Many thanks for the invitation to address this distinguished audience here, in Berlin, at this very unique and historic place although I would have preferred if you’d chosen Prague, which is, after all, the real heart of Europe.

As some of you may know, this is not my first contact with Hillsdale College. I quite vividly remember my visit at Hillsdale which happened more than ten years ago – in March 2000. The winter and low temperatures the evening I arrived, the sudden spring the next morning and the summer the following day can’t be forgotten – at least for a Central European who lives – together with Antonio Vivaldi – in “le quattro stagioni.”

My more important and long-lasting connection with Hillsdale is my regular and very careful reading of your Imprimis. I have always considered the texts published there very stimulating and persuasive.

The title of my already almost lost speech at Hillsdale was “The Problems of Liberty in a Newly Born Democracy and Market Economy.” At that time, we were only ten years after the fall of communism and the topic was relevant. It is different now. Not only communism is over, also our radical transition from communism to a free society is over and we face different challenges and see new dangers on the horizon now.

Let me use today’s opportunity to say a few words about the continent which you’ve been visiting right now, about Europe. You may like the old Europe, full of history, full of culture, full of decadence, full of fading beauty, and I do as well, but the political, social and economic developments here bother me.

Unlike you, I am neither a visitor of Europe, nor an uninvolved observer of it. I do live here and do not see any reason to describe the current Europe in a propagandistic way, using rosy colors or glasses. Many of us in Europe are aware of the fact that Europe faces a serious problem, which is not a short-term or medium-term business cycle-like phenomenon. It is also not a consequence of the recent financial and economic crisis. This crisis made it only more visible. It is something very European. As an economist, I would call it a structural problem which will not – by itself – wither away. We will not simply outgrow it as some hope or even believe.

It used to look quite differently in the past. The question is when it started to change. The post-World War II reconstruction was a success because the war eliminated or at least weakened all kinds of special-interest coalitions and pressure groups. In the following decades Europe was growing, was peaceful and stable, and was relevant. Why is Europe less successful and less relevant today?

I see it basically as a result of two interrelated phenomena – of the European integration process on the one hand and of the evolution of the European economic and social system on the other – both of which have been undergoing a fundamental change in the context of the “brave new world” of our permissive, anti-market, redistributive, conservative ideas forgetting society.

I will start with the first issue 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 – rationally – do not care, partly because they aprioristically accepted the idea that a regional integration is – regardless of its form, style, methods and ambitions – an exclusively positive, progressive, these days also politically correct project. They also very often accept the widely shared conventional wisdom that the weakening of nation states and the strengthening of supranational institutions is a movement in the right direction. I know there are many opponents of such a view in your country (and I guess Hillsdale belongs among them) but it has many supporters as well.

A positive evaluation of the developments in Europe can be explained only as an underestimation of what has been going on here 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. This was undisputedly a step forward and it helped Europe significantly.

It took a different course 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 out of it 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 to my great regret “successfully” undermined. It was forgotten that “the state” is the only institution where real democracy is possible.

After the fall of communism, the Czech Republic, an EU-member since May 2004, wanted to reassume its place among European democracies. We did not want to stay aside, as we were forced to throughout the whole communist era, and the EU membership was the only way to do it. Nothing else legitimizes a country in Europe these days. 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.

The currently most visible European problem is the European monetary union, which aimed to be the most important post-Maastricht “unification” achievement. The realization of this 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. The internal disequilibria – such as trade imbalances or state budget imbalances – became bigger, not smaller. There is no indicator pointing towards a growing convergence in the Eurozone countries. During its first 10 years of existence, the introduction of common currency has not led to any measurable homogenization of its member states’ economies.

People like me have always known that the idea of the European single currency is a wrong one, that it would create huge economic problems and would inevitably lead to an undemocratic centralization of Europe. To my great regret, this is exactly what has been happening.

The Eurozone, which comprises 17 European countries, is not an “optimum currency area” as defined by the economic theory. 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.

In the last couple of years, the negative effects of the “straight-jacket” of the single currency have become more and more evident. 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 strongly.

It is difficult to speculate about the future. I suppose that 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, which is nothing else than a searching for a solution by shuffling problems around between countries, which is, of course, a non-solution, and in low rates of economic growth in the future, which is not a good result either.

The second reason for the European economic problems – not specifically European but worse in Europe then elsewhere – is the quality, productiveness and efficiency of its economic and social system. Europe is characterized by a seemingly people-friendly and non-demanding, excessively paternalistic and, as a consequence, not sufficiently productive economic and social system, called “die soziale Markwirtschaft” (or social-democratism). This system with its generous social benefits weakened motivation, shortened working hours and life employment, prolonged years of studying, diminished the supply of labor (both at macrolevel and structurally), and led to a very slow economic growth.

In Europe 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 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.

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 has a very low priority here. 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 in the last two decades “reinforced” by the gradual acceptance of green ideology, of environmentalism. This process started already 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 details, but I want to at least mention my book “Blue Planet in Green Shackles” which has been published already in 17 foreign languages, and is available also in English.[1] It is one of my favorite topics but you wanted me to talk about Europe and I will not bother you with this topic now. As a useful summary of my book, I’d mention its subtitle which asks: “What Is Endangered: Climate or Freedom?” My answer is that climate is OK. What is endangered is freedom.

Thank you for your attention.

Václav Klaus, Hillsdale College Luncheon, Hotel Adlon, Berlin, June 11, 2011

Published in the publication of Hillsdale College "Imprimis", vol. 40, Nr. 7/8, July/ August 2011.

[1] Competitive Enterprise Institute, Washington D.C., 2008