Finnish politics just got interesting


We think it's fairly obvious that over the past decade the most successful economy in the eurozone has been that of Germany. And we also think it's fairly obvious why this has been so, the so-called Hartz IV reforms. Which appears to be very much what the new Finnish likely Prime Minister believes in:

A millionaire former telecoms executive touted as a technocrat capable of rescuing Finland from economic slump won Sunday's parliamentary election, but he will likely need coalition support from a second-placed eurosceptic party critical of any more Greek bailouts.

Opposition Centre Party leader Juha Sipila, who advocates a wage freeze and spending cuts to regain Finland's competitiveness, beat pro-EU and pro-NATO Prime Minister Alexander Stubb after four years of policy stagnation and a bickering coalition.

Hartz IV looked at Germany's labour costs and concluded that they were too high for the productivity levels in the country. This therefore meant unemployment for some, low economic growth for all. The answer to this was to change the relationship between the costs of labour and the production from that labour.

It's worth nothing that this is one area of economics where there is no difference between the different schools. All will agree that involuntary unemployment is the result of wages being higher than the market clearing level. The arguments all start with why this is so (a supply or demand shock? Capitalist plutocrats screwing everyone? The banks have fallen over?) and then continue on into what should be done about it (raise demand in the economy? Increase educational levels? Lower wages?).

Dependent on the details of what is happening, something which is an empirical, not theoretical, question one of all of them could be happening, could be the right solution, at any one time. Germany then and apparently Finland now mapped it out and decided that it really was simply the general wage level that was too high. That was managed down in Germany and a decade of comparative success has followed (yes, we do have to limit ourselves to the eurozone economies in that comparison, given the burdens of the single currency). Here's hoping that the Finns have the analysis right this time and that the same solution works again.