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Hlavní strana » English Pages » Notes for the Budapest Speech

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Notes for the Budapest Speech

English Pages, 16. 12. 2000

A. The Current Problems of a Newly Born Democracy and Market Economy:

I hope we can all agree now that open, pluralistic and democratic society has been in our countries firmly established.

I would dare to say more than that. Not only the current stage, but the entire process of the transition was democratic. All the difficult, untried, unknown and politically costly transformation measures have been done by democratically formed political structures, at least in the Czech republic and in most of Central Europe, where political pluralism, parliamentary democracy, fierce competition and rivalry of political parties, unconstrained and therefore absolute freedom of the media fully dominate (this was probably not the case when we move more to the East or South of Europe).

This, more than anything else, is important for the understanding of the course of the transition and of its results. It implies that the transition was not masterminded from above, that it was not dictated by one politician or another, that it was - on the contrary - the “joint” product of a very complicated mixture of intentions and spontaneity, of design and action, of planned and unplanned events. There have been all the time two main groups of players: the “reformers” operating in the political sphere and the general public (with all its heterogeneity and diversity). It has been a standard mistake both at home and abroad to assume that the course and the results of such a multidimensional process have been fully in the hands of the first group.

It is easy to criticize such an evolutionary and, therefore, uncontrolled process from outside (as uninvolved observers), from abstract theoretical positions, from absolutistic ideological principles, but it is not fair. We should accept that the transition is not an excercise in applied economics, that it is “real life” with all it takes.

I do not suggest that the politicians do not bear a very specific responsibility. Their task was to formulate a clear and strong vision of where to go, to suggest a viable transformation strategy, to be able to administer the everyday mechanics of the transition and to get (and maintain) sufficient political support for doing it. Some of us succeeded in it, some of us not. Our success or failure, however, dramatically influenced the level of transformation costs and – consequently – the fates and living conditions of millions of people. Some of us have been aware of it.

Starting with the political side of the transition, one of the numerous early tasks the politicians had to go through was to defend and rehabilitate the role of political parties. As you know, the word “party” was totally discredited in the communist era and it was, therefore, crucial not to base political life on the loose, fuzzy organisations such as civic movements and national fronts (for or against something or somebody), which have a different role and function in society.

My personal experience suggests that there is a strong correlation between the presence or absence of a standard political structure (with well-defined political parties) and the success of transition (and I believe the history will prove validity of this “theorem”). This is, however, something not generally accepted.

Another important – if not the most important – task for politicians was to fight the romantic or pseudo-romantic dreams based on two, always available and always fashionable, ideas:

1. the ambition – when changing the society – to look for new, unknown, untried solutions, to use the collapse of communism for creating another utopia;

2. the desire to get something for nothing, the hope that there is such thing as a free reform, a free fundamental restructuring of society and that the heavy transformation costs can be avoided.

I believe that the past ten years proved that both ideas have been wrong, but they are still with us. Based on such or similar illusions, the expectations-reality gap (E-R gap) has been in the Czech Republic steadily growing, not narrowing. There is no doubt that a lot has been accomplished in this past decade (and many statistical indicators demonstrate it quite clearly). We have witnessed an enormous change in the basic substance of life; the expectations have, however, been growing even faster.

The road from communism to a free society and market economy is not straightforward. Nevertheless, some people do not want to take into consideration that there is no magic carpet which could takes us there without the necessity of our own building and travelling the road. To my great regret, such a fairy tale is still there.

There have been many competing visions of where to go which is natural and, in addition to it, for some people – especially for typical Central European intellectuals – feeling bad feels so good that such people invest a lot in criticism and scepticism and in creation of “a bad mood”. To contest such attitudes is a challenge that politicians do not win very often. At least not in the Czech Republic.

B. The Problems of the Deepening of the European Integration Process:

Europe is currently – at least nominally – preoccupied with two parallel processes: one of them is the deepening of the European integration process, the movement towards European unification and the other is the widening, the expansion of European Union to the East. I deliberately said “nominally” because, as I understand it, both processes do not represent true interests, dreams and ambitions of the European citizens. They are – both of them – advocated by several specific groups of European society only and are in the interest of one very influential rent-seeking group, the group of European bureaucrats, who are and will be visible net benefactors of both processes. There is no other “concentrated” group in Europe which could play the role of a countervailing power. With uninvolved and indifferent majority of Europeans, who live in a nirvana of unconsciousness of what is going on and who maximize all pleasures coming from a relatively easy life of mature, rich and in many dimensions “unconstrained” society which is unaware of its limits (and of its strong rivals and competitors), a small minority can have a decisive power.

I would like to say a few words about the European Monetary Union, but I have to admit that I am a very special person to talk about monetary unions, because I am well-known for dismantling monetary union called Czechoslovakia. It gives me, however, a very special perspective and a special sensitivity to this topic.

As a politician and a former economist, I have a frustrating feeling that everything about EMU has already been said, that there is nothing to add, and that there is no lack of knowledge. The problem is whether we use the existing knowledge or not. Famous economists repeatedly tried to explain basic, more or less textbook arguments about both optimum currency areas and monetary unions, but I am afraid the architects of EMU didn´t listen carefully or sufficiently.

Well-known economists continue to remind us that the conditions for a successful monetary union are microeconomic, which means that they have directly nothing to do with the macroeconomic conditions specified at Maastricht. It has been repeatedly emphasised as well that the benefits of free-trade are connected with a free-trade area and a customs union, and not with a monetary union. It has been argued that the appeal of getting something for nothing is wrong, that it is not possible to convert a variable into a constant without paying an inevitable price, without provoking movements of some other variable or variables.

I could go on with similar arguments, but it seems to me that it does not help because it became normal to talk about the benefits of a monetary union and not about its costs.

There will be costs and not just benefits. I will discuss here one issue only. It seems to me that the architects of the Euro must be – to use labels well-known in the economic profession – new classicals or at least elasticity optimists. They have to assume that prices and wages in Europe are so flexible that exchange rate adjustment is not, and will never be, needed. Additionally, they have to assume that labour mobility is very high.

The empirical data do not support these assumptions. In such a situation, something else must become flexible. We call this variable fiscal transfers but their potential size and frequency have not been seriously discussed. (All of us know that the size of fiscal transfers in a recently created monetary union called Germany was and still is enormous. I am aware of the size and frequency of fiscal transfers in a monetary union which used to be called Czechoslovakia. I was its last Minister of Finance who was sending fiscal transfers from one part of the union to another and I know that it was impossible to continue.)

When introducing EURO, it was - probably implicitly or subconsciously -assumed that currency domain (monetary union) can be greater than fiscal domain (fiscal union). As far as I know, it has never been proved, however, that this can be a viable institutional arrangement. I am convinced of the inevitability of the following path: monetary union à fiscal union à political union. One of the consequences of EMU, and I include it on the side of costs, will be therefore the emergence of a fiscal and political union. And the justified question is: Do we really want a political union? I would strongly argue that we shouldn´t feel being guilty of a deadful sin when we raise such a question or even give a qualified answer to it.

The existence of a monetary union without political union means that countries delegate monetary policy to a supranational agency. It can be neutral only on condition that there is a unified economic interest. It is, however, a very problematic assumption when we look at the current European heterogeneity. I´m afraid, therefore, that the costs and benefits of European monetary union will not be equally distributed among its members.

C. The Problems of the Widening of the European Integration Process:

My starting proposition is that the candidate countries – among them the Czech Republic – have a clear and straightforward interest: to participate in the European integration process, not to be left aside or behind, not to stay in a sort of vacuum. They have no real alternative to the entry into the EU.

It should not be forgotten that to enter EU will be costly for them (as it has been costly even before entering). Their citizens are not sufficiently aware of it and they implicitly – and perhaps correctly – assume that it would be more costly not to enter. (To compare both types of costs together with their time structure is, nevertheless, difficult if not impossible.)

There are benefits connected with EU membership as well but they come with a delay and are less tangible than the costs. Nevertheless, this is what the citizens of these countries do not know.

My conclusion is that the candidate countries assume that the benefits are bigger than the costs.

Talking about interests, we should define who is on the other side. There is nothing like an EU interest. EU does not behave – in this respect – as an entity. Only individual member countries have an interest (or interests). There is probably one exception. The bigger the EU, the bigger the political role and prestige of EU bureaucracy. As a result of it Brussels is more in favour of enlargement than individual member countries.

The individual countries of the EU have a much less clear interest than the candidate countries:

they know that they do not have the right to close the doors of their own distinguished club and to block other Europeans from entering it (it has, however, no relation to their genuine, down-to-earth interests);

their interests are very heterogeneous (big vs. small countries, northern vs. southern countries, geographically more distant countries vs. countries close to new members, more agricultural vs. less agricultural countries, rich vs. less rich countries, etc.);

the signing of association agreements between EU and its future members together with their radical liberalization and widespread opening after the end of communism have led to a situation in which the existing EU members will not gain much from enlargement as compared to what they get now. (The "benefit" curves of members and candidates have different shapes);

EU members are rationally or irrationally afraid of the costs of enlargement (because of inevitable fiscal transfers from various structural funds, because of the unpleasant problem of sharing farm subsidies, because of potential domestic employment problems caused by labour flows from new member countries, etc.).

We can say that the member countries assume that the costs of EU enlargement will be higher than the benefits.

The serious (and fair) question is the following one: will the interests of both groups of countries – in the situation of asymmetric motivations – coincide? I have to insist that to raise such a question is not an expression of defeatist Europessimism, that it is – on the contrary – an expression of responsible Eurorealism. The refusal to accept such a question is either Euronaivism or a sheer hypocracy.

Serious preparations (or homeworks) are unavoidable on both sides:

future members must be able to fulfil the Maastricht macroeconomic criteria (with all accompanying consequences) and to strenghten the microstructure of their economies. They have to harmonise their legislation before entry;

EU has to make institutional changes, otherwise it would not be able to deal with more than 15 current members.

I do not want to speculate whose task is more difficult, but I dare to challenge the dominant view that the unfulfilled tasks of the candidate countries represent the only existing obstacle to enlargement.

D. Unification of the Continent or Liberal System?

This brings me to my final point which is the issue of sustainability of current EU economic and social practices (and of the ideologies behind them). In my understanding the current system is, at least in the long run, untenable. The question is whether there is an easy way to change it – in an entity which has an undeniable democratic deficit as well as a non-negligible, geographically given, distance between individual citizens and politicians in Brussels.

We need marginal, incremental, evolutionary changes (and they will be – eventually – realized), but we need more radical or revolutionary changes as well. Europe (or the Euroland) has been in the past decades a victim of a creeping bureaucratization, of an increasing regulatory activism, of nonreceding protectionism and of soft and all-embracing paternalism on the one hand and of increasing "planetary" ambitions vis-à-vis "Le dèfi americain" or the Asian challenge on the other. Both processes are wrong.

Václav Klaus, 2nd Conference of the Central European Centre-Rights, Budapest, 15 - 16 December 2000.