The European Commission formally reprimanded Finland for contravening the EU’s fiscal rules on Tuesday, as weak consumption and geopolitical uncertainty stoked by Russia’s war in Ukraine compound the Nordic country’s gloomy economic outlook.

Brussels’ decision to recommend opening an “excessive deficit procedure” (EDP) against Helsinki – which could theoretically lead to financial penalties – comes just a week after it predicted Finland’s deficit would surge to 4.5% of annual GDP this year: well above the 3.7% shortfall projected in May.

Nine other member states, including France, Italy and Poland, are currently subject to an EDP for infringing the EU’s 3% fiscal threshold. Finland’s debt-to-GDP ratio of 88.4% is also far above the bloc’s 60% official debt limit, although it is close to the eurozone average of 88.2%.

But European Commissioner for Economy Valdis Dombrovskis said that Finland’s surging deficit – which ran to just 0.9% in 2022 – “cannot be fully explained” by the rapid increase of military expenditure brought on by Russia’s full-scale invasion of Ukraine more than three years ago.

However, he noted that the Commission “must acknowledge” Finland’s “exceptional circumstances”, with Russia’s war sapping investor and consumer confidence and causing one of the EU’s historically most vibrant economies to suffer anaemic rates of economic growth.

Helsinki’s decision to close its land border with Russia – which has led to a sharp decline in tourism – has further hampered growth, Dombrovskis said.

Finland’s GDP growth is set to slow to just 0.1% this year, according to the Commission’s latest forecast: down from 0.4% in 2024 and far below the bloc’s average forecast expansion of 1.4%.

Tuesday’s decision was widely anticipated by Finnish officials, with Finance Minister Riikka Purra saying last week that the country’s high deficit means it is “very clear” Helsinki would eventually be hit with an EDP.

Corroborating the Commission’s assessment, Purra noted that Helsinki’s high deficit is not a result of increased defence spending. Rather, she said, it is due to “the weak development of revenue”, including “rapidly growing social welfare expenditures” and benefit payments.

In its country report last week, the Commission said that weak consumption had limited VAT revenue for Helsinki’s right-wing coalition government, while high unemployment has further restricted income tax revenue. Finland’s unemployment rate is currently 9.8% – the second-highest in the EU, after Spain.

Responding to the Commission’s announcement later on Tuesday, Purra confirmed that the news “did not come as a surprise” and that Brussels will inform Helsinki about how quickly it expects the country to correct its deficit in December.

This article has been updated.