The economic crisis of the 1990s in Finland

In the 1990s, Finland underwent a deep depression as its GDP dropped about 14% and unemployment rose from 3 to almost 20%. This is a story of bad luck and bad policies. Bad luck took the form of external shocks: the collapse of trade with the former Soviet Union in 1991, but also sharp cycles in the OECD area. However, bad luck is far from being the whole story. In the abs ence of bad policies, Finland would have experienced a recession, not a dep ression. Bad policies included a poorly designed financial regulation and m istaken reactions to the onset of the crisis. Of particular interest is the role of financial factors in triggering the crisis and aggravating the eff ects of bad policies. Not only were consumption and investment spending hur t by the credit crunch, but there is evidence that the private sector's ind ebtedness has increased structural unemployment, which explains why the rec overy is proceeding with few job creations. A number of general lessons eme rge. They concern the deregulation of financial markets, the policy reactio n to massive capital inflows and the role of employment policies.