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European Integration: A Model to Follow?

English Pages, 5. 4. 2011

Many thanks for the invitation to address this distinguished audience. There are not many places on the other side of the world where I have had the privilege to speak twice. The Institute “Libertad y Desarrollo” is one of them. I remember my visit here seventeen years ago. As I am sure you know, I am here in Chile on an official state visit which has a clear and understandable aim – to promote the Czech-Chilean relations. I came also to better understand the developments in this country and in this part of the world and to learn from it. I did not come here to give any advice or recommendations. I do not believe in the role of foreign advisors.

Let me use this opportunity to say a few words about something I know better, about the continent from where I just came, about Europe. The developments there bother me. I don’t see any reason to describe the current Europe in a propagandistic way, or using rosy colours or rosy glasses. Many of us in Europe are convinced that Europe faces a serious problem, which is not a short-term, or medium-term business cycle phenomenon. It is not an integral part of a recent global crisis either. It is something very European. As an economist, I would call it a structural problem which will not – by itself – wither away.

It used to look quite differently in the past. The post-World War II reconstruction was a success and even in the following decades Europe was growing, was peaceful and stable, and was relevant. What happened in Europe and with Europe? What went wrong? Why is Europe less successful and less relevant today?

I am deeply convinced that it is a result of two interrelated phenomena – of the European integration process on the one hand and of the European economic and social system on the other.

I will start with the first topic because I repeatedly see that the people on other continents do not have a proper understanding of the European integration process, of its effects and consequences. It is partly because they do not care, partly because they believe that a regional integration is – regardless of its form, style, methods and ambitions – an exclusively positive, progressive, politically correct development. They probably accept the conventional wisdom that the weakening of nation states and the strengthening of supranational institutions is a movement in the right direction.

This view can be explained only as the underestimation of what happened in Europe in the last 50 years. In the 1950s, the leading idea behind the European integration was to liberalize, to open-up, to remove all kinds of barriers which existed at the borders of individual countries, to enable free movement of not only goods and services but also of people and ideas across the European continent. It was a positive concept and helped Europe significantly, even though it is difficult to express it quantitatively.

It changed during the 1980s and the decisive breakthrough came with the Maastricht Treaty in December 1991. Political interests to unify Europe and to create a new superpower started to dominate. Integration had turned into unification, liberalization into centralization of decision making, into harmonization of rules and legislation, into the strengthening of European institutions at the expense of institutions in the member states, into the enormous growth of democratic deficit, into post-democracy. Europe’s constituting elements, the states, have been consistently, systematically and “successfully” undermined. It was forgotten that “the state” is the only institution where real democracy is possible.

The Czech Republic, an EU-member since May 2004, wanted to reassume its place among European democracies and the EU membership was the only way to show that it was accepted. There is no other method to do it in Europe these days. Nothing else legitimizes a country. We did not want to stay aside, as we were forced to throughout the communist era. However, for those of us who spent most of their lives in the very authoritative, oppressive and non-functioning communist regime, the undergoing weakening of democracy and of free markets on the European continent represents something we did not expect and did not wish for in the moment of the fall of communism[1].

We witness a gradual shift from liberalizing and removing all kinds of barriers towards a massive introduction of regulation and harmonization from above, towards the ever-expanding, overgenerous welfare system, towards new and more sophisticated forms of protectionism, towards the continuously growing legal and regulatory burdens on business, etc. All that weakens and restrains freedom, democracy and democratic accountability, not to speak about economic efficiency, entrepreneurship and competitiveness.

The most visible European problem of the current era is the fate of the European monetary union. The eurozone project has not succeeded in delivering the positive effects that had been – rightly or wrongly – expected from it. It should help to accelerate economic growth and reduce inflation and, in particular, protect the member states against all kinds of external economic disruptions (the so-called exogenous shocks). This has not materialized. After the establishment of the eurozone, the economic growth of its member states had slowed down compared to the previous decades, thus increasing the gap between the rate of growth in the eurozone countries and that in other major economies, including Latin America. The internal disequilibria – such as trade imbalances or state budget imbalances – became bigger, not smaller.

People like me understood very early that the idea of the European single currency is very problematic, that it will create huge economic problems and will lead to undemocratic centralization of Europe. To my great regret, it did happen.

The eurozone, which comprises 17 European countries, is not an “optimum currency area” as defined by the economic theory. During its first 10 years of existence, it has not led to any measurable homogenization of its member states’ economies. In such a situation, it is inevitable that the costs of establishing and maintaining it exceed its benefits.

My choice of the words “establishing” and “maintaining” is not accidental. Most economic commentators were satisfied by the ease and apparent inexpensiveness of the first step (the establishment of the common monetary area). This helped to form the impression that everything was fine with this project.

Over the last decade, the negative effects of the “straight-jacket” of the single currency have become more and more visible. When “good weather” (in the economic sense of the word) prevailed, no visible problems arose. Once the crisis (or “bad weather”) arrived, the lack of homogeneity manifested itself very clearly. However, the Euro will not collapse, because huge amount of political capital had been invested in its existence. It will continue to exist, but at a very high price which will be seen in large-scale fiscal transfers and in low rates of economic growth in the future.

The second reason for the European economic problem is the quality, productiveness and efficiency of its economic and social system. A seemingly friendly and non-demanding, excessively paternalistic and, as a consequence, not sufficiently productive economic and social system, called “die soziale Markwirtschaft” (or social-democratism), dominates in Europe. This system with its generous social benefits weakened motivation, shortened working hours and life employment, prolonged years of studying, diminished the supply of labour (both at macrolevel and structurally), created bottlenecks and shortages.

Europeans prefer leisure to performance, security to risk-taking, paternalism to free markets, collectivism (group entitlements) to individualism. They have always been more risk-averse than Americans but the difference continues to grow. Also freedom seems to have a very low priority there. It seems that Europeans are not interested in capitalism and free markets and that they do not understand that their today’s behavior undermines the very institutions that made their past success possible. They are eager to very intensively defend their non-economic freedoms, or better to say the easiness, looseness, laxity and permissiveness of modern, or perhaps post-modern European society, but when it comes to their economic freedoms, they are quite indifferent.

The inefficiency and unsustainability of this system was later “reinforced” by the gradual acceptance of green ideology, of environmentalism. This process started in the 1970s, but reached its peak, and its economic devastating effects now, in the era of global warming (or climate change) alarmism. I will not go into detail, but I want at least to mention my book “Planeta Azul (No Verde)” which has been published already in 17 foreign languages, and is available also in  Spanish.

I am confident that you, in Latin America, will not repeat our mistakes. I hope you will aim at creating maximum openness inside the continent, but will keep respecting national sovereignty of individual countries and will – in my terminology – promote economic liberalization, not political unification. I wish you every success in this endeavour.

Václav Klaus, Institute “Libertad y Desarrollo”, Santiago de Chile, April 4, 2011

A slightly modified lecture was given at the Argentine Council for International Relations (CARI), Buenos Aires, March 31, 2011.