Finland prepares for break-up of eurozone

Finland is preparing for the break-up of the eurozone, the country’s foreign minister warned today.

By Ambrose Evans-Pritchard, in Helsinki

The Nordic state is battening down the hatches for a full-blown currency crisis as tensions in the eurozone mount and has said it will not tolerate further bail-out creep or fiscal union by stealth.

“We have to face openly the possibility of a euro-break up,” said Erkki Tuomioja, the country’s veteran foreign minister and a member of the Social Democratic Party, one of six that make up the country’s coalition government.

“It is not something that anybody — even the True Finns [eurosceptic party] — are advocating in Finland, let alone the government. But we have to be prepared,” he told The Daily Telegraph.

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

Mr Tuomioja’s intervention is the bluntest warning to date by a senior eurozone minister. As he discussed the crisis, the minister had a copy of the Economist on his desk. It had a picture of Angela Merkel, the German Chancellor, reading a fictitious report entitled “How to break up the euro”, with a caption: “Tempted, Angela?”

“This is what people are thinking about everywhere,” said Mr Tuomioja. “But there is a consensus that a eurozone break-up would cost more in the short-run or medium-run than managing the crisis.

“But let me add that the break-up of the euro does not mean the end of the European Union. It could make the EU function better,” he said, describing the dash for monetary union in the 1990s as a vaulting political leap in defiance of economic gravity. Finland has emerged as the toughest member of the eurozone’s creditor bloc as it tries to hold together a motley coalition. It has insisted on collateral from both Greece and Spain in exchange for rescue loans.

The coalition government is on thin ice as voters peel away to eurosceptic parties. The True Finns shattered the political order in last year’s election with 19pc support. “Taxpayers here are extremely angry,” said Timo Soini, the True Finn leader.

“There are no rules on how to leave the euro but it is only a matter of time. Either the south or the north will break away because this currency straitjacket is causing misery for millions and destroying Europe’s future.

“It is a total catastrophe. We are going to run out of money the way we are going. But nobody in Europe wants to be first to get out of the euro and take all the blame,” he said.

Like other member states, Finland has a veto that could be used to block any new bail-out measures. However, unlike some states, its parliament would have to approve each future measure of the eurozone rescue, including a full bail-out of Spain.

The issue of euro break-up may come to a head in October as EU-IMF Troika inspectors report back on Greek bail-out compliance. Pleas from Athens for two extra years to stretch out its austerity regime have run into fierce resistance from creditor powers.

“It is up to Greeks whether they want to stay in the euro,” said Mr Tuomioja. “We cannot force Greece out. We can cut off lending and that would lead to a default. Then we could speculate whether that would entail getting out of the euro. Nobody knows if it could be contained,” he said. Mr Tuomioja said Finland would block attempts to strip the European Stability Mechanism (ESM) or bail-out fund of its senior status at the top of the credit ladder, a move that could greatly complicate efforts to lure investors back into Spanish and Italian bonds. “The ESM loans have priority. That is a red line for us. We are very concerned that the rules of the ESM seem to be changing.”

He voiced deep suspicion of plans by a “gang of four” EU insiders — including the European Central Bank’s Mario Draghi — to ensnare member states into some form of fiscal union. “I don’t trust these people,” he said.

Mr Draghi said two weeks ago that the issue of seniority would be “addressed” as part of his twin-pronged plan for the ECB and ESM to buy bonds in concert. A number of EU leaders and officials claimed there had been a deal on the ESM’s seniority status at an EU summit in late June. Finland, Holland, and Germany all deny this.

The warnings on the ESM were echoed by Miapetra Kumpula-Natri, chairman of the Finnish parliament’s Grand Committee on Europe, who said bail-out fatigue is nearing its limit.

“Our law passed this summer says the ESM has the same priority as the IMF. There was a clear understanding on this. Any change would require a new law passed by the whole parliament, and this would be very difficult because the risks would be much higher.”

The issue of EU senior status has become an extremely sensitive one for markets after the ECB and EU creditors refused to share losses from Greece’s debt restructuring, in which pension funds, insurers, and banks lost 75pc.

Critics say the Greek deal set a fatal precedent, triggering further capital flight from Spain and Italy.

Mrs Kumpula-Natri said Finland can be pushed only so far. “There is a feeling on the street that there has to be a limit. I can’t say whether it is 10pc of GDP, or what. It’s not written. But it is obvious that a small country can’t help big countries eternally.”

Reinventing the European Dream

On July 1, Nicosia took the rotating presidency of the EU. Gas, relations with Turkey, Middle East policy: Europe should take this opportunity to set a new major Mediterranean project, argues the American political scientist Anne-Marie Slaughter.

The euro crisis and Queen Elizabeth’s recent Jubilee seem to have nothing in common. In fact, together they impart an important lesson: the power of a positive narrative – and the impossibility of winning without one.

Commenting on the Jubilee’s river pageant and horse parade, historian Simon Schama talked to the BBC about “little boats and big ideas.” The biggest idea was that Britain’s monarchy serves to connect the country’s past to its future in ways that transcend the pettiness and ugliness of quotidian politics.

The heritage of kings and queens stretching back across more than a millennium – the enduring symbolism of crowns and coaches, and the literal embodiment of the English and now the British state – binds Britons together in a common journey.

Hope and purpose

Cynics might call this the old bread-and-circuses routine. But the point is to fix eyes and hearts on a narrative of hope and purpose – to uplift, rather than distract, the public. Are Greeks, Spaniards, Portuguese, and other Europeans really supposed to embrace an austerity program imposed on them because prevailing wisdom in Germany and other northern countries considers them profligate and lazy? Those are fighting words, creating resentment and division just when unity and burden-sharing are most needed.

Greece, in particular, now needs a way to connect its past with its future, but no monarch is forthcoming. And, as the cradle of the world’s first democracy, Greece needs other symbols of national renewal than scepters and robes. It is through Homer that virtually all Western readers first encounter the Mediterranean world: its islands and shores and peoples knit together by diplomacy, trade, marriage, oil, wine, and long ships. Greece could once again be a pillar of such a world, using its current crisis to craft a new future.

Politics intervenes

That vision is more plausible than one might think. Natural-gas fields in the Eastern Mediterranean are estimated to hold up to 122 trillion cubic feet, enough to supply the entire world for a year. More gas and large oil fields lie off the Greek coast in the Aegean and Ionian Seas, enough to transform the finances of Greece and the entire region. Israel and Cyprus are planning joint exploration; Israel and Greece are discussing a pipeline; Turkey and Lebanon are prospecting; and Egypt is planning to license exploration.

But politics, as always, intervenes. All countries involved have maritime disputes and political disagreements. The Turks are working with Northern Cyprus, whose independence only they recognise, and regularly make threatening noises about Israel’s drilling with the Greek Cypriot government of the Republic of Cyprus. The Greek Cypriots regularly hold the EU hostage over any dealings with Turkey, as has Greece. The Turks will not let Cypriot ships into their harbours and have not been on speaking terms with the Israelis since nine Turkish citizens were killed on a ship that sought to breach Israel’s blockade of Gaza. Lebanon and Israel do not have diplomatic relations.

In short, the riches, jobs, and development that would flow to all countries in the region from responsible energy exploitation may well be blocked by the insistence of each on getting what it regards as its fair share and denying access to its enemies.

The vision of a Mediterranean Energy Community thus seems destined to remain a pipedream. Yet July will bring the 60th anniversary of the ratification of the Treaty of Paris, which established the European Coal and Steel Community (ECSC) among France, Germany, Italy, Belgium, the Netherlands, and Luxembourg only six years after the end of World War II. During the previous 70 years, Germany and France had fought each other in three devastating wars, the last two of which ruined Europe’s economies and decimated its population.

'Unthinkable and materially impossible'

These countries’ mutual hatred and suspicion was no less bitter and deep-seated than that afflicting the Eastern Mediterranean. Yet French Foreign Minister Robert Schuman, with the assistance of his counsellor Jean Monnet, announced a plan for the ECSC in 1950, only five years after German troops had left Paris, with the aim of making “war not only unthinkable but materially impossible.” Schuman proposed putting Franco-German coal and steel production under a common High Authority, thereby preventing the two sides from using the raw materials of war against each other, and powering a common industrial economy. The ECSC became the core of today’s European Union.

The EU today is on the ropes, but only a few concrete steps by European leaders might open the door to similarly bold diplomacy that could restore EU and Mediterranean economies and transform the energy politics of Europe and Asia. If the European Parliament and the European Council were to take steps to make direct EU trade with northern Cyprus subject to qualified majority voting rather than consensus (and hence veto by Cyprus), the EU would be able to begin trading with northern Cyprus, and Turkey could begin trading with Cyprus as a whole. These steps could lead in turn to a Turkish, Cypriot, and Greek energy partnership that would provide positive incentives for Turkish-Israeli reconciliation.

The Schuman Plan took two years to crystalize and a decade to implement. But it gave war-torn and desperately poor Europeans a positive vision of a new future, something that Greece and Cyprus, not to mention Middle Eastern and North African countries, desperately need. Europe’s leaders will not surmount this crisis by pounding their citizens with bleak demands for austerity. They must take concrete steps, with Greece as a full and equal partner, to create a vision of real rewards from a rejuvenated EU.

The EU does not have a Queen Elizabeth. What it needs is another Schuman and Monnet.

EU oil embargo on Iran takes effect. Gulf braced for backlash, Hormuz closure

DEBKAfile Special Report
 
The European oil embargo taking effect Sunday, July 1 blocks the sale to European Union members of 1 million, or one third, of Iran’s daily output of 3.3 million barrels a day. EU insurance firms, the biggest in the world, henceforth withhold cover from governments and firms operating tankers which carry Iranian oil. 

This sanction was threatened in January if diplomatic negotiations in the interim failed to persuade Iran, the world’s fourth largest oil producer, to halt work on developing a nuclear weapon.

Three rounds of talks by six world powers (US, Russia, UK, France, China and Germany) with Iran have since ended in impasse. A fourth at a technical level is scheduled for Tuesday, July 3, in Istanbul.

Braced against potential reprisals from Tehran, Saud Arabia and fellow Gulf nations have placed their armies on alert. Completing a deployment begun last Thursday for possible intervention in Syria, Saudi Arabia has massed units on its borders with Jordan, Iraq and Kuwait. The United Arab Emirates sea, air and special forces are on a state of readiness, as are US Fifth Fleet vessels in Gulf waters.

While not anticipating full-scale war, they are acutely apprehensive of possible Iranian strikes against Gulf oil fields, export terminals, pipelines or tankers either by covert Al Qods Brigades squads or local Shiite saboteurs.

Tehran has repeatedly threatened to treat an oil embargo as an act of war and close the strategic Strait of Hormuz to Gulf shipping in response.

Two days before the oil embargo went into effect, Saudi Arabia and the UAE activated two extra oil pipelines bypassing Hormuz and providing alternative routes for their oil to continue to flow to export markets if the Straits are blocked.

The Saudis repaired and enlarged the disused “Iraq Pipeline in Saudi Arabia” –IPS, a 25-year old pipe running 750 kilometers from eastern Saudi oil fields to the Yanbu refineries and export terminal complex on the Red Sea. Riyadh is keeping its volume a trade secret. However international oil experts estimate its capacity at around one-fifth of the Saudi production of around 9.5 million bpd.

The UAE’s 380-kilometer long Habshan-Fujairah pipeline is brand new. Operating from June, it is able to carry 1.5 million bpd of this group’s total 2.5 million bpd output out to the Gulf of Oman port of Fujairah.

American and French forces went on standby at this port since Saturday. Tehran could attack both of these pipelines as one form of reprisal for the tough, new sanction.

Friday, June 29, a senior Revolutionary Guards Corp general announced that missiles with a range of 300 kilometers were to be installed on Iranian warships on duty in the vicinity of the Hormuz Straits.

debkafile’s military sources are looking at next Tuesday, when nuclear talks are due to resume at a technical level, as a critical moment for a possible Iranian response to the oil embargo.  Tehran may make its attendance at the Istanbul meeting conditional on the lifting of the oil embargo. This would effectively wind down the international effort to reach a nuclear accommodation with Iran by diplomacy and open the door to other options.

Iranian lawmakers Saturday dismissed the EU oil embargo as “very little and insignificant” and declared that economic sanctions and Western pressure would have “no effect on Iran’s determination on its path toward development and progress.” The Iranian Majlis’ Economic commission will announce its “scientific and pragmatic policies in the coming days.”