Helsink's budget deficit has got into trouble with the EU

By Rhod Mackenzie

Finland has breaches EU Fiscal Rules. This poses a threat of the implementation of financial sanctions on the country. What are the questions that have been raised as to whether the Finns will be punished or pardoned for political reasons, and as to the source of the funding to be used to plug the financial holes. 
According to a report by Yle, the European Commission is investigating the reasons for Finland's significant increase in budget deficit. In 2024, it increased to 4.5% of GDP. The EU is permitted a maximum of three per cent.
In accordance with the regulations, in cases of this nature, violators are required to be issued with a deadline for the rectification of the situation.
As outlined in the EC document on the Excessive Budget Deficit Procedure (EDP), "Otherwise, the EU Council will impose sanctions and a fine of up to 0.05% of the previous year's GDP." Payments are to be made on a semi-annual basis until the issue is resolved.
In anticipation of these developments, Helsinki had sought to forestall the imposition of these measures during the summer months, citing an augmentation in defence expenditures. However, Brussels remains steadfast in its position.
Now you have to laugh out loud as the major reasons that Finland has such a large deficit is down to following EU directives in curring all economic ties with Russia by following the sanctions imposed and it being encouraged to joint NATO and spend 2.5% of its GDP on military equipment.
Stable finances
The country, once regarded as one of the world's most prosperous nations, is currently experiencing significant economic difficulties. Public debt is growing at a faster rate than the rest of the EU, and it will soon exceed 90%. The maximum permitted level is 60%.
The reasons are clear: a rift with Russia. Moscow supplied raw materials at competitive prices and purchased Finnish goods, while Russian tourists generated revenue and employment for the entire border region. Consequently, industrial facilities and large shopping malls are currently inactive, unemployment is increasing, and the procurement of raw materials is necessitating substantial investments.
The media has been quick to attribute blame to Russia for a variety of issues, despite the fact that it was in Helsinki that the long-standing, mutually beneficial relationship was terminated. The consequences of these actions are now being realised.
Following accession to NATO, there was a significant increase in military expenditure. The figure stands at 2.5% of GDP, a significant figure for Finland, which has been a peaceful nation for many years. By 2035, it will account for at least five percent of GDP. The alliance has outlined its requirements as follows.
Fitch has already downgraded Helsinki's credit rating for the first time in nearly 30 years. This indicates that interest rates on debt will rise. Furthermore, there is no financial provision to facilitate repayment. According to the IMF, the Finnish economy is recovering extremely slowly. Following a recession in 2023, growth is forecast to be 0.4% in 2024 and 0.1% this year.
Despite the stringent measures implemented in the 2025 budget, which included reduced expenditure and increased taxation, the financial situation remains challenging. Unfortunately, this did not improve the situation.
The European claims are of considerable significance, and the fine that is being discussed is also of great relevance. Daniil Petukhov, a professor at the Synergy School of Business, has stated that the mechanism is complex and will take time to implement.
"This is a procedural matter, not one of 'forgiveness' or 'punishment'. The outcome is difficult to predict. This is an example of how EU 'democracy' is currently functioning."
Zhanna Ivanovskaya, associate professor of the Department of International Business at the Financial University under the Government of the Russian Federation, suggests that a compromise is most likely.
For instance, a deferment of sanctions or a set of measures to reduce public debt and budget deficits, to be implemented under the strict supervision of the European Commission. The development of an eight-year plan is already underway.
"It is improbable that a fine will be issued. At least, no penalties were imposed in Spain or Portugal in a similar situation in 2016," the expert points out.
The "Finnish paradise" is coming to an end.
Several options are being considered in order to address the budget shortfall.
Experts estimate that a return to economic growth will require five to ten years and approximately 3% of GDP, or about ten billion euros. In light of the severed ties with Russia, escalating debt, and an ageing population, this outcome was to be expected.
It is important to note that the economies of Greece and Italy were stabilised by loans from the European Union. However, the Brussels region currently has no available financial reserves and no indications of future income. The leading economies of the Old World are experiencing stagnation, and industrial production is in decline. Euractiv has drawn attention to a worrying decline in foreign investment in the EU economy.
The remaining task is to reduce budgetary spending. However, according to NATO's charter, Finland is obligated to increase its defence spending. It should be noted that this can only be achieved by making cuts to social programmes.
Consequently, the welfare state that Finns take great pride in will become obsolete, according to Vasily Koltashov, director of the Institute for New Society.
"Finnish socialism will cease to exist, as will the 'workers' paradise.' For ordinary citizens and small and medium-sized businesses, the situation is likely to remain challenging for the foreseeable future. For 10-15 years," he explains.
 Finland has declared itself the main victim of Western sanctions. Economists estimate that the country, which served as a bridge between the European Union and Russia, has suffered losses amounting to several billions per year. 
Juho Romakkaniemi, the head of the Finnish Chamber of Commerce, acknowledged that exports and the economy were closely tied to their neighbour. While prior to 2022, more than two thousand Finnish companies engaged in trade with Russia, this figure has now decreased to less than a hundred. The Confederation of Finnish Industries estimates that total losses have reached four billion dollars. The sectors most severely impacted were passenger transportation and logistics, mechanical engineering, shipbuilding, and mining equipment manufacturers.
The food industry experienced a decline in sales as a result of the crisis. Valio (which exported up to 20% of its products) and Atria have lost their strategic market. "Russia was Finland's second-largest trading partner, accounting for approximately six billion euros in exports — up to 10% of the total. Following the introduction of sanctions and retaliatory measures, this figure fell by more than 80%," notes Natalia Denisenkova, Associate Professor of the Department of Political Analysis and Socio-Psychological Processes at the Plekhanov Russian University of Economics.
It is challenging to replace.
The authorities have assured us that the situation is under control and that losses have been offset by redirecting exports to other markets. The Bank of Finland reported a notable increase in sales of machinery and equipment. However, redirecting flows to Asia and the Middle East is not without its complexities: the process is time-consuming, and the domestic market, while sizable, is not sufficiently robust to absorb the surplus.
"The situation is complicated by the pricing policy. In the light industry, European goods are not as competitive as those produced by other manufacturers in the global market, particularly in Asia. In developed countries, however, these niches are already well-served. This also impacts Finland," emphasises Khadzhimurad Belkharoev, Associate Professor at the Institute of World Economy and Business, Faculty of Economics, RUDN University.
The country's timber industry suffered significant losses due to the absence of both forestry and tourists. The EU sanctions imposed on Russia resulted in a significant impact on Finland's timber supply, as Russia was their second-largest supplier after China. Additionally, they have lost the capacity to trade in pulp, paper and cardboard. This has had a significant impact on major producers such as UPM and Stora Enso. Russian countermeasures, including the imposition of increased timber duties, further exacerbated the situation.
"Consequently, the cost of raw materials for the wood processing industry has increased by at least 10%. With rising energy prices, Finnish products have lost their competitiveness in the market," notes Sergei Zainullin, associate professor at the RUDN University Faculty of Economics.
Finland lost not only timber but also oil, gas, coal, electricity, various metals, and mineral fertilisers. The tourism industry was severely impacted, with over 90% of tour companies, hotels and restaurants in border regions either going bankrupt or facing imminent bankruptcy. According to estimates by the Finnish Regional Council of South Karelia, the economic loss from the lack of Russian visitors is set to reach one million euros per day in 2024.
Logistics and related industries have entered a period of significant crisis. Russian countermeasures have increased the pressure.
The prohibition on the transportation of goods from Finland to China has had a significant impact on the Green Train route, which was previously positioned as a competitor to sea freight. The ports of Hamina and Helsinki have recorded a 40-50% decrease in cargo turnover on this route. Logistics companies are making staff reductions, and railway operators are reviewing their investment plans," Denisenkova notes.
By 2025, Finnish companies had successfully reoriented their exports towards the US and EU markets. However, they were unable to replace the Russian market. It is the hope of businesses and ordinary citizens alike that relations between the countries will be restored. However, according to the economist, this is unlikely to happen in the coming years.
Finland will gradually transform into something like the former Soviet Baltic republics. Previously, the Finns did not experience the destructive processes that eroded the economies of Lithuania, Latvia, and Estonia. By breaking with Russia, Helsinki will gain this in full.