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Reflections on Current Situation in Europe

English Pages, 18. 8. 2003

Here, in Tennessee, my only comparative advantage is to speak about Europe. I see there two main phenomena. First, Central and Eastern part of Europe is in second decade of its difficult transition from communism to free society and it finally understands that the transition is a costly and lengthy process. Second, Western Europe is - almost innocently and without realizing it - moving to a single European state. This project is based on a very dubious assumption that the more nominally unified European continent is, the better.

I will say few words about both developments but I will not discuss the recent disagreements between Europe and America about Iraq, nor the artificially created dispute between the so-called old and new Europe.

1. Transition in Its Second Decade

The fall of communism in 1989 was followed by enormous expectations not only in the former communist countries but also in the rest of the world. The reality could not satisfy them and we became more and more confronted with what I call the expectations-reality gap.

I am convinced that the reality is a success. It started with the surprisingly “velvet” way of eliminating the several decades existing, very nasty, and oppressive totalitarian regime. In my understanding it was made possible by the growing weakness of the communist regime, which became soft (as regard dealing with its opponents) and visibly inefficient. Its ideology (system of beliefs) was quite unconvincing and nobody took it seriously. As a result of it, communism was not defeated. It more or less collapsed.

Some of our critics argue that the change was too velvet which is, however, not my position. The whole transformation of the political, social and economic systems was done “live”. Millions of people participated. It was not an controlled exercise in applied politics or economics. The politicians had to guarantee an elementary degree of functioning of the society, of the economy, of the administration, and of the political system. More discontinuity (not to speak about anything approaching anarchy) would have been much more costly.

The reality has changed dramatically. The structure of society, the degree of political and economic freedom, the scope of government regulation, the quality of markets, the degree of openness of the economy have reached the level of Western Europe.

Could the reality be much better? It undoubtedly could be. But we know that society is a complex system which cannot be masterminded from above. The transition from one system to another is not a laboratory experiment done in a vacuum but an interplay of millions of people who follow their genuine interests, who have political ambitions, and who are engaged in many forms of activities, including rent-seeking. The outcomes of the process of transition are, therefore, necessarily different from the reform blueprints.

The ambitious social planners of all kinds, colors, and “isms” argue that they would have been able to do it differently. They suggest – now and than – to do it gradually, which means not to liberalize prices and foreign trade, not to deregulate markets, not to privatize the economy. They probably have to assume that it would have been possible to convince the people to stop dismantling the old system and instead to start the years or decades lasting process of institution and legislation building. It would require to stop political democracy, to stop behavior based on genuine interests and to let the well-minded interventionists to prepare the legislation and institutions without the complications done by freedom.

I have problems with the misuse of the term “rule of law”. The members of MPS know from Hayek and Mises that social institutions including law and its enforcement are a product of spontaneous evolution, of human action, not of human design. Social institutions are always imperfect and there is no way they would not be – at least not in a free society. To say that there is or is not “the” rule of law in one country or another is a very dubious statement.

The costs of transition (and of the dismantling of the old system because output began to collapse when the old system started to fail, not when transition began) have a strong negative impact upon many citizens who now support social democratic or socialist parties, who ask for more government intervention, who want more extensive social policy, who don’t care about budget deficits, who are more interested in strikes than in hard work. As a result of it, in most of the Central and East European countries the political parties advocating free markets are in the opposition.

Because of that and because of the impact of EU we have not created a free capitalist system but a version of the European model of “social market economy” based on heavy regulation and on counterproductive welfare systems.

2. The impact of the European Unification and of the Attempts to Create a Postpolitical Society

Several years ago I was arguing that in many respects we liberalized the economy more than Western Europe and that we should not accept the rigid and inefficient European economic and social model. We did not succeed. As you know, eight of the former communist countries were invited into the EU and in April 2003 signed the EU Accession Treaty. As one of the preconditions to it, was to “take over” the complete EU legislation. It has changed our system not for the better.

Central and East European countries need economic growth and economic convergence with the old EU members but I am afraid it is not attainable. The real convergence will not be made easier by nominal convergence (by entering the EU and by complying with the EU rules and policies). On the contrary, the catching-up may be blocked or slowed down because of it. (The formal unifications both of Italy in 1860 and of Germany in 1990 do not suggest that the nominal convergence helps. It was proved that in such a situation the economic convergence was not possible without massive fiscal transfers -unavailable in the current EU). It is not possible to rely on the long-term positive effects of the integration process, which was originally based on opening–up and on liberalization of trade. Current European integration process is more about regulation and new forms of intervention from above.

The draft of the EU Constitutional Treaty, prepared recently by the Convention for the Future of Europe, is a radical document with huge implications for national sovereignty of individual European countries. The proposed constitution will create a new Union, separate from member states and with its own legal personality and status. The Union will derive its powers not from member states but from its own constitution and its law will have primacy over the law of member states. Dual citizenship will be introduced. International treaty making will be conferred to EU bureaucracy, etc.

It is a very problematic development. The attempts to denationalize citizenship represent a dangerous reinterpretation of human rights (not in the direction to a classical liberal political democracy). The attacks on the state (or on the nation state) will - as the inevitable result - create a non-state but no one has yet proposed a democratic substitute for the nation state.

Every treaty and summit take Europe closer to such a brave new world. We have to ask whether the accelerated unification of the EU, the qualitative changes in the European integration process, ambitions which started in Maastricht, gained momentum in the 1990s, and reached their culmination in the current Convention on the Future of the EU; the shift from EC to EU, EMU, possibly EFU and EPU, will increase the welfare (however defined) of EU citizens, will promote the freedom and liberty in Europe, will improve the functioning of the European society and economy, and will enhance the position of Europe in the world. I am afraid it will not.

In the economic and social sphere, we are again witnesses of the disbelief in self-interest, in economic incentives, in the quality of the economic coordinating mechanism, in the price system. We are witnesses of the belief in promising, fashionable or modern products, technologies, or industries and of the belief that these can be masterminded by omniscient bureaucrats in government agencies. We face the same utopias as in the past, now in their computerized, digitalized versions. I am convinced that the counter-arguments are the same today as they were in the past.

We have to ask whether the European economy can survive the rigidities of the European labour market, the burdens of the European welfare state and of the enormous size and scope of redistributive state activities as well as the costs of bureaucratic regulation in all aspects of business. We have to ask whether the individual, very diverse European economies can benefit from the existence of a single currency, from the uniform monetary policy, and from the absence of exchange rates among themselves.

My answers to all these questions are well-known and I believe they are mutually consistent. The problems I see in contemporary Europe have common roots – the misunderstandings of the causes of the Wealth of Nations, the ideas and assumptions about the world that have come to prevail among large sections of politicians, social scientists, journalists and other opinion-makers in our countries. It has always been the role of MPS to fight them.

Václav Klaus, Speech at the Mont Pelerin Society Meeting, Chattanooga, Tennessee, September 18 2003