THE creation of a common market throughout Europe was arguably one of the greatest accomplishments of the grand integration project. Yet now the continent-wide economy seems to be fragmenting as each nation withdraws behind its borders. Finland is no exception.

The common European market is showing signs of segregation, as big players withdraw within the safety of their national borders.

The financial crisis, ensuing recession, and on-going sovereign debt crisis are making businesses stick close to home. Investors are looking for domestic targets, corporations are leery of huge capital projects overseas, and it is even affecting the movement of people. The year 2010 had only 11,905 people emigrate from Finland, the smallest number in more than a decade.

The economic disintegration is endemic throughout the Eurozone. According to Reuters, the German financial regulator told a German subsidiary to curb its transfers to its troubled Italian parent bank. The President of the European Central Bank acknowledged the nationalistic tendencies made his life difficult.

“It is not clear that there are measures that can be effective in a highly-fragmented area,” European Central Bank president Mario Draghi stated recently.

Finnish politicians have been leading the charge for isolationism, with the Finns Party Timo Soini becoming one of the banner-bearers for those not wanting to assist other European states. Even the Finance Minister Jutta Urpilainen has made it clear that the Finnish government will only help out other states under strict conditions.

Banks stay local

For Finland’s big investors, like the pension funds, investing domestically is a safe thing to do. In 2007 Ilmarinen had only 39 per cent of its listed equity holdings in Finland. By the first quarter of 2012, that proportion had risen to 44 per cent. For Varma, the change is even more drastic. Between 2007 and 2011, the percentage of Finnish stocks in their portfolio went from 37 to 56.

Pension funds are big buyers of fixed income investments, because they are looking for conservative, income-producing assets, but they are not willing to take the risk of loaning money to the troubled states of southern Europe. For Varma, 86 per cent of its government bonds are in four countries: Germany, Finland, the Netherlands and Sweden.

“In its fixed income investments, Varma continued its conservative and cautious risk policy, concentrating its government bond investments on Finland and Germany,” the pension company announced in April.

The Nordic region’s largest bank is also retreating into its home market. At the end of 2007, Nordea had 89 per cent of its loans in the Nordic and Baltic region. By the end of 2011, that percentage had increased to 94 per cent.

Foreigners avoid Finland

Foreign investors are avoiding Finland as well, at least in some sectors. In mid-2007, non-residents owned more than 60 per cent of the value of the total Finnish stock market. That number has fallen steadily, and is now about 40 per cent, the lowest proportion since 1997.

International investors have practically stopped all foreign direct investment in Finland. As the Bank of Finland explains: “on average, there were practically no direct investment inflows in 2008-2011.”

There is an exception though, and that is with Finnish bonds and money market instruments. Non-residents have been pouring into the perceived safe haven of some domestic fixed income securities. Over the past twelve months, net purchases by foreigners have been about 19 billion euros. At the time of writing, the ten-year Finnish government bond yield is 1.53 per cent, while the inflation rate is 3.1 per cent, meaning that investors are willing to suffer a loss, in after-inflation terms, for the safety of Finland’s top-rated debt.

DAVID J. CORD

HELSINKI TIMES

LEHTIKUVA / AFP PHOTO / FREDRIK VON ERICHSEN / ANTTI AIMO-KOIVISTO /ESA HILTUNEN