olli rehn : the european economy under pressure - how is geopolitics impacting trade, finance and competitiveness? remarks by mr olli rehn, governor of the bank of finland, at the annual meeting of the eu heads of mission, bank of finland, helsinki, 2 december 2024. * * * accompanying presentation of the speech your excellencies, distinguished guests, ladies and gentlemen, let me warmly welcome you to this traditional lunch event at the bank of finland. it is an honour and pleasure to meet with you today, at the start of the week that culminates to the finnish independence day. as eu heads of mission, your role is pivotal in helping shape our collective future, and i am grateful for the opportunity to engage with you. today, i would like to share my views on how the current geopolitical climate is influencing our economy. i will focus on three key channels. first, the impact of geopolitics on trade. second, on finance, and hence monetary policy. and finally, on competitiveness and productivity. the underlying message you may detect throughout my speech is that we need unity and agility in europe to stay relevant in the world – a world characterised by heightened geopolitical tensions. slide 2. global geopolitical tensions remain elevated currently, we find ourselves amid a tense and dangerous geopolitical landscape, marked by multiple simultaneous conflicts and crises – a polycrisis – which have ramifications on europe and beyond. global geopolitical tensions remain elevated, as shown by the geopolitical risk index – and as we all know from our daily news flow. slide 3. geopolitics is overshadowing economic developments looking at the global landscape, the rise in geopolitical tensions is especially due to russia's illegal and brutal war in ukraine, the conflicts in the middle east, and china's strategic ambitions as a technological and military big power. these developments have profound implications for europe, including for our economic outlook and policy. as we move forward, the key to successfully navigating these global challenges lies in the effective cooperation between the united states and the european union, together with our international partners in the global geopolitical arena. as autocracies like russia and china are forcibly challenging the rules - based international order, we need 1 / 6 bis - central bankers'speeches to defend the value system of liberal democracy against these systemic rivals that advocate alternative governance models. it is therefore

developing economies of the so - called global south. the starting point is solid : we have free trade agreements ( ftas ) in place with 74 countries worldwide, covering over 44 % of our external trade. these countries include major economies, such as japan, south korea and canada. these ftas provide market access to businesses, reduce tariffs and promote trade relationships. moreover, ftas with australia, india ja indonesia are currently being negotiated. 2 / 6 bis - central bankers'speeches right now, we have the choice to conclude the ratification of the mercosur fta, which has been pending for years. this should happen before countries like brazil turn to china, which would not be in our interest. latin american democracies are natural partners for europe, and trade agreements that can strengthen this partnership should be seen as a strategic priority and a geopolitical necessity. the credibility of the eu as a negotiating partners is also at stake. globally, trade is in transformation. protectionism, trade wars and geoeconomic fragmentation in general are the by - products of geopolitical tensions. the pandemic further accelerated the diversion of global supply chains. these developments are likely to increase economic shocks and inflation volatility, and so these are critical issues that central bankers must closely monitor. we are indeed witnessing some signs of trade fragmentation, primarily in two significant ways. firstly, bilateral trade between the us and china has diminished and some supply chains have been relocated from china to southeast asia, mexico and emerging economies in europe, for instance. these shifts aim to mitigate supply chain disruption risks and avoid import tariffs or export restrictions. secondly, russia's war in ukraine has effectively isolated russia from the european union, the g7 countries and their allies. this has resulted in a dramatic reduction in trade between the eu and russia since february 2022. furthermore, china and india are challenging some measures adopted by the eu and the us, like the carbon border adjustment mechanism, the deforestation act and the us ira subsidies as " unilateral trade measures " and barriers to trade. slide 5. domestic value added has decreased in the eu in this complex environment, it is useful to examine whether production is being reshored transferred back home at significant levels. in other words, is globalization truly reversing? our staff analysis of the origins of value added in manufacturing indicates that in the united states, the share of domestically produced value added increased between 2018 and 2023. conversely, in the eu,