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Collapse of Soviet Union Hits Finland Hard

FINLAND - once known as the Japan of Europe - has sunk into a deep economic slump.

The downturn is worse than the Great Depression of the 1930s, says Heikki Salmi, the country's statistical office director.

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Finland's troubles stem from the collapse of the country's main export market - the Soviet Union - and a world oversupply of forestry products.

Unemployment recently reached 18.8 percent of the labor force. Economic output has shrunk 10 percent since 1990. Foreign debt is expected to reach 53 percent of gross domestic product by the end of the year.

Finns, who number only 5 million, worry that government austerity measures could ruin their system of social security.

The decline has been rapid. In the 1980s Finland enjoyed the fastest growth rate in Western Europe, averaging 3.6 percent a year. In 1990 per capita gross domestic product was second only to Switzerland.

Moreover, recovery from what one Ministry of Finance official terms the worst economic crisis since independence 75 years ago is expected to be slow. That official, Sixten Korkman, predicts zero-growth at best this year.

A decade ago the Soviet Union accounted for one fifth of Finland's exports. As that market disappeared, Finland has been unable to find substitute export markets. Nowadays Russia - with which Finland shares a 1,270-kilometer (800-mile) border - plays only a minimal role in Finland's foreign trade.

Finland's public sector debt has skyrocketed during the past three years.

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Tauno Matomaki, chairman of Finland's Central Federation of Industry, warns that without a credible crisis program, Finland will find itself at the mercy of the International Monetary Fund by mid-summer, as other sources of funding the budget deficit dry up.

"We have to be able to foresee a point in the mid-1990s, when government indebtedness no longer grows," Prime Minister Esko Aho says.

In 1992 Finland's international payments deficit (current account) was 22.8 billion markka ($3.8 billion), according to the Central Bank.

Meanwhile, the total indebtedness of Finland's public, household, and corporate sectors was nearly 250 percent of export income, the highest in Europe, according to Postipankki Bank.

Although the economy has shrunk dramatically, government spending has not been cut accordingly. Public welfare programs have been maintained by increasing foreign debt. But the center-right government maintains that this is no longer possible, and has announced cuts of 24 billion markka for fiscal year 1994. The government's real spending is to be reduced to 1991 levels by 1995. The proposed cuts would come in public-sector wages, social security, health care, and higher taxes.

The government and the taxpayers have two major problems: rising unemployment and huge losses in the banking sector.

Credit losses and falling property values would have pushed most banks under were it not for a state rescue operation, which has so far cost around 54 billion markka.

Last year domestic demand fell by 6 percent and investment by 15 percent. Both are expected to fall somewhat further this year, but some positive signs are already emerging. According to the Finance Ministry, productivity increased by 3.5 percent last year and the same is predicted for this year. The yearly inflation rate is just 2.9 percent.

Thanks to the sharp decline of the value of the markka, Finland's foreign trade surplus is rapidly increasing. But because of the need to service its foreign debt, Finland's current account deficit will be some 15 billion markka this year.

This has resulted in a dualistic economy, where the export sector has good prospects but the domestic sector is still sagging.

Finland's government is pinning its hopes on exports to pull the rest of the economy back on course.

Even if the economy as a whole begins a slow recovery, for the average Finn life will be harder for many years to come. Finance Minister Iiro Viinanen warns: "There will be nothing to hand out, just poverty and sacrifices."

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