As the euro zone enters the most dangerous phase of its debt crisis, bailout patience is eroding in the fiscally responsible tier of the zone. While Brussels wonders whether the Finns have become Euro-skeptic, the reality is the reverse. Europeans are turning into Finns.
The Eurozone’s debt crisis is taking a dangerous turn, with potentially global repercussions.
As long as the frustrated investors focused on the peripheral economies, which each accounted for less than 3 percent of the Eurozone GDP, Brussels could tame the fires. Now those times are history, as the prospects of major euro economies, including Spain and even Italy, look increasingly bleak.
In addition to the impending sovereign defaults, the emerging European stability facility will offer too little and come too late, to stabilize the region’s financial sector. The European banks are significantly more vulnerable than has been acknowledged, despite two sets of (not-so-stressful) stress tests.
Led by Jean-Claude Trichet, the European Central Bank (ECB) is sitting on toxic assets that will take years to defuse.
Meanwhile, the erosion of competitiveness and innovation in the peripheral euro economies and the zone as a whole is reducing growth potential, although growth is vital for regional recovery.
And that is why, in the short term, the tiny Finland is significant at a regional level. Although small at around 1.4 billion euros, the Finnish share of the new support for Greece is important because its triple-A credit rating adds weight to the 109 billion euro rescue agreed on July 21 – Athens’s second bailout package.
Economic crisis, political turmoil
For years, the tiny, stable and thriving Finland avoided headlines. Recently it has attracted international spotlight twice.
The first crisis ensued with the outcome of Finnish elections, which boosted the position of the Euro-skeptic “Finns Party”, while endangering the bailout of Greece. The second crisis evolved a few weeks ago as Finland’s Minister of Finance, Jutta Urpilainen, announced that a bilateral agreement had been reached between Finland and Greeceunder which Greece would provide cash collateral for Finland’s guarantees of its bailout loans.
In Brussels, the euro technocrats, led by Olli Rehn, the Finnish-born European Commissioner for Economic and Monetary Affairs, complained that the Finnish government gave no advance notice about the bilateral deal.
In effect, the economic instability that has swept through the continent is now generating political turmoil – even in Helsinki.
In Finland, as in most euro zone countries, the debates over the bailouts are as much about politics as they are about economics. After all, the opposition continues to gain, and Finnish presidential elections will take place in 2012.
In the May parliamentary elections, the conservatives got the majority vote (20.4%), followed by the social democrats (19.1%) and the electoral winner, the Finns Party (19.1%), which left behind the centrists (15.8%).
After tumultuous government talks led by the conservative Jyrki Katainen, the Finns Party opted for opposition, despite electoral victory.
Only days before the bilateral deal with Greece, polls indicated that the Finns Party is now the largest in Finland (22.0%). It has left behind both the conservatives (21.4%) and the social-democrats (19.8%).
The more the governing parties give in to Brussels, the more the opposition will gain nationally. It is this logic that is now being extended across the euro zone.
If Finland does not get its way, it may pull out of the Greek bailout, unleashing renewed trouble in financial markets. In Brussels, euro technocrats complain that Finland is no longer the region’s “model student.” But the realities are more complex.
Unsurprisingly, demands from Helsinki for collateral have sparked requests from countries including Austria, the Netherlands, Slovenia and Slovakia for similar treatment. That these countries are small and open economies is hardly coincidental.
Chancellor Merkel and President Sarkozy have suggested that Finland threatens to spoil the euro zone's attempt to save Athens from default. Then again, these small economies have not forgotten that it was the euro zone’s major economies –Germany and France – that first violated the European Growth and Stability Pact (1995), which effectively paved the way to the ongoing crisis.
Officially, Germany and Paris stand behind the united Europe. In practice, they are already preparing for the Greek exit.
In the UK, the merciless austerity programs have paralyzed growth prospects. In France, President Sarkozy’s ratings have collapsed ahead next year’s elections. In Germany, Chancellor Merkel’s coalition is rapidly eroding in the aftermath of the state elections.
Of the triple-A European nations that leaves Netherlands, Austria, Finland and Luxembourg.
Despite their small size, the role of the small triple A euro countries is critical to the euro zone bailouts because their triple-A status provides legitimacy to Brussels’ efforts to contain the sovereign debt, liquidity, banking and competitiveness crises.
But the small euro economies also face a double bind: If they give in to excessive concessions, they will lose their triple-A status, which will cost dearly to the euro zone. If they do not blink, they will contribute to the exits of the peripheral debt-ridden economies.
In the final analysis, the triple-A euro economies are responsible to their constituencies, not to Brussels. The small euro economies may hope to compromise but are unlikely to blink.
As a result, the future of the triple-A Europe is Finnish.
Dan Steinbock is research director of international business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore).