Finland is opening Pandora's box
Adelina Marini, May 15, 2011
The long-awaited support of Finland for Portugal's bailout could make a sad work of it, judging from the agreement already officially published between the National Coalition Party and the Social Democratic Party. This agreement seems to be concerning not only the loan for Portugal but it is in fact a justification for a change of Finland's position on the country's participation in future bailouts, as well as on the already agreed permanent rescue fund for the euro area.
The permanent mechanism of the euro area to come into force immediately
It is envisaged the so called European Stability Mechanism (the permanent rescue fund for the eurozone), approved during the spring European Council, to enter into force in mid-2013. The first condition in the Finnish agreement, however, in order Portugal's bailout to be approved, is Lisbon "to take initiatives aimed at encouraging private investors to maintain their exposures in the same way that is described in the conditions of the permanent mechanism (the ESM)". This means that Finland insists on the immediate taking into effect of part of the ESM at a time when the temporary rescue fund is operational.
The second condition is Portugal to start selling its national assets in order to ensure that it will repay the loans to the member states. This is enshrined in the programme of the Portuguese government and is very much similar to the bailout agreement for Greece.
With regard to the temporary rescue fund and the proposed changes, Finland insists if any other euro area member state after Portugal is to request assistance, Helsinki to obtain collateral for its guarantee from the Member State in question. The purpose of this condition is Finland to limit its liabilities to the level obtained by agreeing to the Portuguese and the preceding programmes. Besides, the agreement reads, Finland will request a more rigorous analysis of debt sustainability with any future operation of the temporary fund. A more rigorous analysis by the Commission, the ECB and the IMF is envisaged to be enacted with the permanent fund too, while currently such an analysis is being made for Greece and is expected the results of it to be presented at the Eurogroup session on Monday and at the Ecofin meeting on Tuesday (May 17).
Seemingly more conditions for the permanent mechanism
The agreement offers a very interesting formulation: "Finland can accept the establishment of the European Stability Mechanism (ESM) on the following preconditions". The formulation is interesting because the mechanism has already been approved, although by the previous government of Finland during the Spring Council, and was being negotiated from the middle of last year. Besides, the conditions under the agreement are not any different than those in the mechanism:
- Collective Action Clauses (CACs) that facilitate potential debt restructuring are approved, when the ESM is established (which is written the same way in the agreement of the Council);
- Loans granted by the ESM will enjoy a preferred credit status in relation to private sector loans (which is also written in the agreement for the creation of the ESM);
- all Member States must be solely responsible for their public finances and their own debt (which was one of the core demands of Angela Merkel during the negotiations on the ESM).
Financial transaction tax
What surprises in the political agreement in Finland is the demand, which is urgent, to introduce an international financial transactions tax on a geographical principle. "The aim must be a global tax, but in the first phase also a system that is put into effect only at the EU level", the document reads.
For now neither in the EU, nor globally is there a single position, nor a vision as regards the FTT - an issue which was raised in the very beginning of the global financial crisis when many countries allocated billions of taxpayers' money to save the financial sector. Although the issue was raised even at the G20 level, for now no progress has been achieved. According to the European Commission, the FTT should be introduced globally and not only at the EU level because otherwise it might evoke a retreat to favourable destinations. Besides, it is not clear yet what financial transactions should be taxed, nor how will the revenues be collected.
In general the Finnish political agreement obviously is aimed at the domestic political arena, but will for sure reverberate in the European Union and the financial markets as well. The overall tension and nervousness have already reached critical levels, especially after Der Spiegel revealed a document, for which it claimed was taken directly out of the briefcase of Minister of Finance Wolfgang Scheuble, and which covers the idea Greece to leave the euro area.
Although many justifications can be found in support of any unilateral actions (including as regards Schengen) on the problem, the solving of which was postponed, but in the end of the day such actions can bring more harm, most of all in the long run, than benefits. It is a fact that the Finnish agreement can in no way be treated as a threat but it is a symptom of a gaining speed trend, which is dangerous - the European issues to be used to score on national level and to become hostage of populist political theses.