Brussels has just handed a harsh reality check to Helsinki that came out of left field much too quickly for anyone to react to. It came as a shock to the entire EU that Finland, one of the most frugal nations in Europe, would be disciplined for an excessive deficit within the European Union, according to the European Commission. This is a clear indicator of just how quickly the situation has turned sour for the Nordic nation, economically speaking.
Finland joins eight other nations under EU scrutiny
This news release includes Finland among other countries, such as Spain, Hungary, Malta, and the Netherlands, which may be formally rebuked for exceeding agreed budget ceilings. European Commissioner Valdis Dombrovskis called on these member states to devise necessary policies for ensuring that these member states adhere to budget rules drawn by the European Union, especially those with an excessive deficit procedure established within their nations.
This is a reflection of the growing demands being placed on the priorities of member states with regard to public expenditure and economic disciplines within the EU. Countries face immense pressure with regard to enhancing defense budgets and maintaining a stable economy in the wake of international trade uncertainties. The warning sounded by the Commission reflects the common situation among nations with diverse economic performance, which is an indicator of a systemic problem rather than a problem related to the financial management of nations.
Excessive deficit procedure threatens significant financial penalties
Finland currently has a budget deficit of 4.5% of its GDP, much exceeding the 3% level set by the EU, prompting the start of an excessive deficit procedure against Finland by the EU Commission. However, a decision will be taken after clearance from the EU’s financial ministers, and a fine of up to 0.05% of the previous year’s GDP will be imposed if the action is not addressed. The financial ministry announced earlier in the year that Finland is out of the excessive deficit procedure.
The process has a systematic order with increasingly severe penalties for failure to comply with the requirements. A member is given six months to take corrective measures after being recommended by the Council. There will be financial sanctions imposed every six months if the member fails, pending proof of effective action taken being demonstrated. The situation is a stark reversal for Finland, which always managed to avoid an EU infringement procedure due to exceptional circumstances.
Defense outlays form a partial reason for breaching the deficit
The special circumstances with regard to Russia’s war and the closing of the borders have heavily affected the economy of Finland, a fact stated by Commissioner Dombrovskis. The closing of the land border with Russia resulted in a depreciation in tourism, and defense expenditures grew the deficit, but unilateral defense expenditures cannot explain why the deficit is above 3% of GDP, according to the Commission.
Finance Minister Riikka Purra accepted the fact that Finland has to follow the proposed pace of adjustment recommended by the Council when she said, “The next government will have its work cut out for it to adjust public finances.” This shows that the adjustment of finances is a long-term process, which will be carried out for a period of more than one parliamentary term due to budget difficulties faced by Finland.
The fact that Finland is a party within the EU’s disciplinarian procedure is a turning point in European fiscal policy because it shows that even those European states with a reputation for sound finances can be found violating budget rules. The implication of the Commission’s threat against eight member states is that European governments collectively face significant challenges in meeting defense expenditure hikes, growth requirements, and fiscal discipline commitments simultaneously.
