Finland’s image as an island of fiscal virtue in an ocean of European profligacy has eroded to the point that many ask if it can keep its stellar credit rating.
Fitch confirmed Finland’s top “AAA” rating on Thursday, but warned that it could be lowered in future in case, for example, of a “failure to tackle the trend decline in potential growth.”
The Nordic eurozone member has long prided itself on the extremely strict fiscal management that has allowed it to avoid ever breaking EU fiscal rules.
The budget deficit has consistently remained below 3 percent of GDP, while public debt has been held within 60 percent, as required by the Maastricht Treaty.
Strict fiscal management has allowed Finland to remain the only country in the eurozone with a “triple A” rating and a stable outlook from all three major credit rating agencies Standard and Poor’s, Moody’s and Fitch.
Even Luxembourg and Germany, the eurozone’s other two paragons of virtue, can no longer boast that.
Yet the economists have their doubts if Finland is really as strong as it used to be.
“The rating agencies have been lagging behind,” Nordea Bank Finland chief economist Aki Kangasharju said, telling reporters that in his view Finland no longer deserves the highest rating.
“The country’s industrial base has collapsed in a way never seen before and the tradition of political consensus is in tatters,” he said.
Two pillars of the modern Finnish economy — the forest industry and electronics — are in serious difficulties.
A drop in the demand for paper, caused by a growing conversion away from traditional print media toward electronic media, has forced many factories to close down.
Meanwhile, the dramatic decline of Nokia from global leader in mobile phones has broken the momentum in a sector that had been driving growth for more than a decade.
Finland’s exports were virtually stagnant last year from the year before. However, wages still rose 3.5 percent in nominal terms, draining competitiveness.
“There is no area that could be an engine of growth,” Fitch analyst Enam Ahmed said.
He justified the “AAA” rating with a reference to its finances, which he described as “robust,” saying they “give Finland a certain margin to absorb unexpected shocks.”
The credit ratings sector’s optimism may not last if the economy continues to sink.
GDP is expected to contract this year for the second consecutive year, after dropping 0.8 percent last year.
Unemployment is at a relatively high level, especially as the workforce shrinks.
Finland is gradually sinking deeper into debt. Last month, the government said the country would cross the EU threshold of 60 percent next year, while as late as 2011 the public debt was only 49 percent of GDP.
The retirement age was to go up, time spent at university was to go down and incentives to enter the job market were to be boosted for the unemployed and young mothers.
In its statement on Thursday, Fitch said a failure to address obstacles to future growth could contribute to a future downgrade.
“Addressing labor market rigidities and measures to improve the country’s competitiveness would lift long-term growth prospects, thereby supporting the ratings,” it said.
The government has promised more detailed measures by the end of next month.