not the only aspect which must be taken into account if Finland joins the EMU. Internally there must be a willingness to adhere to the low inflation target. Wages and salaries are of course not the only factors behind wage increases, but they are by far the most important cost component in society.

How can the wage/salary structure be organised so that wage /salary increases are compatible with the inflation target ? In practice, real labour costs cannot rise by more than the average rate of labour productivity without causing inflation, which ultimately causes unemployment.

Is it possible to agree upon a system, in which the social security contributions paid by employers, are increased and wage demands thus lowered, as a response to the growing total labour costs during the upswing ? When the economic development decelerates, the social security contributions paid by companies could be lowered in order to make companies more competitive and thus help them maintain their workforce in tact. Wage developments - and thus the whole economy - would be more stabilised over the economic cycle.

Final stance on EMU in General Council

SAK is currently discussing these questions and is also negotiating over these matters with both the employers and the Government.

On March 10th this year, SAK launched a nation-wide series of discussions and seminars for shop-stewards and other trade unionists, concerning EMU. At the opening seminar, the Managing Director of the Finnish Confederation of Industry and Employers promised that their demands for dismantling the bargaining system will be dropped. In fact, on the contrary, he promised that the possibility to conclude incomes policies and centralised collective wage agreements will be guaranteed and that monetary union will not lead to situations in which employers will demand that the nominal or agreed wages must be lowered.

SAK's final stance concerning EMU will be adopted in our General Council meeting in November 1997. Finland's decision, concerning participation in EMU, will be made by the Finnish Parliament, either late in 1997 or early in 1998.

Peter J. Boldt

Peter J. Boldt is an economist and integration expert at the Economic and Social Policy Department of the SAK.