The euro region would be able to survive Cyprus leaving the bloc as members need to ensure rules are adhered to, the head of Finland’s highest parliamentary committee said.
Finland rejects the notion that the area can only survive if there’s also a fiscal union, Miapetra Kumpula-Natri, who chairs the parliament’s Grand Committee, said yesterday in an interview in Helsinki. The euro region can’t continue to be hampered by political brinkmanship and instead should allow automatic triggers to be observed, she said.
“It probably wouldn’t be dangerous for the euro if Cyprus decided it needed its own currency,” Kumpula-Natri said. Still, “it wouldn’t be beneficial for euro members if markets were to consider the euro area a temporary union that countries can enter and exit.”
Cyprus agreed on March 25 to a 10 billion-euro ($13 billion) loan from the euro area and the International Monetary Fund in return for measures including a tax on bank deposits of more than 100,000 euros at its two biggest banks. The nation buckled under the weight of its financial industry, which had swelled to eight times its gross domestic product.
Cyprus’s rescue is one of five crafted by European policy makers over the past three years to protect the 17-member single currency after sovereign bond yields soared and indebted countries struggled to refinance debt. Finland, the only euro nation that boasts a stable AAA credit grade at all three major ratings companies, has struggled to win voter backing to continue contributing to the region’s bailouts.
“Finns don’t really buy the idea that the euro is a political project that can’t be allowed to fail,” Kumpula-Natri said. “For us, the common currency is a rational choice and we think any speculation of its potential fragmentation is bad for everyone involved. This is why Finland’s commitment to the euro is strong and we’ve agreed to bailouts to save it.”
Finland’s willingness to pay doesn’t stretch to income transfers, Kumpula-Natri said. The committee she heads decides on the northernmost euro member’s participation in bailouts through the permanent rescue fund.
“We live in very different societies in terms of income distribution and taxation,” she said. “A union based on fiscal transfers isn’t sensible, because our countries are so different.”
Finland’s goal of continuing monetary union without fiscal union has been criticized as being unrealistic. Writing new rules and hoping countries comply isn’t feasible, said Michael Hewson, an analyst at CMC Markets Plc in London.
“It’s a binary solution: you either accept the fact that you’re going to have to go to full fiscal union or you allow the weaker countries to leave the euro,” Hewson said in a phone interview. “The current model isn’t sustainable.”
Policy makers including EU Economic and Monetary Affairs Commissioner Olli Rehn have repeatedly said the currency is irreversible.
“We don’t want to add to speculation to whether the euro will remain or not,” Kumpula-Natri said. “The real challenge lies in the question of how economies differing that much could be brought to converge in the near future.”