Current policy challenges in the aftermath of global economic crisis - some E...

Ladies and Gentlemen,

To begin with, I want to thank our host (Finnish American Chamber of Commerce) for the invitation and the opportunity to present my views on topical economic and political issues. I start my presentation with a short introduction to economic prospects. Then I raise some issues regarding G20 cooperation. After that I discuss the main features of so called EU 2020, which is a new long term growth strategy for the EU countries. Finally, I touch upon some more political aspects between Europe and the USA.

Ladies and Gentlemen

Some eighteen months have passed since the collapse of Lehman & Brothers which launched the first global financial crisis, and which changed to an economic crisis some months later. Last year the world economy contracted close to 1 % and the US economy 2.5 %.

In the European Union current recession has proved to be the deepest, longest and most broad based recession in the Union's history. GDP fell in 2009 by 4 % for both the EU and the euro area and in Finland we experienced dramatic 7 % collapse of total production.

During the last nine months the outlook for the world economy has distinctly strengthened, especially so in emerging market economies, and mainly in Asia where China is leading the way. This year the world economy is forecast to grow 4 % while in the USA the growth figure is expected to be close to 3 %.

Also, the EU economy is now emerging from recession with GDP growth turning positive again in the second half of last year. The exceptional monetary and fiscal measures put in place have not only prevented a systemic meltdown, but also allowed for a marked improvement in financial-market conditions. This year the growth in the EU is expected be around 1 %. For Finland the growth figure is forecast to be about the same size.

This upturn in economic activity in the EU and abroad is, however, largely driven by temporary factors. The recovery thereafter is projected to be different from earlier cyclical upturns as the economy is finding its way to a new equilibrium. Several factors are expected to dampen domestic demand, including a need for financial deleveraging across sectors, an expected further deterioration of the labour market, and supply constraints stemming from the adverse impact of the financial crisis on potential output.

The recession has caused a deterioration in the labour market as firms are expected to increase labour shedding in the coming quarters. The unemployment rate is set to reach more than 10% in the EU in 2011. Also, in Finland we are going see unemployment rates of around 10 % this and next year, and in the USA the figures are expected to be about the same size. On the positive side, slow growth and high unemployment keep wage and inflationary pressures moderate. Consumer price inflation is expected to remain below 2 % in the period ahead.

Public finances in the EU have been hit hard by the crisis with the average government deficit set to increase rapidly to over 7 % of GDP by 2010. In Finland the deficit figure is more favourable, around 3.5 %, which however exceeds the 3 % limit of Maastricht Treaty. Our situation is still distinctly better than that of the USA where the public deficit is expected to remain close to last year's 10 %.

Indeed, the economic situation for the next two years ahead continues to be highly uncertain. Even though short-term prospects show some improvement, the risks especially in the banking sector and deteriorating labour market conditions are a severe threat to sustainable recovery.

In the years to come, we face a combination of sustained large deficits, lower potential output and an unfavourable demographic development. This makes debt evolution a serious source of concern for the long-term sustainability of public finances, not only in Europe but in the USA as well.

Ladies and gentlemen,

The financial and economic crisis has permanently changed economic policy making in the world. The decisions made in the Pittsburgh Summit last September changed the global framework of economic policy making significantly. Without going to details I want to raise following issues agreed in the meeting.

* First, in the future the G 20 will be the premier forum for international economic cooperation. Now there is a representative forum to provide a coordinated response to the economic and financial crisis.
* Second, the meeting agreed on a framework for sustainable and balanced global growth. Now the countries have committed to a collective surveillance process.
* Third, in the meeting it was agreed to change the voting shares of IMF and World Bank, especially to the benefit of emerging and developing countries.
* Fourth, it was agreed about the reform of the international financial regulatory system. Here it is a question of strengthening the roles and resources of the IMF and the Financial stability Board.
* Fifth, the meeting agreed to reduce the development gap among the poorest countries by agreeing on the establishment of new trust fund by the World Bank.
* Sixth,the participants committed to improve energy market operations and phase out fossil fuel subsidies.
* Seventh, it was made the commitment to fight trade protectionism by calling for fast finalisation of Doha trade negotiations.

In the Saint Andrews meeting last November further progress was made on the timetable for assessing whether countries have adopted policies that are in the collective interest. G 20 agreed to set out national policy frameworks by the end of January, conduct the first cooperative mutual assessment process by April, develop a set of policy options for next Summit in June and develop more specific policy recommendations for leaders at their Summit in November. Here the main political "stress test" will probably be how to handle the future exchange rate policy of China.

There is no doubt that the influence and the power in global economic matters is moving, more or less, faster or slowly, away from Europe and the USA to the big emerging countries. On the other hand, now all the key players are at the table, which means that, in the future, the new "big cats" have to take more responsibility.

For the EU and especially for the small member states this new situation means significant challenge. How, in the future, the Union can guarantee that its opinion and interests are taken into account, whether it is a question of economic or political issues. In my view the only way is to strengthen the internal preparation. In the short term the most acute task is to ensure that the representation in the boards of Bretton Woods Institutions continues to reflect the countries' financial contributions.

The outside world and especially the USA have often blamed the EU of an inability to make decisions. The Lisbon Treaty should bring some improvement to this situation. Regarding external representation in the economic sector, the definite solution to this problem is, however, attained not until the Union is represented by one chair, and this situation is not in view for the time being.

Ladies and Gentlemen,

At the beginning of the year 2000 the EU launched a structural reform programme called Lisbon strategy. The objective of the strategy was for the EU to become the most dynamic and competitive knowledge-based economy in the world by 2010. Even though some results were attained in the last decade the strategy didn?t fulfil its ambitious targets. Without going to details I just want say that there were too many priorities and the implementation suffered from lack of national ownership and weak governance.

The Union has decided to learn about these experiences and is now launching a new European growth strategy named EU2020. Even though the strategy is still under construction the main features are on the table. The new President of the Union, Herman van Rompyi, underlines the need to focus on right but fewer priorities and strong ownership by Member States. According to him the governance is the key.

The European Commission has now delivered the following three priorities for sustainable growth and jobs:

First priority is knowledge and innovation based growth. Better education and digital society are essential elements to attain results in this area.

Second priority is inclusive and high-employment society. What is needed here is to raise employment, improve the skills of labour-force and to fight against poverty.

Third priority is "green growth" in a competitive and sustainable economy. Here the key words are combating climate change, producing clean energy efficiently and secure the competitiveness of the Union.

The implementation of the growth strategy requires strict follow-up procedures both at the Union level and national level. The new General Affairs Council, chaired by Mr. Rompyi, will be responsible on governance of the strategy. The strategy will be finally agreed in the European Council of the Heads of the States next June.

Ladies and Gentlemen,

In my view the dialogue between the EU and the US has worked well, both via the various EU institutions (e.g. Commission, Council and ECB), as well as on bilateral basis. The organization of co-operation aimed at preserving the confidence in financial systems in 2008, as the financial crisis emerged, is a good indication of this.

However, despite close similarities that we have, the American and European "states of minds" are different. This is reflected broadly in the way our markets, policy-making and economies function, and the way we are governed: the EU is built on the principles of sovereignty of its national states,

In Europe, the serious controversies of the last century are deeply rooted in our search for consensus and diplomacy. The avoidance of conflict is the key priority.Promoting harmony and the European values, through the economic integration and EU enlargement, is the cornerstone of EU policy. We have taken small but steady steps towards the harmonisation of our legal frameworks, to promote "the internal markets". The new Lisbon Treaty is a small further step towards a more institutionalised EU policy and representation.

This policy of "slow but steady progress" involves sometimes frustration, but - for those who know Europe's history - this is inevitable. Over the history, passion for quick changes has resulted in tragic events. Therefore it is important that the EU knows how to be patient.

One question has often been raised: Would the Europe's "policy of avoiding conflicts" have been possible without the military domination of the U.S?

To my mind in fact, this question should not be posed at all. The ultimate objective of both the EU and US has been the same, to avoid global conflicts. Policies and means have been different, but complementary to each other. Indeed, our values are the same - building on democracy and stability - and we conduct proactive policies to attain that end.

In carrying out these policies, the Europe has been blamed for being weak and hard-hearted, as it has not forcefully contributed to the management of acute crisis situations at the global level. I t is the fact that, in the EU, common foreign and defence/security policy remains weak. This is due historical reasons. The EU involves a great diversity of Member States who do not want to loose their sovereignty in the global policymaking. On the other hand it is, however, good to bare in mind that the EU is clearly the biggest ODA -contributor in the world.

I believe that we need more realism in our international policy making. Major breakthroughs can only be achieved through "small-step-policy" that are combined with sustainable and consistent overall policy approach that is transparent and broadly endorsed by the international community. In Finland we have much experience about the policy of realism, in which building stability is based on multilateral trust and the recognition of facts.

Ladies and Gentlemen,

Europe and the U.S. share a number of fundamental values. Our societies are based on democratic values, liberty and democracy. The emergence of rapidly growing economies (e.g. India, China, Brazil) does not change the situation but it further increase the importance of transatlantic partnership.

But sometimes we concentrate too much, especially in the public discussion, on trade disputes.

Since 2007 the EU and the U.S. have participated in the Transatlantic Economic Council which provides a high level mechanism to push forward trade negotiations focusing on regulations, investments, trade and security, financial markets and innovation. In the last EU-US Summit a high level Energy Council was established to discuss on energy security and cooperation on new and renewable energy.

For Finland the U.S. remains the biggest trade partner outside Europe. The U.S. market is vitally important for the Finnish export industry. It is also good to bare in mind that the US is still the real "hot spot" of technological innovations. It is a market place where every developed country must be present.

Unfortunately, during the economic recession our exports to the U.S. have dropped dramatically. Indeed, we must work hard to return to the growth path.

Ladies and Gentlemen,

The global community is confronted with a very challenging agenda in a highly demanding economic environment in several years ahead. For us, Europeans, it is important that the EU can continue to play key role when the rules of the international economy are developed and implemented. This requires that common positions of the Union are well prepared and the Union is ready to cooperate effectively with other main global players.

Thank you for your attention.