May 4, 2012

Eurozone debt crisis: Europe’s nations must break free from the Brussels straitjacket

Only a fundamental rethink of the entire EU model can return the continent to health.

Change: Europe faces a task similar to the one the Czech Republic had to contend with when getting rid of its legacy of Communism - Europe’s nations must break free from the Brussels straitjacket
Change: Europe faces a task similar to the one the Czech Republic had to contend with when getting rid of its legacy of Communism  Photo: Getty Images

For years, Europeans have paid insufficient attention to developments on the Continent, or have not dared look at them critically. Some began to look more closely at the problems two years ago – at the start of the eurozone debt crisis – but most still do not want to know that this was only the tip of a much bigger iceberg.
Together with their politicians and economists, they considered even the 2008-9 crisis a global phenomenon, as if Europe innocently imported it, even though it was evident that this was a European and North American crisis. The long-lasting problems in Europe have been widely underestimated: that is why they must be put into historical perspective.
European integration was originally based on a rational idea to liberalise Europe, to open it up and to expand trade by building a common market and a large, interconnected economic space. This liberalisation more or less characterised the first decades of the European integration process. And it brought positive results, especially compared with the 1930s.
But the current era is different, because European integration moved to a different stage. Liberalisation was replaced by a massive shift of competencies from individual member states to the European Union’s “commanding heights” in Brussels; by the radical switch from intergovernmentalism to supranationalism; by the carefully organised weakening of the original building blocks of European integration – that is, individual countries; by large-scale centralisation, additional anti-market regulation, standardisation and harmonisation of the whole continent.
In the past a highly heterogeneous continent flourished due to its diversity, non-uniformity, and the healthy competition between countries. This changed when Europe became unified and was artificially made uniform by centrally organised governance and legislation. It led to the disturbing economic outcomes we see today and to what is called a democratic deficit. I call it post-democracy.
Institutional uniformity turned into a straitjacket that keeps blocking all kinds of positive human activities. The most important moment in this process was the establishment of the European Monetary Union and the introduction of one currency in a group of 12 countries (now 17) that do not form what economists call an optimal currency area. The eurozone sovereign debt crisis is an inevitable consequence of one currency, one exchange rate, and one interest rate for countries with diverse economic parameters. The political decision in favour of this arrangement was taken with almost no attention being paid to the existing economic fundamentals.
Economists know that wrongly constructed monetary unions are costly and do not last long. Such arrangements may be “saved” hypothetically by a degree of solidarity among members and by huge fiscal transfers. But there can’t be any truly authentic feeling of solidarity in Europe and there is no large volume of funds in the hands of Europe’s political authorities to compensate countries that are, because of their economic parameters, the victims of such an arrangement. So there is no imminent solution to the eurozone sovereign debt trap. There are only unpleasant consequences: short-term economic and budgetary problems and long-term stagnation.
The current model is, however, only half of the problem. Besides the difficulties resulting from integration, there is a huge problem with Europe’s social market economy. It prefers policy based on income redistribution instead of productive activities. It prefers leisure, free time, and long holidays to hard work. It prefers consumption to investment, debt to savings, and security to risk-taking. It prefers social democratism to capitalism.
The problem is deeply rooted and cannot be fixed easily by more EU summits. To make Europe productive again requires something structurally similar to the task we had to accomplish in the Czech Republic when we tried to get rid of Communism and its legacy.
This means, at the least, the transformation of the social and economic system, and the restructuring of European integration.
Let me suggest the main components of such a change. First, we must get rid of the unproductive and paternalistic social market economy. Second, we should accept that economic adjustment processes take time and that impatient politicians and governments usually make things worse. Third, we should start making comprehensive reductions of government expenditures and forget flirting with solutions based on tax increases.
We should also stop the constantly expanding green legislation. The Greens must be prevented from taking over much of our economy under the banner of such flawed ideas as the global warming doctrine. And we should get rid of the centralisation, harmonisation and standardisation of the European continent and start decentralising, deregulating and desubsidising our society and economy. It should be made possible for countries that are the victims of the European Monetary Union to leave it and return to their own monetary arrangements. And we should forget such plans as a European fiscal union, not to mention anti-democratic ambitions to politically unify Europe. We should return to democracy, which can exist only at the level of nation-states, not at the level of the whole continent. A serious discussion of these issues is well overdue.
Václav Klaus is President of the Czech Republic. This article is taken from a speech made to the Bruges Group in London on May 3, 2012

No comments: