Prime Minister Jyrki Katainen at the Wirtschaftstag

I am deeply grateful for this honour. To receive such an award –and to be associated with names such as Helmut Kohl, Jean-Claude Trichet and Robert Zoellick – makes me feel very humble.

In his letter to me, Professor Doctor Kurt Lauk, President of the Economic Council, wrote that the council has witnessed my “deep commitment to sound public finances”, my “call for more effective coordination of economic policy in Europe” and my “strict rejection of common Eurobonds”.

These are some of the topics I would like to address in my speech here today. I will analyse the roots and causes of the current situation, try to sketch a way out of this acute crisis, and will say something about the future development of the European Union – especially the euro zone.

Ladies and gentlemen,

The primary reason for this crisis is the failure of Member States to do their homework. One cannot build sustainable growth on mounting debt – public or private. Sustainable growth and prosperity can only be built on a competitive economy. The financial crisis finally burst bubbles in both the public and banking sectors, in countries which tried to borrow their way to prosperity.

This development had three causes: the first was euro zone members’ inability to follow their own rules. The second was that, even though, de jure, we did not have eurobonds, they were available within the euro zone de facto. The third was the development of competitiveness gaps, a movement in the opposite direction to that intended.

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Two clear examples can be found of Member States’ failure to follow our own rules and wholly respect the treaties to which we all signed up. First, when the euro area was originally created, not all members fully fulfilled the criteria. A second failure arose in not abiding by the rules once the currency had been adopted.

I would argue that if we had respected the Stability and Growth Pact as intended, we would have avoided this crisis. Our strengthening of the rule-base and implementation of stricter sanctions, in the form of six-pack legislation and a fiscal compact, have therefore been of vital importance. We must always remember that it was the Member States who watered down the Stability and Growth Pact and its implementation.

What of the structural reasons for the crisis? As I said earlier, we had de facto eurobonds for the first decade of the monetary union. As we can now see, sovereign interest rates did not reflect the actual risk of losing money. Greece and Germany had practically the same bond yields for years – while every investor in the world was fully aware of the gulf between the two countries’ economic performances.

This unfortunate development has two reasons. Firstly, nobody – including lenders – believed that a euro zone country could default. It was thought that, since they have an unlimited right of taxation, liquidity would not be at stake. Secondly, it was an article of faith that other euro area countries and the ECB could not afford to allow a euro-zone member to default. Unfortunately, that assumption has proven to be painfully correct.

Thus the banks, pension funds and other financial institutions shared the illusion that all euro area bonds were safe havens. It is in this illusion that we can see the origins of excessively cheap credit.

So, we actually had the shared liability of eurobonds, but did not follow the fiscal rules. The illusion of a risk-free deal destroyed the pricing mechanism underlying euro zone sovereign debt. But there is no such thing as a market economy without risk.

In some Member States, the single currency created false confidence, based on credit that was too cheap for too long. A mechanism based on which it was lucrative to both lend and borrow transformed the euro zone into a comfort zone. For some member states, this was a more popular way of creating welfare for citizens, than undergoing uncomfortable structural changes in order to create real competitiveness and growth.

But then came the reality check and we had to change course.

Ladies and gentlemen,

While solving the euro zone crisis, we have to make a clear difference between very short-term actions, and those intended for the long term. In discussions of the current crisis, various political and economic interests are vested in confusing these concepts.
In a very short term, we need to recapitalise the Spanish banks and be ready to contain the possible side-effects of the Greek election results.

The bailout package for the Spanish banking sector is the right course to take. Spain has done much to bring about fiscal consolidation and reform its structures. But nothing that Spain did seemed enough for the markets, which were afraid of the possible costs of recapitalising and restructuring the Spanish banks. The markets were also afraid of the possible consequences of a full-scale bailout. Now Spain has a fair chance to show what it is capable of.

In the short term, we must restore confidence and sow the seeds of growth, jobs and prosperity.

Healing Europe essentially means returning to sustainable growth. We can win back confidence in the short term, but austerity reduces short-term growth. On the other hand, when excessive debt is the main problem, adding yet more debt is not a sustainable way of stimulating the economy.

The recipe for sustainable growth is clear: we need budgetary discipline and structural reforms that make us competitive again. At the same time, we must use all means at our disposal to stimulate growth at national as well as EU level. The debate on growth is absurd if it means giving up our commitments with respect to the Stability and Growth Pact and the Fiscal Compact. Austerity and growth are not mutually contradictory. They can – and must – exist alongside each other. This recipe, something that I call “growthsterity,” is a policy that Finland has been pursuing for a long time. It is worth noting that Finland and Luxembourg are the only two countries which have fulfilled the debt and deficit criteria during the entire existence of the euro area.

In its first year in office, Finland’s six-party coalition government has decided on fiscal consolidation equivalent to almost 3 percent of GDP in the coming years. With our public debt level projected to rise to over 50 percent, we made the decisions required to turn it in a downwards direction. If necessary, we will conduct further measures to meet this target.

At the same time, we also made room for carefully targeted tax incentives for growth. For example, we will grant new tax deductions for companies investing in R&D, for capital investments in one’s own company within the SME sector, and for business angels investing in start-ups. We believe in the “nudging effect”, where individuals do their part when the state leads the way in encouraging new investments. This is how we see capital investment arising, in innovations in growth and jobs.

At the same time, we will renew our structures, especially in the municipal sector and the labour market, to increase the number of years worked and the effective pension age. National structural measures are the real key to solving the competiveness crisis in a sustainable manner. We must respect our commitments under the European Semester. Last year was a disappointment in this respect. This year, we must be serious about the recommendations made by the Commission.

Member States must take full advantage of and implement the fresh recommendations given under the European Semester. Peer pressure, so-called “naming and shaming”, must be used to accelerate the structural changes underpinning competitiveness in Member States.

It is no coincidence that the Member States in trouble are those in which wages increased most during the last decade – bearing no relation whatsoever to productivity developments. In most cases, these same Member States have the most inflexible labour markets, with multiple benefits unrelated to productivity and many occupations and businesses functioning as licensed ‘guilds’. In order to sow the seeds of growth and employment, these must be liberalised, as fiscal consolidation progresses.

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But there is more to be done at EU-level as well. The greatest growth potential lies in the development of the internal market and in deepening trade relations with our partners, especially Russia, the US, India and Japan.

Strengthening EU growth and competitiveness requires high levels of ambition in creating open and competitive markets, innovation, smart regulation and a strong single market. We need to remove all unnecessary obstacles to entrepreneurs who wish to expand their businesses across borders.

Concerning the Single Market, we must move forward in three areas. First, there is Single Market Governance, including implementation of the agreed legislation. Peer pressure within the framework of the Semester, and new ways of strengthening the role of the Commission in infringement procedures, could be useful in this regard

Second, we have to agree on the legislative elements included in the Single Market Act. We must also reach agreement on the patent issue.

Third, concerning the future ”Single Market Act II”, we need to focus on initiatives that can bring genuine economic growth. An obvious area, in which more work is needed, is the creation of a Digital Single Market by 2015. Here, progress should be made without delay to ensure that the EU is competitive against other global players.

The Commission is a key player in this. The Europe 2020 strategy must be full of initiatives that open up markets and provide the elements of growth. Developing the single market is a key issue in delivering on the objectives of Europe 2020.

It is worth repeating that the completion of the Single Market is in everybody’s interest and should be an absolute priority in the EU. In this respect, it is very worrying that, on the contrary, there seems to be a new tendency to roll back the Single Market in areas such as financial services. Instead, we need to move forward in certain areas. We should only backtrack when it is clear that we have not succeeded in creating a true Single Market, as in the case of the Services Directive.

We can also create growth by opening up global markets. The European Union must take a new step forward, by entering free trade agreements with its partners. The EU-US, India, Russia and Japan agreements are just a few of those which need to be accelerated.
It is undeniable that bigger markets create more wealth and prosperity. This is not a zero-sum game. More trade means a greater division of labour, which leads to jobs, growth and prosperity.

Open global trade is crucial to us in Finland, since around 40 percent of our GDP is export-based. One could argue that the Finnish welfare society is dependent on an open global market. But the same is true of the whole of Europe. The longer we keep our borders closed, the further behind we will fall, in terms of competitiveness, with players such as the US, China, South Korea, Japan or emerging countries such as Brazil.

Ladies and Gentlemen,

Last but not least, a few words on the long term perspective of the EU and euro area.
What does all this mean for the future of the European Union? EU has always emerged from crises stronger. But we can only do this if we learn our lessons, take the necessary action and have a shared determination to develop the EU and euro area to the next level.

On a larger scale, Europe needs to take the same medicine as the individual Member States in crisis: we must do what is necessary and build trust in our rules. We must admit that the crisis and the reasons behind it have shaken our mutual confidence in the European family.
In the light what we have seen, the genuinely pro-European road is definitely not one on which we should go forward at any cost, in whatever area of further integration, before we are ready. If we disregard obvious drawbacks, break our own rules and ignore our treaties, we can be sure that such drawbacks will return to haunt us, looming even larger in the future.

That same flaw lies in the discussion of eurobonds and the Banking Union. It seems that some want to use this crisis as an opportunity to create a transfer union, where Northern Europe pays the bill for good. In such a union, it would be pre-ordained that some Member States would be unable to make structural changes and political decisions which increase competitiveness, or that they could not be fiscally prudent. But I believe that we all can – and we must.

It is dangerous to think that imbalances in competitiveness in the Euro area should be corrected by weakening the strong. That would make the euro area weaker as a whole. After all, aren’t we in fierce competition with other areas of the world, especially the emerging markets? Wouldn’t it make more sense if we all tried to achieve the competitiveness of the highest benchmark?

For some others, the rapid shift to common liabilities in the euro area represents no more than a quick resolution of the crisis. But at what cost for the future? Being saddled with ad hoc structures, or a hefty bill? And at the cost of legitimacy and a sense of fairness in the northern parts of Europe? Apparently, a “blank cheque“ feels like the easy answer for those outside, who are not obliged to sign it.

I am not fundamentally against eurobonds or a Banking Union. I can see the virtues in those as well. But I oppose too hasty an implementation, or such developments based on the wrong motives. At the end of the day, the EU exists for the common good. The new structures should benefit all.

For example, it is clear that the liquidity and larger scale of eurobonds would push the average yields down substantially – even to the future benefit countries like Germany and Finland. But this would only be true if we have sufficiently strong fiscal rules and a convincing track record in implementing them.

Let us say that we restrict eurobonds to those euro zone states that fulfil the debt and deficit criteria. And we have a proof that the sanctions proposed by the six-pack and fiscal compact are actually applied when called for. I think that we may then be ready for eurobonds. But such a prospect is some way off. At the moment, the criteria are only fulfilled by Finland, Estonia and Luxembourg.

Ladies and Gentlemen,

I believe in the European Union as a project about shared values. We must safeguard and strengthen our values of peace, freedom and prosperity. We need more Europe based on better and more credible rules, which are strictly applied and adhered to.

Those demanding political union should lead the way. Resolving to follow our current rules and treaties is more important than continuously creating new ones. To me, “more Europe” and “political union” means communitarian methods and strong institutions. It also means consistent rules and interpretations, no matter whether a large or small member state is in question.

To protect these values, we must be decisive in our actions to regain and nurture confidence. To promote these values, we need to be a growing, not a degenerating, continent. From us, this requires the courage to face the facts, state the truth and act accordingly – both at national level and as a European Union.