Finland: The world’s happiest country

Agencies :

Finland, ranked the world’s happiest nation for eight years and traditionally one of the European Union’s most fiscally disciplined countries, has just received a wake-up call from Brussels.

The European Commission, the bloc’s executive arm, last week ordered Helsinki to devise a credible plan to resolve the country’s budget deficit, which has crossed the EU’s limit of 3 per cent of gross domestic product (GDP).

The Commission said Finland’s deficit was projected to reach 4.5 per cent of GDP in 2025, while the country’s debt burden was set to hit 90 per cent of GDP next year, up by nearly half since 2019.

The Nordic nation, whose annual economy is worth €300 billion, has now been formally placed under the EU’s Excessive Deficit Procedure.

This could lead to financial sanctions, including large fines, suspension of EU funds and stricter fiscal oversight by Brussels.

Since the 2008/09 global financial crisis, Finland has struggled with fiscal discipline. The collapse of mobile phone maker Nokia, once the engine of growth, left the economy without a clear driver.

That challenge was deepened in recent years by high welfare costs, a huge increase in defense spending and the economic shock of severing energy and trade ties with neighbor Russia over the war in Ukraine.

In 2021, before Russian tanks rolled into Ukraine, bilateral trade between Moscow and Helsinki reached €12.71 billion and made up 4.3 per cent of the Finnish economy. By the first three quarters of this year, trade had fallen by nearly 93 per cent.

The collapse was compounded by Finland’s decision to close its eastern border in late 2023, citing security concerns and Moscow’s weaponized migration tactics. The move halted cross?border shopping and tourism almost overnight, hitting Finnish border regions especially hard.

According to the Bank of Finland, the country’s central bank, more than 2,000 Finnish firms exported to Russia in 2019. By the end of 2023, that number had dropped to around 100.

Jarkko Kivisto, adviser to the Bank of Finland’s forecasting division, told DW that it’s hard to measure the direct impact of the collapse in Finnish-Russian trade on the deficit.

“We don’t have an estimate for this effect,” Kivisto told DW, adding that the impact had been “indirect through weaker economic activity and lower value added, as well as missing tax revenues from Russian tourism.”

Faced with its own threats from the Kremlin, from disinformation campaigns to airspace violations, Finland has sharply raised defense spending from €5.1 billion in 2022 to over €6.2 billion in 2024, now exceeding 2.3 per cent of GDP.

The Nato member has pledged to push military spending toward 3 per cent by 2029, which would make it one of the highest spenders in Europe.

Asked whether the fallout from the Ukraine war would have tipped Finland’s deficit over the edge, forcing additional EU scrutiny, Lauri Holappa, Executive Director of the Finnish Centre for New Economic Analysis (Utak), told DW: “Maybe. It’s possible.”

“Without the invasion, you can argue that we could have used those inputs [defense spending] on more productive things,” added Holappa.

The combination of military spending, collapse of bilateral trade and near-total loss of Russian tourism would have forced the Finnish government to take on additional debt — at a time when the debt burden was already climbing sharply.

Before the war, about a third of Finland’s energy supply came from Russia, leaving the country highly exposed when supplies were cut.

“The largest effect came from the higher energy prices as Finland was quite dependent on energy inputs from Russia,” Heil Simola, senior economist at the Bank of Finland’s Institute for Emerging Economies (Bofit), told DW.

Simola said the Nordic country was able to diversify from Russian energy sources relatively quickly — albeit at much higher prices.

The switch jacked up Finland’s oil import costs by 109 per cent to over €6 billion in 2022 alone, according to state agency Statistics Finland. Finnish exporters were able to adjust to the wiping of non-energy trade with Russia without cutting output or jobs, Simola added.

Moscow has, meanwhile, sought to weaponize the deficit debate by spreading disinformation that exaggerates the economic fallout of cutting trade with Moscow, framing Helsinki as unstable, when the deficit issue had been growing for years.

Domestic pressures have mainly pushed Finland’s deficit over EU-acceptable limits.

An ageing population has swelled pension and health care costs, while the country’s extensive welfare state — employing nearly a third of the workforce — makes fiscal consolidation politically fraught.

Despite the challenges, Finland’s government has passed one of the EU’s strictest budgets for 2025, combining steep spending cuts with tax hikes.

A new so-called debt-brake mechanism commits all political parties to long-term deficit reduction.

However, some policymakers warn that additional austerity measures and tax hikes will be needed in the next parliamentary term.

“Economic growth alone will not be sufficient to restore fiscal balance,” the Bank of Finland’s Kivisto told DW.

“Rough estimates suggest adjustments [tax rises and public sector cuts] of approximately 3 per cent of GDP, or €9–10 billion, are needed over the next 5–10 years.”

But with 80 per cent of Finland’s GDP coming from domestic sectors like household consumption, public services, construction, retail and state-sector employment, economists caution that strict fiscal rules risk choking off the very growth the country needs.

“Around a third of our workforce is dependent on government funding, and constant fiscal consolidation leaves them fearful of cuts,” UTAK’s Holappa told DW.

That uncertainty has weighed heavily on consumer confidence, preventing domestic consumption from recovering despite wage growth and lower interest rates, he added.

“If we now impose strict austerity, along with strict fiscal rules, there’s the risk that we cannot get back on the growth path,” Holappa said.

The warnings carry extra weight for a nation that, despite its fiscal troubles, is consistently ranked the happiest in the world.