Could This Tiny Little Country Be the Linchpin of the Eurozone?

Something wicked this way comes!

The credit crisis in the eurozone has created an economic and political minefield. Some economies are solid, others have unprecedented unemployment. Some leaders threaten to pull out of the eurozone altogether, while other leaders waffle daily on their political stance. Not surprisingly, no one wants to make the first move within this credit crisis.

Rest assured this political bubble of economic unrest will give at some point. The eurozone may be made up of 17 countries, but the economic divide between the northern and southern countries is becoming more pronounced thanks to the credit crisis. And the once strong northern countries are slowly seeing their economies being pulled under by the stagnating south.

Finnish Finance Minister Jutta Urpilainen said recently, “Finland will not hang itself to the euro at any cost and we are prepared for all scenarios. Collective responsibility for other countries’ debt, economics and risks; this is not what we should be prepared for. We are constructive and want to solve the credit crisis, but not on any terms.” (Source: The Telegraph, July 6, 2012.)

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Maybe she has a point. Finland, one of the rich northern eurozone countries, probably doesn’t like the idea of lending a financial hand to bail out countries that helped lead the eurozone into a credit crisis. Countries that may have merrily waltzed into the credit crisis thanks to creative accounting, wasted vast sums on property bubbles, failed to collect taxes, and lived the high life for a decade.

You can only bail out other financially troubled countries for so long and live with a credit crisis for so long. A recent poll by Finnish national broadcaster Yle indicated that 66% of Finns want their country to avoid shouldering more financial responsibility, even if it would save the eurozone. (Source: Wall Street Journal, August 15, 2012.)

In Finland, the euro-loathing opposition True Finns Party has seen its popularity rebound from a sharp drop last year—thanks to the credit crisis—according to a recent Yle poll. True Finns Party Chairman Timo Soini has repeatedly called for Finland to examine an alternative to the eurozone, pointing to the performance of the non-euro Nordic states. Could Finland be the first country to exit the euro? Maybe.

A double-dip recession, high levels of public debt, and loan defaults will make it more difficult for economically viable eurozone countries like Finland to back various bailouts without impacting their own standing.

If anything, this particular credit crisis should remind us that the eurozone is made up of individual countries; countries that have vastly different histories, political and cultural attitudes, social reforms, economic policies, and priorities. And in the end that’s what could eventually cause the breakup of the euro. Maybe that’s what needs to happen.

Finland could certainly be one of the most prepared countries to leave the eurozone. But I can tell you this: once the first of the 17 eurozone countries leaves the union, the rest will be lining up at the exit door.

Where the Market Stands; Where it’s Headed:

In a July 2012 research report from BMO Nesbitt Burns, the brokerage says stocks will move higher in the fourth quarter of 2012. To quote the report, “July should be followed by a solid rally, carrying stocks higher in Q4 of 2012 and perhaps even into 2013.”

I think they’re dead wrong. At the end of December, I’ll revisit their prediction. In the meantime, this humble economist believes that, unassisted by Federal Reserve intervention, the stock market rally that started in March of 2009 is having its last hurrah.

What He Said:

“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in Profit Confidential, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.