When Finland formally joined Nato in April 2023, abandoning the studied neutrality it had maintained since the Second World War, the decision was framed in Helsinki as an existential security choice forced by Russia's invasion of Ukraine. Two years on and security remains the key consideration, but the economic bill is becoming harder to ignore.

Finland now sits on Nato's longest land border with Russia — 1,340 kilometres of frontier that was previously managed through careful diplomatic balance and flourishing bilateral cross border trade.

Both of those buffers are gone. What remains is a country simultaneously rearming at historically unprecedented speed, but that has sent the fiscal deficit soaring to the point it has triggered the EU’s excess deficit mechanism for members that break the prudent spending rules. The collapse of cross border trade of Russians entering Finland at the weekend to shop at large malls or stay in the local hotels has also wiped out €12.7bn of trade a year as recently as 2021 turning local communities into ghost towns.

Finland's debt-to-GDP ratio will reach 90.9% in 2026, rising toward 92.3% in 2027, according to European Commission forecasts — levels that have already prompted Brussels to start the excessive deficit procedure as part of the wider dysfunctional European economy that is being pummelled by the economic impact of the sanctions on Russia and now a snowballing energy crisis as a result of the Iran war.

The general government deficit stood at 4.5% of GDP in 2024 and is projected to remain above 3% through the decade. The IMF, concluding its 2026 Article IV consultation, projects the debt ratio will reach 95% of GDP by the end of the decade and has recommended that Finland consolidate at half a percentage point of GDP per year until the fiscal balance is closed.

Finnish growth has moved from strong rebound from the pandemic of 2.7% in 2021 to near-zero growth  of 0.2% in 2025.  The economy has effectively been flat for three consecutive years between 2023–2025 and among the weakest performers in the eurozone in recent years, with growth well below its long-term average of ~0.8–2.0%.

Rearming at any cost

Having already lost one war against Russia, national security remains paramount. The Winter War with the USSR in 1939-1940 at the end of WWII saw Finland defeated and it lost 10% of its territory, after which the government launched its Finlandization policy of strict neutrality for the Cold War period.

Since then, the government has invested heavily into its military. While on paper its standing army looks small with some 25,000 men, the country has the largest trained reserves in Europe that includes a massive 15% of the population. If Russia were to attack again, Finland could rapidly call up a total of 900,000 men from a population of only 5.5mn, three-times as many as in the Turkish army, of which 280,000 are ready for active wartime units. The military is one of the best equipped and most battle-ready of any in the EU and would play a key frontline role in any war with Russia together with Poland.

But the cost of maintaining its military is big. Finland has committed to increasing defence spending to 3% of GDP by 2029 — up from the roughly 2% maintained during the neutral years — and has signed up to the Nato alliance target of 5% by 2035, of which 3.5% would be direct defence spending and a further 1.5% defence-related infrastructure.

The purchase of 64 F-35 fighter jets, costing approximately €8.4bn, and a €546.8mn deal to double the howitzer fleet to 208 guns represent the most visible line items. Finland now hosts Nato's largest Arctic artillery exercises, 70 kilometres from the Russian border.

"We are experiencing a drawn-out recession. Even though we have returned to growth, employment is growing more slowly than previously estimated. Lower accumulation of GDP is leading to wider deficits and faster growth of debt than we estimated," said Mikko Spolander, director general of Finland's Finance Ministry, in December, European Pravda reports.

Finland's unemployment rate rose by almost 3 percentage points from its low in spring 2022 to reach 9.3% in 2026, according to Bank of Finland projections, driven in part by expanding labour supply — and is expected to remain above the structural rate through 2027. The Bank of Finland's baseline projects GDP growth of just 0.5% in 2025 and 1.5% in 2026, with public finances remaining "deeply in deficit" throughout the forecast period.

To pay for the military, the government has been forced to cut into social spending. Money has been made available for Ukraine, but the government has frozen indexation of unemployment allowances, cut social benefits and streamlined the unemployment benefit system — austerity measures that would have been politically inconceivable in the Nordic consensus model Finland operated under before 2022.

Border economy has vanished

The most direct economic cost of the end of Finnish neutrality has been the collapse of its Russia trade. Finland’s exports to Russia fell by 93% — from €12.7bn annually at their pre-war peak to near zero — following the application of EU sanctions after the 2022 invasion. More than 315 companies in Finland's border regions have gone bankrupt since April 2025, according to local business associations. The outlet malls of Lappeenranta, built to serve the hundreds of thousands of Russian shoppers who crossed the border annually to buy European goods, now record hotel occupancy that rarely exceeds 45%. Trade losses in the border economy are estimated at approximately €1mn per day.

The loss is structural, not cyclical. Unlike the disruptions of the 2008 financial crisis or the Covid-19 pandemic, the Russia trade will not return regardless of how the Ukraine war ends. The sanctions architecture, Finland's membership of Nato and the political rupture between Helsinki and Moscow have made the pre-2022 economic relationship unreconstructable on any foreseeable timeline.

The energy shock compounds the pressure

The Iran war's disruption to global energy markets has arrived at the worst possible moment for a country navigating all of these pressures simultaneously. Finland imports most of its energy. The World Bank projects a 24% energy price surge for 2026 — the largest since 2022. Brent crude touched $126 a barrel on April 30. Europe entered the 2026 gas injection season with only 31bn cubic metres in storage — the lowest level since 2018 — after losing most of its Russian pipeline gas.

The Bank of Finland has warned explicitly that a prolonged energy shock would cripple growth for years, with a worst-case scenario under which GDP growth approaches zero. Finland has no tourist economy to cushion energy shocks. It has no southern European sun to create a solar power cushion. It is an energy-intensive industrial economy in a cold climate, now being asked to pay simultaneously for its security, its austerity and its solidarity with Ukraine.

The energy crisis is restricting the already limited fiscal space the government has to navigate. As debt continues to approach 95% of GDP by the end of the decade that fiscal space is getting even narrower and could erode market confidence over debt sustainability, the IMF warns."

And all this comes at a time when US President Donald Trump is dismantling trust in Nato, leading Brussels to start work on setting up a Euro Nato, without the US participation. Public trust in Nato, according to Finnish polling, has fallen to 46% — with support among women standing at just 37%.

None of this means that Finland's strategic choice was wrong. The alternative of remaining outside Nato in the face of Russian aggression was seen as a security risk too far.

But the costs are real and accumulating. The country that entered the Nato alliance in relative fiscal health is now running deficits that breach EU rules, debt that approaches the levels of southern Europe and a border economy that has simply ceased to exist.