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Remarks for the Saxo Bank Conference on Europe: No Illusions about the EU

English Pages, 13. 9. 2013

Many thanks for the organization of this important gathering and for giving me the chance of speaking here. I am motivated to be here, because I am convinced that we are approaching one of the crucial moments of European history. I suppose most of you came for the same reason. We know that not Europe but the European Union is a problem to worry about. Being aware of it we try to open the eyes of our fellow-Europeans who seem to be hopelessly lost in the noise of the EU propaganda and who are more and more indoctrinated by it. The misuse of words and the evident lies we experience in today´s European debates bring us close to the world of George Orwell and of our communist past.

The title of my today’s remarks as it was introduced in the program of this gathering is identical with the title of my recent book: “European integration without illusions”. The book was published a year and half ago in Prague in the Czech language and has its English[1], German, Spanish, Italian, Bulgarian and Danish versions. The Russian and Polish editions are under preparation. Speaking about illusions, I don’t have any as regards the EU. What I feel is a long-term frustration with the whole European situation, not just with the Eurozone crisis.

I don’t like cheaply devaluing words but in this case the term frustration seems appropriate. We, in our part of Europe, used this term quite often in the long and demotivating communist era. When I use it now, some people do not understand me or do not believe me. They take it as an overstatement, which it is not. Our communist experience sharpened our eyes and radicalized our political stances, something which is missing in Western Europe. Nazism is already forgotten and is more and more considered a mere aberration, impossible to be replicated. Communism was not there.

The aim of the book was to demonstrate my fundamental disagreement with the European integration model which has been built on the naive and excessively optimistic expectations concerning the economic benefits of territorial integration, unification and centralization of the whole continent (without paying attention to its costs) and on the inexcusable negligence and  underestimation of the undemocratic consequences arising from the long term undermining, if not liquidation of nation states in Europe and from the far-going transfer of decision-making to Brussels. This is the short, but correct summary of my position.

All the available evidence suggests that the future will not be easy for those of us who live in Europe, who live here together with our families, children and grandchildren, who have genuine, not only academic interest in its future developments, who are not willing to passively accept the massive destruction of European values, habits, life-styles and institutions which made Europe in the past such a unique place to live in. I am, and I am not alone, not ready to live in this version of the Brave New World.

My country, the Czech Republic, is a part of Europe, a member of the European Union, and a non-member of the Eurozone. In this respect, it is identical with Great Britain. There are, however, important differences. We are not a monarchy. We are not an island protected by The Channel. We are still handicapped by our communist past. What is even more relevant is that more than 80% of our exports go to Europe, to a region which undergoes a long lasting economic stagnation and an acute sovereign debt crisis. Even with the freely floating Czech crown, we are not able to disconnect ourselves from the rest of Europe. The Czech Republic – as a textbook case of a small open economy – needs a healthy economic growth of its main trading partners to be able to grow. And this is, regretfully, not the case now.

The current economic and political problems in Europe did not come out of the blue. They were also not imported from somewhere. They are the direct consequence both of the European economic and social system and of the EU institutional arrangements. They form an insurmountable obstacle to any positive development, an obstacle which can be removed neither by more optimistic rhetoric nor by eventually more rational short term economic policies. The problems go much deeper. They are rooted in the post-World War II developments, ideas and ideologies, in the – now dominant – European mindset, which some of us call Europeism. It is an incoherent amalgam of the whole cluster of both old and new, profoundly antiliberal “isms”.

What is fundamentally flawed is the European economic and social system, which is not a system of free markets. Ours is the world of heavily distorted markets. It is quite logical that the overregulated European economy, additionally constrained by a heavy load of social and environmental requirements, operating in a paternalistic welfare state atmosphere, makes healthy economic growth impossible. This burden is too heavy and the incentives to a productive work too weak.

If Europe wants to grow, it has to transform itself, it has to undergo a systemic change, something we, in our part of Europe, made 20 years ago. It was easier to do it there because our communist past gave us many very instructive and unforgettable lessons, which the current generation of West Europeans did not get. We wanted to establish “market economy without adjectives” (which was one of my widely quoted slogans at that time) but by joining the EU we got – as an entry welcome present – something fundamentally different, “die soziale Marktwirtschaft”. I am not sure it is possible to change it again. I don’t see any political party in Europe now ready to start radically depoliticizing, deregulating, desubsidizing the economy. It must be done, however.

That is not all. Additional problems have been irreparably brought about by the European integration model. The artificial, absolutely unnecessary centralization, bureaucratization, harmonization, standardization, unification and, therefore, de-democratization of the European continent – based on the concept of “an ever-closer union” – is another fatal mistake. The European Union has conquered Europe and deprived it of its democracy.  The issue of democracy or, better to say, of the lack of it, is for me the most important and the most pressing one. How is it possible that this issue is not sufficiently discussed in Europe these days? Is democracy considered not so important?

The Europeans are – partly understandably – occupied by debating the failure of the euro which is, of course, a sufficiently big problem. They pay the costs but don’t want to hear that this failure was inevitable and that its consequences were well-known in advance. All economists who deserve to be called economists had known that Greece and some other countries were doomed to fail having been imprisoned in such economically irrational scheme which was introduced mostly on the basis of political, not economic arguments. And these political arguments did not come spontaneously from individual member countries and certainly not from citizens of these countries who had lost the belief in their old currencies. This evidently economically inefficient and politically antidemocratic project was promoted by European politicians and intellectuals who traditionally do not pay attention to economic efficiency and democracy. (They are satisfied with their own wealth and with their own power.)

The benefits promised as a result of accepting a common currency never arrived, which may not be necessary to stress here in England. The proclaimed increase in international trade and financial transactions was relatively small and temporary and was more than offset by the huge and ever growing costs of this arrangement.

It is evident that in good weather (in economic sense) even the non-optimal currency areas could function (as all kinds of fixed exchange rate regimes did for some time). When bad weather came – the financial and economic crisis at the end of the last decade – all the inconsistencies, weaknesses, inefficiencies, discrepancies, imbalances and disequilibria became evident and the monetary union ceased to function. This was not a surprise. In the past all fixed exchange rate regimes needed exchange rates realignments sooner or later which is an argument found in any elementary economic textbook.

The expectations, or better to say wishes or dreams, to make the very heterogeneous European economy homogenous by means of monetary unification proved to be wrong. The European economies have diverged, not converged since the introduction of the euro. Monetary union requires for its meaningful operation several preconditions that are not so easy to fulfill. Some of them were formulated in the 1961 Robert Mundell’s seminal article.[2] But Prof. Mundell forgot to tell us that when there are significant transfer payments (high degree of income redistribution) inside individual member countries of the monetary union, there must be – symmetrically – huge fiscal transfers among member countries as well. The redistributionist and entitlement mentality which is dominant in Europe can’t be suppressed at the Union level. This point has been – to my mind – never discussed and recognized in the past. It has been suddenly discovered in connection with the Eurozone debt crisis.

I stress the systemic issues and consider it wrong when some people miss the broader context and concentrate on the short-term behaviour or misbehaviour of individual countries, e.g. of Greece or of other countries of the European South. Greece did not cause the current European problems, Greece is the victim of the Eurozone scheme. The system is a problem, not Greece. Greece made just one fatal error – to enter the Eurozone. Everything else was its usual behaviour. Letting Greece leave the Eurozone would be the beginning of a long journey of this country to a healthy economic future. Some Greeks – regretfully not their politicians – already understood that “one size does not fit all” and I only wish the same would be understood by leading EU politicians. I don’t see it, however.

Time is ripe for a fundamental decision: should we continue believing in the dogma that politics can dictate economics or should we accept that we have to return to democracy and to an elementary economic rationality? My answer is yes, we have to make a change, we have to initiate a radical discontinuity with the past – the sooner, the better. The European elections next year represent one of the chances to say it out loud. Not only in Great Britain or the Czech Republic, but all over Europe.

What we need is not a new round of summits in Brussels, but the courage of citizens of individual European countries to say that “the emperor has no clothes”, that the current EU arrangement is a mistake. It must be done in a genuine political process, it must arise as an outcome of political debates in a democratic setting. It must be generated by the people, by the “demos” of these countries, not by “inhabitants” of Europe or by bureaucrats in Brussels. We already live in a semi-democracy or post-democracy, but we still have elections. It is our duty to make use of them.

Thank you for your attention.

Václav Klaus, City Gate House, Bloomberg´s London Office, London, September 13, 2013.

[1] My book „Europe, the Shattering of Illusions, Bloomsbury Publishing, London, 2012.

[2] Mundell, R., “A Theory of Optimum Currency Areas”, American. Economic Review, pp. 657-665, 1961.