Finland Another EU nation falls victim of the Euro
Jarno Lehtola is a Postgraduate Student in Economics of Sustainability Torrens University Australia and Member of the Board Modern Money Lab Europe
The Finnish Industrial Trade Union Helsinki mass demonstration against labour market reforms
Finland ’ s current economic challenges are closely linked to its loss of monetary sovereignty as a member of the Eurozone.
That proposition may sound controversial. Yet it is difficult to make sense of Finland ’ s economic situation without starting there. The country faces weak growth, high unemployment and a polarised debate over public spending, competitiveness and labour-market reform.
These challenges have domestic causes, but they also reflect the institutional constraints of monetary union without a corresponding fiscal authority.
The late British economist Wynne Godley anticipated many of these problems before the launch of the E uro. In work developed with economist Marc Lavoie, he argued that monetary union created a structural asymmetr y . Member states surrendered control over interest rates, exchange rates and currency issuance, yet remained responsible for maintaining employment and economic stability.
When downturns arrived, they discovered that key policy tools had been removed from their toolbox.
Finland ’s current experience illustrates this dilemma. The unemployment rate recently climbed above 10 percent, making it the highest in the European Union. Meanwhile, public debate has increasingly cent re d on spending cuts aimed at restoring fiscal sustainability and reducing the public debt-to-GDP ratio in line with the European Stability and Growth Pact.
Public discussion often treats the government budget as if it exists in isolation. Godley and Lavoie ’ s stock-flow consistent framework suggests otherwise.
Their starting point is simple. Every economy contains three broad sectors: the private sector, the government sector and the foreign sector. The financial balance of one sector must be matched by the others.
If households and firms save more than they spend, another sector must spend more than its income. Likewise, an external deficit implies that domestic sectors must absorb the corresponding financial imbalance.
This is not a theory. It is an accounting identity.
The policy implications are often misunderstood. If the private sector seeks to save and external demand is insufficient to offset that saving, government deficits are not simply political choices. They emerge as the counterpart to private saving desires.
This matters for Finland.
For several years Finnish households have faced weak growth, high borrowing costs and uncertainty about incomes. Businesses have been cautious, and investment has remained subdued.
Under these conditions, attempts to reduce government deficits through austerity can become self-defeating. Lower public spending reduces incomes. Lower incomes reduce tax revenues. Slower growth increases welfare expenditure. The deficit often falls far less than expected, and in some cases not at all.
In such circumstances, austerity can undermine the fiscal goals it is intended to achieve.
Inside the Eurozone, the problem is more severe because adjustment mechanisms are limited. Finland cannot devalue its currency. It cannot independently adjust interest rates to suit domestic conditions. It cannot spend as a sovereign currency issuer does. Monetary policy is set at the Eurozone level, while fiscal policy operates within supranational constraints.
Godley warned that such arrangements would become problematic in downturns because fiscal policy would carry most of the adjustment burden under constraint. The experience of the Eurozone during the pandemic reinforced this insight, as fiscal rules were suspended to avoid deepening the downturn.
Finland in 2026 is not Greece in 2010. The differences are important . Finland has stronger institutions, higher productivity and greater stability. Yet there is a structural similarity worth recognising. Both are small open economies operating within a monetary system they do not control.
Greece showed that economic necessity and institutional capacity can diverge sharply. Finland faces a milder version of the same tension. At times, the economy may require more public spending than current fiscal rules permit.
Without exchange-rate flexibility, policymakers turn to internal devaluation. Instead of currency adjustment, they reduce domestic costs through wage restraint, deregulation and spending cuts. While exchange-rate depreciation spreads adjustment across the economy, internal devaluation concentrates it on workers, households and public services.
The social costs are clear . T he macroeconomic benefits are uncertain at best.
Lower wages reduce purchasing power. Domestic demand weakens. Firms face lower sales. Investment becomes less attractive.
In a monetary union, not all countries can improve competitiveness through wage suppression since , as Godley’s framework demonstrates, one country ’ s exports are another ’ s imports.
This is where the distinction between export-led and wage-led growth becomes relevant. An economy cannot rely indefinitely on external demand while weakening domestic purchasing power. Wage restraint may improve competitiveness indicators, but it can also erode the demand base that supports investment and productivity growth.
None of this implies that monetary sovereignty is a cure-all. Small open economies face real constraints regardless of currency arrangement . External financing conditions still matter, but for a monetarily sovereign government they operate primarily through exchange rates, inflation and financial stability rather than through solvency constraints.
The key question is not whether constraints exist, but which constraints matter most. A sovereign currency issuer faces mainly real resource constraints, such as labour, energy and productive capacity. A Eurozone member faces those same real constraints plus institutional financial constraints.
That distinction is significant.
Finland ’ s most realistic path forward lies neither in denial nor in ideological confrontation. Within the current institution al structure , the priority should be productive public investment rather than austerity.
The focus should be on productivity-led competitiveness: investment in skills, research and development, and industrial policy supporting higher value-added sectors. This can strengthen external performance while sustaining the domestic demand that supports employment, business investment and tax revenues.
At the European level, Finland should pursue change on three fronts.
In the short term, it should identify and exploit points of flexibility within the current set of fiscal rules.
Over the longer term, it should push for a more flexible fiscal framework, seek like-minded allies and play a more active role in shaping debates in Brussels.
Thirdly, t he Eurozone still lacks permanent fiscal stabilisation mechanisms that Godley identified as necessary for a sustainable monetary union , such as common investment capacity, shared unemployment insurance and tools that prevent procyclical austerity in downturns.
Pushing for these reforms is not idealism. It is our national interest.
The objective should be higher employment, rising productivity and improving living standards for the broad majority of people.
Achieving these goals requires recognising the institutional constraints within which Finland currently operates. Our challenges are not only cyclical or domestic in origin. They also reflect the structural limitations of a monetary union without adequate fiscal architecture.
More than three decades ago, Wynne Godley warned of these tensions. Finland ’ s experience suggests his warning remains relevant today.
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Jarno Lehtola – What the Euro Took Away: Finland’s Missing Tools for Prosperity
Aggregated summary from an independent source. Read the original at BraveNewEurope.