During World War II, Denmark and Norway were occupied by Germany; Finland fought a costly war with the Soviet Union; while Sweden, though neutral, still felt the war's effects. Following the war, the Nordic countries pursued the idea of a Scandinavian defence union to ensure their mutual defence. However, Finland, due to its Paasikivi-Kekkonen policy of neutrality and FCMA treaty with the USSR, could not participate.
It was proposed that the Nordic countries would unify their foreign policy and defence, remain neutral in the event of a conflict and not ally with NATO, which some were planning at the time. The United States, keen on getting access to bases in Scandinavia and believing the Nordic countries incapable of defending themselves, stated it would not ensure military support for Scandinavia if they did not join NATO. As Denmark and Norway sought US aid for their post-war reconstruction, the project collapsed, with Denmark, Norway and Iceland joining NATO.
Further Nordic co-operation, such as an economic customs union, also failed. This led Danish Prime Minister Hans Hedtoft to propose, in 1951, a consultative inter-parliamentary body. This proposal was agreed by Denmark, Iceland, Norway, and Sweden in 1952. The Council's first session was held in the Danish Parliament on 13 February 1953 and it elected Hans Hedtoft as its president. When Finnish-Soviet relations thawed following the death of Joseph Stalin, Finland joined the council in 1955.
On 2 July 1954, the Nordic labour market was created and in 1958, building upon a 1952 passport-free travel area, the Nordic Passport Union was created. These two measures helped ensure Nordic citizens' free movement around the area. A Nordic Convention on Social Security was implemented in 1955. There were also plans for a single market but they were abandoned in 1959 shortly before Denmark, Norway, and Sweden joined the European Free Trade Area (EFTA). Finland became an associated member of EFTA in 1961 and Denmark and Norway applied to join the (EEC).
This move towards the EEC led to desire for a formal Nordic treaty. The Treaty of Helsinki outlined the workings of the Council and came into force on 24 March 1962. Further advancements on Nordic cooperation were made in the following years: a Nordic School of Public Health, a Nordic Cultural Fund, and Nordic House in Reykjavík were created. Danish Prime Minister Hilmar Baunsgaard proposed full economic cooperation ("Nordek") in 1968. Nordek was agreed in 1970, but Finland then backtracked, stating that its ties with the Soviet Union meant it could not form close economic ties with potential members of the EEC (Denmark and Norway). Nordek was then abandoned.
As a consequence, Denmark and Norway applied to join the EEC and the Nordic Council of Ministers was set up in 1971 to ensure continued Nordic cooperation. In 1970 representatives of the Faroe Islands and Åland were allowed to take part in the Nordic Council as part of the Danish and Finnish delegations. Norway turned down EEC membership in 1972 while Denmark acted as a bridge builder between the EEC and the Nordics. Also in 1973, although it did not opt for full membership of the EEC, Finland negotiated a free trade treaty with the EEC that in practice removed customs duties from 1977 on, although there were transition periods up to 1985 for some products. Sweden did not apply due to its non-alliance policy, which was aimed at preserving neutrality. Greenland subsequently left the EEC and has since sought a more active role in circumpolar affairs.
In the 1970s, the Nordic Council founded the Nordic Industrial Fund, Nordtest and the Nordic Investment Bank. The Council's remit was also expanded to include environmental protection and, in order to clean up the pollution in the Baltic Sea and the North Atlantic, a joint energy network was established. The Nordic Science Policy Council was set up in 1983 and, in 1984, representatives from Greenland were allowed to join the Danish delegation.
Following the collapse of the Soviet Union in 1991, the Nordic Council began to cooperate more with the Baltic states and new Baltic Sea organisations. Sweden and Finland joined the European Union (EU), the EEC's successor, in 1995. Norway had also applied, but once again voted against membership. However, Norway and Iceland did join the European Economic Area (EEA) which integrated them economically with the EU. The Nordic Passport Union was also subsumed into the EU's Schengen Area in 1996.
The Nordic Council became more outward-looking, to the Arctic, Baltic, Europe, and Canada. The Øresund Bridge linking Sweden and Denmark led to a large amount of cross-border travel, which in turn led to further efforts to reduce barriers. However, the initially envisioned tasks and functions of the Nordic Council have become partially dormant due to the significant overlap with the EU and EEA. In 2008 Iceland began EU membership talks, but decided to annul these in 2015.