February 22, 2015

Munich Speech: Looking at Europe from Prague Which Recently Celebrated the 25th Anniversary of the Fall of Communism

Thank you for inviting me to come to Munich after a relatively long time and for giving me an opportunity to speak here tonight. Last time I made a speech in this city was in May 2009 in the moment of the culmination of my fight with the Lisbon Treaty, which I considered then and consider now – with the benefit of hindsight – an important component in a series of wrong steps towards economically unproductive and politically undemocratic European arrangements. My last speech at the invitation of Prof. Sinn was held at the University of Munich in June 2004 and its title was “Die Implikationen der diesjährigen Erweiterung der Europäischen Union”. When I look at it now, it seems almost pre-history.

This time, I came with a slightly different topic even though its substance is rather similar. Let me say a few words about Europe using two specific perspectives – looking at Europe and especially its current institutional form, the EU, from a relatively new EU member state, the Czech Republic (from “New Europe”, using Donald Rumsfeld´s infamous terminology), and looking at it from a country which recently celebrated the 25th anniversary of the fall of communism. I made many speeches about it all-over Europe last autumn. I will not repeat my main arguments connected with this anniversary here now but I want to say very clearly that despite all my criticism of some of its aspects, the post-communist transition in my country (and in some other Central and East European countries as well) was a success. And it was done without any external help, without fiscal transfers from anywhere.[1]

We very soon succeeded to establish the standard framework of a full-fledged parliamentary democracy and – on the economic side – to organize a rapid and fundamental systemic change[2]. We resolutely refused attempts to introduce all kinds of “third ways” (due to our 1968 experience), and we were horrified by talks about a possible convergence of existing economic and political systems. We wanted the “first way”, capitalism, which was – as we were reminded very soon – not exactly what the Western world expected from us. After half a century of Soviet Union dominance, we wanted to be a free and sovereign country again. It proved to be difficult to realize this ambition in the – at unification aiming – Europe.

We live in a different and much better world now than 25 years ago but we are – in some respects – disappointed. The beginning was promising. It is not so promising now. In the last couple of years, we have been moving away from standard politics to post-political, post-democratic arrangements, from authentic, ideologically well-defined political parties to ad hoc political projects based more on marketing than on ideology or party membership. Radically and without unnecessary delays, we liberalized, deregulated and desubsidised the economy. However, both for domestic political reasons and because of our EU accession, we started a reverse process. Our economy is more regulated and subsidized (and harmonized and standardized) now than it was the case a decade ago. The increasingly destructive weakening of the nation-state by the European Union (and its ideology) and by moving towards global governance fundamentally undermined our sovereignty. All of that bothers us.

We are not sure about the positivity of the role played by the EU. Due to the absence of hard and convincing data, it is difficult to correctly and convincingly evaluate the overall impact of our EU membership. The entry into the EU was not a controlled experiment as the economists understand it. We have not lived in a vacuum, all other things have not been kept equal, the “ceteris paribus” condition was not fulfilled. This makes a serious quantitative analysis almost impossible. It is, nevertheless, quite evident that we have entered neither a healthy, prosperous, fast growing economic area, nor a truly democratic entity.

We feel that the EU membership brings us back from capitalism to a modern form of European socialism, to a new administratively organized society (in Walter Eucken´s sense[3]), which is not very much different from the old, totally discredited “second way”. It may sound too harsh, but I always justify this stance by saying that living in communism sharpened our eyes. Not everyone in Europe had such an experience.

I have repeatedly criticized European politicians, European intellectuals and European business people for not taking the evident problems connected with the current European integration process and with the undermining of elementary principles of market economy seriously enough. It is frustrating to see that nothing significant has changed in this respect even when its failure became so evident in the last couple of years. I keep reading with great interest prof. Sinn´s articles (and learn a lot from them) but he criticises mostly one aspect of the European integration process – the Euro. I, on the contrary, see the whole system as basically flawed.

We continue marching in the same blind alley as before

- regardless the deteriorating economic data,
- regardless the waning respect and position of Europe in the rest of the world,
- regardless the deepening of the democratic deficit we are confronted with,
- and regardless the undeniable increase of frustration of those who live in Europe and are objects of this progressivist and constructivist experiment.

The long-term economic stagnation Europe is facing is not a historical inevitability. It is a man-made problem. It is an outcome of a deliberately chosen and for years and decades gradually developed European economic and social system on the one hand and of the more and more centralistic and undemocratic European Union institutional arrangements on the other. They both and especially they together form an unsurmountable obstacle to any positive development in the future. As I said, what we go through is not an accident or a misfortune. It is a self-inflicted problem. It is a self-inflicted injury. Hundreds of small, at first sight innocent details have metamorphosed into a serious systemic problem.

It is relatively easy and already not brave or courageous to criticize. We should, however, try to outline what to do.

It is more than evident that the European 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. If Europe wants to start growing again, if Europe wants to solve its many daunting social problems, it has to undertake a far-reaching transformation of its economic and social system. This is my proposal No. 1. When I say transformation, I don´t have in mind partial reforms or cosmetic changes.

The excessive and unnatural centralization, bureaucratization, harmonization, standardization and unification of the European continent created a deep democratic defect, not just a democratic deficit as it is euphemistically called. This is a much bigger problem than the current economic stagnation. Getting rid of it – which means changing the whole concept of the European integration, eliminating its post-Maastricht developments – is the task No. 2. We have to rehabilitate the concept of the nation-state which has proved to be an irreplaceable institution – for nothing less important than democracy. To continue repeating the misleading mantra that the nation-state inevitably leads to wars must be stopped. The Germans know that better than anyone else.

A year ago, on January 1, 2014, the EU architects and exponents planned to celebrate the first 15 years of the European common currency, but this anniversary went almost unnoticed. Euro evidently did not help practically anyone. On the contrary, it brought new problems. It weakened the self-discipline of individual countries. It created a new “fuzzy” state of affairs. It produced an exchange rate which is too soft for the countries of the European North and too hard for the European South. It opened the doors to unproductive and involuntary redistribution (no authentic personal solidarity but government-organized fiscal transfers.)

This can’t be considered a surprise. European monetary union is nothing else than an extreme version of a fixed exchange rate system. All historically known fixed exchange rate regimes needed exchange rates realignments sooner or later. Eliminating this powerful – and for centuries successfully functioning – adjustment mechanism was a naive attempt to stop history.

The erroneous belief that the very heterogeneous European economy could be – in a relatively short period of time – made homogenous by means of monetary unification belongs to the category of wishful thinking. Europe can be made more homogenous only by evolution, not by revolution, not by means of a political project.

We should discuss this absolutely crucial issue correctly, but not politically correctly. I find it wrong to concentrate the debate on the undeniable weaknesses of some, mostly southern EU countries. These are not or shouldn’t be surprising. They constitute the long term definitional characteristics of these countries. They entered deliberately the Eurozone with these characteristics and they were deliberately admitted to it.

These countries, however, did not bring about current European problems. The system itself is a problem. By entering the Eurozone, these countries became victims of the single currency system. They were forced to function in a world of – for them – unsuitable and inappropriate economic parameters. It proved to be untenable. Letting these countries leave the Eurozone – in an organized way – would be the beginning of their long journey to a healthy economic future. This is my proposal and our task No. 3. I guess prof. Sinn may agree with me[4].

Some directly uninvolved observers and critics (mostly from America) keep telling us – as if we didn’t know it – that it was a mistake to establish a monetary union whose members enjoy fiscal sovereignty. They recommend us to establish a genuine, full-fledged fiscal union and don’t want to hear that the people of Europe want to retain fiscal sovereignty of their nations. Establishing a fiscal union in Europe should not be our task. On the contrary. Our task No. 4 is to guarantee fiscal sovereignty of individual European countries.

The growing undermining of nation-states in Europe has many unpleasant consequences which ultimately damage Europe, the most visible of which is the more and more daunting immigration problem these days. This is not an issue of an appropriate approach to different cultures, religions, races, ethnicities. The acceptance and even promotion of massive immigration is a new intolerance which – in the name of political correctness – threatens not only the cohesion of countries in Europe and the social peace in these countries, but the future of freedom and democracy on our continent. The much needed public debate about this issue has been prematurely closed or – at least – strictly constrained. To hold a different than a politically correct opinion is considered unacceptable and the holders of such an opinion are demonized. To rehabilitate nation-states, to reintroduce some sort of borders, to get rid of overgenerous welfare state policies, to forget the destructive ideology of multiculturalism is our task No. 5. This is not in contradiction with prof. Sinn´s view expressed in his articles “Deutsche Gerontokratie”[5] and “Ökonomische Effekte der Migration.”[6]

These negative trends seem to be irresistible. I am often asked, what kind of concrete measures to implement in such situation. I consider this question wrong. It implies that such measures do exist which is not true. The much needed change must start differently. It must start by acknowledging that the whole system has failed and that the system must be changed. Partial measures are not significant because they cannot change the substance. We need a fundamental transformation of our thinking and of our behaviour. We do need a “Paradigma Wechsel”. This is our task No. 6.

The economic and social costs of the status quo keep rising. There are – as I suggested – no quick fixes, but serious changes must be made very rapidly. The currently dominant European politically correct thinking and those who promote and represent it are unable to do it. They turn every problem and every crisis into a politically tempting morality tale, whereas we face a systemic defect. The EU, and especially the EMU, has a “Geburtsfehler”.

We should learn from historically proven lessons. We shouldn´t count on more regulation. We have already too much of it. We have been for a long time witnessing cumulative, exponentially growing regulation and government interventionism in Europe. The problem is not the absence of regulation. There is too much regulation and the regulators are not smarter than the regulated. Those of us who experienced communism did not expect that such an extent of government interventionism as we see now could come again. It seemed to us that the masterminding of the economy from above was so discredited by the communist experience that it could never return. We were wrong.

We also wrongly assumed that everyone took for granted that government failure is inevitably much bigger than any imaginable market failure, that the visible hand of the government is always much more dangerous than the invisible hand of the market, that vertical relations in society must be less productive (and less democratic) than horizontal relations.  We were also proved wrong.

The solution to the European problems can´t be also based on the reliance on restrictionist domestic policies because

- restrictionist policies – without deep structural and systemic changes – bring about a vicious circle of austerity and because
- cutting discretionary spending – the only short-term remedy – is quantitatively insignificant in the long run (as many European countries already discovered).

We have to look at it differently. The historical experience tells us quite convincingly that the European spending and borrowing culture (promoted by years of loose monetary and fiscal policies and by the progressively growing welfare state) is not tenable. We should accept that we have run out of monetary and fiscal ammunition and that what remains is a return to free-market principles, to a fundamental deregulation, liberalization and desubsidization of the European economy. It is not my ambition to speak here now about the irrationality of the European, especially German energy policy. I leave it aside but let me recall my book devoted to the irrationality of the global warming doctrine which forms the illiberal ideology which stands behind the current energy policy[7].

I agree with prof. Sinn that there is no solution without an exchange rate realignment which requires that some countries will have to leave the Eurozone. He often speaks about the similarity between today´s Eurozone situation and the end of the Bretton Woods system, something some of us still remember. 

The economists should tell the policy-makers that all successful transitions in history included a deep currency devaluation at the start and that Europe cannot avoid it either. The devaluation of the Euro is, however, not a solution. Some Eurozone countries are insolvent at any feasible Euro exchange rate and they have to accept it. Exit from the single currency area is for some of them inevitable.

We have to return to the first principles. Economics cannot be ruled by politics. This was one of the crucial characteristics and main defects of Communism. We are very close to falling into a similar trap again. Otmar Issing once said that the Maastricht Treaty was “the triumph of political ambitions over economic reservations”. To change this way of thinking asks not only for better monetary, fiscal, or exchange-rate policies, for usual modest structural reforms, for better regulation, for smarter finance ministers or central banks governors. As I said, it requires a fundamental “Paradigma Wechsel”, it needs a Velvet Revolution.

The people in Europe must wake up, they need a “shock therapy” (something we didn´t have to go through after the fall of communism because people were fully awake back then. It was not necessary to tell them that the system was basically wrong – they knew it). I am afraid that the people in Europe are not sufficiently aware of it now. Unfortunately, there are also no political leaders who would be able and ready to explain it to them.

Václav Klaus, speech at the Munich Seminar, CESifo Conference Centre, Munich, January 26, 2015

You can also watch the video from the Václav Klaus' Munich lecture (in German).

[1] See my comparative analysis of our and East German experience: „Komparative Analyse der Transformation im Multavialand und Albisland“, Dresden, 2007, http://www.klaus.cz/clanky/15.
[2] More about it in my study “Czechoslovakia and the Czech Republic - The Spirit and Main Contours of the Postcommunist Transformation” prepared for the Peterson Institute´s survey of economic transformations: The Great Rebirth: Lessons from the Victory of Capitalism over Communism, Peterson Institute for International Economics, Washington, DC, 2014. See also http://www.klaus.cz/clanky/3666.
[3] See his canonical “On the Theory of the Centrally Administered Economy: An Analysis of the German Experiment”, Economica, New Series, Vol. 15, No. 58, Wiley, May, 1948.
[4] See his article “Neustart für den Euro” in ifo Standpunkte 2014, which was originally published in Handelsblatt, No. 11, January 16, 2014.
[5] See his article in ifo Standpunkte 2014, published originally in Wirtschaftswoche, No. 24, June 7, 2014.
[6] “Ökonomische Effekte der Migration”, Frankfurter Allgemeine Zeitung, December 29, 2014.
[7] See my book “Blauer Planet in grünen Fesseln. Was ist bedroht: Klima oder Freiheit?”, Wien, Carl Gerold’s Sohn Verlag, 2007.


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