The late 1980s and early 1990s were a dramatic period in world history. The fall of the Berlin Wall and the collapse of the Soviet Union fundamentally changed the post-World War II order in international relations. The Cold War and the confrontation between the East and the West became history. Estonia, Latvia and Lithuania re-declared their independence. The situation in the immediate neighborhood of Finland changed dramatically, for the better.
In September 1990, Presidents George H. W. Bush and Mikhail Gorbachev met in Helsinki. The main item of their discussions was Iraq’s invasion of Kuwait, later leading to the Gulf War. For Finland, being a venue for a meeting of the leaders of the two great powers was important, particularly as it seemed to usher in a new era.
President Mauno Koivisto visited the U.S.in May 1991, two years after President Bush had delivered his famous speech on a “Europe whole and free” in Germany. This vision of a continent “whole and free” was something that Finland also wanted to see realized after decades of division. The country placed strong emphasis on European integration which was taking long leaps forward.
In his New Year's address of 1992, President Koivisto said that the European Economic Area was a desirable alternative for Finland, because it opened up the possibility of participating in the growing European market place, while leaving at the same time room for independent decision making. He also hoped that the reforms in the East would soon lead to rising production, viable forms of trade and a revival in economic cooperation. The background for the latter statement was that with the collapse of the Soviet Union Finland lost important markets practically overnight.
In 1992, Finland and Russia replaced the 1948 Treaty of Friendship, Cooperation and Mutual Assistance between Finland and the Soviet Union with a new agreement that was essentially similar to other agreements between Russia and western countries.
That same year Finland opened preliminary talks on membership in the European Union. With the announcement of Sweden to seek full membership, the EEA membership became practically obsolete for Finland as well.
In 1992, Finland announced it would purchase F-18 Hornets from the U.S. to modernize its aging fleet of fighter planes. With this purchase, Finland gave up the long-standing policy of balancing its key defense equipment acquisitions between the East and the West. The government stated that the decision was based purely on technical and economic considerations, but the purchase was a very important step in post-Cold War Finnish-U.S. relations.
Finland suffered a great depression in 1990–1994. The sudden collapse of the Soviet Union sent shock waves through the Finnish economy, given the major role that trade with the eastern neighbor had played for decades. The economic crisis was one of the worst in an industrial country since World War II.
The severity of the depression had underlying reasons beyond the collapse of the Soviet Union. Finland was, like many western economies, hit by a banking crisis. Throughout the 1980s, Finland experienced a strong economic boom. Finns used foreign credit to invest in stock and real estate markets. Soaring prices attracted frantic speculative activity by banks, private companies, individual investors and even workers’ unions. Many investors believed that it was possible to get incredibly rich by exploiting the stock and real estate bubbles. The term "casino economy" was used to describe this activity.
When the economy crashed, the GDP fell by 13%, and the unemployment rate climbed from 3 to 18 percent within four years. There was a wave of bankruptcies, and tens of thousands of households had debt problems.
The government had to take strong action to save the Finnish economy. The Bank of Finland was forced to abandon the policy of a fixed exchange rate in September 1992, and the Finnish markka was allowed to float. Industrial production benefited from devaluation and recovered quite rapidly. To solve the banking crisis, the government took over the savings bank group that had suffered the largest losses, and in addition, restructured and downsized the banking industry.
The social costs of the crisis were large and durable, and mostly related to long-term unemployment. The depression left its mark in culture, politics and the general sociopolitical atmosphere. In the years that followed, the unemployment rate fell to 10%, but never reached the 3% rate witnessed prior to the depression.
Nonetheless, the painful measures taken in the early 1990s laid the foundation for Finland’s strong economic performance from the latter half of the decade onwards. Namely, the government decided in the middle of the depression and the austerity measures to invest heavily and boldly in innovation ecosystems. This paid off very quickly as Finland became a leading country in the world in particular in information technologies.
For Finland, membership in the European Union was a logical step in the western integration that it had pursued within its possibilities after World War II. The European Union had developed its political dimension forcefully, and Finland considered carefully what EU membership would mean for its foreign and security policy. The conclusion was that it would most likely strengthen the international position and security of the country. Early on, the decision was made in Finland that as a member of the Union it would be best to be in the core of the Union to maximize Finland's influence. A strong EU would be in the benefit of Finland.
Discussion about a possible membership in NATO was overshadowed by the EU membership process. There were many reasons for this, including the fact that after the end of the Cold War the prospect of military threat had receded. Finland did not feel that there was a security deficit. But the enlargement of EU and NATO to the former eastern European countries and in particular to the Baltic states was important for Finland, and particularly the former was strongly and unanimously supported by Finland, the latter after some hesitation in some circles.
Martti Ahtisaari won the presidential election in 1994. President Ahtisaari devoted special attention to foreign and security policy and was the president to lead Finland into the European Union. After two years of negotiations, a referendum organized in 1994 confirmed that close to 57% of the Finnish population was in favor of joining the EU. As a result, Finland became a member of the European Union in the beginning of 1995. Due to the EU membership, Finland’s trade policy with the U.S. was now determined by agreements between the EU and U.S., not bilateral ones.
In addition, by joining the EU, Finland abandoned its policy of neutrality which was not compatible with the fact that the EU is a political union. However, as the European Union is not a military alliance, Finland defined its position as militarily non-aligned or not belonging to military alliances.
President George H.W. Bush visited Finland again in 1992 when the CSCE arranged a high-level meeting in Helsinki. Other participants included Boris Yeltsin of Russia and Helmut Kohl of the united Germany.
In 1995, Helsinki hosted a seminar marking the 20th anniversary of the Conference on Security and Cooperation in Europe. Participants included former U.S. President Gerald Ford, one of the original signatories to the CSCE Final Act. In his opening speech, Prime Minister Paavo Lipponen gave his assurance that Finland will participate more actively in peacekeeping operations. This was an important way to continue the policy of international engagement and burden-sharing. Unfortunately, the needs for peace-keepers and crisis management were suddenly found closer to home than before, as the crisis in the Balkans erupted.