Finland entering dual-deleveraging trap

Abstract

This thesis examines whether Finland is entering a rare macroeconomic configuration known as double deleveraging, where both the private sector and the government reduce debt simultaneously. Drawing on the frameworks of Dalio (2012), Eggertsson & Krugman (2012), Reinhart & Rogoff, Richard Koo, and IMF crisis diagnostics, the analysis shows that Finland now meets the structural criteria for such a contraction. Private credit creation has stagnated since 2008, public debt has reached exhaustion, and eurozone membership removes key monetary stabilisation tools.

Four adjustment paths are evaluated. Scenarios A and B—deflationary adjustment or IMF intervention during crisis—lead to prolonged stagnation. Scenario D, deeper Nordic capital-market integration, improves microeconomic conditions but cannot resolve sovereign-level constraints. Only Scenario C, a controlled return to national monetary sovereignty supported by the IMF, enables a “beautiful deleveraging” by restoring currency flexibility, allowing controlled inflation, and enabling long-term bond issuance in domestic currency.

The thesis presents an original contribution: following a markka-based deleveraging, Finland could realign its macro-financial cycle with Sweden. Such synchronisation would stabilise inflation dynamics, restore competitiveness, and reintegrate Finland into the Nordic economic rhythm. The study concludes that proactive transition is essential to avoid persistent deflation and restore sustainable growth.