What’s Gone Wrong with Finland’s Economy?

If asked to guess the worst performing economy in Europe, we imagine most people would say Germany, where GDP has barely grown since the pandemic, or maybe France, which seems mired in a semi-permanent debt crisis. However, while the EU's big two economies are clearly facing some structural problems, the correct answer to this question is probably Finland. It's gone somewhat unnoticed, but Finland is quietly suffering through an appalling economic crisis. In real terms, GDP has only just recovered to pre-pandemic levels, and persistently weak growth has given way to record levels of joblessness, with Finland's unemployment rate rising from a recent low of 5.8% in October 2022 to 11.1% today, the highest in the EU. It's hard to overstate how bad this is. This means that the Finnish economy has essentially been stagnant for more than six years, and, given that Finland's population has increased during this time, actually shrinking on a per capita basis. And yet, if you zoom out, somehow things look even worse. Since the 2008 crisis, which clearly hit Finland pretty hard, the Finnish economy has grown by just 3%. This translates to an annual average growth rate of less than 0.2%, and implies that Finland has been in a per capita recession for the best part of 18 years. So in this video, we thought we'd do our best to figure out what exactly has gone wrong in what looks like perhaps Europe's most dysfunctional economy. Despite its sometimes overwhelming presence, there are still a handful of EU countries not using the euro. Why is this, and what's going on with the euro's missing members? That's just one of 80 pages in the magazine, because there's more in too long than you'd expect. Purchase your copy by clicking the link in the description. So, as we see it, there are essentially two questions here. First, what are the relatively immediate causes of Finland's post-pandemic slump? And second, what are the more structural causes of Finland's nearly two-decade-long stagnation since 2008? Let's start with the first question. There are at least four factors at play here. The first and most obvious is the invasion of Ukraine, and the subsequent severing of economic relations with Russia. This was particularly bad news for Finland. Not only did it have to deal with the subsequent energy crisis, but Russia, with which it shares an 1100km border, had also previously been one of Finland's largest trading partners. More generally, Finland is a small, open economy that relies more than most on international trade, which means it's been disproportionately affected by the wave of protectionism we've seen sweep across the global economy in recent years. The second reason is a housing crisis. Going into the pandemic, Finland's housing market looked a bit bubbly. Despite stagnant economic growth, Finnish property prices had risen steadily throughout the 2000s and 2010s. This all changed when the European Central Bank started raising interest rates in mid-2022. Mortgage costs in Finland, where basically everyone gets an adjustable rather than a fixed rate, immediately jumped. Demand for housing fell, and the bubble popped. House prices have been on the decline ever since, and have now fallen nearly 20% from their mid-2022 peak. Unsurprisingly, this has been terrible news for the Finnish economy. Not only has it undercut consumer confidence, it's also contributed to unemployment, because construction used to account for something like 20% of all employment. The third reason is austerity. Stagnant growth means that Finland's tax base hasn't really grown, but public spending has continued to rise, giving way to persistent budget deficits. After a decade of solid surpluses, Finland has run a budget deficit every year since 2009. Finland's debt burden has duly risen, with its debt-to-GDP ratio rising from 35% in 2008 to 89% in 2025. To remedy this, the government has recently implemented a policy of austerity, with spending cuts and indirect tax rises which, while may be necessary from a fiscal perspective, hasn't been good for the Finnish economy in the short term. And this takes us onto the fourth and final reason. The one area where spending is going up is defence, which has gone up from 1.4% of GDP in 2021 to 2.5% of GDP in 2025, and is due to hit 3.2% by 2030. There was some hope, in Finland and the EU more generally, that increased defence spending would help spur GDP growth more widely, in part by accelerating Europe's hitherto elusive re-industrialisation. While it's perhaps too soon to say for sure, this doesn't really seem to be happening, in Finland or elsewhere in the EU. GDP has remained stagnant, and the industry's share of employment has barely budged. This is plausibly because the desired second-order effects of defence spending are usually actually downstream of defence-related increases in research and development, or R&D, spending, which European militaries tend to neglect. So, those are the four things we think explain Finland's post-pandemic slump. Onto the second question, what explains Finland's post-2008 stagnation? Well, we see two fundamental reasons. The first is a persistent lack of investment. This is most obviously apparent if you look at research and development spending in Finland, which collapsed in 2008 and never recovered. Quite a lot of this had to do with Nokia, which accounted for something like 40% of all Finland's R&D spending, but also effectively collapsed around 2008 after the release of the iPhone. But this problem then continued into the 2010s, in large part because the housing boom essentially sucked up a lot of capital, meaning less money for productive investments in the rest of the economy. This dearth of investment is plausibly the main reason that Finland's productivity growth has been so weak since 2008. The second, and we think generally under-appreciated, structural problem in the Finnish economy is what we might describe as its human capital problem. There are two sides to this problem. The first is demographic. Many other developed countries are currently fretting about their aging populations, but in large part because Finland's fertility rate collapsed in the 60s, decades before most other European countries, Finland has actually been struggling with an aging population for some time. Finland's median age surpassed 40 back in 2005, roughly a decade before the rest of Europe, and its so-called dependency ratio, which basically measures the ratio between the non-working and working populations, has been skyrocketing since 2010. According to the latest UN data, Finland currently has the joint highest dependency ratio in the EU alongside France. The second side to Finland's human capital problem is educational. Finland's education system used to be renowned the world over. Despite being publicly funded, not too expensive and famously uncompetitive in its early years, the Finnish system produced some of the brightest kids in Europe, and throughout the 2000s Finnish students topped the OECD's PISA rankings. In 2000, 2003, 2006 and 2009, Finnish students outperformed all their European peers, coming second globally in 2003 and 2006 to Hong Kong and Taiwan respectively. However, something has gone wrong. From 2009 onwards, Finnish PISA scores started tanking, and Finland came 20th in the latest rankings, implying Finland has seen the worst declines in educational attainment of any OECD country. This is the nub of Finland's so-called human capital problem. Its population is old, aging and increasingly poorly educated. All in all, Finland's stagnation is proof that even rich, well-functioning countries can quietly descend into disrepair, and European policymakers should pay due attention. Now, you're probably looking to learn more about this story and keep up with how it progresses, and the first place you're going to start is online. But in today's world, it feels like 99% of websites demand your email address just to simply visit the page. So, you type in your email to access the site quicker, but unknowingly you've now put your online safety at risk. Your information can now be sold online, and your email inbox is suddenly cluttered with a bunch of spam you never asked for. Thankfully, we have a solution for you, and that solution is ProtonMail. That's because ProtonMail offers a wide range of features to help keep you safe, from advanced phishing protection that flags potential attacks to keep your inbox secure, to blocking invisible email trackers and preventing companies from spying on you just so they can target you with ads. ProtonMail has it all. They even offer unlimited email aliases to get around those pesky websites that demand your information. They use end-to-end and zero-access encryption, meaning your emails truly stay private, inaccessible to advertisers, trackers, and even Proton itself. That means no ads, no tracking, and no profiling, which feels increasingly uncommon today. Proton also makes switching from your old cluttered inbox incredibly simple with a migration tool that lets you move everything over in just a few clicks. Or, if you prefer, you can start fresh with a brand new email account and enjoy a clean, organized mailbox from day one. So, if you want to take back your privacy, start using ProtonMail for free using our link at proton.me forward slash tldr, and you'll be one step closer to a fully protected online experience free of data exploitation.