Prime Minister Matti Vanhanen at the Unice Day, Brussels 17 October 2006

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Chairman,
Ladies and gentlemen,

Thank you very much for inviting me to speak here today. The seminar is well-timed, coming just before an important milestone in the Finnish Presidency: the informal EU summit to be held later this week in Lahti. As the main theme of the summit, we have chosen ‘Innovation policy as a source of European growth’.

Innovation lies at the core of the EU’s competitiveness policy. Globalisation is not a zero-sum game where an increase in welfare in one place would result in a decrease of welfare elsewhere. Thanks to trade, increasing specialisation and the exploitation of emerging markets, the world’s overall production and productivity is set to improve. We want Europe to use these new opportunities to put its vast material and human resources to productive use for the benefit both of Europeans and of our partners around the world.

The challenges facing Finland are largely the same as those facing many other European countries. Our welfare model is being called into question by global competition and an ageing population. Ageing represents a major challenge not just to the development of working life and the labour market, but to the social security system in general. The ageing of the population will generate increased pension, medical and care costs and that will put pressure on our public finances. I welcome the Commission’s communication on the demographic future of Europe as a valuable contribution to the debate.

In 2004 my government commissioned a national study into globalisation and competitiveness, resulting in over a hundred concrete proposals. The key proposals were made in close cooperation with social partners. Together we concluded that our globalisation strategy should be based on three elements: investment in knowledge, openness and the ability to reform.

First, we realised that Finland has to continue investing in education, knowledge and the creation of high-level competence. Without this we cannot achieve sufficient productivity growth. Second, Finnish society and Finnish markets need to become more open than they are at present. Openness means more trade and competition, more immigrant labour, more foreign students and researchers, and hopefully also more foreign investment. As for the ability to reform, we need to convince our citizens that, by reforming public services and creating incentives to work, invest and become entrepreneurs, we can deliver better social care than without reforms.

This year in Finland we started a new project on globalisation in order to check whether our previous analysis was correct and to see how the proposals made two years ago have been implemented in practice. As part of the project we invited several acknowledged European economists and policy experts to write analyses on globalisation, the challenges posed by it, and on the appropriate policy responses in Europe. Most of these contributions were published four weeks ago, in part to provide material for policy discussion prior to the Lahti informal summit. In early December the whole set will be published, including an updated analysis of the Finnish economy and an assessment of the need for further policy reforms. An initial conclusion is that we were right on most counts, but in 2004 we underestimated the impact of rising energy prices. The informal summit in Lahti will provide a good opportunity to debate energy.

At Lahti EU Leaders will also meet President Putin of Russia. Energy is one important dimension at this meeting. I think that it is very important for the EU to be able to speak with one voice, even though some may feel that this effort is doomed from the start, a blunder at worst. I disagree. The message that we need to send is that the EU and Russia are interdependent in terms of energy. They need our markets as we need their energy. But this relationship needs to be built on openness and reciprocity. Russia is welcome to the EU market, but it needs to grant the same openness to the EU. We need a level playing-field for our companies.

Russia will need major investment in its energy sector. I think that European companies can make a major contribution to Russia’s energy sector. But for this to take place, we need a level playing field. And this investment is not just about extraction. There is also a huge potential in increasing energy efficiency in Russia, with foreign capital and technology. The EU will soon start to negotiate a new comprehensive agreement with Russia to replace the expiring Partnership and Cooperation Agreement. It would be useful to include the principles that should govern our energy relationship in this new agreement.

The discussion with President Putin is not limited to energy. We will discuss the overall strategic partnership between the EU and Russia. This partnership has unused potential in many fields. However, we also need to recognise that problems exist. True partnership does not shy away from difficult issues and the Finnish Presidency will raise them. The recent murder of the Russian journalist Anna Politkovskaja is a sad testimony to many problems that Russia faces today.

Ladies and Gentlemen,

Economic globalisation poses great challenges for Europe, but it also provides new opportunities. As business leaders, you know –better than me that Europe faces increasing competition from production in China, India and other rapidly developing countries - not just in industry but also in the service sector.

The trends have been visible for some time. I think everybody is already in agreement that Europe has to give up a lot of simple manufacturing where the key competitiveness factor is low-cost labour. What is probably less widely recognised is that many other tasks, more complex than simple assembly work, are also subject to competition from the emerging countries. As one of the analyses I referred to rather neatly puts it: we are in a new stage of globalisation, where production is being unbundled and divided into small segments taking place in different parts of the world. The new stage is characterised by unpredictability, sudden changes and the ability to divide production into tiny sections that can be all outsourced into different locations.

This wider competition provides wider challenges but also wider opportunities. If we are capable of using them, we can not only replace the jobs that must go but replace them with better, more productive jobs.

Unfortunately the benefits of wider markets and opportunities for a better division of labour are not as automatic as the costs seem to be. We need to adapt. We need to change, we need to be agile. How to do it? This is the main question for Europe. Costs and losses are highly visible; benefits are spread thin on the ground.

Europe’s answer to globalisation should not be closed doors and higher walls. Setting new hurdles for foreign competition is just postponing the inevitable. It is much better to use our energy to find new ways of doing things.

Europe has a good starting point in many respects. We are a continent with a high level of education and a strong science tradition. Cultural diversity is a good basis for new ideas. We have been successful in numerous sectors of industry, and many European companies are in the vanguard of development in the world.

However, we have not been able to make full use of our strengths. The rate of unemployment is far too high, and productivity is modest in many fields. The Lisbon process, which was launched by the European Union six years ago, has not achieved its objectives. For this reason, the Union decided last year to focus its efforts on the promotion of growth and employment even more clearly than before. The national reform programmes, which are currently being revised, are a visible sign of this re-orientation.

Nevertheless, the reform process and the recent, fairly strong economic growth must not lull us into thinking that the problems of European economic growth have been solved, or that we can rest on our laurels and wait for the fruit to ripen. That is not the case. We are still unable to create new innovative products at the rate needed to replace the production we are losing through competition and technological development. We still cannot create a sufficient number of workplaces to replace those that are disappearing.

The problem is that we still do not have a wide enough consensus about the implementation of necessary reforms. This applies to many issues to be decided at the national level, but especially to matters that require a common will at the Union level.

The practical implementation of the Lisbon agenda in terms of innovations is at the core of our EU Presidency. We should also keep in mind that the real underlying competitive strength of the EU is the internal market. This market provides European companies with a strong home market and also tough competition, which they need in order to thrive in global markets.

Ladies and gentlemen,

The policy of promoting education, research and innovation gives rise to great expectations but it is one of the policy areas in which Europe has fallen badly behind not just the US but also many of the dynamic emerging economies in Asia. It is my strong belief that the only way Europe can turn the perceived threat of globalisation into an opportunity is by resolutely promoting innovation and creating markets that are conducive to innovative activity.

We need to make progress with innovation. Our future success is dependent on an effective innovation policy that not only encourages innovations, but also turns them into products, companies and good jobs. We need to build political momentum for innovation. The Lahti summit should make the case for a more business-driven innovation policy and a dismantling of barriers to innovation. A critical look at market conditions is required if we are to find ways to tap Europe’s innovative potential. The European R&D market is too fragmented. There are some very practical steps Europe can take.

In the area of innovation policy, action is urgently required on many fronts, both at national and EU level. The level of R&D investment in many countries is one example. Then there is the task of reforming higher education in Europe to create more world class centres of excellence; getting the fragmented patent system in order and modernising the IPR systems more broadly to reflect the role of knowledge as a factor of production; getting Europe-wide platforms for the development of key technologies started, and making sure that we can establish European standards early on for innovative new developments. We have a long list of things to do. My aim is to make real progress on these issues in Lahti.

European Technology Platforms provide a new way of achieving critical mass for R&D projects and many European companies have already become involved in their chosen field, from nanotechnology to embedded systems. Promising areas are identified by business, not government. Technology platforms are public-private partnership at its best. Companies need to invest, but it will be matched by public funding from EU and national sources. If Platforms grow, they are eligible for European funding as Joint Technology Initiatives. We hope that in Lahti European leaders will make a strong commitment to boosting the development and adoption of these initiatives and to ensuring that they receive sufficient funding from national R&D budgets. The Finnish Government has decided to allocate 70 million euros to one promising technology platform, Artemis, focusing research efforts in embedded systems.

There is also a need to underline the close link between policies on innovation and on intellectual property rights. We need a more efficient, genuinely European policy on intellectual property rights. We must make the European patent system more cost-effective and reliable without compromising quality. In the absence of a Community patent, we could still reduce patenting costs through the London Protocol. In addition, the European Patent Litigation Agreement could be a good basis for introducing improvements to litigation.

Standards are in fact a very good example of how joint European action can produce great results. Europe is too slow in agreeing on common standards, which means that standards are usually set by others. We have one European success story – mobile telephony, where the GSM standard has become a Global Hallmark – but there are not many others. A mobile TV standard could be the next European standard, but time and technological evolution is already passing us by. And standards need to be agreed together with business.

I know that all these issues are extremely difficult. I also know that innovation policy is not really a crowd-pleaser. But we need to recognise that innovations are crucial for Europe’s future. And we should not underestimate the importance of the European cooperation. In innovation too, we are stronger together than alone.

The March European Council gave us the task of exploring the development of a set of common principles on flexicurity – how to combine flexibility and security in the labour market. This is not an easy task. I see it as an opportunity to continue the debate on what globalisation means to Europe and what Europe should do to make full use of it. This debate can not be conducted without the social partners. That is why it was a very natural decision for me to invite the social partners to a Social Summit during the Finnish EU Presidency. The extraordinary, informal summit that is to be held in Lahti on Friday will be a first opportunity for us to talk about flexicurity together. The functioning and adaptability of the European labour market is without doubt crucial for European competitiveness. We need more jobs, we need more bridges between jobs, we need more mobility, we need more working years and good quality work places.

In terms of innovation we should not forget that innovations are often generated and introduced in the work place.

Ladies and Gentlemen,

European markets need to function more effectively, and this requires continued reforms both in the labour and product markets and also in the public sector. Reforms are never easy but economic reform is not by definition an enemy of the welfare state. Economic efficiency and social justice are not in conflict. At the same time it must be said that, contrary to the general mood in some Member States, an open-doors policy with regard to enlargement poses no threat to European economies, or to our high levels of welfare. The real risk for our prosperity is a Europe that shuts its doors and starts building higher fences.

Thank you.