Olli Rehn on the Big Competitiveness Challenge Facing Europe

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1:48Hello and welcome to another episode of the All Thoughts Podcast. I'm Traci Alloway. And I'm Joe Weisenthal. Joe, do you remember earlier this year, there was a moment when everyone got really excited about Europe for the first time in probably decades? You see, you know, I always think about is for the two of us for a long time of our careers, one of the many sub themes that we go, it's like, when is Europe going to turn on the fiscal tabs? When are they going to start spending money in Germany? All these questions, when are they going to be less so focused on austerity or balanced budgets, etc.

2:22And then finally, and maybe Trump had something to do with it and defense spending had something to do with it or politics. Finally, we're getting spending. It was like five minutes and everyone was really excited about some of the defense stocks. and the euro's rallying and it looked, you know, a little bit more politically stable perhaps than the U.S. What's happening, though? I like how's that going? I'm not sure. I haven't followed it as closely as I should have. I will say, I mean, the euro is still pretty strong against the dollar. And if you look at the euro stocks, that's still doing pretty well as well.

2:50So there is some optimism that is still circulating the market. But you're absolutely right. We should talk about what this means. What does it actually mean for Europe to, quote unquote, seize this moment? right? This very particular moment. And what exactly does Europe want to achieve? Totally. And, you know, a lot of the conversations that we have in the U.S. context certainly apply in the European context. So industrial competition with China, whatever we're feeling here in the U.S., certainly very heightened anxiety in Europe with the stress on the auto industry and the chemicals industry and so forth.

3:23Energy prices, obviously electricity costs in the U.S. becoming a major topic, et cetera, just as big in Europe, if not bigger, especially in the wake of the Ukraine war, the shutting off of the nuclear power plants in some countries, et cetera. So pretty much everything that we're sort of wrestling with here, the sort of - Productivity, regulations. The splintering of the traditional parties within domestic politics. Our parties have a bit more of a monopoly than the European ones do, but there's similar stresses going on. So anything that we're talking about here, it's very useful to see how it comes across from the European lens.

3:58Absolutely. So I'm very happy to say we do, in fact, have the perfect guest. We're going to be speaking with Olli Renn. He is, of course, the governor of the Bank of Finland. He is also a governing council member over at the ECB. So Olli, thank you so much for coming on All Thoughts. Thanks very much for the invitation. Great to be here. So from your seat in Europe, wait, where are you actually based in Europe? Where do you spend most of your time? I have a dual life, not schizophrenic, but dual life. I have two home fields, two home terrains. One is Helsinki and Finland. The Bank of Finland is the National Central Bank of Finland.

4:32But we are also, at the same time, we are a member of the euro system. And my second home terrain is thus Frankfurt and the governing council of the ECB. And the same goes for the large part of our civil servants, economists and lawyers at the Bank of Finland, like in the other 19 national central banks. That's the euro system. Perfect. So from your seat in Helsinki and Frankfurt, does it feel like something's changed within Europe? Does it feel like there is the sense that maybe the current time period is some sort of opportunity? Certainly, things have changed in Europe a lot for the worse, as we know, because of Russia's unsatisfied brutal war in Ukraine.

5:14But second, as a wake-up to that situation, including the impact of President Trump as well. And I would say that if you look at Europe for the moment, we have one issue which is above others, and that is common defense and spending on common defense from air defenses to drone production and other elements of military technology and production. And that's also very much an economic issue. Actually, it's a financial opportunity in a sense that the best argument for safe assets in Europe is indeed defense spending. We need both national and European funding. This is, in my view, a possibility to pave the way for a deep and liquid European capital market.

6:00That's great. I'm glad we jumped right into this question of further integration and some of the stakes here, particularly as it relates to defense, because this has been something that's been on my mind a lot and I wanted to get in with you. When we're thinking about industrial capacity or think about industrial competition. Scale is really important. The size of the market is very important. And this is part of the whole premise of the euro area, which is let's have an integrated market. And yet, on the other hand, domestic politics are still a thing. I have to imagine in defense specifically, there must be a lot of anxiety at each individual country.

6:36Do we want our national maker of X rolled up into some larger conglomerate? To what degree, whether we're talking about defense or any other industrial sector, does there still remain a tension between the scale required for competitiveness and the desire for some sovereignty within each country to have their maker of X or Y? Yes, there is that tension. But that's why we do. We make policy and that's why we try to change things in Europe. Actually, that brings to my mind an anecdote concerning precisely common defense, how things have changed. The country I know best, Finland, joined NATO in April 2023.

7:23And I recall my own time in military service in the early 1980s in the Savo Brigade in eastern Finland, in the city which used to be the headquarters of Maas and Mannerheim during the winter war. Today, that garrison area is actually a regional sub-headquarters of NATO. So you see the change in terms of defense in this regard in northern Europe. Talking about economies of scale, yes, we lack a genuine single market in many areas like services and to some extent capital. And that's why we are very committed to move forward with, for instance, the Savings and Investment Union, which aims at, say, transforming the formidable savings of Europeans, 10 trillion, that's the estimate, to productive investment by some kind of, say, popular capitalism.

8:20That's, in my view, one essential element of creating a more unified Europe and creating a more competitive Europe. The other thing when it comes to building up a defense industry that is sometimes debated is this idea of should you spend money on investing in defense programs or should you spend money, you know, buying the products that these defense companies are actually producing? Because what's the point of building out this massive capacity if you don't have a dependable customer for the foreseeable future? How would you structure that sort of spending to make sure that it's durable, I guess, and effective?

8:58That's a very critical question in the European context. And that's why, as we are conducting joint European funding exercises in this regard, like the 150 billion euro safe instrument by the European Commission, it's essential that we purchase those arms and arms technologies by common procurement and by investing in joint research and innovation projects. That's the way to get more bang for the euro. And that's now the effort which the European countries and the Commission are engaged with. In fact, it is clear, it's quite clear that we are going to, in Europe, we are going to purchase both, say, domestic European products and also American products.

9:46In some areas, the US is more advanced. Just, for instance, Finland is purchasing 64 F-35s to replace our existing fleet of 64 F-18s, which date from the early 1990s. How costly is it, I guess to put it bluntly, I don't know, that the US is not the reliable trading partner? It might have seemed to be. I mean, I know there's still a lot of trading. You just mentioned, you know, replace the plane fleet, et cetera. But clearly, we all read the news. We all know what's going on. How costly is it for Europe? And do you perceive there to be a lot of, frankly, unnecessary duplications of investment efforts across the Atlantic currently because of trade tensions?

10:32We do expect that and that's having a negative impact on productivity and thus on the economy, growth and well-being. As far as the impact of US tariffs is concerned, we have tried to estimate that it's a bit difficult as policymaking is fairly volatile. So it depends on the day or the week when you take the cutoff data. But you know that perhaps. But our estimate, which is roughly done on the basis of the current U.S. tariff regime, is that it will hit growth in the eurozone roughly by half a percentage point next year. But the good news is that the European economy is actually demonstrating resilience.

11:16We are still growing this year, probably around 1 % or so, 1.2%. And we are projected to grow by 1.3 % in the next two years, despite the headwinds of both geopolitical tensions and tariff wars. So you wrote something for Vox a few months ago called Europe Must Not Waste Its Currency Moment. And, you know, reading it, it sounds very much like there's perhaps an ambition to maybe replace some of the influence or some of the global role of currently fulfilled by the U.S. and the dollar with the euro. Is that how we should be reading it? Is there like a conscious effort underway currently to expand the euro's influence in the world?

12:04There is a deliberate conscious effort to enhance the euro's global role in the currently changing international monetary system. And if I put the background first, I think we are seeing the international monetary system or the global financial system in transformation for the moment. And you have two main drivers in broad sense. On one hand, the geopolitical confrontation, and on the other hand, we have a technological disruption thanks to digital assets, cryptos, stablecoins, central bank digital currencies. How this will play out will be quite crucial as to the evolution of the monetary system.

12:46Concerning the geopolitical competition, we see China's efforts to strengthen the role of renminbi or the yuan. for instance with the Rodan Belt initiative and linking trade agreements to an enhanced role of the yuan. But, and there is a major but, there are still capital controls in China and there is no legal certainty in China in the Western sense. So that creates quite significant limitations for the renminbi. In the technological side, we've seen the growth of stablecoins more recently. We've seen a certain volatility of cryptos last week, last Friday. Just a little. Just a little, yes. And for instance, stablecoins, they are clearly intended to increase demand for U.S.

13:34treasuries to fill the federal deficit of the United States of America and thus to enhance the role of U.S. dollar and U.S. dollar dominance. I believe that on the basis of historical experience, let's say, for instance, by the writings of Professor Barry Eichengreen of C. Berkeley, that historical shifts in the international monetary system take place slowly and on the basis of the structural changes in the economy and security structures. That's why I believe that U.S. dollar dominance will prevail for quite long, perhaps less as a single unipolar hegemon in the monetary system than before, and we may move towards a more multipolar monetary system.

14:20And the euro can have a significant reserve role there on the condition that we can strengthen the foundations of the European economy in security in terms of economic dynamism and in terms of digital sovereignty. When it comes to economic dynamism, people are pretty pessimistic about Europe these days. They look at an industrial sector that is maybe being hobbled by a competition with China. They see the country, the various countries as not being at the forefront of the AI investments. With tech in general, there is a perception that the economies are still overregulated. It's not a great place to have a startup and so forth.

15:05What is the sort of the bull case or maybe the sales pitch for sort of the Euro Inc., the European economy? Where does growth come from in a dynamic, durable manner? There is a vibrant startup community, for instance, in Finland. Finland is actually – Finland is probably the exception. You do hear about Finnish startups. Sweden, France, many other countries. We actually have a rather vibrant startup community in Europe. By the way, welcome to SLUSH, even though I'm not the organizer, but SLUSH is the well-known major conference in Helsinki in November. We'd love to come to that sometime. If you can introduce us next 2026, we'd love to come.

15:47That's the major startup. That sounds great. Global startup even since early 2010s. Okay, that's good to know. The name SLUSH comes from November because you have so much SLUSH in November. That's why it's called SLUSH. But it's a very bright event in the darkest time of the year. But this is why everyone goes into the saunas the rest of the time, to get out of the slush. Yeah, well, I do it 12 months per year, a few times per week. Sounds great. It sounds fantastic. Not bad, not bad. But even more seriously, so we have startups, we have some unicorns. But the general challenge in Europe is that in the scale-up phase, many companies choose the U.S., say Silicon Valley or New York Stock Exchange or a combination of both.

16:29because it's easier to get venture capital. You have a large market, which is culturally fairly similar, even though there are certain differences between California and Helsinki, California and, say, South Carolina. Right, yes, okay. So in any case, it's the scale-up phase and internationalization phase where we have to do better. And that's why, for instance, our government's efforts to enhance growth in Finland are focused on funding of scale-ups and growth companies.

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19:13Message and data rates may apply. JPMorgan Chase Bank N.A. Member FDIC. Copyright 2025. JPMorgan Chase and Company. So when I think about a business being competitive, especially in the areas that people seem to be very excited about nowadays, things like AI, data centers, I guess defense nowadays, I think about one aspect of competitiveness is price, right? And if your input costs are higher than a lot of other people, then you're going to struggle to provide these things at a low cost. And in Europe, the big input costs that people seem to struggle with is energy, right? How in the world does Europe start to compete in terms of global competitiveness with energy prices so high?

20:00And what can you do about it? We have to go back to Finland metaphysically, mentally now again, because we have an X number of data center investments coming in Finland, mostly with foreign direct investment. thanks to the combination of relatively inexpensive electricity and relatively cool climate, which is conducive for data centers. So in that sense, there are differences within Europe as well. The key is very much to continue the green transition with consistency. For the moment, still countries like Germany are suffering from higher electricity and energy costs. That is true, largely because Germany was so dependent on Russian fossil fuel, especially because it's energy intensive chemical and other industries who have been so dependent.

20:57But the green transition is moving forward. We lean much more on renewable energy than before. Of course, energy efficiency and smart electricity systems play also a key role here. And I would expect that this green transition will be, I mean, not concluded, but will be very far by the end of this decade so that we have a much more competitive condition in Europe in this regard. I add one thing. Often when you compare fossil energy to, say, renewable energy, the capital costs in renewables are often higher, like, say, investing in wind parks or solar energy. The running costs are quite low. Meanwhile, in fossil fuels, it's often, let's say, the reverse, so that the capital costs are not that huge, but you have very significant running costs.

21:55So once you are far enough in the green transition, preferably supplemented by nuclear energy, in my view, then our cost competitiveness in terms of energy will also be much better. It sounds like the solution to some of what ails Europe is that everyone needs to be more like Finland. Sounds like you haven't figured out and everyone else in Europe needs to be more like that. No, for real, when it comes to broad industrial pressure, can you attribute – and maybe this is more of a German-specific question, but I think it probably applies more broadly. Is it possible to decompose the degree to which competition with China, especially things like chemicals, China is very competitive with chemicals, though it doesn't get much attention.

22:41Obviously, cars globally is just a huge story. When you look at like sort of the sputtering out of industrial production in Germany or just Europe more broadly, is it possible to decompose how much of it is undercutting on price from China versus the higher costs that have surged, particularly since early 2022? Well, it is possible, but I don't have the figures off the cuff. But I recall that in 2022, which was the high point of energy costs in Europe. So we calculated with a friend of mine and then we verified that by our economists. That year, Europe paid 800 billion euros for fossil fuels instead of the long-term average of 300.

23:24So we paid 500, 600 billion euros more that year, which then was roughly 3 % of GDP. So in 22, we had, you can say that it was kind of an extra tax of every European of 3 % of the income on average, which of course created quite a lot of popular opposition and criticism. Fortunately, we have been, it's not actually about fortune, it's about political will and action. We have been able to broadly adjust to the end of Russian gas in Europe. But we still have some work to do in many countries. You mentioned Germany. Germany still has work to do in order to reduce its energy costs in its industrial production.

24:19If you could wave a magic wand and do one thing to boost European either productiveness, productivity, or competitiveness, basically make all of Europe more like Finland, what would it be other than installing saunas in everyone's house? That's a good idea, actually, even though fairly electricity. Yeah, I was saying, let's not hope it would be energy. Depending if you use electricity or wood in heating. I have both. In the summer court, it's wood by the lake. That's so good. More seriously, if I could do one thing, I would complete the single market without delay and also create a genuine savings and investment union with a deep and liquid capital market because this would help address the challenge of venture capital and financing of European startups and growth companies.

25:15What would that sort of cohesive market do that you can't do right now at a national level? Would it just lower capital costs for everyone? For instance, concerning the savings and investment union, you have actually a long list of concrete decisions that it will require. But the key things are in many ways to have a safe asset, a European safe asset, which would facilitate the creation of genuine European capital market. And then in addition to that, there are quite reasonable proposals of creating either tax incentives or other decisions that encourage people to invest, people meaning individual citizens and households.

26:02Sweden actually is a very good example of this. So that in Sweden, for instance, you have a certain portion of your retirement payments that you have to invest to the stock market or funds. Oh, I see. Yeah. Which has helped to create a culture of investment in Sweden. And we are actually, even though Finland was mentioned as a role model, but we are benchmarking Sweden in Visekard because they have the most vibrant venture capital market also. So thanks to this quite a well-functioning capital market. It makes total sense that I think of the euro area, whatever version of it we want to talk about, it's an ongoing project.

26:44It's always a work in progress. It will probably never be completely finished. There's always more to do. But this, to my mind, gets to the sort of like the challenge of domestic politics, right? And like we all see what's happening here. We're October 16th. Our government is shut down, but it feels like various aversions of this stress are replicating themselves across the sort of rich, developed Western countries. France, their government always seems to be like two weeks away from collapsing. Who knows if they'll have a government? I don't know if Belgium has a government these days. I think the Dutch have an election coming up.

27:20Who knows what's happening there? If you look at polls in Germany, we all know that parties like the AFD, which are on a very different trajectory, are doing very well in the polls there, etc. Like how much of the – yeah, it's great to say like people here in D.C. at these conferences and here at Bloomberg love the idea of like integrated markets. But how much is the roadblock that you foresee to get to where you want essentially the reality of domestic electoral politics in each of the member countries? It's a continuous challenge and you're right. So when you said that Europe or the European Union or the Eurozone is a community or a community of states that is in constant movement, I would wish that it would be in a more rapid movement.

28:06But it is indeed an unfinished business and will continue to be so. That's why it is actually so fascinating and meaningful to work for Europe. On these two brief points. First, the political battles or the political competition of the souls of the people are done in Europe, in the member states. National politics are key here. And that's why I have a high regard for national politicians who face this challenge in the town hall meetings and in the social media or elsewhere. And of course, in terms of policymaking. So we have to be able to do such concrete policies that help alleviate the concerns of the citizens and boost sustainable growth and job creation in Europe.