Minister of Economic Affairs Olli Rehn, Growth and Competitiveness in Europe: Case Finland

Ministry of Economic Affairs and Employment 26.10.2016 15.55
Speech

Proactive Trade Agenda – Now! –seminar, Finlandia Hall, 26th October

Welcome to Helsinki! It is a great honor for me to meet you and express some thoughts on some central policy issues, European and Finnish. I want to thank the EESC and its Employers’ Group, as well as EK and ICC, for arranging this conference on such an important subject.

Let me still start with the title of your seminar: Proactive Trade Agenda – NOW! It has sure been chosen with quite some courage! Against the backdrop of the recent days’ developments, it is fair to say that it has probably not been invented in Wallonia! Nor in the Trump Tower!

Be that as it may, new trade initiatives and free trade agreements are important for countries like Finland that depend on exports and economic openness – like all EU member states. We can’t afford to be refuseniks, as our economic and social welfare and employment crucially depend on trade. So how are free trade and the world economy faring today?

Not that well. The world economy appears to be in a low-growth trap, with persistent growth disappointments weighing on future growth expectations.

Continued weak trade growth also reflects the lack of progress in the opening of global markets to trade in goods and services. Headwinds against the TTIP and CETA agreements, as well as against the TPP deal, are concrete examples of changing public opinions in Europe and elsewhere.

This is linked to what in fact amounts to a legitimacy crisis that the EU is experiencing now, due to the position that the Walloon parliament has taken towards the CETA agreement. The current stalemate sets the requirement to ratify trade agreements by regional or national parliaments under further consideration.

It is essentially a matter of the EU’s credibility as an international partner, which is the crucial underpinning of our global goals, stretching from competitiveness to climate, and from trade to development.

Personally, I was surprised that the Commission agreed to treat CETA as a mixed agreement. Now we are waiting for the ruling of the European Court of Justice. However, it is hard to see other meaningful options than to separate the Community and Member State parts in the future trade agreements, with respective separate ratification procedures.

This underlines the importance of communication and dialogue with our citizens on why trade is important to our welfare and employment.

We have to pursue such policies that share the benefits of free trade and investments widely and fairly. This is the way to show that expanding free trade is not a problem, but a part of the solution.

The European economy returned to the path of recovery and growth in 2013 after the debt crisis was tamed. The recovery has been continuous but modest.

The Commission published its first post-Brexit Economic Outlook in July – the next is coming in November. The growth forecasts for 2016 and 2017 have been revised slightly but not dramatically downwards.

Hence, with the view of the Brexit shock, the Eurozone economy seems more resilient than what was probably expected. The resilience is the product of the rebalancing process that has accompanied the recovery. The Eurozone has overall turned from a current account deficit to a current account surplus. This is also the case of deficit countries in aggregate. The process of rebalancing and reforms have worked.

While a more coordinated policy approach within the Eurozone could have produced stronger demand and thus stronger growth, as the Commission used to recommend, the return of the current account surplus has nevertheless made the Eurozone economy sturdier and more capable of facing headwinds that it confronts in external or internal demand. Thus, more resilient.

It is noteworthy that – while you can’t necessarily read this in the pages of Anglo-American financial media – the Eurozone has grown more strongly in the past 10-12 months than the US. We certainly have big problems still, especially the challenge of youth unemployment, but it is yet reasonable to recognize the underlying resilience of the Eurozone.

For Britain, it seems that the full economic ramifications of Brexit will rather materialize after the UK’s future relationship with the EU becomes fully known. Having said that, the currently prevailing uncertainty is affecting investment decisions negatively, and the fall of sterling is more than likely soon felt in consumer prices by boosting inflation.

So how should Europe then approach the Brexit talks?

A British friend of mine lamented recently that Brexit could make the EU paralyzed for the next couple of years.

That is a real danger. But that’s in fact precisely what the EU should avoid, and can avoid.

Thus, first of all, we cannot let the EU become paralyzed because of the Brexit fuss in the UK. Instead, we must maintain the EU’s capacity to act and tackle its current challenges.

Second, nobody should think of revenge, but act in a mature way and work for a close and mutually beneficial relationship. But you need two to tango: it requires that the UK herself starts fairly soon to define what it finally wants from her EU relationship. This should obviously happen as soon as possible and without undue delay, latest by the time the UK submits the article 50 notification by the end of March.

The UK is likely to negotiate three issues in parallel. Firstly, a withdrawal agreement or the ‘terms of the divorce’. Secondly, a new settlement with the EU – permanent or transitional or both. Thirdly, at some point the UK will have to negotiate its trade relations with third countries, assuming that she will leave the customs union.

The question of Britain’s access to the Single Market will no doubt be at the core of the coming negotiations. It goes without saying that the four freedoms are a package, and there is no single market á la carte. The four freedoms of the single market have together a larger impact on economic dynamics than each of them separately – their combined impact is larger than their purely numerical sum.

The single market has been constructed over the decades. The synthetic package they constitute leans on the political and historical support of different member states, and shaking this balance would easily hit the wall. While the economics of the single market obviously matter as well by bringing in better economic dynamics, this political-historical grand bargain is the key reason why the free movement of people and workers is related to the UK’s access to the single market, not least to the question whether the passporting rights of UK-based banks can be maintained in the future.

The Finnish Government has started an internal reflection process to define Finnish policy priorities in the post-Brexit world. With Brexit, we will lose one of our most important partners in such policy areas as the single market, competitiveness and free trade. Our voice will no doubt be even louder and stronger in these areas in the future.

The Eurozone went through several reforms of economic governance in 2010-12 to correct the systemic shortcomings of the Economic and Monetary Union (EMU), and to restore confidence into the euro. This allows us to focus on the real economy to reinforce the still modest recovery, and thus also to help recover the EU’s legitimacy.

Let me now focus on “Case Finland”. Our economy was in a stagnating recession and slow-motion economic decline for too many years 2011-2015. Our goal now is to turn the economy around on to the path of sustainable growth and job creation.

Last year’s growth was already positive and this year’s forecast is positive as well, with +1.1 % growth. But we have still much to do to solidify and strengthen the recovery. Our GDP in 2018 is still estimated to remain slightly below the level of the pre-crisis peak at the end 2007.

We know that our current situation is a combination of several simultaneous structural factors: structural changes in our key industries (ICT and forestry), economic difficulties in our key export destinations, and a rapidly ageing workforce. At the same time, our export industries suffered from a very serious loss of structural and cost competitiveness.

To turn the economy on the path of sustained growth again, the Government focuses on three key objectives: first, restoring our cost competitiveness and pursuing structural reforms; second, ensuring the sustainability of public finances; and third, investing in growth sectors and improving the business environment.

The first task of the Government was to restore our cost competitiveness. Following five rounds of negotiations with trade unions and employers, we concluded a Competitiveness Pact in May.

The agreement will reduce the unit labor costs by 4 percent. This will help the price competitiveness, especially of export industries, which is comparable to the effects of classical internal devaluation. In return the Government will boost domestic demand by reducing income taxes by 515 million euros, which is ca. 0.25% of GDP.

As a matter of fact, one could describe "Case Finland" as a case in point of a northern Eurozone country that is going through a classical internal devaluation. The basic fact of living in a currency union leaves internal devaluation as the only relevant option to correct a profound loss of cost competitiveness.

All in all, the Pact will lead us to catch up in cost competitiveness with Sweden by 2018 and Germany by 2020. Moreover, the Competitiveness Pact included significant elements towards firm-level local agreement on working conditions, such as on the working time.

The economists agree – which by the way is rather rare for any economists, knowing the old story of five economists and six positions – that the Competitiveness Pact will help creating 35 000-45 000 new jobs. This is a big step towards targeted employment rate of 72 %.

The wage-setting system will also be reformed by specifying a so-called Finnish Model, which will be based on the benchmark of internationally exposed export sectors when setting the wages in other sectors.

However, sustainable change for better economic performance requires a supportive business environment for enterprises that tend to invest, grow and employ when conditions are favorable.

One key policy program of the Government is the “Entrepreneurship Package”. We aim to remove barriers to entrepreneurship and improve the overall business environment for SMEs and other businesses aiming both at the domestic market and global markets.

The Government is also investing to support the development in sectors where we see most potential for growth. I call them BCHxD². That is B for the bioeconomy, C for cleantech, H for healthcare and health-related technologies, and D for digitalization as an underpinning driver of growth. For instance, we have a substantial new investment aid program for renewable energies and new energy technology.

Of course in a market economy it is not up to the Government to pick the winners. But we can give an extra boost for the sectors where the potential for growth and jobs is greatest. The European Fund for Strategic Investments is an important funding instrument in this respect.

In the current politico-economic stagnation, it is important to intensify reforms in Europe. The reformed EU must be big in big issues and small in small issues. It must focus on the essentials: safeguarding peace and security, and ensuring the conditions for jobs and growth.

Let me make one final note on that which applies equally to Europe in general and to Finland in particular.

There is no silver bullet – or single arrow – to bring higher sustained growth.

Instead, we must make all relevant arrows fly, which in Europe means boosting investment and reforms, consistently balancing public finances over the medium term, and executing an expansionary monetary policy.

That’s the recipe for a stronger real economy – for sustainable growth and job creation. And that’s what today’s Europe definitely needs, and that’s what our citizens expect and deserve.

Thank you!

Olli Rehn