Finland Holds Key to Euro Zone ‘Grand Bargain’

When European Union leaders gather in Brussels at the end of the week to finalise a much-anticipated “grand bargain” to solve their debt crisis, the eyes of the financial markets will be focused on an unlikely place: Finland.

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After months of negotiations, the Finnish government, normally one of the most pro-European Union members in the bloc, is set to hold up one of the central elements of the package, in part because it has been blindsided at home by the rise of a populist anti-euro party that is threatening to cause havoc in next month’s national elections.

At issue is the euro zone’s €440 billion ($625 billion) bail-out fund.

Although finance ministers on Monday agreed the structure of a new €500 billion fund that will come into effect in two years, the current system cannot use its full financial firepower to rescue failing economies, a move seen as essential if large countries such as Spain and Italy are pushed into bail-outs.

But while leaders have agreed to raise the fund’s bail-out capacity from the current €250 billion to the full €440 billion, they have not decided how to get there.

The easiest and, for many weeks, most likely outcome appeared to be leaning on the euro zone’s six triple A-rated countries, including Finland, to double their loan guarantees, a move reluctantly supported by even Germany, which would have to increase guarantees most.

But, during an emergency meeting of euro zone leaders on March 11 and in further negotiations last week, Finland blocked the increase.

“We haven’t had that many friends in the last round [of EU meetings], that’s true,” Jyrki Katainen, Finland’s finance minister and head of the centre-right National Coalition party, said.

The issue is particularly acute for Mari Kiviniemi, the Finnish prime minister, whose Centre party fell to third place in a TNS Gallup poll released last week, behind the National Coalition and the surging, populist True Finns, led by Timo Soini, a charismatic Eurosceptic.

Ms Kiviniemi’s party has its roots in rural Finland, where anger over Greek and Irish bail-outs is high and True Finns has made significant inroads. Opposition leaders have jumped at the chance to make her position more awkward.

If no deal is reached on Friday, the decision could be left to Mr Soini, whose party is now just two points behind the front-running National Coalition – and who has vowed to block any increase in Finnish commitments.

Without unanimity in the euro zone, the deal could fall apart.

In an interview with the Financial Times, Ms Kiviniemi acknowledged that Finland was playing the unusual role of “troublemaker” in negotiations.

But, with the parliament’s Europe committee opposing the increase and the legislature dissolved ahead of the April 17 elections, her hands are tied.

“I don’t have the mandate from the parliament to increase them,” she said, noting it would have to be called back into an emergency session to approve an increase.

“It would be very, very difficult. I would say impossible, because this topic is a very hot one.” Ms Kiviniemi is not the only one struggling with the issue.

In the face of a True Finns assault, the Social Democrats have abandoned their pro-EU roots, voting against the Greek and Irish bail-outs.

In an interview, party leader Jutta Urpilainen would not say whether she would back the increase if she became prime minister.

In some ways, Ms Urpilainen has more to lose than the prime minister. Her party has suffered the most at the hands of True Finns in the depressed paper mill towns of south-eastern Finland, where working-class voters have abandoned the Social Democrats in droves.

In the Gallup survey, her party came fourth with 17.4 percent, which would be the party’s worst showing ever.

The mainstream parties insist they are willing to join True Finns in government. But all three party leaders are clearly uncomfortable with the prospect.

“Timo Soini very clearly said his party is not ready to accept any new aid or guarantees or anything to the EU,” Ms Kiviniemi said.

“Does he really mean that? Because if he really means that, it would mean he can’t come to government.”

At this rate, it may be Mr Soini himself who decides who leads Finland.