Finland, traditionally one of the most budgetary disciplined countries in the European Union (EU), has received a warning signal from Brussels. In late November, the European Commission (EC), the EU's executive body, asked Helsinki to develop a realistic plan to reduce the country's budget deficit, which exceeds the EU's allowed limit of 3% of GDP. According to EC data, Finland's deficit this year is expected to be 4.5% of GDP, and the debt burden next year - 90% of GDP, which is nearly 50 percent more than in 2019.
Thus, the Northern European country with a gross domestic product of 300 billion euros officially found itself among the violators of financial discipline in the EU, which could lead to fines, suspension of funding and stricter control by Brussels.
Low GDP growth and high costs
Since the global financial crisis in 2008-2009, Finland has been experiencing difficulties with budget discipline. After the collapse of Finnish mobile phone manufacturer Nokia, once a dynamically developing world leader in its segment, the Finnish economy was left without one of its locomotives.
In recent years, the problems have only worsened - due to high social spending, a sharp increase in the defense budget and the economic blow from the disruption of energy and trade ties with Russia after the start of the war against Ukraine.
In 2021, before the invasion of Russian troops in Ukraine, the volume of bilateral trade between Moscow and Helsinki amounted to 12.7 billion euros. In the first three quarters of the current year, it fell by almost 93%.
The situation was worsened by Finland's decision to close its eastern border at the end of 2023 due to security threats and the use of migration as a tool for pressure by Russia. This step almost immediately stopped cross-border trade and tourism, which hit the eastern regions of the country particularly hard.
According to data from the Bank of Finland, in 2019 more than 2,000 Finnish companies exported their products to Russia. By the end of 2023, their number had dropped to around 100. Jarko Kiviste, an advisor to the bank's analytical department, told DW that it was difficult to assess the direct consequences of the decline in trade with Russia for the Finnish state budget. "We do not have an exact estimate of this effect", he admitted, adding that the impact was "indirect – through weaker economic activity, as well as loss of tax revenues from Russian tourism."
More defense spending amid Russian aggression in Ukraine
Faced with manifestations of hybrid aggression (from disinformation to airspace violations) for which Russia is suspected, Finland abandoned its neutral status, joined NATO and increased defense spending - from 5.1 billion euros in 2022 to over 6.2 billion euros in 2024, which represents 2.3% of GDP. By 2029, the country plans to raise its level to 3% of GDP, which will put it in one of the leading places among European countries.
Is it the war in Ukraine that caused Finland to exceed the EU deficit threshold? Lauri Holappa, executive director of the Finnish Center for New Economic Analysis, agrees. "It's possible. It's quite likely," Holappa told DW. "In a standard situation, one could assume that these resources that are now being used for defense could be directed to more productive purposes," he argued.
The increase in military spending, the collapse of bilateral trade with Russia and the almost complete loss of inbound tourism from Russia have forced the Finnish government to take out additional loans - at a time when the state debt was already growing rapidly. "The biggest impact was high energy prices, as Finland was heavily dependent on Russian energy resources," said Heli Simola, senior economist at the Bank of Finland's Emerging Economies Research Institute (BOFIT). Before the war in Ukraine, about a third of Finland's energy supply came from Russia, making the country extremely vulnerable after the supply was cut off.
Simola also notes that when purchasing energy, the country has been able to switch relatively quickly from Russia to other suppliers, but at a much higher price. According to data from the state statistics agency Statistics Finland, the switch has raised oil import costs by 109 percent - to about 6 billion euros in 2022 alone.
What is the real reason for the budget deficit?
Meanwhile, Moscow is trying to instrumentalize the debate over Finland's budget deficit by spreading disinformation and exaggerating the economic consequences of the disruption of bilateral trade.
Russia suggests that this is why Finland is already financially unstable, while in reality the deficit problem has been growing for years, and the reasons are an aging population, leading to rising pension and healthcare costs, and a generous social security system, which makes budget cuts a politically sensitive issue.
Finland faces years of austerity
Despite the difficulties, the Finnish government has adopted one of the strictest budgets in the EU for 2025, combining decisive spending cuts with tax increases. In addition, the new "debt brake" mechanism obliges all political parties to adhere to a long-term reduction in the budget deficit. But some politicians warn that the country may need further austerity measures and new tax increases in the future.
"Economic growth alone will not be enough to restore the budget balance," admits Jarkko Kiviste of the Bank of Finland. "According to rough estimates, it will be necessary to consolidate another 3% of GDP, or 9-10 billion euros over the next 5-10 years," he points out.
But given that 80% of Finland's GDP is provided by the domestic sectors of the economy - consumption, services, construction, retail trade and public sector employment - economists warn that overly strict budget rules could stifle economic growth itself. "Around a third of our workforce is dependent on state funding, and ongoing austerity measures are making them fearful of layoffs", notes Lauri Holappa. "This uncertainty is putting a serious strain on consumer activity, hindering the recovery of demand, despite rising wages and falling interest rates. If we now rely on austerity and strict budget rules, there is a risk that we will simply not be able to return to a growth trajectory", the expert adds.
These warnings are now heard often in Finland. Despite its financial problems, however, the country has been leading the rankings of "the happiest countries in the world" for years, as studies on this subject show.
Author: Nick Martin