How Europe’s shining light deals with its challenges head on

As central Europe heaves under the burden of torrential flooding, one little corner of Europe has been having its moment in the sun.

Last week Lapland experienced its highest temperature for May, with a high of 30.5 degrees recorded in Utsjoki, a tiny town on the northern edges of Finland deep within the Arctic circle.

The unseasonably balmy weather can be read as an apt metaphor for the euro zone’s most northerly country.

Finland is one of Europe’s shining lights. As the euro area continues to struggle with economic stagnancy, Finland has continuously outshone its continental neighbours in terms of economic performance, educational achievement and innovation. Finland – the only Nordic state in the euro – is the proud owner of the euro zone’s only stable triple-A credit rating.

As Moody's pointed out last week, Finland is the only government in the European Union that has never breached any of the Maastricht fiscal criteria. It has one of the lowest debt-to-GDP ratios in the euro zone with public debt equating to about 53 per cent of GDP.

Slowing economy
Nonetheless, all is not completely rosy. There are signs that the economy has been slowing.

Industrial production has contracted in recent months, while unemployment has crept up to 8.8 per cent. It also faces more long-term challenges, particularly from changing demographics. An ageing population means pressure on future healthcare and pensions expenditure; meanwhile, the threat of wages spiralling ahead of productivity looms.

What sets Finland apart from some of its less conscientious fellow euro members is the sense that it is doing something about its challenges.

Even last week’s European Commission’s annual assessment of member state economies was full of praise for the country’s fiscal consolidation measures, despite soft warnings of future threats to econo- mic balance. While other countries blunder through the financial crisis, Finland likes nothing better than rectifying problems and getting stuck in to difficult structural changes.

It is no coincidence that when the list of commissioners was being divvied out among the EU's 27 member states, Finland got the economics brief, with Finnish commissioner Olli Rehn becoming the symbol of no-nonsense austerity.

Finland’s responsible fiscal attitude derives from harsh experience. During the 1990s Finland entered a deep recession, as the collapse of communism in the Soviet Union deprived the country of its main export market. It was forced to devalue its currency in 1991, before gradually beginning the long journey back to growth.

This strict adherence to fiscal discipline is likely to be on everyone's mind when Enda Kenny meets Finnish prime minister Jyrki Katainen tomorrow in Helsinki. Ireland's bid to get debt relief on the State's investment in AIB and Bank of Ireland is reaching a critical stage, with discussions focusing on whether the euro zone's ESM fund can be used to "retroactively" directly recapitalise banks.

Finland is one of the opponents to the move. Along with Germany and the Netherlands, it issued a joint statement last September, outlining its opposition to the use of the ESM fund for legacy assets.

Bilateral opportunity
But while the Taoiseach's meeting with Katainen offers an important bilateral opportunity at a sensitive political moment, Ireland could also benefit from examining Finland's economic and social model. Finland and Ireland have many similarities.

Finland, with a population of about 5 million, is one of the euro zone’s smallest countries, situated at the periphery of Europe. Like Ireland, it has emerged from a complex colonial past.

But there are differences. Finland has embraced a progressive economic model that has blended the typically Nordic inclination for a strong welfare state with a healthy openness to the private sector.

It values balanced budgets and fiscal discipline while always keeping an eye on the future, all of which has been achieved against a remarkable background of social cohesion. So far it has managed to escape the social unrest experienced in neighbouring countries.

The existence of a six-party government is indicative of the diversity and spirit of mutual trust that visitors frequently identify as a feature of Finnish society. Most significantly, Finland has invested in innovation.

It invests heavily in research and development, linked in turn to its phenomenally effective education system.

As Ireland’s disproportionate dependence on foreign multinationals comes into the spotlight, the importance of cultivating an indigenous, sustainable private sector based on innovation and education has never seemed so clear.