Finland and the Last Taboo of the Euro Zone

Finland has become the unlikely creator of a European storm after foreign minister Erkki Tuomioja confirmed that the country was preparing for a break-up of the euro zone.

Finland Flag
Jenni Holma | Flickr | Getty Images
Finland Flag

As all eyes are on Greece as the most likely country to exit the euro zone first, could it actually be Finland — a country with a population half that of Greece’s and a GDP per capita that is 40 percent higher — that inadvertently brings down the single currencyzone?

There has been growing political opposition to euro zone bailouts in Finland, a country with an exemplary fiscal record of its own which has kept its budget deficit within EU budget rules since 1996.

But when Finnish foreign minister Tuomioja said that his country was preparing for a euro zone break up, the screech of diplomatic back-peddling could be heard all the way from Scandinavia. Finland’s Minister for European Affairs, Alex Stubbs, attempted to reassure its euro zone neighbors that the country was“100 percent” committed to keeping the euro intact.

A week on from Tuomioja’s statement, he’s now toeing the euro-party line. “We have no prognosis for a euro zone collapse,” Tuomioja told CNBC on Tuesday.

“We think this is unlikely and we are working together with our European partners to avoid it. No-one would benefit from such a collapse,” he wrote in an email. “We have no plan or intention to leave the euro.”

However Tuomioja’s apparent volte-face doesn’t disguise the continued calls from the finance minister that the region should be prepared for a worsening crisis.

“Being prepared for such an event means only looking at the consequences it could entail without in any way working towards it,” he wrote.

Tuomioja’s views reflect Finland’s opposition towards more financial support for debt-ridden, peripheral countries.

The country negotiated special collateral for bailout funds it provided and its conservative fiscal management has ensured its AAA status from Fitch and Moody’s. It’s also one of the few countries that still has a stable outlook on its sovereign rating.

But Ben May, European economist at Capital Economics said Finland, as much as Greece, could put the future of the euro zone at risk with its tough stance to future bailouts.

“Finland’s continued hardline stance on the provision of support to the peripheral economies increases the risk that the euro zone will not implement the measures needed to maintain the existing membership of the single currency ,” he argued.

Finland, like Greece, has faced difficult situations in the past. The country got itself out of a systemic banking crisis in the 1990s through austerity and currency devaluation, to turn its primary budget deficits of 9.4 percent of GDP into a surplus of 7.9 percent by 2000.

As such, “it is not difficult to understand why Finland is exasperated by Greek demands for a less onerous pace of fiscal consolidation,” May noted.

Where the jeopardy from Finland could lie, is in the risk that the country does not have much to lose or gain from being in the euro zone, with its banks less exposed to peripheral debt.

Indeed, the country might well start to resent its more profligate southern euro zone countries burning up its hard-earned bailout funds and it may start looking closer to home at its Nordic neighbours - and main trading partners - who are doing rather well.

It won’t have escaped Finland’s notice that as its economy shrunk in the second quarter on a quarterly basis, those of Norway, Sweden and Denmark are growing.

With the ramifications of a euro zone break up “rather less serious” for Finland, any attempts to “bully Finland into softening its stance” could be very foolish — “if the country upped the ante and threatened to leave the euro zone,” May said.

Euro zone leaders (no matter how omnipotent) should heed Finland’s warning voice over the euro zone, according to May, who says it may be more prophetic than they dare to admit.