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Tuesday, 22 March 2011

Finland blocking Euro bailout fund might be a blessing in disguise

The Financial Times writes about Finland blocking the “grand bargain” to solve Europe’s debt crisis. Here are some important parts of this article:

When European Union leaders gather in Brussels at the end of the week to finalise a much-anticipated “grand bargain” to solve their debt crisis, the eyes of the financial markets will be focused on an unlikely place: Finland. 
After months of negotiations, the Finnish government, normally one of the most pro-European Union members in the bloc, is set to hold up one of the central elements of the package, in part because it has been blindsided at home by the rise of a populist anti-euro party that is threatening to cause havoc in next month’s national elections. 
At issue is the eurozone’s €440bn bail-out fund. Although finance ministers on Monday agreed the structure of a new €500bn fund that will come into effect in two years, the current system cannot use its full financial firepower to rescue failing economies, a move seen as essential if large countries such as Spain and Italy are pushed into bail-outs. 
But while leaders have agreed to raise the fund’s bail-out capacity from the current €250bn to the full €440bn, they have not decided how to get there. 
The easiest and, for many weeks, most likely outcome appeared to be leaning on the eurozone’s six triple A-rated countries, including Finland, to double their loan guarantees, a move reluctantly supported by even Germany, which would have to increase guarantees most. 
But, during an emergency meeting of eurozone leaders on March 11 and in further negotiations last week, Finland blocked the increase.

The European debt crisis was pushed aside by the events in Japan and the smouldering war in the Middle-East. Although these subjects asked for the immediate attention of the world, inquiring minds knew that nothing was solved yet in the European debt crisis.

These debt crises show Europe at its worst: instead of discussing and following one straight-forward approach, all European countries follow their own path. You can compare it with twenty frogs in a barrow all jumping in different directions:
-     France and Germany always wanting to play the first fiddle, often finding eachother as counterparts, but sometimes not.
-     Great Britain always having the attitude to look at Europe as “that continent at the other side of the pond with which we are vaguely connected” and never feeling really committed to Europe.
-     Spain, Italy, Portugal, Ireland and Greece all trying to get as much out of the deal as they can.
-     Netherlands, Belgium, Finland and other small countries acting like: “hey, look over here?! We are important too?! And we pay a lot of money for your sake”
-     The East-european countries acting like: “don’t bother us, we have enough problems of our own”.

And especially the last ten years there is a strong and growing influence from the populist parties within Europe: it began with Lega Nord and Umberto Bossi in Italy, the FPÖ and Jörg Haider in Austria and "Vlaams Belang" (Flemish' Interest) with Filip de Winter in Belgium. Afterwards countries like The Netherlands, Germany and some East-european countries followed the populist trend. 

All populist parties have two things in common:

-     They are all directed towards keeping their country exclusively for the “original” inhabitants, whoever that may be. People from other (especially Arabic / African) countries are seen as parasites that live to steal from their fellow citizens, the pensions and welfare plans and in return try to bring the militant islam to their new home countries.
-     They are all rabidly anti-Europe as Europe is a faceless monster that only tries to grow and grow and that crushes citizens who are against it. More Europe is less freedom in their eyes.

The Euro is like the monsters’ breath-of-life and needs therefore to be battled and defeated. In the times of the old currency life was much better in the populist’s eyes. This is often pure nostalgia. Forgotten is the enormous prosperity that was brought by the EU to all the member states that took part in it.

In one thing, however, the populist parties in the European countries are right, but for the wrong reasons: Europe should indeed stop bailing out the PIIGS and with that the banks that lended the PIIGS the enormous amounts.

It is impossible for Greece to pay back the amounts it borrowed, unless Greece wants to sell its whole country to the Chinese. The same goes for Ireland. And if Italy and Spain sink deeper into trouble the same will apply to them. Every few months the hedge funds and other holders of sovereign bonds are testing the resistance of Europe and the European Triple-AAA countries by raising the interest rates for Greece, Ireland, Portugal, Spain and Belgium. And with every test the resistance gets weaker.

It is impossible for Germany to bail out the rest of Europe. The integration with East-Germany in the nineties brougth West-Germany almost to its knees and East-Germany was only a country of 17 mln people in 1989. And although the Netherlands and Finland are relatively rich countries, it is impossible to keep up funding all bailout funds. And with every donation of a country to the European bailout funds the populist parties become stronger. And when the populist parties are in political power, it doesn’t matter anymore that they are wrong.

The banks that lended the money to the PIIGS countries in the meantime show themselves from their worst side:
-     Handing out bonuses to their topmanagement 'like it is 1999' (from the Prince song that is)
-     Threatening to leave their home countries if the governments dare to enforce new strict banking rules upon the banks (Barclays and other banks)
-     Polishing their balance sheets and hiding the true, much lower value of their assets.

It might be that the Finnish obstruction of the European bailout fund is a blessing in disguise. The path of bailing out all European countries in trouble is a wrong and unsustainable path.

The best way to solve this crisis is to enforce a haircut on all sovereign bonds from countries that are not able to repay their debt anymore. In the end it is so much better for the PIIGS to enforce the haircut than to have an enormous debt for the next fifty years to come.

And if some banks fail as a consequence: so be it. It is better to pay back the people and companies that stashed their possessions in these banks, than to maintain the banks that made such a mess of it in the first place. Waving goodbye to some of the bonus boys is a very low price to pay for it.

But if Europe will discover this wisdom? It might, due to the Finnish!

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