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Riyadh Speech: The European Problems As Seen from Prague

English Pages, 17. 1. 2012

Secretary General, Ministers, distinguished guests, ladies and gentlemen,

In the past twenty years, I had been – especially in its first part –mostly asked to speak abroad about the intricacies of the transition which the former communist countries, including my country, the Czech Republic, had to undertake on their way from communism to a system of parliamentary democracy and market economy. This unique and revolutionary transition is over but I believe our experience should not be forgotten. I spoke about it four days ago at a conference in Vienna where many Central and Eastern European leading architects of radical reforms of that time – with the benefit of hindsight – came to discuss their experiences. But I will not talk about it now.

I am aware of the topic of your today’s conference, of your interest in our experience in moving – as you put it in the invitation letter – from traditional manufacturing towards the modern “knowledge-based economy” but I will probably disappoint you by saying that I don’t believe in the idea of a knowledge-based economy and that this was also not our ambition to build it. Our truly historic task was to convert the irrational and inefficient centrally planned, semi-autarchic, fully state owned economy into a market economy based on private ownership with minimum government intervention and with open borders to the rest of the world.

Because of our almost half a century lasting communist “experiment” we are very sensitive to some terms and concepts even now. We used to live in the world of “national industrial policies”, of all kinds of “development policies”, as you call it now and we are a proof that they did not function. We did not want to repeat our previous mistakes and to make new, but similar attempts to mastermind the economy from above again. We wanted to make it free. We wanted to let the economic agents themselves discover where to invest, how to invest, in what field and country to invest. We liberalized, deregulated and desubsidized the economy and had no intention to reregulate it under different, perhaps more modern, but in any case bureaucratically or technocratically, not economically, formed priorities.

We understood that there are no new “magic” sectors that would save our very rusty and obsolete economy. Our problem was not having the “wrong” sectors, but inefficiency in the whole economy. We had to reform or restructure the whole economy,  which means the “Old Economy”, not just to support the so-called “New Economy”, as it is fashionable to call it now. We understood that competition (both domestic and foreign) is crucial, because “there is no competitiveness without competition”.

Our economic programme was to introduce competition, to guarantee macroeconomic stability, and to minimize inflation after decades of administered prices that lost any “touch” with economic reality. We did not try to tell companies what to do. The economic agents should get a chance to discover their comparative advantages themselves. We believed in their rational behavior – on condition they are free to make their own decisions. As an economist I believe in the efficiency of the genuine market economy and don’t believe in any fashionable adjectives attached to it – as social market economy or as information or knowledge economy.

The recent crisis gave us in this respect another clear signal. At least in Europe, the countries which did not buy into modern dreams of deindustrialization were more successful in coping with the crisis than countries which gave special privileges to the service sectors and to the support of the most sophisticated technologies. A solid and multi-faceted industrial basis was a real help.

Let me turn to another topic I consider relevant. As someone from Europe, I suppose I’m expected to say something about Europe because Europe has become – for some people rather unexpectedly – a problematic region. Foreign observers started to pay closer attention to Europe only in the last two years of the Eurozone debt crisis and for that reason underestimated the previous developments. The current debt crisis in the Eurozone, which makes everyday’s headlines in the media, is only the most visible tip of the iceberg of a much deeper and much longer existing European crisis which is a long-term consequence

– of the European economic and social model characterized by overregulation and by the unproductive welfare state and
– of the form and the method of the European integration process.

Let me develop this point a little further. The European integration started with a rational and undoubtedly positive idea of its founders to liberalize Europe, to open it up, to eliminate barriers existing at the borders of European countries, to form a free trade zone and a customs union, to create a common market and a large interconnected economic space. These tendencies dominated only the first stage of the European integration process. Some people both in Europe and in the rest of the world – incorrectly – assume that this is the right description of the current situation.

The second stage has been much less positive. The overal liberalization and the removal of barriers were replaced by a different project – by centralization, regulation, and standardization, by harmonization of most of economic activities and economic parameters, by radical shift of competencies from individual member countries to the EU headquarters in Brussels, by the change of the whole concept of integration from intergovernmentalism to supranationalism, by de-nationalization of European member states and by a shift towards European governance. A fundamentally heterogeneous European continent, which flourished in the past because of its diversity and non-uniformity, has been gradually artificially unified and homogenized by a centrally organized governance and legislation. It brought about negative economic effects and led to what is called a democratic deficit (or lack of democratic accountability). I call it postdemocracy.

This very problematic tendency has been accelerating in time with crucial turning points connected with both the Maastricht and Lisbon treaties. At a lower level of integration, the consequences of centralization had not been that dramatic. In the era of a deeper integration, the existing European heterogeneity became more and more in contradiction with the institutional uniformity, which turned into a form of straightjacket and keeps blocking the economic activity.

The most important moment in this process was the establishment of the European Monetary Union and the introduction of common currency in a group of originally 12, now 17 countries that do not form an optimal currency area. The current Eurozone sovereign debt crisis is an inevitable consequence of one currency, one exchange rate, one interest rate for countries with very different economic parameters. The political decision about this arrangement was taken without sufficient attention being paid to the existing economic fundamentals. I have to say that some of us have been criticizing this project for years, as early as in the early 1990s.

It is evident that non-optimal monetary unions may be “saved” by solidarity among their members and by huge fiscal transfers, but it asks for two things:

- for an authentic feeling of solidarity (which existed e.g. in Germany after the German unification, but does not exist in Europe);
- for sufficient size of funds in the hands of the political authorities.

None of these preconditions exists and that is why I don’t see any easy solution to the Eurozone sovereign debt problem. A longer-term solution, if we exclude the non-realistic “revolutionary” increase in the authentic European solidarity, depends on the acceleration of the economic growth in Europe. It is, however, difficult to find any reason for such acceleration now. Most of the EU countries must make fiscal cuts, not fiscal expansions and not only in the short term but at least in the medium term as well. The necessary fiscal adjustments do not make a fiscal stimulation possible.

The main European problem lies in the European economic and social system that doesn’t allow for a rapid economic growth. The European “soziale Marktwirtschaft”, as it is called in German, prefers social policy based on income redistribution to productive work. It prefers free-time and long holidays to hard work. It prefers consumption to investments, debts to savings, security to risk-taking. All of it is part of a broader civilizational and cultural problem, deeply rooted in the European continent or in most of its countries. It can’t be exterminated overnight, it can’t be changed as a result of one or another EU summit, it can’t be changed by painless cosmetic changes. It requires a deep systemic change, something structurally similar to the task we had to accomplish two decades ago in the moment of the fall of communism.

As some of you may know, my country is a member of the EU but not of the Eurozone. We still have our own currency, the Czech crown. As a Central European country in the heart of Europe, we had no other choice than to participate in the European integration process and almost eight years ago we became a member of the EU. We were aware of the problems connected with the common European currency and wanted to accelerate our economic growth and to continue our much needed adjustment processes with sufficient adjustment capability which, of course, requires flexible exchange rates, our own interest rates, our own monetary policy. We didn’t find any advantages in using the German or Greek exchange and interest rates. For the time being, we don’t have any plans to enter the Eurozone.

At the same time, we tried to be aware of both the costs and the benefits of our EU membership, even though it becomes fashionable and politically correct in Europe to talk about benefits only.

What are the main economic benefits of the EU membership?

1. Becoming a part of an – until recently – very prestigious club of economically developed and stable countries is supposed to improve the image of the country and to attract foreign investors;
2. a territorially bigger market – without protectionistic barriers among countries – is undoubtedly an advantage;
3. certain fiscal transfers (on condition the country is below the EU average in GDP per capita, which is the case of the Czech Republic) do exist but net fiscal gains are not large and macroeconomically practically irrelevant;
4. the obligatory implementation of the European legislation is a benefit on condition the country itself has less liberal legislation and is generally less organized. (In our case, it is hardly positive.)

At the same time, there are undisputable economic costs connected with the EU membership:

1. every country has to participate in the co-financing of this large, expensive, highly bureaucratic organization;
2. there are non-negligible domestic costs as a result of the membership (bureaucratic paper work and all kinds of similar requirements, the need to organize endless conferences, meetings, trips abroad, to finance the artificially created EU jobs, etc.);
3. the import of a very heavy and, therefore, economic activity undermining legislation based on excessive regulation, controlling, harmonization, standardization, subsidization;
4. the implementation of an overgenerous and therefore demotivating European welfare system.

It is very difficult, if not impossible, to give quantitative estimates to the impact of all these factors. My guess is that the net positive effect of the membership is very small, if not negative. The very sluggish economic growth after half a century of the deepening of the integration process and of “more and more Europe” does not suggest that the opposite could be the case.

As a result of all this, Europe will not be a “locomotive” of the world economic recovery and growth. I expect the BRIC countries – together with rationally functioning oil-exporting countries – to be the most dynamic part of the world economy in the visible future. I wish you every success in this respect.

Václav Klaus, key-note speech at the 13th GCC Industrialists’ Conference, Riyadh International Convention and Exhibition Center, Riyadh, 17 January 2012

Published in Policy Magazine, vol. 28, No. 1, Autumn 2012, Australia. Download the article in PDF here.