The early 1990s depression in Finland was one of the worst economic crises in Finland's history, even worse there than the 1930s
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
.
The depression of 1991–1993 had a deep effect on the economy of Finland throughout the 1990s, especially in terms of employment but also in culture, politics and the general sociopolitical atmosphere. The
gross national product
The gross national income (GNI), previously known as gross national product (GNP), is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign ...
decreased by 13%, and the
unemployment rate
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the referen ...
rose to 18.9% from 3.5%.
Since then, despite an overall recovery, unemployment has been persistent, and Finland has never returned to the state of nearly
full employment
Full employment is a situation in which there is no cyclical or unemployment#Cyclical unemployment, deficient-demand unemployment. Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely Structu ...
that had existed before the crisis.
Causes
![Jakobstad paper factory](https://upload.wikimedia.org/wikipedia/commons/c/cb/Jakobstad_paper_factory.jpg)
An underlying cause was the economic policy of the 1980s. Finland experienced a strong economic boom throughout the 1980s that dragged on and "overheated" the economy, leading to the corrective contraction of the depression. One reason was a change in Finnish banking laws in 1986 to allow Finnish companies to seek credit more easily from foreign banks, which was considerably less expensive than Finnish domestic credit. That led to a large-scale search for foreign loan sources, which helped to undermine the strength of the Finnish central bank. Additionally, consumer credit regulation was drastically relaxed, and the consumer loan portfolio increased dramatically, at times by more than 100% per year.
Those factors led to the strong short-term growth and in turn unsustainably increased both commercial and residential property values as well as the amount of money in the national economy. Stock and real estate bubbles created an environment in which large short-term profits were posted, leading to an artificially-inflated appearance of great wealth in the economy. The term "casino economy" was used to describe the use of loans to get very rich very quickly on paper by exploiting those bubbles.
The huge devaluation that occurred in November 1991 increased the debts of Finnish companies holding foreign loans in foreign currencies. They did not properly scale with the devaluation that the Kouri–Porter model had shown as early as in 1974. It was not followed in Finland in connection with the freeing of money market. However, foreign currency loans were only 15% of all loans.
The
collapse of the Soviet Union
The dissolution of the Soviet Union, also negatively connoted as rus, Разва́л Сове́тского Сою́за, r=Razvál Sovétskogo Soyúza, ''Ruining of the Soviet Union''. was the process of internal disintegration within the Sov ...
also played an important role, as it had represented 15–20% of Finland's foreign trade. Thus, a key Finnish export market disappeared nearly overnight. The rising price of oil in 1973 and 1979 and the increase of car use in Finland had also raised the level of the
bilateral trade
Bilateral trade or clearing trade is trade exclusively between two states, particularly, barter trade based on bilateral deals between governments, and without using hard currency for payment. Bilateral trade agreements often aim to keep trade def ...
with the
Soviet Union
The Soviet Union,. officially the Union of Soviet Socialist Republics. (USSR),. was a transcontinental country that spanned much of Eurasia from 1922 to 1991. A flagship communist state, it was nominally a federal union of fifteen national ...
. Oil itself often had been used as currency for international trade between the two countries.
Furthermore, political decisions based on the strength of the
Finnish mark
The markka ( fi, markka; sv, mark; sign: Mk; ISO code: FIM, typically known outside Finland as the Finnish mark) was the currency of Finland from 1860 until 28 February 2002, when it ceased to be legal tender. The mark was divided into 100 pe ...
weakened the international competitiveness of Finnish industry. In particular, much of the Finnish economy was reliant on the paper industry, which also experienced an overproduction worldwide.
Results
Consumption and investment fell in both the public and the private sector as a consequence of the depression. The number of company bankruptcies rose greatly, and the bankruptcies and the weak economy caused mass unemployment. Unemployment from 1992 to 1997 was consistently over 12% and went as high as 36.7% in construction industry during year 1994. Smaller banks ended up absorbed by big ones because they had difficulty maintaining profitability as a result of risky loans made to companies that went bankrupt, resulting in a nationwide bank crisis.
The budget deficit of the state of Finland was several percentage points of the GNP. Furthermore, Finland's sovereign credit rating was downgraded.
Economic policy
![Paavo lipponen 15](https://upload.wikimedia.org/wikipedia/commons/5/52/Paavo_lipponen_15.1.2002.jpg)
The liquidity of the banking system of Finland weakened as a consequence of the bank crisis. The government answered it by guaranteeing in 1991 the debts taken by the Finnish banks. To help the export industry, Finland performed devaluations in 1991 and 1992 and so entrepreneurs who had taken foreign currency loans found themselves in a financially-disadvantageous position.
To save the banks, the state deposit insurance fund (
bad bank
A bad bank is a corporate structure which isolates illiquid and high risk assets (typically non-performing loans) held by a bank or a financial organisation, or perhaps a group of banks or financial organisations. A bank may accumulate a large por ...
),
OHY Arsenal, was established and divided among loan-making banks. The largest recipients were the savings bank group Suomen Säästöpankki and Säästöpankkien keskusosakepankki (SKOP), a bank owned by small local savings banks. The remaining banks also received financial support. The savings bank group was liquidated and divided among the Osuuspankki Group, KOP, Postipankki and Yhdyspankki. In 1994, KOP had to merge with Yhdyspankki to form Merita Bank, which was later merged with
Nordea
Nordea Bank Abp, commonly referred to as Nordea, is a European financial services group operating in northern Europe and based in Helsinki, Finland. The name is a blend of the words "Nordic" and "idea". The bank is the result of the successive m ...
.
National government and municipal spending were strongly cut to guarantee the liquidity of the country. That weakened social services and other things. In 1995, Lipponen continued to operate under austerity measures, which had restricted government expenditures even for a period after the depression had formally ended.
The Finnish economy began to gradually recover in the mid-1990s. The depression of the early 1990s was mainly localised in the Nordic countries, and each nation's economic difficulty had a reverberating effect for the others. In other parts of the world, the economy grew as normal, and Finland indeed recovered quite fast, especially with export-led economic growth after Finland's local financial matters had been settled. The guiding star was the
conglomerate Nokia
Nokia Corporation (natively Nokia Oyj, referred to as Nokia) is a Finnish multinational corporation, multinational telecommunications industry, telecommunications, technology company, information technology, and consumer electronics corporatio ...
, which focused its efforts on mobile telephony and grew into a world market leader in less than a decade.
See also
*
Finnish banking crisis of 1990s
The Finnish Banking Crisis of 1990s was a deep systemic crisis of the entire Finnish financial sector that took place mainly in the years 1991–1993, after several years of debt-based economic boom in the late 1980s. Its total taxpayer cost was ...
*
Early 1990s recession
The early 1990s recession describes the period of economic downturn affecting much of the Western world in the early 1990s. The impacts of the recession contributed in part to the 1992 U.S. presidential election victory of Bill Clinton over incu ...
References
{{DEFAULTSORT:Early 1990s Recession In Finland
Economic history of Finland
Financial crises
Early 1990s recession