Editor’s note: The following essay is based on a speech delivered recently by Olli Rehn, Governor of the Bank of Finland, at the Bank of Finland’s biannual lunch for EU Heads of Mission in Helsinki.
What emerges most clearly is that geopolitics can no longer be treated as a distant backdrop to monetary policy or macroeconomic analysis. Decisions taken in capitals, often under the pressure of security concerns and strategic rivalry, now shape growth prospects, inflation dynamics, trade flows and financial stability in ways that demand constant attention from central bankers and policymakers alike. The era in which globalisation advanced largely through technical cooperation and market integration has given way to a period in which strategic considerations dominate, fragmenting economic relations and forcing Europe to reassess its position in an increasingly contested world economy.
The starting point of this assessment is the recognition that geopolitical tensions have become a central force shaping economic outcomes. Trade wars, sanctions, and the re-ordering of supply chains are no longer exceptional events but persistent features of the international system. For Europe, this environment presents a particularly difficult challenge. The continent is deeply integrated into global trade, dependent on open markets and predictable rules, yet increasingly exposed to shocks that originate outside its borders. Despite these pressures, the euro area has shown a degree of resilience that might have seemed unlikely only a few years ago. Growth has remained positive and has exceeded expectations during the year, supported by rising real incomes, strong employment and increased defence spending. These factors have helped cushion the impact of higher tariffs imposed by the United States and the wider disruption of global trade.
At the same time, the brutal realities of power politics are nowhere more visible than in Ukraine. Russia’s invasion has shattered long-held assumptions about security in Europe and has forced the European Union into a defensive posture. Ukraine’s struggle is not only about its own sovereignty but about the security architecture of Europe and the future of liberal democracy on the continent. The Governor’s remarks make clear that Europe cannot afford hesitation or complacency in the face of such challenges. Standing with Ukraine until a just and lasting peace is achieved is framed not as an act of charity but as a strategic necessity. The credibility of Europe as a political and economic actor depends on its ability to respond decisively to aggression and to uphold its core values under pressure.
An examination of the Russian economy reveals a picture of stagnation masked by the demands of war. According to forecasts by the Bank of Finland Institute for Emerging Economies, Russia’s economic growth has slowed to around one per cent this year, reflecting deepening imbalances. While the economy remains capable of financing the war effort, this capacity rests heavily on war-related industries rather than broad-based growth. Sanctions imposed by Europe and its partners have constrained Russia’s access to financing and advanced technology, limiting its longer-term economic potential. Yet the effects of sanctions are complex and often indirect. Although some countries continue to export goods to Russia that are subject to European restrictions, the costs of doing so have risen sharply. Research shows that the median price increase for sanctioned goods purchased by Russia between 2021 and 2024 is almost ninety per cent. For critical items such as ball bearings and piston engines, unit prices have more than doubled. This illustrates how sanctions, even when partially circumvented, still erode capabilities by raising costs and reducing efficiency.
The discussion of Russia’s situation is closely linked to a broader analysis of China’s role in the global economy. Despite rising export barriers and increasing scrutiny from trading partners, China’s goods exports have continued to grow at an exceptional pace. Even restrictions imposed by Russia on certain imports, such as cars, have not derailed this momentum. Several factors explain this resilience. Extensive capacity expansion, often fuelled by subsidies, has pushed producer prices down, while a weakening yuan has enhanced competitiveness. As a result, net exports have supported Chinese growth at historically strong levels. The current account surplus reached almost five hundred billion US dollars in the first nine months of the year, exceeding any previous full-year surplus in China’s history. Such figures point to profound macroeconomic imbalances that carry implications not only for China but for the global trading system as a whole.
Against this turbulent international background, the euro area’s recent performance stands out as a source of cautious optimism. The economy has managed to maintain positive growth, even as uncertainty remains high. The European Central Bank’s September forecast projected growth of about one per cent in both 2026 and 2027, suggesting a modest but sustained expansion. Inflation, which has been a central concern in recent years, has stabilised around the ECB’s two per cent target. This achievement reflects a combination of easing supply pressures and the impact of earlier monetary tightening. At its most recent meeting, the ECB Governing Council decided to keep the policy rate unchanged at two per cent, underscoring a careful and measured approach in an environment characterised by uncertainty.
The Governor emphasises that forecasting in such conditions is an exceptionally difficult task. There are significant risks on both sides, with the balance between upward and downward pressures on growth and inflation remaining finely poised. In this context, the commitment to a data-dependent approach becomes essential. Decisions must be guided by empirical evidence rather than fixed assumptions, and by a clear monetary policy strategy that focuses on maintaining price stability over the medium term. Equally important is the anchoring of inflation expectations, which serves as a foundation for effective policy transmission. The ECB’s commitment to making decisions meeting by meeting, without pre-committing to a specific interest rate path, reflects a recognition that flexibility is indispensable when uncertainty is high.
Beyond the immediate remit of monetary policy, the speech addresses broader issues of financial stability and market dynamics. Elevated stock market valuations, particularly in the United States, have raised concerns about potential overheating linked to the rapid development of artificial intelligence. Market values appear high relative to the growth of the real economy and corporate earnings, increasing the risk of a sharp correction. Such a correction could have global repercussions, underlining the interconnected nature of modern financial markets. In this context, the importance of strong capital buffers cannot be overstated. Stress tests indicate that European banks, including those in the Nordic region, are resilient even under severe scenarios. This resilience provides a degree of reassurance, but it does not eliminate the need for vigilance.
The evolving structure of the financial system also demands attention. The expansion and diversification of non-bank financial institutions is reshaping the way credit is provided to businesses and households. Investment funds, pension funds, insurance companies, securities trading firms and participants in crypto markets now play a growing role alongside traditional banks. This diversification is an integral part of the European Union’s Savings and Investment Union initiative, which aims to mobilise Europe’s substantial savings for productive investment and to broaden the sources of financing beyond the banking sector. At the same time, the increasing interconnectedness between banks and non-bank entities introduces new channels of risk that regulators must monitor carefully. The challenge lies in supporting innovation and diversification without undermining the stability that has been built through robust regulation.
Regulatory reform is therefore another important theme. Simplifying overly burdensome rules while preserving crisis resilience is a delicate balance. The establishment of a High-Level Task Force on Simplification within the ECB reflects an effort to address this challenge in a systematic way. Proposals are being developed to lighten reporting requirements and streamline supervision where there is a clear need, while avoiding any weakening of banks’ ability to absorb shocks. The emphasis on careful calibration rather than sweeping deregulation reflects lessons learned from past crises, when insufficient oversight amplified vulnerabilities rather than promoting sustainable growth.
Turning to Finland, the speech provides a candid assessment of a recovery that has lagged behind the euro area average. Weak employment and fiscal consolidation have weighed on growth, and public finances have come under severe strain. The debt-to-GDP ratio is expected to reach eighty-five per cent this year and to exceed ninety per cent by 2027, raising the likelihood of an excessive deficit procedure. Yet recent data also point to signs of improvement, particularly in industrial production. These developments suggest that the foundations for a stronger recovery may be forming, even if challenges remain significant.
Investment plays a central role in this more hopeful outlook. Many recent projects in Finland are linked to critical technologies and infrastructure that align with long-term strategic priorities. The announcement that NVIDIA will invest one billion dollars in Nokia to accelerate next-generation artificial intelligence and support the transition from fifth-generation to sixth-generation networks is emblematic of this trend. The rapid growth in data centre projects, supported by relatively low energy prices and low emissions in energy production, further highlights Finland’s attractiveness as a location for technology-intensive investment.
Finland’s long-standing expertise in Arctic conditions is also gaining renewed relevance. Decades of experience have produced capabilities in icebreaker design, satellite technology, weather observation and energy systems tailored to harsh environments. The icebreaker agreement involving Finland, the United States and Canada, estimated to be worth over five billion euros, illustrates how this expertise can translate into substantial economic opportunities. Such projects not only support growth but also strengthen Finland’s role within broader strategic partnerships.
The vitality of the Finnish innovation ecosystem is reflected in the resurgence of startup activity and investment. Events such as Slush, hosted in Helsinki, bring together creativity, entrepreneurship and global networks, reinforcing Finland’s reputation as a hub for technology and growth companies. After a dip in 2023, investment in Finnish growth companies has begun to rise again and is approaching the record level of 1.66 billion euros reached in 2022. Domestic venture capital is particularly important, not only in the early stages of company formation but also during scaling and international expansion. These trends suggest that, despite near-term difficulties, the longer-term prospects for innovation-driven growth remain intact.
Fiscal policy forms another crucial element of the Finnish outlook. The achievement of a parliamentary pact on fiscal rules, inspired by the Swedish model, signals a shared commitment to strengthening debt sustainability. Reaching such an agreement in a difficult economic environment demonstrates an ability to take responsible, forward-looking decisions across political lines. This consensus provides a foundation for restoring confidence in public finances and for supporting growth without compromising long-term stability.
The speech culminates in a broader reflection on Europe’s future, framed as a triple test involving defence, decarbonisation and economic dynamism. Recent events have underscored the need for Europe to take greater responsibility for its own security, particularly in light of shifts in United States foreign policy. Supporting Ukraine remains the most immediate and effective way to strengthen European security, but it must be complemented by national and collective projects that build the European Union’s own defence capabilities. Investment in defence, however, will only contribute to growth if it supports research and development and leverages private sector capacity rather than simply expanding procurement.
Decarbonisation is presented not as an optional policy choice but as Europe’s only viable energy strategy. Lacking abundant domestic fossil fuels, Europe’s path to energy security lies in renewables, clean technology and efficiency. The transition to a low-carbon economy is reaching a critical phase, offering Europe an opportunity to lead in clean technology and secure low-cost energy. Experience shows that emissions can be reduced while growth continues, and that the two objectives are not mutually exclusive. For a net importer of fossil fuels, the gains from improved energy independence and efficiency represent a strategic advantage.
Economic dynamism, the third element of the triple test, depends on revitalising productivity growth. Europe faces structural challenges, including fragmented capital markets and a less unified innovation system than that of the United States. Mobilising savings more effectively is therefore essential. With up to ten trillion euros held in bank accounts, there is vast potential to channel funds into productive investment, particularly equity financing that can offer higher returns. Accelerating the Savings and Investment Union, with a clear and ambitious timeline such as completion by January 2028, is identified as a key step in this direction.
Underlying all these challenges is the central importance of human capital. Europe possesses world-class universities, skilled workers and a strong tradition of academic freedom. In a context where the United States has relied heavily on imported talent, any weakening of that inflow presents an opportunity for Europe. Seizing it will require sound immigration policies, sustained investment in education and a culture that values research and measured risk-taking. Human capital is described as the foundation of long-term growth, without which investment and innovation cannot flourish.
Europe’s resilience derives not only from policies and institutions but from its method of working together. Progress has historically been achieved through practical cooperation and shared solutions, from the early days of coal and steel to the creation of the single market and the euro. Today’s challenges, whether in defence, the green transition or capital markets, demand the same approach. By investing wisely and acting collectively, Europe can reinforce its economic and social fabric. In an unpredictable world, unity remains the most reliable path for small and large states alike, providing security, upholding values and safeguarding the future prosperity of European citizens.