The International Monetary Fund trimmed its growth forecasts for Finland amid uncertainty over Russia, and it urged the Finnish government to cut spending and move on with structural reforms to make the economy more competitive. The IMF said it expects Finnish gross domestic product to grow 0.3 percent this year and 1.1 percent in 2015, down from its earlier estimates of 0.7 percent and 1.3 percent. Finland's economy shrank 1.4 percent in 2013 after taking a turn for the worse in the last quarter of the year. Private consumption fell and investment weakened.
Finland is one of only three euro zone countries that still hold a triple-A credit rating (Germany and Luxembourg are the others). But weak European demand has cut into its exports of paper, machinery and ships, and flagship companies like Nokia have been struggling. Now the Ukraine crisis is casting a new shadow over the economy. Western leaders are threatening sanctions against Russia after Russian-speaking troops seized control of the Ukrainian region of Crimea. Sanctions could weaken Russia's economy, which in turn would be likely to affect Finland's, since Russia is one of its biggest trade partners.
"Weaker external demand could easily derail the recovery - for example, because of the negative effects from an escalation of geopolitical tensions, or slower euro area growth," the IMF said in a statement. The IMF said the Finnish government should agree on new austerity measures to rein in debt. It also suggested policymakers step up plans to lift the retirement age, boost public-sector productivity and reshape the country's system for negotiating wages.
The six-party government, led by conservative Jyrki Katainen, is due to discuss the country's medium-term spending plan in March 24. The government had said earlier it could begin new austerity measures worth around three billion euros. Recently, it backed off that plan, saying it is likely to phase the measures in over three years. Olli Rehn, the EU's top economic official and a Finn, said in an interview on Friday that Finland must make a deal on credible measures to protect its credit ratings.