26th July 2012
Moody's decision to downgrade the sovereign debt ratings of Germany, Luxembourg and the Netherlands on Monday demonstrated the extent to which the troubles of Southern Europe are creeping northwards. Yet despite the increasing severity of the region's woes, the agency reaffirmed a stable outlook for Finland's top credit rating.
In its report Moody's praised the country's "fiscally conservative budgetary policies" and noted that, in contrast to a number of its peers in the single currency, Finland boasts a "relatively healthy and domestically oriented banking system". One of the most significant factors behind the stable economic outlook, however, comes not from domestic strength but due to what the report calls its "relative insulation from the euro area".
As European politicians discuss the future of the euro the push towards a formal fiscal and political union appears to be intensifying. Such a strategy implies that the solution to the region's present difficulties lies not in trying to untangle the web of economic and political bonds between nation states but in strengthening them.
To use a biological metaphor, it is akin to stitching up a wounded foot in the hope that the body can heal it rather than severing the limb to prevent contagion.
Yet the Finnish example suggests something quite different. Despite joining the eurozone in 1999 its European partners account for only a third of its exports and over recent years it has proven an unwilling participant in efforts to rescue struggling eurozone states.
Finland's collateral agreements, lauded by Moody's as a pillar of its economic stability, are in fact manifestations of this reluctance to engage in Europe's bailout packages. The Finnish government's insistence on receiving collateral from countries that use rescue funds has proven a major point of contention. Many see it as a way of avoiding making a meaningful contribution to dealing with an existential threat to the region.
In other words the ratings agency could be seen as rewarding a country for following a policy of isolationism. For the recipients of eurozone aid packages this could send worrying signals as those nations that have stood behind them are punished for their participation and may become more reluctant to shoulder the burden.
There are also inherent risks to Finland's position. An IMF report on the country last month notes that economic growth is likely to slow to 0.5% this year and "risks to the outlook are tilted to the downside, with heightened uncertainties". Any deterioration in global markets – particularly spill over from a European slowdown – could undermine this already meagre growth figure and swing Finland into a recession.
Moreover its refusal to negotiate over collateral demands may cost it political capital if the eurozone survives the crisis. Prime Minister Jyrki Katainen has been forced to stick to the policy as his coalition government could only be formed on the condition that the country receive collateral in exchange for loans, but domestic opposition is growing.
Earlier this month Jan Vapaavuori, head of the Katainen's National Coalition party, raised questions over the costs of Finland's position on the issue. In an interview published in Finnish daily Helsingin Sanomat he said:
"Is it so that because the collateral demand was written in the government programme, we fight tooth and nail to keep it without considering all the consequences it may have on Finland's international position?"
Downgrading Germany's outlook due to systemic problems within the single currency yet maintaining Finland's rating seems an odd decision. In the event of a euro collapse the latter is unlikely to escape unscathed, nor is walking away from the currency without incurring significant costs a realistic prospect (despite recent rumours). If the threat is truly an existential one then Helsinki is no more a safe haven than Berlin.
However, the awkward truth is that the country is faring significantly better than its southern peers and, indeed, a number of countries outside of Europe as well. Isolationism may be unpalatable but its success could prompt more countries to ask whether Europe needs less Europe and more Finland.
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