Is Finland Planning Euro Exit?

As if the presidential election campaign, the tensions in the Middle East and the escalating welfare-state crisis in Europe were not enough, reports this morning:

Taking a cue from Europe, the markets are tumbling deep into the red as anxiety over the eurozone debt crisis boils back to the surface. The Dow is down 210 points, or 1.7%, the S&P 500 is off 1.6% and the Nasdaq is 2.2% to the downside. Economically-sensitive sectors, including materials, energy, technology and consumer discretionary, are taking the steepest losses.

This will probably translate into bad GDP numbers for the third quarter, numbers that will be released just before the November election. But there is a far more urgent matter related to this: the eurozone crisis itself. And that is an escalating crisis that refuses to die down, obviously because the underlying welfare-state crisis remains unsolved. The tensions between countries in at different stages of the crisis are growing almost by the day, which puts enormous stress on the common currency. The latest news is that some of the best-performing euro countries might leave the currency. has the scoop:

Within the eurozone there are great stresses. At one extreme there are punitive costs of borrowing for Greece, Cyprus, Portugal, Ireland, Spain and Italy; at the other there is zero or negative interest rates for Germany, the Netherlands and Finland. Doubtless the first group begets the second, as captive investors in euros have to buy government bonds, and this requirement is being funnelled away from risk into safety. This is the opposite of the convergence intended behind the creation of the euro.

Precisely. When Greece entered the euro they effectively got hold of a credit card cosigned by Germany and other less debt-prone nations. The original idea was that Greece would use this credit card very responsibly and not max it out. In return, their credit rating would be guaranteed by first-tier Germany and other well-behaving euro countries. But in order to refrain from using that credit card, Greece would have had to do something structural about its welfare state – ideally dismantle it altogether – something that was totally unpalatable to them. Instead, they paid their way through several years of continuous, lavish entitlement spending and refused to see the rapidly approaching end of the credit line.

Now that they are there, they have called their co-signers, primarily Germany, and asked them to chip in toward the credit card bill. (That’s what the “bailout” is all about.) Germany in turn is now in the unfortunate situation that its credit rating is now increasingly being determined by Greece, not the other way around as was originally the plan. The same is happening to small, well-behaving euro countries like Finland, as explained in the story:

Launched in January 1999, the original members of the eurozone bent the entry rules to qualify with respect to budget deficits and the level of outstanding government debt. This was not an auspicious start, but hey, governments bend the rules all the time, don’t they? Greece then joined two years later, and would have had a severe funding crisis if it hadn’t. This was bending the rules at a new level. There followed what economist Philipp Bagus aptly called the tragedy of the commons. Eurozone members, who on their own would have had difficulty accessing affordable credit, used the low interest rates on the back of Germany’s rating to borrow, borrow, borrow. This was not a problem until the financial crisis of 2008, when the borrowing became progressively more difficult, and insolvency beckoned.

In other words, the euro allowed welfare states that had already taxed-and-spent their economies into the tank to stay afloat and continue to spend as if there was no tomorrow. Which, in a matter of speaking, there won’t be if they stubbornly stay in the euro. But it is important to remember in this context that Europe’s banks own a lot of government debt, more than half of total national debt in some countries. This has led to a vicious downward spiral now that the welfare states are desperately trying to honor their current debt levels and even attempting to borrow more.

These are the euro’s backers. On a rough rule of thumb, measured by the commitments behind the European Financial Stability Facility, 41% of the euro’s backers have requested, or are likely to request a bailout themselves.

As I explained in early May, one quarter of the eurozone GDP is under austerity pressure. This raises the stakes in saving the euro, but so does the absence of eurozone-wide government bonds. The individual member states still issue their own treasury bonds, which means that there is no single government at the helm the euro when the sea gets stormy. Crisis-ridden countries have basically expected Germany to take that role, and thus far Germany has indeed done that. But their commitment is not endless – far from it. notes this and moves on to explain that:

In this case we have 17 governments, some of them insolvent, and the solvent governments unwilling to underwrite the lot. And one of the solvent governments, Finland, is quite likely to desert the sinking euro ship: Finland is Scandinavian firstly, and European secondly. She only participates in bailouts if she obtains extra collateral. It is unlikely that she will remain committed to the eurozone project if it continues to deteriorate.

Apart from the erroneous remark about Finland being Scandinavian (it is not) the suggestion that Finland would be the first country to exit the euro is a credible one. The Finns have so far “managed” their welfare-state crisis by means of exceptionally high taxes, a long series of spending cuts (slow-progressing austerity) and government perks to large export-oriented corporations whose wealth has brought in enough taxes to make up for an otherwise rather paltry economy. They have pretended that their welfare state is of a different breed than the Greek one, but down to the core – when it really matters – they are very similar.

This is beginning to show: recent macroeconomic data hint that the Finnish economy is slowing down from government overload. If this turns into a lasting trend the Finns would be very wise to back out of the euro and concentrate on their own macroeconomic problems.

Time will tell. But we do know one thing: all it takes is for one highly credit-rated country to leave and the gate has been left open for others to follow. In theory, the Finns and other euro countries with good credit will use their own pending exit as a threat to force Greece and Spain out. However, that is unlikely to work because it would be an admission that the welfare state is too heavy a burden for some European countries to carry. France, with its new socialist government, will not allow such blackmail against Greece and Spain.

Only one option remains for good-credit euro countries: get out now and save your credit line for your own welfare-state crisis.