Finland's unfortunate debt crisis

CopenhagenFinland remains the happiest country in the world according to theWorld Happiness ReportDespite its struggling economy battling stagnation, the unemployment rate is already the second highest in the EU (only behind Spain), and imbalances in public finances are leading to significant cuts in its prized welfare state. Not so many years ago, the Nordic country was an example of what are known as... countries frugal and one of the EU's most fiscally disciplined partners. Now things have changed, and the country's public debt is projected to reach 90% next year, almost 50% higher than in 2019. The public deficit has also risen this year to 4.5% of GDP, a figure higher than the 3% of GDP tolerated by Brussels.

For all these reasons, the European Commission has finally decided to issue a warning to the Helsinki government and has formally added Finland to the EU's excessive deficit procedure. This step means that if Finland fails to reduce its public debt below 3% by 2028, Brussels will impose financial sanctions with hefty fines, suspend EU funds, and implement much stricter fiscal supervision.

The country's economic downturn is not new and began a decade ago. It all started with the 2008-2009 financial crisis and the collapse of mobile phone giant Nokia, which had been the engine of growth driving the economy and exports. Later came the Covid-19 crisis, and since then, the economy has stagnated, unemployment has risen, and public finances have increasingly fallen into the red. Adding to these challenges is the rising cost of maintaining the welfare state due to an aging population, which increases public spending year after year. Another factor was the sanctions imposed on Russia for its attack on Ukraine, which impacted tourism, exports, and energy ties between the Nordic country and Moscow.

Before the Russian invasion, bilateral trade between Russia and Finland represented 4.3% of the Finnish economy, particularly in the eastern border regions. With the war, this trade plummeted by nearly 80%, according to the Bank of Finland. Furthermore, Finnish companies have also been affected by the energy supply cuts from Russia, which accounted for a third of the country's total energy consumption.

Cuts, except in defense

In this context, the Finnish government, led by a coalition of conservative parties with the far right, considers reducing public spending an absolute priority, and is therefore implementing a program to cut €9 billion from the annual budget over the next eight years. As a result, the Finnish Institute for Health and Welfare warned of the social impact of the austerity plans, stating that they will push 110,000 people below the poverty line, including 27,000 children. However, there are no prospects on the horizon indicating that public debt will decrease in the coming years, according to the International Monetary Fund, which has led to the first downgrade of Finland's debt in the last ten years by Fitch Ratings. According to the European Commission, the country's economy will remain almost stagnant next year, with growth of just 0.1%. Therefore, the state is not expected to increase its revenue beyond raising taxes to help reduce public debt. Given this economic outlook and the imposed budget constraints, the dramatic increase in defense spending since the country became a new member of NATO is even more controversial. Spending has risen from €5.1 billion in 2022 to over €6.5 billion in 2025, a figure that represents around 2.5% of GDP. Furthermore, the Finnish government has committed to increasing military investment to 3% of GDP by 2029.

The debt will continue to rise

To address economic challenges, the Nordic country's parliament approved one of the EU's most restrictive and stringent budgets a few weeks ago, along with a new mechanism called the "debt brake," which commits all political parties to long-term deficit reduction. However, experts warn that further measures will be necessary: "I'm concerned that this will create a vicious cycle that hinders economic consolidation," explained Jussi Systa, a researcher at the think tank Kalevi Sorsa Foundation.

The expert pointed out that "the Finnish growth model was based on exports from an obsolete industrial model centered on the paper industry and consumer electronics." The problem, according to Systa, "is that the government has not been able to compensate for the loss of revenue" resulting from the collapse of Nokia and the drop in paper prices (which have fallen by 70% due to digitization). Finally, the expert noted: "We need investments that promote more complex production and measures to strengthen domestic demand."