Vatanen was born and grew up in rural Tuupovaara in Eastern Finland. He is married to Rita and has four children: Kim (1972–2024), Ria (born 1980), Tua (born 1982) and Max (born 1990). They have homes in Finland and France. Vatanen speaks fluent Finnish, English and French.
Vatanen's debut year in rallying was 1970. He made his World Rally Championship debut at the 1974 1000 Lakes Rally and that same year won the Nortti Rally in an Opel Ascona, beating Hannu Mikkola — a result that brought him to wider attention.
His first international rally was the 1975 Rothmans 747 Rally in Jamaica, driving a Datsun 120Y, where he placed twelfth with co-driver Gerry Phillips. At the end of that season he was offered his first professional drive in a Ford Escort RS1800 for the RAC Rally. He crashed out on the second day but had impressed Ford team manager Stuart Turner enough to be offered a seat in the British Rally Championship the following year. Vatanen won the British Rally Championship in 1976 and repeated the feat in 1980, co-driven on the latter occasion by David Richards, who later became chairman of Prodrive.
Between 1977 and 1979, Vatanen also competed in selected World Championship events, initially for the official Ford team and then, after its withdrawal from the sport at the end of 1979, for the semi-private Rothmans Rally Team. He took his debut WRC win at the 1980 Acropolis Rally.
Vatanen became World Rally Champion in 1981 co-driven by David Richards. The pair parted for the 1982 season; Vatanen did not defend the title, competing instead in the British Championship in a Ford Escort before moving to the Opel team for 1983. The Opel Ascona and Opel Manta were two-wheel-drive and not fully competitive, but Vatanen still won the Safari Rally that year. For subsequent seasons Vatanen was co-driven by Terry Harryman.
In 1984, Vatanen signed with Peugeot's factory team to drive the Peugeot 205 T16. From the 1984 1000 Lakes Rally through to the 1985 Swedish Rally, he won five consecutive world rallies. He was tipped to win the 1985 world title but was trailing teammate Timo Salonen at mid-season after a series of accidents and mechanical problems.
At the 1985 Rally Argentina, Vatanen's car somersaulted at over 120 mph (190 km/h). His seat broke and he was thrown around inside the car, suffering severe injuries to his legs and torso and life-threatening internal bleeding. He spent 18 months recovering — first from his physical injuries, then from severe depression — before making a complete recovery.
Vatanen returned to motorsport in 1987 and went on to win the Paris-Dakar Rally four times: with Peugeot in 1987, 1989 and 1990, and with Citroën in 1991. In 1988, while leading the same rally, his car was stolen, preventing him from winning that edition.
Following Peugeot's withdrawal from Group B rallying in 1986, Vatanen used the lessons from the 205 T16 programme to drive the Peugeot 405 T16 at the Pikes Peak International Hillclimb. With at least 600 bhp, four-wheel drive and four-wheel steering, he set a record time up the hill, a performance captured in the short film Climb Dance.
In 1997, Vatanen won the FIA World Cup for Cross-Country Rallies with a Citroën ZX Rallye-raid alongside navigator Fred Gallagher.
Vatanen drove for Mitsubishi Ralliart Europe in four WRC events in 1989 and five in 1990, with his best result being second at the 1990 1000 Lakes Rally. From 1992 to 1993 he competed for Subaru in 11 events, finishing second three times, including on the debut event of the first Subaru Impreza in Finland. He was leading that event before being overhauled by eventual winner Juha Kankkunen and was subsequently dropped by Subaru in favour of Carlos Sainz. He returned to Ford for 1994 in a Ford Escort RS Cosworth and scored a podium at Rally Argentina — the first time he had contested that event since his accident there nine years previously.
Vatanen marked his 100th World Rally Championship event at the 1998 Rally of Great Britain. He made a final WRC appearance at the 2003 Rally Finland with a Bozian Racing-prepared Peugeot 206 WRC, finishing eleventh.
In September 2008, Vatanen participated in the Colin McRae Forest Stages Rally, a round of the Scottish Rally Championship, reuniting with David Richards in the same Rothmans-sponsored Ford Escort RS1800 they had driven together in 1981.
In 1999, Vatanen was elected to the European Parliament from the list of the conservative Finnish National Coalition party. In 2004 he was re-elected, this time from the list of the French Union for a Popular Movement. He did not win election in 2009. In July 2009, Vatanen declared his candidacy for the FIA presidency; on 23 October 2009, he lost the election to his former Peugeot team boss Jean Todt. Vatanen is a signatory of the Prague Declaration on European Conscience and Communism.
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