The Finnish economy faces a hard winter, but at the moment the economy is expected to recover more rapidly than from the global financial crisis. Once the current crisis has passed, however, we will still face the familiar longer-term problems in our economy, aggravated further by the pandemic. The sustainability gap in Finland's general government finances was significant already before the crisis, and now it has widened further. The sustainability gap is now estimated at around 5.5% of GDP.
‘In Finland, we now have to find a way to live in two time periods at once. While we are resolving the acute crisis, we must also focus our thoughts closely on the economic challenges that we will face once the crisis has passed. It is necessary to support businesses, households and economic recovery while at the same time strengthening the conditions for sustainable growth and higher employment,’ says Governor Olli Rehn. We need reforms that strengthen employment, the sustainability of general government finances and the economy’s capacity for renewal.
In terms of productivity growth, an important role is played by research and development and other corporate investment. The government can improve the conditions for innovation and for introducing innovations created by other countries. ‘We must not expect quick returns from the development of skills and the financing of research and development activity. Research shows that the full productivity impact of such efforts will be felt only after a number of years. It is therefore important that decisions are taken without unnecessary delay,’ emphasises Governor Rehn.
Economic policies during the COVID-19 crisis have been characterised by rapid responses on a wide front, both in Finland and throughout the euro area. Fiscal and monetary policies have helped businesses and households through the worst phase of the crisis and have supported the post-crisis recovery of the economy. ‘The monetary policy measures of the European Central Bank continue to preserve accommodative financing conditions and have helped to prevent the threat of a new financial crisis and self-reinforcing deflationary developments,’ emphasises Governor Rehn.
The second wave of the pandemic will significantly weaken the near-term outlook for inflation and economic activity. The Governing Council of the ECB decided in December 2020 on several measures targeted at easing financial conditions. For example, it decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by EUR 500 billion to a total of EUR 1,850 billion. The Governing Council extended the horizon for net purchases under the PEPP to at least the end of March 2022. ‘Purchases under the PEPP will be conducted in a flexible manner and over an extended period in order to preserve favourable financing conditions throughout the pandemic,’ elaborates Governor Rehn.
The Governing Council also decided to conduct three additional longer-term refinancing operations targeted at banks. The interest rate on these operations can be as low as -1%. ‘The Governing Council stands ready to use and adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner’, says Governor Olli Rehn.