Euro Crisis: Economic Turmoil, Political Backlash

Soon I have been 14 years the chairman of the party,” said Timo Soini, chairman of the True Finns, after Finland’s April 17 election. “Today is the pay day!”

The euro-skeptical True Finns made great gains in the election, and their increased support correlates almost perfectly with the mounting trouble of the eurozone bailout packages.

During the past three decades, three large parties — the social democrats, the conservatives and the centrists — have dominated Finnish parliamentary politics and coalition governments. Last Sunday, that period faded into history. In this election, the winners were the conservatives (20.4% of the vote), social democrats (19.1%) and the True Finns (19.0%).

In comparison to the 2007 election, both the conservatives and the social democrats lost, while the centrists lost big (15.8%), along with the small parties.

In contrast, the True Finns quadrupled their support by attracting frustrated blue-collar workers, anxious white-collar employees and angry rural voters from the social democratic SDP and the Center Party.

Just like a butterfly effect may trigger a tornado, the small True Finns could trigger substantial angst across the entire eurozone.

The great Finnish upset

Timing is everything. In 1995, Finland joined the EU after the collapse of the Soviet Union and of Finno-Soviet trade, and following the banking meltdown and the most severe recession since the 1930s.

After decades of a delicate geopolitical balancing act next to the Soviet Union, EU membership was strongly supported by the dynamic social democratic duo, Prime Minister Paavo Lipponen and President Martti Ahtisaari, the 2008 Nobel Peace Prize laureate.

That same year, Timo Soini founded the True Finns, amidst the ruins of an old populist protest party that had thrived in the 1970s and 1980s, when tens of thousands of Finns had to move to Sweden for jobs.

Unlike the debt-ridden “PIIGS” countries today (Portugal, Italy, Ireland, Greece and Spain), the Finns worked their way through the recession, which sent unemployment from 2.1% in 1990 to 19.9% in May 1994. Soini had a party, but no wind beneath his wings.

Leaving behind small domestic markets, Finnish multinationals went after global growth. Small and medium-size firms (SMEs) struggled to stay behind the flagship firms.

Nokia’s growth exploded in mobile communications. Forestry giants — Stora Enso and UPM Kymmene — expanded and consolidated. Metal engineering giants — from Metso and KONE to Outokumpu and Ruukki — internationalized. Even chemical concerns — Kemira and Orion — saw their opportunity.

After 15 years of relatively solid growth, the recent global financial crisis hit Finland hard, and the GDP contracted by over 8% — more than during the country’s civil war in 1917-18. In the past two years, Finland had had a strong rebound — though largely with old revenue sources.

Today, globalization creates more jobs for Finnish multinational corporations abroad than domestically. In the small country, 25 companies account for half of all exports. Even the pride of the 1990s, Nokia, is struggling.

Still, against all odds, Finland has emerged as one of the eurozone’s fastest-growing economies. In the fourth quarter of 2010, the GDP expanded an annual 5.2%. Meanwhile, the Finnish budget deficit has been kept within the bloc’s 3% threshold even as its economy contracted 8.2% in 2009. Its deficit should narrow to 1.6% of the economy this year, in contrast to the EU average of 5.1%.

Today half of all Finns oppose euro-area rescues. After their recovery from the devastating early 1990s and the global financial crisis, they have little sympathy for the fiscal softness of the Southern European “Club Med” countries.

The Euro-Nordic headache

The election took place only days after Portugal became the third euro member to seek a bailout and market speculation grew over impending debt restructuring in Greece.

With their strong election performance, the True Finns could disrupt efforts to tackle the euro debt crisis because Finland, unlike other euro countries, requires approval from its parliament to participate in EU bailouts.

Even before the election, the largest opposition party, the Social Democrats, led by chairman Jutta Urpiainen, began setting conditions on support for Portugal. Following in their footprints, the conservative Finance Minister Jyrki Katainen and Prime Minister Kiviniemi called for harsher measures in the case of Portugal.

Now Katainen is expected to become the next conservative prime minister, replacing Kiviniemi, whose Center Party plunged from first to fourth place since the 2007 election.

In Brussels and Lisbon, a Katainen-led government would ease angst because it is seen as pro-EU and supportive of the Portuguese bailout. Conversely, with their election gains, the True Finns will seek a majority that allows them to block the euro region’s bailout mechanism.

Since the election result means complicated inter-party negotiations for a coalition government, it will be difficult for the Finnish parliament to make a decision on the Portuguese rescue plan by next month, when Lisbon seeks to complete the package.

Further, the government is expected to include at least one anti-bailout party — either the True Finns or the Social Democratic party, which voted against previous rescue packages for Greece and Ireland.

Since EU rules require unanimous approval for each euro bailout fund, Finnish support is vital — it is one of the few remaining AAA-rated euro economies. However, euro officials are exploring options for the Portuguese deal without the Finns, if necessary.

After economic turmoil, political shift

In most competitiveness rankings, the Nordic economies are among the global leaders. As small and open economies, however, their prosperity is predicated on the growth of their major trade partners, the large EU economies and the United States. In Finland, for instance, the EU dominates almost 60% of all exports and over 80% of all direct investment abroad.

Amidst the global financial crisis, euro governments saved their banks at the expense of the taxpayers. Now the economic crisis is generating a political backlash — from the small Nordics to the large EU economies.

In 2007, the Danish People’s Party received a 13.9% vote share in the parliamentary election. Two years later, the Norwegian Progress Party raked in 22.9%. Last fall, the right-wing nationalist Sweden-Democrats garnered 5.7% of the popular vote.

Germany is amidst seven elections in the 16 federal states, which are hammering Chancellor Angela Merkel’s Christian Democratic Union (CDU). The support for its coalition partner, the Free Democratic Party (FDP), has collapsed.

In France, President Nicolas Sarkozy’s centre-right Union for a Popular Movement (UMP) party suffered in regional elections last month, amidst a strong performance by the far-right National Front. In Italy, the Northern League, an anti-immigration party pivotal in Prime Minister Silvio Berlusconi’s coalition, has seen its support double in the past five years.

In June 2010, elections in Belgium led to a landslide victory for the separatist and conservative New Flemish Alliance in Dutch-speaking Flanders. In Holland, the far-right Geert Wilders could become the next Dutch prime minister after significant gains in the recent regional elections.

In the absence of a comprehensive solution, euro leaders are scrambling to bail out, or bail in, one crisis economy after another. As long as the countries to be rescued have been small — accounting for less than 2.5% of the eurozone’s total GDP — the problems have been averted. But after Portugal, the spotlight will shift to Spain, which contributes 11.5% of eurozone GDP.

Unfortunately, the problems are systemic. Neither muddling through the economic turmoil nor nationalist political shifts will resolve the problems. The euro crisis is not just about liquidity — it is primarily about solvency. The advanced economies can live beyond their means some of the time, but not all of the time.

Amidst the broadening political backlash, Europe has few alternatives left. It must move toward deepening integration, or cope with greater fragmentation.

Editor’s Note: Dr. Dan Steinbock is Research Director of International Business at the India, China and America Institute. His Finnish studies include Winning Across Global Markets: How Nokia Creates Strategic Advantage in a Fast-Changing World (2010); Greater Helsinki Metropolitan Report (2010); Finnish Strengths, Global Opportunities (2008); Competitiveness of Finnish Urban Regions (2007); Competitiveness of Finland’s Cluster Leaders (2006); Finland’s Innovative Capacity (2006); Globalization and the Finnish ICT Cluster (2005).