Sweden's Borg urges neighbor Finland to reform labor market

With a parliamentary election due on April 19, Finnish Prime Minister Alexander Stubb asked Borg, with whom he shares a center-right economic approach, to come up with ideas to tackle Finland's economic problems.

The Finnish economy has contracted three years in a row amid weak demand from Europe and Russia as well as issues with its biggest companies.

Borg served as Swedish finance minister from 2006 to 2014, steering the economy through a tough period with tax reductions and pro-market reforms.

In his report, Borg said Finland's export competitiveness had fallen about 20 percent since 2007 relative to Germany, the rest of the euro zone and non-euro member Sweden as labor costs kept climbing despite poor economic performance.

In the Finnish labor market system, workers in almost every sector get the same pay hikes.

Borg suggested the government should push the labor unions and employers' organizations to come up with a new system that would remain coordinated but would allow more sector-specific negotiations.

He said Finland should also increase labor force participation by freeing work-related immigration, modifying the pension system and cutting sabbatical leaves.

"If you have a (new) wage formation system and some structural reforms, you could reinvigorate the business climate ...," Borg told a news conference.

Political tensions between Stubb's party and the Social Democrats within the current coalition have slowed its reform drive. Last week, it put off healthcare reform until the next government.

Stubb said he agreed with Borg's findings.

"We have three alternative paths forward ... First is to stimulate the economy with more debt, which is the path of Greece. Second is to increase taxes and cut benefits and services. Third is the path of Borg, structural reforms."

In recent opinion polls Stubb's party has trailed the opposition Centre Party, which has agrarian roots, and is neck-and-neck with the Social Democrats and populist party The Finns.

Borg's report was written together with Juhana Vartiainen, the head of Finland's State Institute for Economic Research who this week announced his resignation from the Social Democrats to become an election candidate for Stubb's party.

Economists at Nordea Bank, who on Wednesday forecast zero economic growth for Finland this year, said they thought the only thing lacking in Borg's report was tax reductions.

(Reporting By Jussi Rosendahl; Editing by Gareth Jones)