Euro Zone’s Austerity Fan in the North Unveils Stimulus Plan

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Finland was once a prominent cheerleader of austerity in the euro zone. It’s now changing tack.

The Nordic nation’s incoming government, made up of five parties across the political spectrum, is creating a stimulus mechanism intended to stop sudden economic shocks from ravaging its economy.

The plan would release an extra 1 billion euros ($1.1 billion) of spending between 2020 and 2022 if there’s a major external shock, such as a recession in the euro zone.

“We aren’t going to do pro-cyclical fiscal policy that would reinforce a negative spiral if one were forming in the economy, but instead we would enact counter-cyclical policy to fix such a problem,” Prime Minister designate Antti Rinne told reporters in Helsinki on Monday.

The move marks a major about-face for Finland. During Europe’s debt crisis, the Nordic country became known for its strident views on fiscal restraint, which it sought to impose on euro members in the south fighting bankruptcy. But Finland failed to live up to its own ideals, allowing public debt to double over a ten-year downturn, as the government didn’t adjust welfare spending to the slump.

The new recession-busting tool would allow massive stimulus outside the pre-set policy limits. Finland uses four-year budget frameworks to ensure the government’s economic policy remains predictable, responsible and far-sighted. The frameworks have tended to cover about 80% of spending.

Read more on the incoming government’s plan to ramp up spending

The new tool could be used in case of a 0.5% contraction over two consecutive quarters in the euro area and a 0.5% cumulative increase in the bloc’s seasonally adjusted unemployment rate. In Finland, a contraction of at least 1% over two consecutive quarters and a 0.5% cumulative increase in the trend of its unemployment rate could also lead to the mechanism being triggered.

The government will rely on an assessment by the Bank of Finland, economic research institutes and Finance Ministry’s economics department to decide if and when using the tool is justified. The spending is limited to 500 million euros per year.

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