After the recent EZ Summit, Finnish PM Jyrki Katainen (conservative) came under fire from opposition MPs claiming that he had overstepped his mandate in agreeing to the deal struck in the Brussels Summit. Under the agreement, the European Stability Mechanism (ESM) may eventually recapitalize banks directly and buy up bonds. As Katainen noted, these novelties would not come into force before a single supervisory authority for the EZ banks is established.
On July 6, Agence France Presse reported Finland’s Finance Minister Jutta Urpilainen (Social Democrat) had said the country would consider leaving the Eurozone rather than paying the debts of other countries. Afterwards, her aide said the AFP report was false.
The real message was twofold. On the one hand, Finland is committed to membership in the Eurozone and considers the euro beneficial. On the other hand, Finland doesn’t support increasing joint liability within the bloc.
Refraining from referring to Finland directly, Italian PM Mario Monti said that individual member states should not damage the credibility of decisions made collectively at the European level.
Are the Finns contemplating an EZ exit (‘Fixit’)?
Economic gains, but political muscle
The simplest exit argument asks: Why should Finland stay in the Eurozone, which other Nordic nations never joined? But the assumption is flawed. One size does not fit all, not even in the Northern Europe.
Norway and Iceland have not joined either the EU or the EZ. In the past four years, Iceland has suffered a massive real estate bubble, which it survived with the flexibility of its currency. In turn, Norway has been an economic success story, along with Sweden.
However, Finland had its own massive real estate and banking bubble in the early 1990s, when it still had its own currency, the Finnish markka. In turn, the case of Norway is immaterial. It is oil that makes possible its high GDP per capita. For years, Sweden has achieved strong growth coupled with low debt and inflation. But in 2012, growth is set to slow sharply from 4% in 2011 to 1%. While the growth prospects in Sweden’s major trading partners are now in question, the country’s past success is strengthening the krona.
Most importantly, all other Nordic countries differ from Finland in one crucial respect: they are not Finland. This small Nordic country shares a long border with Russia, which has historically shaped Finnish economy, politics and society. Sweden joined the EU for economic gains; Finland for political muscle.
Finnish decisions for or against the EZ are also subject to geopolitical considerations.
Integration, not just currency gains
Another set of arguments focus on the proposed economic benefits of leaving the EZ, as opposed to the expected costs of staying in the EZ. If Finland were to exit the EZ it might also be forced to exit the EU. In practice, the Finns could semi-peg a new Finnish mark to the euro or to the deutsche mark, if the EZ were to disintegrate eventually – or so the argument goes.
However, the Finns did not join the EZ just to optimize currency gains, or even stability. Through the Cold War, Finland had engaged in a difficult balancing act between the Soviet East and the capitalist West. The last thing the Finns want is to re-insulate their country, voluntarily.
Theoretically, Finland could try to keep most benefits of free trade with the EU by establishing a free-trade agreement with the EU and/or with Germany; or it could try to quit the EZ, but try to stay a member of the EU. But the Finns are too pragmatic to think that you can keep the door open by closing it.
True, an exit would allow Finland to avoid the losses and costs that continued EZ membership would entail, including the obligation to contribute to the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM), potential losses deriving from the build-up of Target 2 balances, excessive trade losses, additional implicit liabilities, potential GDP losses and so on.
The argument assumes that Finland’s current economic strength is sustainable and that it will remain a surplus nation. Finland’s economy grew by 0.8% q/q (5.1% y/y) in the first quarter of 2012, after stagnating in the previous quarter. In 2011, Finnish economy expanded by 2.9%; an excellent performance under the current circumstances, but not easily replicable. In 2012, Finnish growth is poised to slow down significantly. By mid-2010s, the country will have to cope with the adverse impact of an aging population, and the subsequent impact on productivity and growth.
Today, Finland is one of the few remaining triple-A nations in the EZ. However, Finland’s leading sectors – forestry, metal-engineering and mobile communications – have globalized and are maturing, while the country’s export-led growth model is not immune to the secular impact of the ongoing global crisis. Moreover, the struggling Nokia accounts for the bulk of the country’s measured innovation.
In Finland, the question whether to stay in or to exit from the EZ is seen as a question of life and death. Small countries cannot afford to big mistakes.
Pro-EU and, with reservations, pro-euro
Some observers argue that social, business and political forces in Finland are today skeptical of the euro and/or supportive of an exit. However, euro-skepticism does not automatically translate to the support of an exit.
According to the most recent polls, Finnish conservatives, despite erosion, remain the dominant party (21.6%), whereas Social-Democrats have caught up (20.8%). The two are followed by the Center Party (16.5%) and the euro-skeptic Finns Party (15.6%), whose support has declined during the past year.
After a year or two of turmoil, the Finnish party landscape is normalizing. The dominant parties – Conservatives and Social-Democrats – are more or less pro-EU and, with reservations, pro-euro.
The leading representatives of the business community struggled for years to make Finland a part of the EU and the EZ. They do not criticize European integration, but some of them do wonder aloud whether European integration might be possible without the euro.
Certainly, if the EZ opts for increasing the potential losses and credit risk of the core members via a fiscal and transfer union, debt mutualization and EZ-wide deposit insurance, the forces pushing for an exit would grow stronger.
The status quo does not preclude a Finnish exit from the Eurozone, but makes it less likely in the short term. The Finnish growth model is highly dependent on Europe.
Euro-centric growth model
Long-term projections indicate that Europe’s role in the world economy shall significantly decline in the coming decades. Nonetheless, Finland’s trade is highly euro-centric.
Today, Europe accounts for almost 80% of all Finnish exports. During the past decade, the role of Asia (largely a proxy for China) has increased rapidly but is still less than 15% of all exports. In the past few years, the role of North America has collapsed to 4% at the expense of Asia and other regions (5%).
Europe also dominates more than 80% of all Finnish direct investment abroad.
In other words, Finland’s trade is focused on proximate nations that have relatively prosperous economies, but diminishing growth prospects.
Finnish trade is far less voluminous with more distant nations that have relatively poor economies, but great potential growth prospects.
That, in a nutshell, is the Finnish dilemma.
Breaking up is hard to do
So what will the Finns do? They will monitor very carefully the strategic moves of Germany and the other remaining triple-A countries in the EZ.
When the going gets tough, they will attach ever-more stringent conditions, in order to avoid any perceived “joint liabilities.” They believe in an integrated Europe, but they want bang for their buck.
Domestically, the dominant parties will continue to try to defuse the euro-skeptic voices of the Finns Party, without actually advocating an exit.
Social, business and political forces in Finland will remain increasingly skeptical of the euro, but they will look for alternatives to an exit. Whatever they do, they are likely to do it in company.
They will be gnashing their teeth. They will be fuming and outraged. But at the end of the day, they will remain pragmatic.
They will not take the final step, unless they have to. But if they have to, they will.