Europe's Financial Crisis Spreads North (Portfolio)
Video Transcript:
Video Transcript
Earlier this week, credit rating agency Moody’s assigned a negative outlook to three AAA-rated eurozone countries -- Germany, Luxembourg and the Netherlands -- citing the ongoing uncertainty surrounding the euro. This serves as a stark reminder that the fates of Northern Europe’s economies are inextricably connected to their southern counterparts.
It is difficult to come across positive news for Europe these days. Spanish bond yields are at record high levels as region after region is asking the already troubled central government for financial aid. The worsening situation in Spain is putting Italy at increasing risk, and in Greece the crisis is simply stuck on repeat -- Athens needs more time and money, and creditors are again threatening to cut off aid to the country.
While the southern periphery is struggling, Northern European countries have remained mostly above the fray -- and even profited, to some extent -- benefiting from lower bond yields and capital inflows due to their perceived status as safe havens within the eurozone. Northern politicians are full of negative rhetoric when it comes to the prospect of continuing to financially bail out the eurozone’s struggling members. And yet, Europe’s politicians have established a long track record of doing just that, showcasing the constant struggle and interconnection between economics and politics.
Political rhetoric aside, preserving the eurozone as a market is critical to the survival and prosperity of Northern Europe’s export-oriented economies. But as preserving that export market becomes increasingly expensive and unsustainable, determination to save the currency union at all costs is presenting a greater economic threat in its own right.
Indeed, the increasing costs of collectively supporting other euro-area sovereigns, specifically Spain and Italy, is the very reason that Moody’s believes the economies of Germany, Luxembourg and the Netherlands are now at risk. A recent slowdown in German manufacturing and weakening business morale indicates that Germany’s economic resilience is indeed strained.
Of the four remaining AAA-rated countries, only Finland’s outlook remains stable by Moody's standards. Finland’s exemption is a result of Helsinki’s different political and economic interests in the eurozone. Finland adopted the euro as its currency in 1999 after suffering a deep recession at the beginning of the decade. Finland’s Nordic neighbors were experiencing a similar economic crisis, and with the countries of the former Soviet Union in complete disarray following its collapse, Helsinki saw increasing ties with Europe as a means of improving its own security and stability.
Joining the eurozone was more about creating distance with Russia than it was about hitching Finland's economy to the European wagon. This is evident in the diversification of Finland’s export markets. Only 30 percent of Finnish exports go to other eurozone countries, compared to Germany’s 40 percent, the Netherlands’ 57 percent, and Luxembourg’s 70 percent.
Despite its fiscal health, the size of Finland’s economy and its small population give it little influence over the decision-making processes that can be dominated by larger countries like Germany, or even financially troubled giants like Spain or Italy. Nonetheless, Finland has remained defiant and isolated in its unilateral -- and successful -- demand for collateral from both Greece and Spain in exchange for Helsinki’s contributions to bailout funds. However, with market pressures growing and economic outlooks becoming bleaker across the board, Finland might find itself less isolated in the future.
It is becoming clearer that the North can’t sustain the weight of being the only guarantor of the eurozone. As the bailout bill grows, governments are reaching their legal limits in aid that they can provide without further consulting their voters. As the domestic economy weakens, it's going to become increasingly difficult for governments to garner public support for continuously bailing out other countries. The question is how much longer Northern Europe can financially and politically afford to foot the bill.
As economic hardships increase, it becomes more difficult for individual voters to see beyond their own circumstances. The challenge for politicians will be to explain that economic prosperity in the North is linked through export dependency to economic stability in the South. This is a hard argument to sell, especially as the cost of stability becomes a distinct threat itself. Moody’s negative outlook is a good reminder.
