How sleepy Finland could tear apart the euro project

By Mehreen Khan 18 April 2015

Europe's biggest cheerleader for austerity is heading to the polls, and its stance on Greece threatens to catalyse a break-up of the union

Finland's stricken economy has been strangled by the euro just as much as Greece

Finland is the unlikely stage for the latest turn in Greece’s interminable debt drama this weekend.

With events having decamped temporarily to Washington DC, Athens will be keeping half an eye on developments in Helsinki, where the Nordic state of just 5.4m people heads for the polls on Sunday.

In the five years since Greece’s financial woes were revealed to the world, it has been sleepy Finland which has emerged as the most trenchant critic of EU largesse to the indebted Mediterranean.

The outcome of the country’s general election could now determine Greece’s future in the monetary union

Getting tough on the Greeks

In a leaked memo seen last month, it was revealed that the Finns had already drawn up contingency plans for a Greek exit from the euro.

Although ostensibly a sensible measure for any finance ministry to contemplate, the document confirmed the Finns' position as the most uncompromising of the EU’s creditor nations.

The reputation is well-deserved.

At the height of Greece’s bail-out drama in 2011, Helsinki negotiated an unprecedented bilateral agreement with Athens, receiving €1bn in collateral in return for supporting a rescue deal.

A year later, the Finns were prime candidates to become the first dissenters to voluntarily break the sanctity of monetary union. “We have to be prepared,” the country’s then foreign minister told the Telegraph three years ago.

Finnish PM Alexander Stubb meeting Germany's Angela Merkel last month

Greece's current impasse is also partly a result of Finnish obstinacy.

Helsinki was one of the main obstacles to securing a longer extension to Greece's bail-out late last year. The eventual compromise of a three-month, rather than six-month reprieve, has seen the new Leftist regime scramble desperately for cash since February.

With the situation in Athens deteriorating by the day, both Finland's prime minister and central bank governor have eschewed high-minded rhetoric about European unity, to insist creditors should be ready to pull the plug on Greece.

Strangled by the euro

But unlike its fellow creditor giant Germany, Finland is more economic laggard than European powerhouse.

Having been mired in a three-year recession, the country heads to the polls with economic output still 5pc below its pre-crisis levels.

Finland has suffered an economic downturn of almost Greek proportions.

The boon from falling oil prices and launch of Eurozone QE will still only see the economy expand at a paltry 0.8pc this year, worse only to Italy and Cyprus.

Stagnating growth saw the country stripped of its much coveted Triple-A sovereign debt rating last year. The International Monetary Fund now recommends a cocktail of structural reforms and fiscal consolidation that would make officials in Athens bristle.

"There is no sympathy for Greece any more, especially because our own economy is struggling," says Jan von Gerich, strategist at Nordea bank in Helsinki.

"If there was a referendum on a bail-out deal tomorrow, it would fail."

The tale of the Finnish economy proves competitiveness is not merely the plague of southern Europe.

At the heart of the country's woes are stifling wages, which have risen by 20pc, while the crisis-hit countries have slashed their labour costs.

Unemployment has shot up to nearly 9pc, while the country’s debt and deficit levels will both fall foul of euro-area limits this year.

Much like its fellow northern counterparts, Finland has also fallen into a demographic trap. It is now the fastest ageing country in the world, topping Japan in the race to get old.

Weak productivity and an ageing population, all trapped in the strictures of a monetary union, make Finland a microcosm for much of Europe's future economic woes, says Karl Whelan, a professor of Economics at University College Dublin.

“The future for growth in Europe appears to be Finnish” says Mr Whelan.

The euro has also robbed the economy of the freedom to devalue its currency - the tried and tested instrument the Finns have used to extricate themselves from the midst of their deepest depressions.

The Finns were one of the first economies to follow Britain’s lead and abandon the inter-war Gold Standard in 1931. They also moved to a free floating exchange rate at the height of a banking crisis following the collapse of the Soviet Union in the early 90s. In the aftermath of both episodes, the country was able to get back on its feet through reflationary export-led booms.

But faced with political and economic crisis in neighbouring giant Russia, the country’s current and likely outgoing premier Alexander Stubb, has bemoaned a “lost decade” under the monetary union.

Blocking another bail-out

The run-up to its last elections saw the unprecedented rise of the Eurosceptic True Finns, who were ostracised from the coalition-making process for their fierce resistance to Greek aid.

This time round, the party - which has been re-branded as just The Finns - has taken a more subdued approach. Their charismatic leader Timo Soini has refused to categorically state whether or not he would block a new debt deal in a bid to make the Finns more palatable to any future coalition partner.

Unprecedented among left-leaning parties in Europe however, Finland's Social Democrats now lead the charge against a third Greek bail-out.

But it is The Centre Party who are on course to become the largest in the parliament. The race for second place will be fought over by the Social Democrats and The Finns. Whatever the outcome, the position of finance minister will be occupied by the head of the junior coalition party.

The Centre Party's Juha Sipila is on course to become Finland's new Prime Minister

And should Greece need a third bail-out this summer, as the parlous state of its coffers suggests, then the Finns stand ready to throw sand in the wheels of a fresh agreement, says Moritz Kraemer, chief rating’s officer at Standard & Poor's.

“The Finns will have a very conservative line as before,” says Mr Kraemer.

“They want stringent conditions attached to any bail-out deal and could be put the test very quickly when the new parliament gathers at the end of the month. They might have something to vote on very soon.”

Any insistence on another preferential 2011-style deal from the Finns could cause another major political schism in Europe.

Unlike the first ad hoc rescue deals secured at the height of the crisis, the Eurozone now has a rule-based bail-out mechanism in place through its European Stability Fund. Brussels will be loathe to give the Finns any kind of preferential creditor status over the rest of the Eurozone, adds Mr Kraemer.

“It will be communicated to the Finns that they have to play by the rules,” says Mr Kraemer.

But the nature of the rescue mechanisms still gives disproportionate veto power to individual member states, says Mr von Gerich.

"Even the European Stability Mechanism needs unanimity among all member states unless there are really exceptional circumstances," he says.

The only saving grace for the prospect of another political meltdown in the Eurozone, is that Athens shows no signs of completing its existing bail-out, let alone agreeing a new deal.

"This is all for the day after tomorrow" says Mr Kraemer. "The task at hand is still to get Greece through to June, before anything else can be negotiated."

How sleepy Finland could tear apart the euro project - Telegraph