Governor Olli Rehn: Article in Kanava magazine 4/2023

Governor Olli Rehn
Bank of Finland
The original article was published in Finnish in Kanava magazine 4/2023

Crisis resilience essential for Finland in harsh world of geopolitics

The international environment in which Finland operates is experiencing a transition as tough as that seen thirty years ago. At that time we saw the fall of the Berlin Wall, the dissolution of the Soviet Union, the integration of Europe and the coupling of China to the world economy. These changes brought a strengthening of collective security, which is so important for small countries like Finland.

Those developments marked an advance in the evolution of humanity, but in recent years the world has been in reverse gear, towards a renewed chill in international cooperation. Russia’s illegal and brutal war in Ukraine and China’s efforts to challenge the liberal model of society mean a return to the past, to the survival of the fittest and the law of the jungle. Collective security and the rules-based international system are creaking at the seams. Symbolising the United Nations in crisis, Russia held the presidency of the UN Security Council earlier this year.

The growing economic and military strength of China and Russia’s neo-imperialist policies have been transforming international relations since the early 2000s. Putin’s speech in Munich in 2007, radiating a revanchist mindset, amounted to a declaration of spheres of interest, and the seizure of Crimea in 2014 was barefaced military aggression, to which the West made a softly-softly response. The turning point came in February 2022 when Russia attacked Ukraine. We then entered a new era of strategic confrontation. A contemporary Iron Curtain has descended between the West and Russia.

The stakes are high for the future of Europe and liberal democracy in general. According to French philosopher Bernard-Henri Lévy, this is a battle of Western democracies against imperialist powers, and if Ukraine is lost, this would embolden such powers to undertake similar actions elsewhere in the world. What is at stake then is not only security in Europe but also world peace.

This is about the universal values set out in the UN Charter: peace, human dignity, rule of law and democracy. These also happen to be Western values, which have their origin in the Age of Enlightenment. The leading countries of the Global South – India, Indonesia and Brazil – are all democracies, for which these values can be assumed to be important. But in these large G20 countries, the heavy burden bequeathed by colonialism – and their own economic interests – are colouring their views and appear to be preventing them from condemning Greater Russian imperialism in all its naked brutality.

A second Cold War or the control of deep-seated conflicts?

To Finland, Russia and its politics are always of major significance for security policy because of our extensive border with the country. However, for global politics and the world economy, the key issue is the future development of US-China relations. Geopolitics is also casting a heavy shadow over the world economy. As to future developments, we can outline at least two alternative scenarios.

The first scenario is a second Cold War, in which the United States and the European Union build an alliance of liberal democracies, while authoritarian regimes construct their own alliance, headed by China. In this arrangement, Russia is China’s protégé and source of natural resources. This type of global confrontation, which is already happening, would most probably lead to a polarisation not only in geopolitical terms but also in the world economy. In the economy, progress along this path is already apparent in many aspects, from trade policy to competition in technologies, but there is still some way to go.

The second scenario would be conflict control concerning conflicts between the United States and China. A ‘floor’ would be defined for their relations, which would be a minimum level below which they would not go. This could develop into a revival of globalisation to some degree, involving the United States, China and the European Union, but not Russia. However, this would require an easing of tensions between the United States and China, which presently does not seem likely – particularly if China were to start supporting Russia not only politically but also by delivering weapons or weapons technology, as has been hinted by US intelligence agencies.

But instead of these two clear-cut scenarios, we are likely to face a more complex world with a deepening but not complete polarisation. It is particularly difficult to envisage a total breakdown of economic relations between the United States and China. Nevertheless, based on current information, the first scenario is the more likely of the two, and is already evolving.

China is looking at Russia’s war in Ukraine through its Taiwan spectacles, analysing how the West, and the United States in particular, would react if it took military action against Taiwan or imposed an economic blockade on Taiwan. Since China’s Communist party congress last October, the political leaders in Beijing have continued their ‘wolf warrior’ rhetoric, openly challenging the United States. In return, in its efforts to stop China, the United States’ actions are ever more clearly following the containment policy principles formulated by George Kennan, the architect of U.S. foreign policy in the early phases of the Cold War.

Depicting each other as the enemy serves domestic policy goals in both countries. Nationalistic movements in both the United States and China paint a picture of the opposing nation as the root cause of their citizens’ problems. In China, as in Russia, labelling the United States as a hostile country is a key part of the aggressive process of modifying the national identity.

The fact that the public dialogue between China and the United States focuses on menacing visions and tough demands can be seen as dangerous. Actions that have been interpreted as hostile seem to have created a self-reinforcing spiral, with a growing risk of miscalculation. Maybe they believe there is only a small chance of unintended escalation?

This is a cause for concern. Even during the Cold War, connections between the superpowers were able to be maintained. Any military conflict, or even nuclear war, arising from an escalation or pure accident would have resulted in catastrophic consequences for humankind, and so the Cold War adversaries – the Soviet Union and the United States – were able in 1963, in the hottest moments following the Berlin and Cuba crises, to establish a crisis communications hotline between them. The current cavalier, undaunted attitude taken towards catastrophic risks of escalation is highly irresponsible.

Interdependency can be a trap but also a straw to clutch

The interdependence of Europe and Russia turned out to be a trap for Europe. It was asymmetric, which provided Russia leverage particularly over German political decisions. Or so it seemed, at least – but in the end Europe proved last winter that when the chips were down, it was able to adopt a unified approach and adjust fairly rapidly to life without Russian oil and gas.

What about the interdependence between China and the West? Is it the same kind of asymmetric trap as Europe’s dependence on Russian energy? The answer to this is not straightforward. It is worth pointing out that trade between the United States and the former Soviet Union totalled, in today’s terms, USD 2 billion in value per year, while in the case of the United States and China – even after a hot trade war that has persisted for almost five years – trade hit a record high in 2022 (USD 690 billion in value), or USD 2 billion per day!

Polarisation into two blocs is undoubtedly a threat to the global economy. Nevertheless, statistical data suggest that reports of the death of globalisation are highly exaggerated. The volume of world trade is almost at a record high, surpassing the pre-pandemic level of 2019.

On the other hand, these macro data mask a variety of trends which paint a much more complicated picture. Instead of globalisation being dead, it would be more apt to say that it is shapeshifting. Protectionism has increased. Countries are striving towards reshoring and friend-shoring of production. They are seeking alternative factories and makers to be used in supply chains.

Decoupling of the US and Chinese economies would have a negative impact on the entire global economy. The International Monetary Fund (IMF) estimates that significant fragmentation of the global economy could depress global output by as much as 7% over the long term. This is roughly equivalent to the combined output of Japan and Germany.

The China debate in the United States focuses on manufacturing job losses and Taiwan. The utility of depicting China as the enemy is evident from the fact that the hawkish China rhetoric introduced during Donald Trump’s presidency has retained its potency during President Joe Biden’s term. The hard-line policy on China is one of the rare issues on which there is agreement among Democrats and Republicans in Washington. The policy also enjoys popular support, according to a survey conducted in March: 83% of Americans have a negative view of China. The same narrative has also been behind many of President Biden’s major projects, such as the Chips Act and the Inflation Reduction Act, which supports transition to clean energy.

Towards the end of last year, the United States introduced restrictions on exports of the most advanced semiconductors to China. Technological leadership and competitiveness in technologies will largely also determine the countries’ military capabilities. The superpowers are now competing for supremacy in artificial intelligence applications, quantum computing and space technology.

Led by the United States, the European Union and Japan, a common approach towards China was outlined by the G7 at its summit in Hiroshima. In trade and the economy, they are aiming towards de-risking rather than decoupling. This is a more sensible option for Finland and Europe. But how this is done in practice will be one of the biggest questions in the coming months and years.

China’s competitive position is weakened by various structural problems, such as its continued debt accumulation, an ageing population and the economy’s unhealthy dependence on the property market. Increased concentration of political power is undermining the operating environment for businesses. Technology companies in particular have been treated unpredictably, and top executives can disappear from view. Moreover, foreign investment in China declined last year as the Ukraine war made Western investors aware of the risks related to dependency on China.

The rapid pace of population ageing in China will be reflected in the country’s economic strategy and security policy over the coming decades – and perhaps even in the next few years. Compared with China, the US population is young and dynamic as a result of significant levels of immigration over a long period. In fact, the average age in China surpassed that in the United States somewhere between 2017 and 2020, depending on the statistics you choose. India, in turn, overtook China in spring 2023 as the world’s most populous country.

China’s population peaked in 2021, and its labour force in 2015. According to geopolitical analyst Peter Zeihan, by 2070 China’s population could have fallen by as much as half compared with 2020. This means that instead of 1.4 billion, the Chinese population could total less than 700 million in 2070. This is probably overstated. According to population projections by the United Nations, even with a low birth rate the Chinese population would total over 900 million in 2070. This, too, would be a considerable decline.

Surprisingly little attention has been given to this fairly likely turnaround in China’s population, even though it could have considerable implications for international policy and the global economy. China’s leaders may feel that foreign policy achievements cannot wait beyond the short term.

Much depends on where China places itself on the chessboard of international politics. It has sought to play a peacemaker role in the Russia-Ukraine war, but since China openly supports Russia, it is difficult to see that this would lead to any results. On the other hand, if there were to be a suspension of hostilities, China would be needed as a guarantor power to prevent renewed aggression by Russia. For this reason, the United States has not directly rejected China’s role. But the hard fact is that the war will principally be resolved on the battlefield, which is why the West should continue to provide support to Ukraine for as long as necessary. Only a just peace can be a lasting one.

The economic interdependence of the United States and China may also be of relevance: will it be the ultimate factor that prevents a political and military escalation despite the noisy rhetoric and the clamour over trade policies? We do not know yet, of course, but it is worth pondering.

Any further escalation of tensions between the United States and China would not be favourable from Finland’s perspective. It would be in our interests if the United States and Europe were to align their approaches in regard to China – not acting on American interests alone, but genuinely coordinating their approaches.

In this context, Professor of History Stephen Kotkin has seen the war in Ukraine as an opportunity to strengthen transatlantic relations. The war has triggered a renaissance in Euro-Atlantic relations, as a result of which the West has rediscovered itself. Kotkin believes it is important now to consolidate these closer relations and incorporate them into the normal framework of cooperation. Whether this will be successful will go a long way to determining what kind of a turning point the Ukraine war brings to this century. It is easy to concur with Kotkin’s views.

Close cooperation in the West has a significance beyond the geopolitical dimension. International cooperation is essential for global resilience to crises, including the greatest challenge of our time: the fight against climate change. This fight is lost without active global cooperation, where the West is leading the way in climate technologies and in the implementation of agreements. The international community must ensure the necessary cooperation and coordination in these issues, despite the increasing polarisation into blocs. The fact is that without China, India, Indonesia, Brazil and other emerging economies, there is no way to win the fight against climate change.

As Professor Jean Pisany-Ferry has pointed out, global cooperation does not require geopolitical alignment or belief in the virtues of democracy. What it does require, however, is an environment of trust.

Finland’s membership of NATO does not diminish the importance of its national defence capability

Russia’s illegal and brutal war in Ukraine moved the debate on whether Finland should join a military alliance onto a fresh track after years of muted hesitancy. Although the performance of the Russian army has been poorer than expected and Russia is no longer the great and mighty Soviet Union, it is in our own best interests as Finns not to underestimate Russia’s military resources and its long-term ability to mobilise them.

Much will depend on internal developments in Russia. The International Criminal Court has issued an arrest warrant against Vladimir Putin. Russia’s descent into neo-Stalinism will either continue or end in uncertainty that could last for years.

For Finland and other frontline countries, the outlook in the immediate years ahead is not encouraging. The picture will be determined considerably by the course of the war and its turning points, and there will be tough decisions ahead. Ukraine’s future place is in the European Union and in NATO. Achieving this will require historic solutions both from these organisations and from all of their member countries.

The primary objective of Finland’s foreign policy has always been national security, and now, in order to guarantee this – as neighbours of an aggressive and unpredictable Russia – we chose to join the NATO defensive alliance. Trade with Russia has also been put on extended hold. We may share the same railway gauge with Russia, but our value systems are on different tracks. Democracy and the rule of law are core values of the Republic of Finland and are not open to compromise.

Public support for joining NATO rose rapidly to almost 80%, making it an easy decision democratically – thanks to the people of Finland, the country’s leaders and the Finnish Parliament. However, the decision was not pulled out of thin air. Rather, its foundations go back years, although the debate around membership remained unnecessarily cautious. For too long, NATO was shied away from as if it were a military alliance threatening our security. The shadow of the 1948–1992 Finno-Soviet Treaty extended all the way into the 21st century.

In recent decades, we have progressed in many ways in integrating our security policy with other European countries and the United States. A significant step was taken by acquiring Hornet fighter jets in 1992. Finland joined NATO’s Partnership for Peace programme in 1994, which is why our defence forces have been practically NATO-compatible for a long time. It also goes without saying that had Finland not joined the European Union in 1995, it would have proven difficult now to take that additional conclusive step into the Western security community.

From the perspective of military strategy, the NATO membership of Finland and, eventually, Sweden alongside Norway and Denmark will form a significant defensive force in Northern Europe, underpinned by NATO’s command structure and logistical and materiel support from the United States and other allies. Finland’s role in regard to the Baltic countries’ defences will also become more clearly defined. The Baltic countries, in turn, will form part of Finland’s defence.

The debate in Finland on our policy as a NATO member has already begun. The discussion has included talk of self-imposed restrictions similar to those in Norway. In the Norwegian model, neither nuclear weapons nor permanent forces are allowed on the country’s territory during peacetime. For my part, I expressed my thoughts on the membership question back in 1994 in an article published in the foreign policy journal Ulkopolitiikka and then two years later in my book Pieni valtio Euroopan unionissa (‘A small country within the European Union’).

The world has changed of course in the ensuing decades: the Norwegian membership model dates back to the beginning of the Cold War in 1949, and the ‘Nordic balance’ of the 1990s is also outdated. The foundations of Finland’s active stability policy (sometimes more active, sometimes less) began gradually to crumble after 2014 in view of Russia’s expanded power politics, before finally collapsing overnight with the invasion of Ukraine, even though Greater Russian imperialism had already made a return in the 1990s and was clearly spelled out – if it hadn’t been already – in Putin’s 2007 Munich speech.

From both a military and a security policy perspective, Finland should act as any normal NATO member state, with appropriate clarity and without any stunts. As former Commander of the Finnish Defence Forces Ari Puheloinen summed it up, the best alliance from a military point of view is a full alliance.

As a new NATO member, we will properly go through all the details, demands and responsibilities of membership, while fine-tuning our NATO policy in the process. Policies will naturally be determined together with our NATO allies. Our NATO membership will be complemented by the agreement between Finland and the United States on bilateral defence cooperation, which is currently being negotiated and will allow smooth cooperation with the United States at short notice in all security situations.

It is unlikely that anyone would offer to place nuclear weapons on Finnish soil, and such weapons should not in any case be brought in or stored here during either peace or war. This principle is legally secured in the International Treaty on the Non-Proliferation of Nuclear Weapons and in Finland’s Nuclear Energy Act.

At the same time, we must have an accurate and realistic view of the role of NATO’s nuclear deterrent. In the run-up to the parliamentary elections, party leaders were asked in a Finnish Broadcasting Company programme whether Finland would refrain from participating in NATO exercises where nuclear weapons are involved. The answers were evasive. In my opinion, the question is wrongly framed (a tried and tested trick, which professional journalists are quite entitled to use!). This is because all NATO military activity, and therefore all its exercises, is based on the defensive alliance having a credible nuclear deterrent, which, by its very existence, raises the threshold for launching a military attack against any NATO country. I do not see how this cornerstone of NATO’s deterrence could – or should – be faded into the background, even during ‘normal’ military exercises of the alliance. However, it is clear that permanently locating nuclear weapons on Finnish soil would not serve NATO’s purposes.

In the hard world of power politics, having contingency plans and allies is the easiest way to get through difficulties and minimise damage. NATO membership makes Finland stronger. But we must remember that although NATO membership brings security through a strong collective and preventive deterrent, the primary responsibility for defending Finland’s territorial integrity in the face of a crisis lies with ourselves, that is the Finnish Defence Forces, our reservist army – this has not changed. We must continue to take great care of our national defence capabilities.

Each of us is needed for maintaining the collective will to defend the nation and for retaining Finland’s defence capabilities. Our national security is ultimately reliant on civil society, in that each day, it is shaped and nurtured in the minds of every Finn and in the life we share as a nation.

Foreign and security policy is always about weighing up change and continuity. NATO membership brings both of these. Joining the alliance is a historic move. But it should also be noted that Finland’s policy of having a ‘NATO option’ did not go to waste, as it prepared the ground for joining the alliance. This was Finland’s long-term foreign policy stance.

As a NATO member, too, Finland’s long-term stance includes the prospect of seeking constructive solutions, a path we have followed since the first Cold War emerged. Going forward, Finland together with the other EU countries will need to pay closer attention both to Europe’s neighbouring regions, such as Central Asia and North Africa, and the emerging economies of the Global South, big and small.

The division of the world into blocs based on ideology and commerce is not in the interests of Europe or Finland. Even so, for us to succeed as a nation it is necessary to navigate in such a world. Our crisis resilience must therefore be strengthened, especially through building proactive resilience. The foundations for this will be secured if we have a robust presence internationally and a sound economy. Resilience also calls for solid investment in comprehensive security and well-ordered cooperation in the nation’s leadership, involving all the relevant institutions and spheres of responsibility. In today’s tough environment, a small country’s national decision-making must not be distracted by needless jostling among its members.

In comparison with other countries, Finland has particularly good preparations in place for dealing with crises. General crisis awareness is high among Finns as a consequence of our country’s history. We also have a unique contingency planning organisation that operates through public and private sector collaboration. But we cannot rest on our laurels. We need to further build our crisis resilience, for instance by learning from Ukraine’s experience in keeping society’s basic functions running, such as energy networks, telecommunications and payment systems.

Crisis resilience is also reliant on strong general government finances. The public debt-to-GDP ratio of Sweden and of Denmark has remained at around 40%, whereas Finland’s has doubled since 2009, to its current level of about 70%.

Though it needs reforming, we have a fairly sound welfare state in Finland, but the economy is too small to carry it in its existing form. The equation must be balanced up if we are to manage in a world where crises are ever present. This will demand a two-pronged approach: one involves bolstering the economy’s growth potential, and the other a rebalancing of the public finances.

Resilience also includes security of supply, especially in the energy sector and in food production. Although in Finland, too, energy prices have risen substantially, we have coped with the energy crisis better than many other countries, thanks to our carefully considered policy of focusing on a range of energy sources.

Having the highest level of food security in the world also contributes to our security in Finland. This should not be taken for granted though. The need for a thriving rural economy as a guarantor of our national security of supply has not changed, although this often seems to be forgotten amid the tumult of global politics.

History can teach us a lesson here: the 1917 and 1944 food shortages in Finland come to mind, as these led to the unity and survival of our nation being placed under great strain. We ought not to lose sight of this even in today’s world, where it is no less important for people to have food on the table.

Resilience requires a robust capacity for renewal

The international environment in which Finland operates is experiencing a transition as tough as that of the early 1990s – for both the economy and security. Globalisation is creaking at the seams, and Europe’s security framework has come close to ruin. The world is now significantly more challenging – even perilous – from Finland’s viewpoint. We must learn to live in a global environment of heightened geopolitical tension.

But we should also remember that we have many strengths that will enable us to build our wellbeing and resilience to crises. Our membership of the European Union and now also of NATO provides us the backdrop we need. Finding success in other respects in a transformed world of power politics will, however, require sharply focused economic and public policy, because favourable outcomes will not be automatic. Today, our economy rests on firmer foundations than in the early 1990s, which was preceded by the mistaken economic policies of the 1980s. We are nevertheless today afflicted by a wasting disease: underperformance.

Finland emerged from the early 1990s recession by embracing research, expertise and enterprise. We invested in innovation funding even during the recession, and we reformed corporate taxation, put the competitiveness of Finnish labour on a stronger footing and focused on renewable energy. A balance was brought to the public finances.

I see Finland of the future as being a skilled and entrepreneurial society that genuinely cares. A place where earnings are derived from skills and enterprise, from sustainable production and from renewable natural resources.

This also requires that the incentives for getting educated and trained, for engaging in entrepreneurial activity and for doing work are in the best of shape. If all this is to be achieved, we will need economic policies that are level-headed and take a long-term view.

Today’s Finland is still well placed to stop itself languishing and not only to cope but to thrive. But this requires both a strong capacity for renewal and a readiness for mutual cooperation – all being well, these qualities will come to the fore and enable us to prosper. The icy world of realpolitik will not wait, even for the world’s happiest nation.