Europe Economy

How Finland Could Bring the Euro's Demise

The Nordic country of 5 million people may decide to leave the single European currency and return to its markka if it is forced to cough up funds to support weaker euro zone members, Matthew Lynn, an analyst with Strategy Economics, wrote in a research note on Thursday.

Finland
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Finland sparked worries that it may scupper a second deal to bail out Greece, reached last July, after it demanded collateral in exchange for its contribution to the euro zone's rescue fund, the European Financial Stability Facility.

The Nordic country has "a clear financial incentive to get out" of the euro and voters are "already rebelling against the cost of the bailout package," according to Lynn.

"Finland has the potential to provide the spark that will eventually pull apart Europe's increasingly unstable singe currency," he wrote.

The country runs a "healthy" current account surplus, which was 3.3 billion euros ($4.5 billion) last year, Finnish residents' total assets exceed liabilities by 28 billion euros and the government debt is just over 50 percent of gross domestic product, Lynn noted.

A country like Greece, with a huge trade deficit, would find it hard to leave the euro zone because it needs to borrow from other countries to fund the trade gap, but a state with a current account surplus doesn't face such problems, he explained.

"The incentive for Finland to leave the euro is quite clear," Lynn wrote. "It has become an increasingly chaotic monetary zone, subject to extreme instability as it struggles to find a way of containing the debt crisis."

If Finland decides to reintroduce the markka, its strong growth and low debt would see the currency appreciate, seeing the cost of imports fall and the value of the country's overseas investments rise, while it would escape the increasing financial cost of the bailouts, he added.

The best way for investors to play the possibility that Finland would leave the euro zone is to buy Finnish bonds, because the spread over German bonds can fall considerably, Lynn also said.