Finland, one of the most fiscally disciplined countries in the European Union, received a wake-up call from Brussels.
The European Commission ordered Helsinki last week to develop a credible plan to solve the country’s public deficit, which exceeded the maximum limit set by the European Union of 3% of GDP.
Finland’s budget deficit is expected to reach 4.5% of GDP in 2025, while the country’s debt will reach 90% of GDP next year, about 50% higher than in 2019.
The Nordic country, with an annual economy of 300 billion euros ($349 billion), has been officially included in the EU’s excessive deficit measures. This could lead to financial sanctions with high fines, suspension of European funds, and stricter financial supervision by Brussels.
Low growth, high spending, then war in Ukraine
Since the 2008-2009 financial crisis, Finland has struggled to maintain fiscal discipline. The collapse of the Nokia telephone company, which was once an engine of growth, left the economy without a specific engine.
This challenge has been exacerbated in recent years by rising welfare costs, a massive increase in defense spending, and the economic impact of the severing of energy and trade ties with neighboring Russia due to the war in Ukraine.
In 2021, before the Russian invasion, bilateral trade between Moscow and Helsinki amounted to €12.71 billion and represented 4.3% of the Finnish economy. During the first three quarters of this year, trade fell by approximately 93%.
The collapse was exacerbated by Finland’s decision to close its eastern borders at the end of 2023, due to security concerns and Moscow’s immigration methods. Almost immediately after the measures were implemented, cross-border shopping and tourism came to a halt, particularly affecting the border areas between Finland and Russia.
According to the Bank of Finland, more than 2,000 Finnish companies were exporting to Russia in 2019. By the end of 2023, this number had fallen to about 100 companies.
Jarkko Kivisto, forecasting advisor at the Bank of Finland, told DW that it is difficult to measure the direct impact of the collapse in trade between the two countries from the deficit.
“We have no estimate of this impact,” Kivisto said, adding that the impact was “indirect, through weak economic activity and lower value added, as well as the loss of tax revenues from Russian tourism.”
Increased defense budget due to Russian aggression
In the face of Kremlin threats, the NATO member state has dramatically increased defense spending, from €5.1 billion in 2022 to more than €6.2 billion in 2024, now exceeding 2.3% of GDP. The country has committed to raising military spending to 3% by 2029, making Finland one of the highest spenders in Europe in this area.
This combination of military spending, the collapse of bilateral trade, and the almost complete loss of Russian tourism would force the Finnish government to take on more debt, at a time when the burden was already rapidly increasing.
Before the war, about a third of Finland’s energy supply came from Russia, leaving the country highly vulnerable when supplies were cut.
“The biggest impact came from higher energy prices, as Finland was highly dependent on Russian energy inputs,” Hale Simula, chief economist at the Bank of Finland’s Emerging Economies Institute, told DW.
Finland is facing years of austerity
Despite the challenges, the Finnish government has approved one of the EU’s toughest budgets for 2025, which combines deep spending cuts with tax increases. A new mechanism called the “debt brake” obligates all political parties to reduce the deficit in the long term. However, some lawmakers warn that additional austerity measures and tax increases will be needed in the next parliamentary session.
“Economic growth alone will not be enough to restore fiscal balance,” Kivisto of the Bank of Finland told DW. “Adjustments of about 3% of GDP (about 9 to 10 billion euros) are needed in the next five to 10 years, through tax increases and reductions in the public sector.”
But since 80% of Finland’s GDP comes from domestic sectors such as private consumption, public services, construction, retail trade and government employment, economists warn that strict fiscal rules risk stifling the growth the country needs.
These warnings carry additional weight for a nation that, despite its financial problems, is still ranked as the happiest in the world.
(os/cp)