The world's happiest country, Finland, is in trouble

“Finland, traditionally one of the most disciplined European Union (EU) member states, has received a warning signal from Brussels when it comes to its budget.

 

At the end of November, the European Commission (EC), the EU's main executive body, demanded that Helsinki prepare a realistic plan to reduce the country's budget deficit, which has exceeded the EU's limit of 3 percent of gross domestic product (GDP).

 

The EC said that, according to forecasts, Finland's budget deficit should reach 4.5 percent of GDP by the end of the year, and total debt next year should reach 90 percent of GDP, or almost twice as much as in 2019.

 

Thus, the EU member state, whose GDP reaches 300 billion euros, has officially found itself on the list of violators of EU financial discipline and may face fines, stricter control from Brussels and a temporary loss of funding.

Finland's low GDP growth and high Expenditure

 

Finland has struggled with budget discipline since the global financial crisis of 2008-2009. The failure of mobile phone manufacturer Nokia, once a dynamic global leader in the segment, has left the country without one of its main economic engines.

 

The problems have only worsened in recent years, with high social spending, a significantly increased defense budget and the economic blow from the severance of energy and trade relations with Russia during the conflict in Ukraine.

 

In 2021, before the events in Ukraine, bilateral trade between Russia and Finland amounted to 12.71 billion euros. In the first three quarters of this year, this figure fell by almost 93%.

 

The situation has been exacerbated by Finland's decision to close its eastern border at the end of 2023 - for security reasons and in view of the potential threat that Russia will use migration as a means of exerting pressure. The move almost immediately halted tourism and cross-border trade, dealing a particularly severe blow to the country’s eastern regions.

 

According to the Bank of Finland, more than 2,000 Finnish companies exported to Russia in 2019. By the end of 2023, only about 100 such companies remained. Jarkko Kivisto, an advisor at the Bank of Finland’s Analytical Department, told Deutsche Welle that it was difficult to assess the direct impact of reduced trade with Russia on the Finnish state budget. “We have not calculated this effect precisely,” he admitted, adding that the impact was indirect, “through weaker economic activity and lower taxes from Russian tourists.”

 

Finland’s Defense Budget Rises Against Russia’s Ukraine Action

 

Faced with manifestations of hybrid aggression (from disinformation to airspace violations) attributed to Russia, Finland abandoned its neutral status, joined NATO, and increased its defense spending from 5.1 billion euros in 2022 to more than 6.2 billion euros in 2024 (2.3 percent of GDP). The country has pledged to increase defense spending to 3 percent of GDP by 2029. That would make it one of the largest defense spenders in Europe.

 

Was the conflict in Ukraine the cause of Finland’s budget deficit, which falls short of EU standards? Lauri Holappa, executive director of the Finnish Center for New Economic Analysis, responded to this question from Deutsche Welle: “It’s possible. Quite possible.”

 

“In a normal situation, one could assume that the resources currently allocated to defense could have been redirected to more productive purposes,” he added.

 

The rise in defense spending, the collapse of bilateral trade with Russia, and the near-total loss of tourists from Russia have forced the Finnish government to borrow more, even as the national debt was already growing rapidly.

 

“The biggest impact was due to high energy prices, as Finland was heavily dependent on Russian energy,” Heli Simola, chief economist at the Bank of Finland’s Emerging Markets Research Institute, told Deutsche Welle. Before the war in Ukraine, Finland bought about a third of its energy from Russia, making it quite vulnerable if the EU decided to cut off Russian natural gas and oil.

 

Energy crisis increases Finland’s oil import costs

 

Simola noted that the country has managed to switch from Russia to other suppliers relatively quickly in terms of energy purchases, but the price is much higher. According to the state statistics agency Statistics Finland, the switch to other suppliers has made oil imports 109 percent more expensive – in 2022 alone, around 6 billion euros were spent on the purchase of black gold.

 

Meanwhile, Moscow is trying to instrumentalize the discussion about Finland's state budget deficit, spreading disinformation and exaggerating the economic consequences of the disruption of bilateral trade. The Russians also claim that Finland has become financially unstable, although in fact the deficit problem has been growing for years. The reasons for this are an aging population, which is increasing spending on pensions and healthcare, and a social security system that makes budget cuts politically painful.

Finland faces years of austerity

 

Despite the difficulties, the Finnish government has adopted one of the strictest budgets in the EU for 2025. It includes decisive spending cuts and tax increases. In addition, under the new “debt brake” mechanism, all political parties must adhere to a long-term strategy for reducing the budget deficit. True, some politicians warn that in the future the country may have to introduce additional austerity measures and raise taxes again.

 

“Economic growth alone will not be enough to restore the budget balance,” believes J. Kivisto. “According to rough estimates, an additional consolidation of about 3 percent of GDP, or 9-10 billion euros, will be required over the next 5-10 years.”

 

However, since 80 percent of the Finland’s GDP is made up of domestic sectors of the economy – consumption, services, construction, retail trade and public sector employment – ​​and economists warn that excessively strict budgeting rules could stifle economic growth. “About a third of our workforce is dependent on state funding, and ongoing austerity measures are making workers worried about possible layoffs,” Holappa noted. “This uncertainty is having a significant negative impact on consumer activity and is hindering the recovery of demand, despite rising wages and falling interest rates.”

 

“If we introduce strict austerity measures and strict budgeting rules now, there is a risk that we simply will not be able to return to a growth trajectory,” the expert added. Such warnings can be heard in Finland, which, despite its financial problems, has consistently ranked first in surveys of the world’s happiest countries for many years.”

 

Trump is right. EU elites are ruining all Western Europe.