What will happen to the euro?

Relatively strong economy should shield Finland from worst shocks

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“A dentist asked a colleague yesterday if he should buy Norwegian krona. People are really talking about things like this. It is rather grim”, says Professor Pertti Haaparanta of the Aalto University.
      And why wouldn’t people be worried, now that decision-makers are saying frightening things? Economic and Monetary Affairs Commissioner Olli Rehn warned on Wednesday that politicians had ten days to restore confidence in the euro.
      All of the world’s leading economic journals have pondered the possible demise of the euro. The Economist wrote a week ago that the euro has weeks to live at the most. The Financial Times reports that companies are already making contingency plans for a post-euro era.
     
Is there any reason for the fear? Officially, dropping the euro is not even possible. The treaties speak nothing of any such possibility.
      However, this does not mean that dissolution of the currency could not happen. If needed, methods have been invented for the withdrawal of an individual country, or for the breakup of the entire euro, as well as other emergency situations, have been invented.
     
The withdrawal of a single small country like Greece would not necessarily destroy the entire common currency. However, bankruptcy of Italy would force the eurozone into deeper introspection.
      Italy, which has EUR 350 billion of its EUR 1.6 trillion debt coming due in the next 12 months, cannot be saved by any support package. If interest on Italy’s loans continues to rise, the country will have to leave the euro, go into bankruptcy, and devalue its new currency. The resulting losses for banks and other investors would be astronomical.
      After that, the status of the euro in the eyes of investors would be so weak that politicians might decide to cancel the whole project – perhaps.
     
In the view of The Economist the destruction of the euro could begin with the collapse of a large bank. For instance, the Italian bank Unicredit has such extensive linkages with the world financial system that its fall could spark a destructive chain reaction in companies in the financial field.
      But not even that would necessarily topple the euro.
      “If a large bank falls, help will start to come from central banks from all over the world. Its impact would be that great”, Professor Haaparanta says.
     
At the Research Institute of the Finnish Economy (ETLA), managing director Sixten Korkman does not believe that any kind of bankruptcy would destroy the euro project.
      “The dissolution of the monetary union would be such a terrible situation that it is difficult to see it as a solution to any problem. The euro is also a very political project by nature, whose original idea was to bind the unified Germany with European unification. I do not believe that there is a desire to give this up”, Korkman says.
      He believes that the crisis will be handled one way or another. Before long the European Central Bank (ECB) will announce that it is guaranteeing the loans of the euro countries, which would lower the interest rates of the countries in crisis. This would ease the anguish of the banks and would give politicians more time to solve the disciplinary problems of the monetary union.
     
But what if the ECB just looks on as the euro ship sinks and politicians decide in a panic to return to national currencies post-haste?
      Stefan Törnqvist, head of asset management at the Ålandsbanken bank, has been predicting the demise of the euro since January. He feels that the damage has already been done, and that giving up the euro would not necessarily make the situation any worse, at least not for Finland.
      “In Europe we have a credit slump, a flight of depositors, and a flight of investors from government bonds. Getting away from uncertainty would be the most important thing now, even if it were to take place through a collapse”, Törnqvist says.
      Instead of a slow crisis, there would be a sudden collapse followed by adaptation.
     
So would it be a good idea to place one’s money in Norway with its strong krona?
      “If you ask what Stefan Törnqvist would do if someone were to say that we would have the markka in February – the answer would be ‘nothing’. We would probably make it through the situation quite well. The Finnish economy is strong and we have good companies.”
     
The Finnish currency would probably be relatively strong and stable, because Finland’s trade is in balance – that is, we export and import about as much.
      “It is hard to see why there would be a flight of deposits from here. Banks operating in Finland are also in good shape.”
      Housing loans and other contracts denominated in euros would be rewritten, but that would also not necessarily lead to anything very radical, if the interest rate level were to remain low.
     
Companies are undoubtedly making careful calculations about risks that lie ahead. No great panic seems to be setting in.
      “The most important preparation for us is strong liquidity, and we have increased our liquidity goals”, says Elina Ronkanen-Minogue, director of balance management at the OP-Pohjola Group Central Cooperative.
      The group’s activities are almost completely in Finland, which reduces the currency risks.
      Crane manufacturer Konecranes, meanwhile, has operations in 50 countries. In spite of this, the company has not taken any exceptional measures to prepare for a euro crisis.
      “We have followed normal principles of crisis management. We are thinking about where to keep our cash supplies, and what banks have credit limits”, says CFO Teo Ottola.
      However, all large companies have prepared for a looming credit slump and a recession by securing their financing further into the future than usual.


Previously in HS International Edition:
  Growing fear of recession in eurozone (15.11.2011)
  Rehn: Financial crisis contaminates core of eurozone (25.11.2011)
  Stubb wants greater say in eurozone for countries with AAA rating (18.11.2011)

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