The twin challenge of the Nordic welfare model

Esteemed colleague, distinguished invited guests, ladies and gentlemen:

I have the honour and pleasure to welcome you to this Finnish-Swedish seminar on the challenges facing the Nordic welfare state. Now that we are entering a new phase of globalisation and facing the pressures of a rapidly ageing population, today's topic is highly important and timely for Sweden, for Finland, and for Europe in general.

I am particularly glad to see so many Swedish representatives at this seminar, which is being held in the ideal location, the Swedish-Finnish Cultural Centre in Hanasaari.

We are particularly pleased to welcome you, Professor Anthony Giddens, as the keynote speaker. You are familiar to us not only from sociology textbooks - to me, at least - but also, perhaps most importantly, as the developer of the Third Way in social policy.

I would like to take off my Head of State hat for a moment to say that the political movement in which I have been involved all my life is grounded in that Third Way. The most memorable election campaign poster ever used by the Finnish Centre Party and its predecessors excellently illustrates the Third Way. It dates from the years of peril in the 1940s, when Finland, and the political powers represented in the current Government coalition in particular, were fighting for the country's existence with armaments, diplomacy and above all Nordic democracy. The poster dates from 1948 and can be described like this:

On the left is the 'oppression of Communism', depicted in forbidding dark red. On the left is the 'prison of Capitalism', depicted in equally forbidding black. In the middle of the poster, however, is the Third Way, depicted in light green tones, that offers the 'straight and narrow road of a free people' towards a brighter future.

With this summary of the Third Way, I would like to warmly welcome you to our seminar, Professor Giddens.

I would like to begin by discussing Europe and then moving back to the Nordic countries. The concept of a 'European model' is an important component in the social heritage of the European Union. It is related to the Third Way or to the social market economy, the underlying philosophy of the German economic miracle. The European model consists of two dimensions that rely on each other. The first of these is the market economy, which generates growth, innovation and permanent jobs. The second is solidarity, which guarantees basic security to all citizens and equal opportunities, not least in education. These two dimensions complement each other and need each other.

European countries have much in common, but they have their differences, too. Each country has its own way of deciding on the balance between these two dimensions. The Nordic countries share a welfare policy different from that of the rest of the world and largely different from that of the rest of Europe, too. Comparisons have shown that the Nordic countries have many things in common, such as equitable income distribution, a low poverty rate, gender equality, equalopportunities for children and the levelling of regional differences. I feel we can justly be proud of all these elements.

On the European level, there has been talk about a convergence of policies with deeper integration. Since we have a common economic area, we also have common ground rules. These rules have impact on our welfare policy. However, it would be too much to say that the Nordic countries are losing their special character on the European map. The special characteristics of the Nordic welfare model even withstood the test of severe recession. Its legitimacy is deep-rooted.

Common challenges provoke different reactions in different countries, depending on what each country considers important and how they have managed things so far. Finland's principle is that of reformism: we reform our society and revise policies to adapt to new circumstances. Our aim is a society based on expertise and entrepreneurship, with particular emphasis on strengthening business dynamism, removal of incentive traps and ensuring that work is financially rewarding. The work is underway but by no means complete.

The future of the Nordic welfare model is dependent on how it can meet the twin challenges now facing the EU: the effects of ageing and the changes going on in the world economy.

Ageing has been discussed as a phenomenon that is lurking somewhere over the horizon. This is short-sighted. The demographic shift is progressing faster than is commonly thought, and it requires action now, not tomorrow.

Unfortunately, Europe is largely unprepared for this change. There are considerable pressures to reform pension and welfare systems, causing permanent political tensions.

This demographic shift will change Finnish society even more than European society in general. As early as this year, there will be more people leaving the labour market than entering it.

The number of people aged 65 and above is expected to increase by over half a million by 2030, which means that the dependency ratio for senior citizens will double.

In Finland, consensus has been reached on pension reform, the results of which we will soon be able to assess. If considered necessary, we are prepared to introduce further reforms.

It is just as great a challenge for Europe to perform successfully in the new phase of globalisation referred to as the 'China effect'. This is a phase of both qualitative and quantitative change.

In quantitative terms, the major change in the world economy is that the giant countries of China, India, Brazil and Russia, with a total population of over 2.5 billion, have joined the free market economy. China and East Asia have become the industrial workshop of the world.

In qualitative terms, we are no longer talking about industrial production moving to countries with lower labour costs; now, services and product development are also being moved abroad. The breakthrough of information technology and e-business has escalated this trend.

De-industrialisation, which means a withering of traditional industry and the transfer of production to low-cost countries, is a major concern in both Europe and the United States. It is obvious that the number of jobs in traditional industry will continue to decline in Europe. It is just as obvious that it is up to Europe itself to create new jobs in high-expertise sectors and in the services. We should not panic, but we should be seriously concerned. One key to success is the question of whether we can reinforce our position at the cutting edge of the information society.

The joint response of the EU to this twin challenge was outlined in the Lisbon Strategy in 2000, in recent competitiveness reports (the most recent one released in January 2004), and in the deservedly well-received employment report Jobs, Jobs, Jobs - Creating more employment in Europe published by the expert group led by former Dutch Prime Minister Wim Kok. All these focus on a reform of the social market economy, an updating of the European model.

We have annexed the report of Wim Kok's working group as part of the seminar material distributed to you all. I wish that all Finnish, and European leaders on a wider front too, would carefully examine the report and its conclusions. Kok's employment report must not become dead letter.

Taken together, these aforementioned reform programmes make up a survival strategy for the European model. They all focus on three issues. Firstly, we must invest in human capital and competence. Secondly, we must strengthen the potential and dynamic environment for entrepreneurism. Thirdly, we must improve the capacity for change and adaptation among companies and their employees.

The problem with the Lisbon Strategy is not its content but the lack of capacity for implementing it. I would not, however, put the blame with the Commission, the role of which is to make initiatives and report on Member States' results. The issues, in which we lag behind, are ones in which competence usually rests with the Member States: new jobs, research laboratories, hospital beds and broadband access cannot be created in Brussels.

As the interdependence of the EU Member States has continued to increase, we should have common and independent ways to promote the economic and social health of Europe as a whole. This whole, once again, is more than the sum of its parts: the whole European economy would gain new growth potential from reforms implemented by all Member States.

So, what is the state of the Lisbon programme four years after it was drafted? This is reviewed accurately both in the Commission's recent competitiveness report and in the report of Kok's working group. Both declare flatly that the Lisbon employment goal cannot be achieved at the present rate.

Within Europe, the situation is far from coherent. Different Member States face different problems in achieving the goals, and on the other hand many Member States have achieved good results in several sub-areas.

The Kok report, like the White Paper on competitiveness and employment published by Jacques Delors ten years earlier, puts Denmark and the Netherlands at the top as the best countries in combining investments in skills and human capital with a strengthening of entrepreneurship and labour market adaptation. It is hardly surprising, therefore, that specifically the Kok report marks out Denmark and the Netherlands as an example for other Member States to follow.

Sweden and Finland fare admirably in comparisons assessing the success of knowledge and information-based economy. But as regards societal readiness for change and reform, we have hardly reached the European average.

The recommendations for Finland and Sweden in the Kok report are very similar. The Finnish Government is now closely analysing these recommendations. The working group considered that we should reduce employer contributions, particularly in low-paid jobs, reform tax and benefit systems to remove incentive traps, improve the coverage and efficiency of active labour market policy, diversify our business structure and level out regional development.

What is crucial for the Nordic countries is how we can successfully respond to the changes currently going on in the world economy. Our shared strength is that we have successfully built up an economy of skills and an information society. On the other hand, faced with globalisation, we tend to withdraw into ourselves, which is a natural reaction in the traditional Nordic welfare state model. In Finland, this is evident in the calls for greater employment security. It is also reflected in the debate on corporate taxation and capital gains taxation.

In conclusion, it may be observed that the Nordic welfare model has functioned well over the past decades. It has guaranteed basic security and services and generated the basis for an information and knowledge-based economy.

However, things have changed both externally, because of the new phase in globalisation, and internally, because of the rapid ageing of the population in Europe. We must be sensitive to pressures to reform the Nordic welfare model and to the solutions proposed for this purpose. This is the objective of this seminar.

The same applies to the European Union. Over the past years, the Union has devoted ample time and energy to the tackling of institutional problems. At the same time, European economies have trailed behind the other large economic areas, namely Asia and North America. Currently, Europe is the most slowly growing economic area in the world. Simultaneously, the new phase of globalisation is introducing new pressures to adapt to the European model of society.

Competitiveness is the Union's hard core and the source of new jobs. Therefore, employment, growth and competitiveness must be the focal points of the European Council meeting agenda in March.

The Nordic countries must be willing to embrace reforms and promote them in the European Union. This will enable us to require the other Member States and the entire Union to pursue the necessary reforms.