EUROPE’S August doldrums seem to have reached even the crisis-prone euro zone. A declaration at the end of July by Mario Draghi, president of the European Central Bank (ECB), that he would do “whatever it takes” to preserve the euro has helped push down borrowing costs in Italy and Spain, the two largest troubled countries. The prime minister of Greece, Antonis Samaras, is visiting his counterparts in Berlin and Paris to ask for more time to push through budget cuts but not, he says, for more bail-out money. A damaging row between Greece and its creditors is likely to be avoided for a few more weeks—at least until the “troika” of the ECB, the European Commission and the International Monetary Fund decides whether to approve the next tranche of rescue money.
Yet it would be foolish to bet on an extended lull in the euro crisis. The Greek economy is in deep recession, and Germany seems adamant that no more money will be made available to help it out. Germany’s central bank remains opposed to the ECB buying bonds in order to cap the borrowing costs of Spain and Italy. To these familiar concerns is added a newish one: that efforts to shore up the euro might be scotched not in Berlin but in another austerity-minded northern capital: Helsinki.
Last month Finland’s finance minister, Jutta Urpilainen, caused a stir when she said that her country would “not hang itself to the euro at any cost” and that it would not be prepared to shoulder the debts of other states. More recently the foreign minister, Erkki Tuomioja, revealed that Finland had made contingency plans for the break-up of the euro. Uniquely, Finland has demanded collateral for its part of Greece’s second bail-out and for the funds it underwrites to support Spain’s crippled banks. If a grand bargain on the mutualisation of debts is ultimately required to keep the euro together, the Finns could block it. A few observers even think a “Fixit” (a Finnish exit from the euro) is more likely than a Grexit.
Fix it or Fixit?
It is true that Finland has the most to lose from a pooling of sovereign debts. The IMF reckons the combined gross debt of euro-area countries will peak at 91% of GDP next year, when the ratio in Finland will be just 53%, the lowest of any euro-zone country bar Estonia and Luxembourg. Finland’s borrowing costs are roughly the same as Germany’s. After Japan and Italy, Finland has the most rapidly ageing population among rich countries, so it is wary of adding to its debts. And having recovered from a nasty banking crisis in the 1990s through their own efforts (albeit with a favourable tailwind from the world economy), Finns are hostile to bail-outs.
Finland might also have least to gain from keeping the euro show on the road. Its banks have little direct exposure to the euro zone’s troubled periphery, in contrast to those of France and Germany. Its economy is less integrated into the euro zone than those of other northern bail-out grumps, such as the Netherlands. Only 31% of Finnish exports go to other euro-zone countries, a smaller share than is sold by Eurosceptic Britain. Five of Finland’s seven biggest foreign markets lie outside the euro zone. Its biggest supplier is Russia and its largest single customer is Sweden, whose economy is growing more quickly than Finland’s (see article).Norway is also doing better. Finns fed up with being asked to stump up for Greece and the rest cannot have missed that their nearest neighbours seem to be thriving outside the euro.
The odds are still that the Finns could be dragged by the Germans into some form of grand bargain that involves pooling debts. Public opinion is still in favour of staying in the euro, not least because of the deep-rooted fear of being pushed back into Russia’s orbit. But Germany’s chancellor, Angela Merkel, should treat the furious Finns as yet another sign that her gradualist approach to the euro crisis is not working.
The longer Mrs Merkel waits to unveil a grand bargain, the more Europe seems to come apart (the Dutch are also getting crankier about bail-outs—see article). Meanwhile, the costs of a bail-out are rising, especially as the austerity programmes Mrs Merkel favours shrink Europe’s economies. Could the Finns still be bullied to stay in if the euro zone’s overall debt ratio jumped above 100% of GDP? Or a coalition led by the ultra-right True Finn party came to power in Helsinki? These questions are only going to get harder for Mrs Merkel.
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