(c) 2013, Bloomberg News.
(c) 2013, Bloomberg News.
HELSINKI — Finland's six-party government, matching Belgium's as the euro area's most fragmented coalition, is failing to push through the kinds of reforms Prime Minister Jyrki Katainen is telling southern Europe to commit to.
Agreeing on policy "is very difficult among six parties," Reijo Heiskanen, Helsinki-based chief economist at OP-Pohjola Group, said in an interview. "Looking at the bigger reforms, it hasn't progressed at all."
Finnish lawmakers are torn between pushing through tough economic changes at home and delivering policies that would please voters grappling with a recession and job losses. The government has slid in the polls, while Finland's two opposition parties have gained. As Katainen works to keep his coalition from splitting, he has continued calls urging southern Europe to stick to unpopular austerity programs.
The yield on Finland's benchmark 10-year bond has risen relative to similar-maturity German bunds this year, with the spread widening to 27 basis points at the end of last week. The yield difference was as narrow as 13 basis points in May. Finland is the euro area's only remaining stable AAA member, and credit default swaps signal it's a safer credit even than Germany.
Still, Finnish politics are hampering Katainen's efforts to control the government's debt load, which at an estimated 56.2 percent of gross domestic product this year, is bigger than in neighboring Sweden, Norway or Denmark, according to the European Commission.
Finland's unwieldy coalition has been characterized by internal rifts that have hampered law making. The opposition has also complicated the legislative process by putting forward 13 no confidence motions in the past 24 months.
In the only other euro member where a six-party coalition rules, a power struggle left Belgians without a government for 540 days after 2011 elections. Katainen took two months to form his alliance in 2011 after "The Finns" party was catapulted into third place on a euro-skeptic election platform. That compares with just a few weeks after previous elections. Katainen's National Coalition Party trailed the opposition Center Party by 4 percentage points in a broadcaster YLE poll on Aug. 1.
Finland needs to reform its municipally funded health-care system as it prepares to look after Europe's fastest aging population. The country of 5.4 million people has about 320 municipalities, most of which are too small to afford the rising care costs, and the government is working to push towns to merge into larger units. Municipal and social-services reforms have been in the works since at least 2005.
"To an extent they haven't really understood how hard some of these issues are," Heiskanen said. That "may explain some of the difficulties the government has encountered."
Progressing with reforms is very important with regards to keeping Finland's credit rating, he said. "If clearer signs begin to emerge that the government isn't able to grapple with the issues -- if political will or the system's ability to deliver are seen as becoming weaker, then that increases the risk" to the rating.
Finland's recessions have also depleted government coffers, causing it to fund five consecutive years of budget deficits through borrowing. The decline of former stalwarts Nokia Oyj and the forest industry is structural rather than cyclical, and Finland, which is due to hold elections in 2015, has yet to find ways to replace the lost jobs.
"There needs to be considerable progress in the next year because after that, elections begin to approach and it becomes harder to push things through," Heiskanen said. "Focusing on these issues is at the moment very important."