The EU's Excessive Deficit Procedure: what does it mean for Finland?
In recent years, Finland has narrowly avoided being placed under the Excessive Deficit Procedure (EDP). However, this autumn, the EDP could no longer be avoided, as weak economic development has kept the deficit higher than expected.
In practice, being placed under the EDP means that Finland must take corrective actions to improve the situation. In December, the Commission defined a so-called corrective net expenditure path for Finland, which Finland is required to follow.
Based on the Commission’s forecast, Finland will not remain on the corrective path in 2026 and 2027. However, the flexibility granted on the basis of defence spending helps Finland to stay close to the permitted limits.
Under the Excessive Deficit Procedure, the Commission’s assessment is not based on individual deficit or debt figures, but the adequacy of adjustment measures is assessed only through compliance with the corrective net expenditure path. The Commission’s assessment is comprehensive rather than mechanical and may also take other relevant factors into consideration.
Finland is close to non-compliance with the debt rules
The general escape clause of the EU debt rules, which had been activated due to the COVID-19 pandemic, was deactivated in 2023. As from 2024, the debt rules have again been in force.
Finland has failed to comply with the deficit criterion after the COVID-19 pandemic. However, breaching the criterion does not automatically mean that the Commission places a Member State under the Excessive Deficit Procedure.[i]
How has the Commission assessed Finland’s compliance with the deficit criterion in recent years?
In spring 2024, the deficit exceeded the reference value only for the current year (Figure 1). The Commission stated that the deficit for the current year was close to the reference value and that it would fall below the reference value in the following year. The Commission stated that it would reassess the situation in Finland in autumn 2024.
In autumn 2024, the deficit still exceeded the reference value only for the current year (Figure 1). The Commission assessed that the deficit excess was exceptional and temporary but no longer close to the reference value. The Commission concluded that the Excessive Deficit Procedure would not serve its purpose, as the deficit was projected to fall below the reference value without additional measures.
In spring 2025, the deficit exceeded the reference value for the previous and the current year (Figure 2). The Commission assessed that the deficit excess was neither temporary nor close to the reference value. However, the breaches of the deficit criterion could be fully explained by higher defence spending.
In autumn 2025, the deficit exceeded the reference value for the previous and the current year (Figure 2). The Commission assessed that the deficit excess was neither temporary nor close to the reference value. This time, the increase in defence spending was not sufficient to fully explain the deficit excess. The Commission proposes placing Finland under the Excessive Deficit Procedure.
The Commission’s next assessment is scheduled for spring 2026
Based on previous observations, it can be said that Finland has faced challenges in complying with the debt rules. Already in autumn 2024, the Commission’s decision to spare Finland from the Excessive Deficit Procedure was inconsistent with the Commission’s interpretation at the time. [ii]
Against this background, being placed under the EDP is by no means surprising. The procedure as such does not change the economic situation in Finland, but above all, it entails closer monitoring of fiscal policy.
The next assessment is scheduled for late spring next year. The Commission will then examine Finland’s progress in relation to the corrective net expenditure path and the adequacy of the Government’s fiscal measures.
Putting the debt-to-GDP ratio on a downward path requires long-term commitment
Despite the higher deficit and debt level, the risk premium on Finnish government bonds (the yield spread relative to Germany) has remained low. The financial markets value Finland’s stable institutions, significant pension assets, and EU membership.
The debt brake strengthens confidence that adjustment measures will move from words into concrete fiscal policy actions.
Finland’s challenges therefore lie in ensuring medium-term debt sustainability. The growing debt ratio should be put on a downward path. Based on previous observations, this is entirely possible.[iii]
The Excessive Deficit Procedure emphasises that Finland’s key challenge is not an individual EU procedure but the ability to combine plausible adjustment with a policy that supports economic growth in order to put the debt-to-GDP ratio on a downward path.
[i]The deficit criterion is considered to have been complied with if the actual deficit for the previous year and the projected deficit for the current year do not exceed the 3% reference value. Otherwise, the Commission will prepare a report to assess whether the deficit has decreased substantially towards the reference value and whether the excess can be considered exceptional, temporary, and close to the reference value.
[ii]The Commission used this interpretation for the first time in spring 2024 for Italy. According to the 2024 annual report of the European Fiscal Board, the Commission had previously proposed the initiation of the EDP in a similar situation.
[iii]Based on previous observations, the adjustment or the (structural) primary balance level required to put Finland’s debt ratio on a downward path are achievable. In this context, see for example the article by Darvas et al., Sovereign Debt and Fiscal Integration in the European Union.