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Apr 11, 2011 | 20:16 GMT

7 mins read

The Portuguese Bailout and Finland's Elections

GEORGES GOBET/AFP/Getty Images
Summary
Olli Rehn, the EU commissioner for economic and monetary affairs, has warned Finland against blocking the upcoming bailout package for Portugal. Indeed, Europe is concerned Finland's emerging True Finns party will derail the bailout. However, Finland's blocking the bailout is unlikely for a variety of reasons, not the least of which is the centrality of the European Union to Finland's security policy.
EU Commissioner for Economic and Monetary Affairs Olli Rehn warned Finland on April 9 against blocking the upcoming 80 billion euro ($115 billion) bailout package for Portugal. Rehn, a former Finnish member of the European Parliament and former economic adviser to former Finnish Prime Minister Esko Aho, added that he trusts that Finland "will show its responsibility and support this conditional financial assistance program for Portugal." Rehn's warning comes ahead of the April 17 Finnish elections, with the Euroskeptic, populist True Finns party poised to quadruple its electoral results from 2007 by garnering around 16 percent of the national vote. The concern in Europe is that True Finns, which has already campaigned against the expansion of Europe's bailout mechanism, will enter the government and derail the EU bailout, reintroducing the risks of financial contagion across Europe. Such a scenario is unlikely, however, given the centrality of the European Union to Finland's geopolitical conditions, its relatively healthy financial situation and the relative weakness of the emerging True Finns to the four governing parties.

Portugal's Bailout and Finnish Politics

Outgoing Portuguese Prime Minister Jose Socrates had already officially requested a bailout from the European Union ahead of Portugal's June 5 elections. Motivating the decision to seek the bailout is that fact that Lisbon must soon raise cash to cover maturing debts amounting to 9.3 billion euros, with a 4.23 billion euro bond maturing April 15 and a 4.93 billion euro bond maturing June 15. Furthermore, the Portuguese Finance Ministry's April 5 revisions to the government's books now show additional, previously unaccounted debts amounting to 16 billion euros, raising its 2010 budget deficit by 1.8 percentage points to 8.6 percent of gross domestic product (GDP). This calls into question just how much budget deficit financing will add to the already high 18.9 billion euros (around 11 percent of GDP) worth of debt maturing in 2011. Due to the high cost of financing, Portugal has been forced to rely mainly on six- and 12-month refinancing throughout 2011, which means that it has delayed the problem by only a few months. The bailout request by Portugal is therefore unsurprising, as STRATFOR has previously forecast. The concern, however, is that the rise of the anti-establishment, populist True Finns party in Finland, which has campaigned on a strongly anti-bailout Euroskeptic platform, will now derail the assumed safety net for Lisbon. True Finns is not just opposed to a bailout of Portugal, but also to the expansion of the European Financial Stability Facility's (EFSF) lending capacity, the 440 billion-euro bailout mechanism, the nominal size of which belies the fact that it can only lend about 220 billion euros due to institutional limitations. The pre-election situation in Finland forced eurozone leaders to postpone the agreement on expanding the size of the EFSF from their planned meeting in late March until June. The emergence of True Finns is precisely the sort of anti-establishment threat to the eurozone elite that STRATFOR forecast would begin to emerge in its 2011 annual forecast. The movement is not strong enough to come to power, and the latest polling from Finland suggests that the four ruling parties will have just enough seats to form a government even without it. However, its rising popularity is forcing the governing elite to adjust their own campaign platforms, lest they lose votes to True Finns. The Finnish government has therefore taken a cautionary stance on EFSF enlargement and the Portuguese bailout, hoping to delay its decision on both issues until after the general elections on April 17.

Finland's Financial Health

For Finland, the Portugal's bailout is, for the most part, financially manageable — Helsinki would shoulder around 1.2 billion euros. For one of the few eurozone countries with an expected 2011 budget surplus (2.1 percent of GDP) and generally a government debt level (54.9 percent) well below the eurozone average, Finland is not in any sort of economic trouble. The Finns themselves have collective memories of a relatively recent and severe financial crisis that required unpopular government bailouts of the financial industry. Due to external shocks — a severe drop of bilateral trade with the collapsing Soviet Union and a wider global economic downturn — and a financial sector that was overly reliant on short-term borrowing, Finland entered a severe recession in the early 1990s. The GDP dropped 10.5 percent between 1990 and 1993 and unemployment rose from 3.1 percent in 1989 to 16.6 percent in 1994 — some of Finland's employment sectors are still recovering to this day. The crisis forced Finland to undergo austerity measures as severe as those currently being forced on the peripheral eurozone countries. Finns therefore are unlikely to have much sympathy for the European periphery, especially since Greece, Ireland and Portugal have recourse to eurozone bailouts, whereas Finland did not. (It did, however, have the option of currency devaluation). It is therefore not only the right-wing True Finns party that is rejecting the Portugal's bailout, but also the center-left opposition parties.

The EU in Finland's Geopolitical Calculus

However, an important mitigating factor in the Finnish psyche is its geographic location. Finland shares the longest border with Russia of any EU member state and has long practiced a policy of military neutrality so as to allay Moscow's concerns of Finland as a threat. While Finland has flirted with NATO in recent years, and its troops have joined NATO in a number of military operations, such as those in Kosovo and Afghanistan, Helsinki is hesitant to formally join the alliance for fear that it would provoke Russia. Instead, Finland considers its EU membership a central pillar of its security policy. This is a unique policy in Europe because most EU member states are also NATO members and therefore do not consider the European Union an important factor in terms of geopolitical security. However, maintaining a close military relationship with its Nordic neighbors and actively participating in the European Union — including its security components — are methods Helsinki employs to come under NATO protection without really being a member. As such, Finland does not have the option of being a truly Euroskeptic country, as NATO member states Denmark and Poland have been in the past, or Ireland, which ultimately has few geopolitical threats. There is more at stake for Helsinki than pre-election politics and 1.2 billion euros more in government debt. Ultimately, Helsinki will wait for the elections to end on April 17, at which point it will either cajole True Finns into accepting bailout mechanisms as the price of its entry into the government or be able to form a government without it. At the very least, if Finnish resistance somehow continues, the EFSF will be able to use its position as a non-EU entity — the fund is essentially a Luxembourg bank and therefore flexible in how it applies its rules — to funnel at least a portion of the funds to the Portuguese despite Finnish opposition. This sort of creativity from the EFSF has until now been unnecessary, but it is unlikely that a relatively small, peripheral economy such as Finland's — despite its importance as one of the six AAA rated eurozone economies — would be able to hold back a bailout upon which the other 16 eurozone states agree. This is especially unlikely given the relatively small portion of the overall bailout that Helsinki is set to shoulder.

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