Euro

Finland Prepares For a Euro Breakup While Merkel Reportedly Backtracks

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Finland's foreign minister, Erkki Tuomioja, has said that European governments must prepare for a eurozone break up, adding that the Finnish government was prepared:

Our officials, like everybody else and like every general staff, have some sort of operational plan for any eventuality.

This is one of the strongest warnings given by an elected European politician, and is particularly noticeable coming from a member of the Social Democratic Party of Finland. With the German Federal Constitutional Court ruling on the constitutionality of the European Stability Mechanism and the release of the troika's audit only weeks away it is understandable that the government of one of Europe's more stable countries is making contingency plans.

The troika audit will almost certainly find that the Greek government has not been keeping to the austerity conditions necessary to receive bailout funds. There are reports that German Chancellor Angela Merkel is perhaps changing her mind about the bailout conditions, and may cave to pressure to give Greece the next bailout installment despite the Greek government's inability to meet austerity conditions.

Such a move from Merkel would be a reversal in rhetoric and policy. The German government's line has been to support Greek membership of the euro-zone while arguing strongly for conditional austerity measures on the part of countries that receive bailouts. 

Without austerity conditions being attached to the European bailouts then the government of Greece will have no incentive to behave responsibly. A lack of austerity conditions will also set a worrying precedent for potential bailouts of Spain and/or Italy. Such a situation would see the eurozone crisis unravel a lot quicker than many expected.

Of course, there is a huge amount at stake politically for Merkel were she to decide to reverse her position. Some of her colleagues, not to mention a healthy chunk of the German people, would put Merkel under pressure to keep to her original position.

The political positioning in Europe is becoming increasingly awkward and unworkable. Merkel, typically one of the most stringent proponents of austerity conditions is reported to be backing off despite domestic pressure. Meanwhile Finland is preparing for an almost inevitable Greek exit from the eurozone. Finland and Germany were worth keeping an eye on before today's news because both possess veto power over a future bailout. The recent developments make the situation a little more unpredictable than it already was. Social Democrats are openly talking of a euro breakup, and one of the most prominent propoents of austerity is said to be opening up to bailouts with weak conditions.