Government issued statement to Parliament on loan package to Spain

Summary of Prime Minister Katainen’s speech at the plenary session of Parliament on 19 July 2012 

(Translation. Original released in Finnish on 19 July)

A parliamentary session in the middle of July is exceptional, but Europe’s economic situation is also exceptional.

It’s good that today we are having an in-depth discussion, not only about the loan programme for Spain, but also about the future of the EU and the euro area – and above all about Finland’s place in Europe.

The news from Europe is certainly worrying for Finns. Many wonder whether they or members of their families will keep their jobs, whether interest on loans will rise or whether welfare services will have to be cut.

The Finns are a nation of smart people, who follow world events. The problems of Europe and the global economy have slowed Finnish exports and economic growth, and this is why we had to make cuts and tax increases. Many have lost their jobs because of Europe’s economic problems.

In addition to the loan programme for Spain, I would like to address the direction that Europe is taking and Finland’s place in Europe.

Spain has asked the other euro countries for a loan to stabilise its banking system. Spain has a problem with its public finances, but the biggest challenges relate specifically to the country’s banks. As far as Spain’s public finances are concerned, it’s worth noting that the country’s new government has rolled up its sleeves and readily accepted the challenge. This is not only a matter of intentions, because the Spanish government has already achieved a lot. This year and next, Spain will adjust its economy by around 30 billion euros, which corresponds in both years to three per cent of GDP. The problem for Spanish banks stems from the real-estate bubble. Restoring the stability of the banking system requires measures of such magnitude that Spain cannot implement them without external help. It’s for this reason that Spain asked in June for a loan from the other euro countries.

After a careful assessment, the euro countries announced their readiness to grant Spain a loan of up to 100 billion euros to rehabilitate the country’s banking system. The funding provided to Spain will be a loan, which the Spanish Government has undertaken to pay back.

The majority of Finns certainly do not want to increase Finland’s financial liabilities for the situation in other countries. But the majority of Finns assuredly do not want the additional redundancies, public spending cuts or tax increases that would result from Europe’s economy slipping out of control.

The loan programmes have prevented the uncontrolled collapse of Europe’s economy. They have not, however, removed the risk to future development caused by countries that are in a poor condition. Excessive debt and deficit problems, lack of competitiveness, labour market rigidity and a low retirement age all create structural problems that will take time to repair. Taking into account the seriousness of the situation, we must focus on putting matters right and understanding that some of our partner countries are in a really difficult situation.

Finland has consistently called for common ground rules and a tightening of financial discipline. We have demanded that everyone commit to the rules just as firmly as we do. Supervision of the rules, moreover, has been repeatedly tightened in recent months. We need additional measures, however, to ensure that problems are avoided in the future.

During the autumn, we will have to take a position on, among other things, the financial market union and the development of the economic and monetary union. These are big issues that require us to conduct a calm and analytical discussion of Finland’s overall interest and our country’s place in European integration.

In future discussions on the EU, we will have to decide whether an integrated Europe is in Finland’s interest. For Finland, is it worth continuing the construction of a more integrated Europe? The Government’s response to this is a strong yes: we want to look actively for solutions to promote a new kind of European Union and to build a stronger euro.

Broadly speaking, all Finns and Finnish political parties stand for the concept of strict financial discipline and responsibility. We are not in the EU to shake our fists or to oppose everything. We are in the EU to pursue the issues we believe to be right and to cooperate on behalf of an integrated Europe, because this is important for Finns. In the EU, we must be able to plead a case, agree solutions and also to make compromises to achieve our objectives.

With regard to Europe and the euro, it is easy to be pessimistic right now. But I do not understand those who wish for the break-up of the euro area or Finland’s withdrawal. This is absurd for two reasons.

Top economists are virtually unanimous in the view that withdrawal from the euro would come with a high price for all of us. Not only economically, but also in terms of the welfare society and, of course, European integration.

I firmly believe that the unity of the euro area is overwhelmingly the best option for us Finns. Secondly, the crisis has brought a whole new turn to the development of the EU. Past errors have proved to be so expensive that there is now a true desire to rectify them. Finland must be at the forefront of this work. Continuing our joint project will require action to preserve the Union and the euro. It will also require deeper integration in the future. Crisis management measures and discussing the future of the EU is difficult due to a lack of trust among Member States. Many of us feel that our cooperation has not always been fair.

The euro countries’ summit in June reaffirmed its previous decisions on the status and application of a permanent stability mechanism, the ESM. A new aspect was a proposal to establish joint European banking supervision. The idea of banking supervision has been well received both in the Member States and in the markets. The reckless lending of banks, indeed, has been one of the reasons for the problems of Ireland and Spain.
Supervision must also be on a joint basis because problems in one country are quickly reflected in other euro countries.

Many open issues are still connected with a joint supervision mechanism. For example, it is unclear whether supervision will apply only to big banks or also to regional savings banks. For us, it is important that banking supervision covers the whole EU area and is not confined only to the euro countries.

In connection with banking supervision, we discussed the possibility of recapitalising problem banks directly, bypassing the home country. We agreed that direct recapitalisation can be considered only when a European banking supervisory authority is in operation. The concept of the direct recapitalisation of crisis banks against ownership is sensible, because it helps separate the problem banks from central government finances. It also strengthens the power of those who provide the financing to determine what will be done with the banks.

During the autumn, there will also be discussion on a financial market union, which would include, in addition to supervision, a joint deposit protection and crisis solution mechanism for banks. We have responded, in principle, positively to the idea that banks should themselves establish their own European funds. Finland is interested in ways of improving adherence to joint rules relating to central government finances. For us it is important that everyone operates according to the same ground rules. Increased supervision and discipline will undoubtedly mean the granting of authority to joint bodies. We cannot think that supervision will affect others, but not us.

The break-up of the euro area would shake the foundations of the European Union. It would also have political consequences. Let’s not forget that the European Union is essentially a peace project. We must keep Finland’s long-term interest clear in our minds. An overview of the common interest should not overshadowed by details. Sometimes it’s good to look up and check that we are heading in the right direction. Now and then it’s also worth looking back to see from where we have come. Finland has travelled a long road from a poor peripheral country to a European success story. Continuing our success story will require that Finland continues to have a strong influence in Europe.