Why I Still Don’t Support Bailouts

The Times

After more than 20 EU final crisis summits and hundreds of billions of euros later, there is still no solution in sight to the European crisis. The current bailout mechanisms are obviously not working. The debt burdens are not decreasing – they are increasing. Greece’s debt today, after two bailouts and the largest debt default in history, is larger than it was in the beginning.

Bailouts do not support average Europeans. In the crisis countries they are likely to be unemployed with plummeting standard of living. In the paying countries, they are being burdened with enormous liabilities ensuring that their productivity disappears too.

The only thing that the bailouts are achieving is direct transfer – taking the problem away from the banks and placing it squarely onto the shoulders of the European taxpayer. The only ones who are benefitting are the politically well-connected banks and speculators who are rapidly cutting their exposures and keeping the profits from their erroneous risk taking. Heads I win, tails, well I win little less. For the productive economy the bailouts are achieving precious little.

This is the main reason why The Finns Party and I have steadfastly stood against the bailout madness right from the beginning. This logic is getting resonance, not only among the economists. One only needs to look at the demonstrations in Southern Europe and polls to see the deep disapproval. In Finland, in the recent national poll, 66 per cent of our citizens opposed further bailouts while only 22% were in favour.

Indeed, I am often asked about the bailouts’ legal, moral, realpolitik, and economic facets.

As a legal question, not only did we not commit to bailouts, but the treaties under which we joined explicitly prohibit any fiscal bailouts between nations – and the central bank from financing governments. Finland is also one of the very few countries that always lived within the budget deficit and maximum debt rules, throughout the Euro’s history. The irony is that by agreeing to these bailouts, we are also likely to break the founding principles.

As also our President has noted, the moral consequences are even more important. It is often assumed that this is rich North helping poor South. Unfortunately, this is not true. Whilst the northern governments appear in better shape than their southern counterparts, at the household level the case is often the opposite. For example, the household net financial wealth in Finland is actually below that of all the crisis countries. Similarly, the household disposable income has been lower (excluding Portugal). The reason is simple: in Finland, the overall tax burden is 43% of GDP, whereas in Greece, Portugal, Spain, and Greece it is over 10 per cent lower. Indeed, one could claim that the European countries are following two different business models: Some countries favour high taxes, low borrowing, and poorer households while others prefer lower taxes, higher government borrowing, but wealthier households. It is increasingly difficult to justify to the Finnish tax payers why they should pay their high taxes twice.

Similarly, there are the uglier, realpolitik aspects of bailouts. Clearly, the main justification for the European “common” bailout program arises from the banking sector exposure. Bank risk toward Greece, Ireland, Portugal, Spain, and Italy was €570 billion for Germany, €590 billion for France, and €250 billion for the Netherlands at the beginning of the crisis (BIS). Thus, while it may be tempting for Germany, France, and the Netherlands to try to bail out their banks through the common mechanism rather than directly, this clearly is not the case for everyone. For example, Finland’s banking exposure was less than €2 billion, or 0.12% of the total.

The same applies to trade. In Finland, less than 15% of all our exports go to the Euro countries outside Germany and the Netherlands. We export more to Kazakhstan and Bangladesh than either to Portugal, Greece, or Ireland. It is thus hard to rationalise that the bailout billions are used to save domestic jobs.

All this would probably be somehow tolerable if the mechanism was actually working. Unfortunately, it is not. As in any market economy, the only viable solution is the freedom to fail, not the continuous moral hazard. Restructuring is needed to make the debt levels sustainable. Banks and speculators must accept losses from their unsound investments. Insolvent banks must be either recapitalized or shut down.

Otherwise, the bailouts’ enormous size will create a true long-term economic shackle not only to us, but to everyone in Europe. Finnish Business and Policy Forum EVA computed that Finland’s maximum exposure today is €89 billion. Even if only a small portion of it materialises, this is a large sum for a nation whose entire annual budget is €50 billion. As I write this, we are eliminating municipalities, reducing social services, and cutting our military and police to save millions – and at the same time we are spending literally billions in the bailouts that are not even working.

I am proud to be European and keen to support our common future. However, today’s EU is not Europe, and Brussels’ bureaucracy is not European democracy. European nations should not endanger this great heritage and shared destiny on the altar of political patronage and corporate favours. We will always support and participate when actions are productive and fair. The current European bailouts are neither.

Timo Soini
The Finns Party