January 23, 2013

Remarks of the President at the Wiener Com.Sult Congress: Europe Has Not Yet Made the Necessary Change


Many thanks for inviting me to attend your congress once again and for giving me a chance to speak here this morning. I remember being here two years ago with my criticism of the fact that the European political class did not face up to the seriousness of the current European problem. In the past two years, nothing has changed in this respect, to my great regret. We still continue marching in the same blind alley.

In the meantime, I wrote a book about it with the title “European Integration Without Illusions” which has been published also in English, German, Italian, Spanish and Bulgarian. The Danish version will be completed in several days. The British publisher called it “Europe: The Shattering of Illusions”, the German “Europe braucht Freiheit”.

The book reflects my frustration with the situation in Europe. It discusses the European institutional developments since the Second World War till the outbreak of the Eurozone debt crisis as well as the current reaction to it and its costs. As the most important I consider the chapters devoted to the polemics with the excessively optimistic expectations of the economic benefits of territorial integration (and centralization) as well as the chapters devoted to the discussion of the undemocratic consequences of denationalization and communitarization of Europe. The first one is an economic issue, the second one a political topic.

All the available evidence – both the economic data and the measures implemented in Europe up to now – suggests that the economic future will not be easy for those of us who live in Europe together with our families, children and grandchildren, and have, therefore, a genuine, not only academic interest in the European future.

My country, the Czech Republic, is a part of Europe, a member of the European Union, and a non-member of the Eurozone. More than 80% of our exports goes to EU-countries, to a region which undergoes both an undeniable economic stagnation and an acute sovereign debt crisis. Even keeping our own freely floating Czech crown we cannot disconnect ourselves from the movements in the rest of Europe. The Czech Republic – as a textbook case of a small open economy – needs a healthy economic growth of our main trading partners to be able to grow. This is, regretfully, not the case.

The present situation in Europe did not fall from heaven, neither is it an accident. It is the consequence of the deliberately chosen and gradually constructed European economic and social system and of the more and more dominant European Union institutional arrangements. They both form a fundamental obstacle to any further positive European development, an obstacle which cannot be removed by cosmetic changes or by eventually more rational short term economic policies. The problems are deeper.

As I said, I see the important part of the problem in the European economic and social system itself. It is more than evident that the overregulated economy, additionally constrained by a heavy load of social and environmental requirements, operating in a paternalistic welfare state atmosphere, cannot grow. This burden is too heavy and the incentives to a productive work are too weak. If Europe wants to grow, it has to undertake a fundamental transformation, a systemic change, something we had to do 20 years ago in our part of Europe.

The other part of the problem is the European integration model. The excessive and unnatural centralization, harmonization, standardization and unification of the European continent based on the concept of “an ever-closer Europe” is another mistake.

It can be discussed from many perspectives, but as we all know it found its “climax” in the monetary unification of Europe. Its failure, and it is appropriate to call it a failure, was inevitable, expected, and well understood in advance. Its consequences – especially for economically weaker European countries which were used to undergo unpleasant, but much needed and unavoidable adjustment-bringing devaluations of their currencies repeatedly in the past – were well-known in advance as well. All economists who deserve to be called economists had known that Greece and some other countries were doomed to fail having been imprisoned in such a system.

The benefits – promised as a result of accepting a common currency – never arrived. The assumed increase in international trade and in financial transaction was relatively small and was more than offset by the costs of this arrangement.

In good weather (in economic sense), even the non-optimal currency areas could function, as all kinds of fixed exchange rate regimes did for some time. When bad weather came – the financial and economic crisis at the end of the last decade – all the inconsistencies, weaknesses, inefficiencies, discrepancies, imbalances and disequilibria became evident and the monetary union ceased to properly function. This can´t be considered a surprise. In the past all fixed exchange rate regimes needed exchange rates realignments sooner or later which is another argument found in every elementary economic textbook.

The expectations, better to say wishes or dreams, that a very heterogeneous European economy would be made homogenous by means of monetary unification were proved to be wrong. The same is true about the – now proposed – banking and fiscal unions. Let´s accept that the European economies have diverged, not converged since the introduction of euro. The elimination of one of the most important economic variables – of the exchange rate – from the existing economic system led to the blindness of politicians, economists, bankers and all other economic agents.

Various international gatherings where we – Europeans – are confronted with people from other continents are eyes–opening. One of the recent ones was the EU-Asia summit in Laos, two months ago, the next one – EU-Latin America summit – will be in Santiago de Chile this weekend. I found it surprising when the Spanish minister of foreign affairs stated in Laos as regards the Euro: “we were not warned in advance about the possible consequences of the European common currency”! I am convinced that everyone was warned, some people just did not listen.

Let´s not be misled. It is wrong when discussing the current European problems to concentrate on the individual countries, e.g. on Greece or any other country in the European South. Greece did not bring about the current European problem, Greece is the victim of the Eurozone system of one currency. The system is a problem. Greece made just one tragic error – to enter the Eurozone. Everything else was its usual behavior, which I – and we all – don´t have a right to criticize.

Greece´s degree of economic efficiency or inefficiency and its propensity to live with a sovereign debt was or should have been well-known to anyone. To let Greece leave the Eurozone – in an organized way – would be the beginning of a long journey of this country to a healthy economic future. The Greeks hopefully already understood that “one size does not fit all” and I only wish the same would be understood by leading EU politicians. I don´t see it, however.

Their way of thinking is based on an almost communist type of reasoning: economic laws do not exist, politics may dictate economics. People like me were raised in an era when such a mode of thinking was dominant in communist countries of Central and Eastern Europe. Some of us dared to express our disagreement with it already in the past. We were considered enemies then, we are considered enemies now.

Time is ripe for a fundamental decision: should we continue believing in the dogma that politics can dictate economics and continue defending the common currency and other similar arrangements at whatever costs or should we finally accept that we have to return to economic rationality?

The answer to such a question given by the overwhelming majority of European politicians until now has been YES, we should continue. Our task is to tell them that the consequences of such a policy will be higher and higher costs for all of us. At one moment, these costs will become intolerable and unbearable. We should say NO.

What we need are not more frequent summits in Brussels, but a fundamental transformation of our thinking and of our behaviour. Europe has to undertake a systemic change. Coming to such a decision needs a genuine political process, not the approval of a document prepared behind closed doors. It must arise as an outcome of political debates in individual EU member countries. It must be generated by the people, the “demos” of these countries.

We speak about a crisis. But crisis is – in Schumpeter’s definition (and Schumpeter belongs both to my country and to Austria) – a process of creative destruction. Not everything can be saved and maintained. Something must be destroyed or left behind in this process, especially the wrong ideas. We should get rid of utopian dreams, of irrational economic activities and of their promotion by European governments. Part of this implies that even some states must be left to fall. The opponents of such positions keep saying that such a solution would be costly. It is not true. The prolongation of the current muddling through is more costly. The costs the Europeans are afraid of are already here. They are sometimes called sunk costs.

Thank you for your attention.

Václav Klaus, 10th International Vienna Congress com.sult 2013, House of Industry, Vienna, 22 January 2013