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Fiscal Disasters and Recoveries: Notes for the Coolum Panel

English Pages, 30. 7. 2011

It is neither a great discovery nor a courageous analytical insight to say that we live in an era of huge fiscal disasters and of very slow and unconvincing recoveries. It is a wide-spread phenomenon, not relevant for a small group of randomly chosen countries only, but it is not global. It is a Euro-American problem (and I don’t want to speculate whether Australia belongs to it or not). It certainly does not exist in Asia, Latin America or Africa.

It is also not a result of simple, easily reversible mistakes of fiscal policy in one country or another. The fiscal deficits we see around, without wars or revolutions almost non-existent in the past, and the consequent slow recoveries are the product of a systemic failure of our societies which goes beyond the economy. In the economic jargon, one can say that the people in some countries – because of the disconnection between their performance and their rewards – do not want to respect the good, old rule, called hard budget constraint.

I am the only speaker from Europe here today and should, therefore, speak about Europe. It is not easy. Europe is too heterogeneous to make it possible to speak on behalf of it (and to unify it under the banner of the EU, upgraded by the Lisbon Treaty). In addition to it, I do not often consider myself being a European. I have such a feeling very rarely, only in remote countries – as in Australia. I prefer to say that I am a citizen of one of the European countries.

There are, nevertheless, some characteristics one can call “European”. They are, however, more of a systemic, than geographic nature. I shall concentrate on them.

In the communist era we lived in a system where politics dominated the economy, which had well-known – extremely detrimental – consequences. What we wanted when communism collapsed was to create an autonomous economic system where politics will have only a marginal role in the economy. We did succeed in changing the economic system fundamentally, central planning and state ownership were dismantled in a very short period of time, the first years were very promising, at least in our country, but politics influences the economy now much more than some of us wanted and expected.

We wanted a free market system but got the very European “soziale Marktwirtschaft”, the social market economy, which is characterized by massive redistribution, paternalism, absence of motivation, excessive regulation, government intervention in all fields, irrational support of suddenly promising but economically not viable ideas and projects, counter-productive labour market rigidities, fiscal deficits, and sluggish economic growth. Moreover, the continuously, almost linearly growing living standards come to be considered a justified claim (or entitlement), almost a human right there.

When there is a “good weather” (in the economic sense), such a system somehow functions. It produces positive rates of economic growth (although much slower than in BRIC countries) and weak, but for some period sustainable fiscal positions of individual countries. When bad weather – due to any endogenous or exogenous negative shock – comes, the rates of growth become negative and fiscal positions unsustainable. This is true regardless of how one or another economic crisis started and who or what was responsible for it.

The problem is aggravated by attempts to fight the crisis by means of huge fiscal injections into the economy to – allegedly – avoid an even greater crisis. We know that this is a mistaken ambition. From time to time the economy needs what Schumpeter called a creative destruction. It needs the elimination of its unproductive and inefficient parts. Without such a process, there can be no strong recovery. As someone recently put it, “capitalism without bankruptcy is like Christianity without hell”. However, it seems that in the brave new world of today no politician is ready to let the economic crisis take its course.

The communist leaders were always telling us that we have to work more diligently and efficiently, that there must be more of technical progress, that the education must be better (they did not know the term ‘knowledge economy’ yet), that they would support the increasing use of computers (again, it was before the birth of the ‘information economy’), etc. We were repeatedly arguing that it would not help, that we need a fundamental systemic change.

I have been often criticized for comparing the current situation in Europe with communism. I am aware, more than most of my critics, of all the differences between communism and the current European political, social and economic system, but I don’t want to hide – and thus contribute to the underestimating of – all the similarities between them. Nominal or formal differences may be big, real differences smaller.

Economies with “fiscal disasters and slow recoveries” need a systemic change, not just a better policy. Europe has to get rid of its “soziale Marktwirtschaft”.

Our continent has one additional feature – its specific monetary system, based on common currency for 17 (out of 27) EU member countries. The Czech Republic is not one of them. It is essential to say that the European Monetary Union is another example of the dominance of politics over economics. The monetary union was established between very heterogeneous countries and without the support of a fiscal and political union. Its proponents evidently hoped that the monetary union would help to form a fiscal and political union which was always their aim. However, they did not want to say it openly at that time because such a project would had been rejected.

They will probably get the fiscal union (or at least get the EU moving in that direction) because they will never allow the monetary union to collapse. The economic price for its continuation will be, of course, very high and the inhabitants of Europe, the citizens of individual European countries, will involuntarily bear the costs. The systemic characteristics of our society will be even worse than they are now, the redistribution will grow, the individual motivation will be further weakened.

To conclude, I am afraid fiscal deficits and sluggish economic growth will remain a permanent characteristic of some of our societies. Self-inflicted irrationalities – like the fight against global warming – will make it even worse.

Václav Klaus, Centre for Independent Studies Consilium, Coolum, Australia, 30 July 2011