EMU Dilemma: Fix It or “Fixit”?

By Henri Erti. Originally published on 2012/09/20

The proposed solution for the EU financial crisis is being contemplated at the nexus of the European continent, but the bulwark is beginning to crack under the pressure deriving from the peripheries of the EU. While the rampant inferno has been temporarily contained, Finland has stunned the EU leaders, who have been promulgating the importance of the financial bailouts for both Greece and Spain. While the term ”Grexit” has been egregiously enhancing the crisis, a new term, “Fixit (Finland’s Exit)”, will inevitably shock the markets and delay the recovery.

Play by the Rules

Finland, the only EU country with an AAA-rating with no expected downgrading, has debilitated the EU consensus on the ESM and dithered its role in bailing out countries, which have not played by the generally accepted rules established in the Maastricht Treaty. Finland’s current minister of finance, Jutta Urpilainen, has publicly stated that Finland can’t and won’t hang on to the Euro if the costs are accumulated on the shoulders of wealthy countries such as Finland. According to the IMF report on Finland, the gross-debt to GDP of Finland is 53%, whereas the EU average combined gross-debt to GDP is 91%. Such ratio exhibits prudent, yet efficient fiscal policies and disciplined monetary planning that is not reflected in the majority of the Euro countries. Even the Euro leader, Germany, has a roughly 80% debt-ratio. Consequently, Finland has the least to gain from the current plan to save the Euro given its size and the current state of the economy.

Should I Stay?

While the Finns are desperately trying to avoid being drag down from the fiscal cliff, the Finnish government created consternation in Brussels by demanding special terms on the collateral part of the bailout package. Surprisingly only Netherlands has given tacit support for Finland, but such support has been merely symbolic and diplomatic sympathy. Admittedly, such demands have been justified given the healthy state of the Finnish economy: unemployment is down to 8.5 % and the housing market has been stable. Furthermore, it must be noted that 5 out of 7 Finland’s trading partners are outside the Euro zone. Consequently, exports have not been damaged as severely during the European crisis. At the same token, only a third of the current exports go to Euro zone, with growing cooperation with Sweden, Russia and the UK. As a result, the accumulation and binding of sovereign debts has no foreseeable benefits for such dynamic economies as Finland.

Or Should I Go?

Ironically, Olli Rehn (the European Commissioner for Economic Monetary Affairs) has been raucously advocating for a new European Banking Union, which would diversify the risks of the European banking affairs. Such proposal has been considered very opaque in Finland because the banking union would directly benefit the EU states with large banking sector and vicariously benefit the states with critical need for financial assistance. Finland’s repudiation has been clear because Finland has neither a large banking sector, nor need for a bailout. Albeit that the majority of Finns still support EU membership and the Euro, the people have clearly reminded the government that it is not palatable to masquerade the crisis with words such as “mutual responsibility or “crucial stabilizing methods” when the fundamental idea of the banking union is to socialize the banking risks.

Grass Is Greener in Sweden

When Finland adopted the Euro, the atmosphere was exuberant due to the perceived possibilities the Euro would generate. In Sweden, however, the people decided to opt out the full membership EU and Euro. Both in cultural and geographical sense, the comparisons between Finland and Sweden have generated fierce discussion in Finland. Such discussions have not missed the populist political leaders in the Finnish parliament, who have begun caterwauling for a union between the Scandinavian countries. Even though such idea might be utopian, one can’t miss the fact that other Nordic countries are frankly booming without the Euro. While the GDP of Finland decreased by 1% in 2011 due to the recession, Sweden recorded a 1.7% increase. Furthermore, Sweden runs a healthy current-account surplus with 7 % of GDP, whereas Finland recorded its first deficit since 1993. Also Norway and Denmark have recorded benign economic performance during the EU crisis. One cannot help to wonder, what if Finland never joined the Euro in the first place and choose a cooperation with the Scandinavian countries instead.

A New Domino Effect?

Nouriel Roubini, or as the world knows him “Dr. Doom”, has predicted that Finland might exit the Euro even before Greece. Such chimera scenario could start a destructive domino-effect, which would diminish the credibility and the future of the Euro zone. The majority of Finns still support EU membership, but increasing bailouts are diminishing their firm adherents, who have so far managed to keep the Euro on feeding tubes. While the Euro-fanatic Alexander Stubb (the Minister for Europe and Foreign Trade of Finland) desperately tries to cover the Euro anomalies by adding more bricks to the protective fire-walls, Finland has already started to think about the contingency plan, which would minimize the collateral damages from a possible Euro break-up.