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Milano Speech: Looking at Europe and Its Stagnating Economy from Prague

English Pages, 13. 3. 2015

Thank you for the invitation and for giving me an opportunity to address this distinguished audience.

My last speech in this historic city was six years ago when I was presenting the Italian version of my book devoted to the economic critique of the global warming doctrine.[1] I challenged in it the very shaky economic foundations of this mistakenly considered non-economic, non-social science doctrine.

The environmentalists and their politicians do not try to understand the meaning of discounting, the subtleties of intertemporal decision-making,[2] the relationship between the stock of natural resources and technical progress, the irreplaceable role of prices in any meaningful decision-making, the connection between the level of economic development (and of income) and the demand for environmental protection, etc. I am frustrated that the economic profession does not pay sufficient attention to this important, if not crucial issue of our time. In the subtitle of my book I asked “What is endangered? Climate or Freedom?”. Even though the economic science has enough arguments to answer these questions correctly, it does not use them sufficiently. Part of our profession even participates in the advocacy of this harmful doctrine and in helping to introduce economic measures based on it.

I am glad to be among economists because – in the last 25 years, after entering politics in the moment of the fall of communism – I was more often among politicians or at conferences where economists tried to give advice or to sell their ideas to politicians. It is much more productive to be here. I am not convinced about our ability to mastermind macroeconomic outcomes, to come up with reliable quantitative forecasts and especially I don´t believe – together with the public choice school – that politicians listen to us and follow our recommendations. They maximize something else than general welfare (whatever this term means).

As a true believer in economic science, I know that to come here with anything meaningful asks for making use of one´s comparative advantages. They are in my case – hopefully – in the rather tricky field between economics and politics, they are about Europe and its economy, they are connected with my experience of living in a country which has been already more than ten years in the European Union and – last but not least – with my personal experience based on the recently celebrated 25^th anniversary of the fall of communism and of the end of living in an irrational system of central planning, of state ownership, of rigid, administratively formed prices, of shortage economy, etc. I recently wrote a longer study devoted to this.[3]

When I was asked – already twenty five years ago – to organize the economic transformation of my country I didn´t approach this historically unique task with overambitious constructivistic plans. The experience with it was in many respects very useful. I learned – even more than I expected – that the transformation process was not an exercise in applied economics, that it was not a controlled experiment, that the necessary steps were not taken in a political and social vacuum and that the decisions were not made at meetings of sophisticated economists. I understood that – to make an analogy – it was necessary to be capable of playing chess (and to convince the citizens of the country that you are able to play it) but it was absolutely impossible to organize this complicated, many dimensional process as a chess game. It was not possible to attempt at implementing all the theories about the optimal sequencing of reform measures or to know the position on the chess board after the 25^th move of the black queen.

The transition was done in a “real time”, with many political, economic, social, and foreign policy constraints. Its substance is still mostly misunderstood or misinterpreted – foreign investors and business people used to have different interests, foreign observers have got only a very limited knowledge of that process and we, who were there, didn´t have time to write books about it. To caricature the substance of that unique historic process – as it is repeatedly done even now in serious economic journals – as a dispute between the advocates of “shock therapy” and “gradualism” is missing the point.[4]

Despite all my criticism of some of its aspects, I have to argue that the post-communist transition in my country (and in some other Central and East European countries as well) was a success. What is important – especially in connection with today´s discussions about how to solve the untenable indebtedness of some EU countries – is the undeniable, but not often mentioned fact that it was done without any meaningful external aid, without any quantitatively significant financial help from abroad, without fiscal transfers from anywhere.[5]

We live in a much better political and economic system now than 25 years ago but we are – in many respects – disappointed. The beginning was promising. We very soon succeeded to establish the standard framework of a full-fledged parliamentary democracy and – on the economic side – to organize a rapid and fundamental systemic change towards a market economy. Radically and without unnecessary delays, we liberalized, deregulated, desubsidized and privatized the economy. It didn´t last long enough, however.

Both for domestic political reasons and because of our EU accession, we started a reverse process. As a consequence of it, we have been moving away from standard politics to post-political, post-democratic arrangements. Our economy has become more regulated and subsidized (and harmonized and standardized) now than it was the case ten, fifteen years ago. The increasingly destructive weakening of the nation-state by the European Union (and its ideology) and by moving towards global governance fundamentally undermined our sovereignty and – with it – our ability to implement coherent and consistent domestic policies.

This is not a denial of the – among economists well-known and basically undisputed – positive arguments in favour of the economic integration, of opening-up of countries, of eliminating unnecessary barriers at the borders of individual countries, of liberalizing flows of goods, services, labour and capital among countries. This is a criticism of the way how Europe has been integrated and what kind of economic and social system has been gradually established there. The original – less ambitious – integration project, which originated in the 1950s has been in the last two decades transformed into a centralized, bureaucratic, excessively standardized and harmonized project aiming at the unification of the whole continent. I see in it many features resembling the system we abandoned 25 years ago. The difference between terms “integration” and “unification” is in this respect absolutely crucial.

Many of us are not convinced about the positivity of the role played by the current EU – for us as well as for the rest of Europe. I have to admit – but the other side should admit it as well – that due to the absence of hard and convincing data, it is difficult to correctly and convincingly evaluate the overall impact of our EU membership. As I said, we have not lived in a vacuum, all other things have not been kept equal, the “ceteris paribus” condition was not fulfilled. This makes a serious quantitative analysis almost impossible. It is, nevertheless, quite evident that we have entered neither a healthy, prosperous, fast growing economic area, nor a truly democratic entity.

The EU membership brings us back from capitalism to a modern form of European socialism, to a new administratively organized society (in Walter Eucken´s sense [6]), which is not much different from the old, in our eyes totally discredited system. Not to be misunderstood, I see the whole system, not only its details, as basically flawed.

I have repeatedly criticized European politicians, intellectuals and business people for not taking the evident problems connected with the current version of the European integration process and with the centralistic and dirigistic economic arrangements, which undermine elementary principles of market economy, seriously enough. It is frustrating to see that nothing significant has changed in this respect even when its failure became so evident in the last couple of years.

Europe continues marching in the same blind alley as before

- regardless the no change indicating economic data,

- regardless the waning respect and position of Europe in the rest of the world,

- regardless the deepening of the democratic deficit we are confronted with,

- and regardless the undeniable increase of frustration of those who live in Europe and are objects of the constructivist experiment of European liberal – in American sense – elites.

The economists should tell all those who are ready to listen that the economic stagnation Europe is facing is not a historical inevitability, that it is a man-made problem. That it is an outcome of a deliberately chosen and for years and decades gradually developed European economic and social system on the one hand and of the more and more centralistic and undemocratic European Union institutional arrangements on the other. They both and especially they together form an unsurmountable obstacle to any positive development in the future. As I said, what we go through is not an accident or a misfortune. It is a self-inflicted problem. It is a self-inflicted injury. Hundreds of small, at first sight innocent details have metamorphosed into a serious systemic problem.

It is relatively easy, almost politically correct and already not innovative and courageous to criticize the European reality we see around us. This criticism is easy, simple, almost effortless. It is more difficult to come up with proposals what to do with it. Let me briefly indicate some steps towards a perspective solution. They are political, but require economic underpinning and justification.

1. It is more than evident that the European overregulated economy, additionally constrained by a heavy load of social and environmental requirements, operating in a paternalistic welfare state atmosphere, cannot grow. This burden is too heavy. If Europe wants to start growing again, if Europe wants to solve its many daunting problems, it has to undertake a far-reaching transformation of its economic and social system. This is my proposal No. 1. When I say transformation, I don´t have in mind partial reforms or cosmetic changes. Even the term “structural reforms” in its usual IMF meaning is inadequate. I have in mind a fundamental systemic change.

2. The excessive and unnatural centralization, bureaucratization, harmonization, standardization and unification of the European continent have led to a deep democratic defect there. This I consider – in the long run – a much bigger problem than the current economic stagnation. Getting rid of it means changing the whole concept of the European integration, eliminating its post-Maastricht developments, which forms my proposal No. 2. We have to rehabilitate the concept of the nation-state which has proved to be an irreplaceable institution – for nothing less important than democracy. To continue repeating the erroneous view of many European politicians that nation-state inevitably leads to wars must be forgotten.

3. More than a year ago, on January 1, 2014, the EU architects and exponents planned to celebrate the first 15 years of the European common currency, of the euro, but this anniversary went almost unnoticed. Euro evidently did not please practically anyone. On the contrary, it brought new problems. It weakened the self-discipline of individual countries. It created a “fuzzy” state of affairs, without clear delimitation of competencies and responsibilities. It produced an exchange rate which is too soft for the countries of the European North and too hard for the European South. It opened the doors to unproductive and involuntary redistribution (this is not an authentic personal solidarity but government-organized fiscal transfers.)

This can’t be considered a surprise. European monetary union is nothing else than an extreme version of a fixed exchange rate system. It is unnecessary to repeat to this audience that all historically known fixed exchange rate regimes needed exchange rates realignments sooner or later. Eliminating this powerful – and for centuries efficiently functioning – adjustment mechanism was a naive attempt to stop history. (Let´s differentiate this adjustment mechanism from the so-called competitive devaluations.)

We should also say very loudly that the belief that the very heterogeneous European economy could be – in a relatively short period of time – made homogenous by means of monetary unification belongs to the category of wishful thinking. Europe can be made more homogenous only by evolution, not by revolution, not by means of a political project.

I find it also wrong to concentrate on the criticism of undeniable weaknesses of some, mostly southern EU countries. Their weaknesses have been well-known for a long time. They constitute their long-term definitional characteristics. These countries entered the Eurozone with these characteristics and they were – deliberately – admitted to it. We shouldn´t pretend that these characteristics appeared unexpectedly in the last couple of years.

It is evident that countries like Greece did not bring about current European problems. The system itself is a problem. By entering the Eurozone, these countries became victims of the single currency system. They were forced to operate in a world of – for them – unsuitable and inappropriate economic parameters. It proved to be untenable. Letting these countries leave the Eurozone – in an organized way – would be the beginning of their long journey to a healthy economic future. This is my proposal No. 3.

4. Some directly uninvolved observers and critics (mostly from America) keep telling us – as if we didn’t know – that it was a mistake to establish a monetary union whose members enjoy fiscal sovereignty. They recommend us to accompany it with a genuine, full-fledged fiscal union and don’t want to hear that the people of Europe want to retain fiscal sovereignty of their nations. Establishing a fiscal union in Europe should not be our task. On the contrary. My proposal No. 4 is to guarantee fiscal sovereignty of individual European countries.

5. The growing undermining of nation-states in Europe has several unpleasant consequences which have been weakening Europe. The most visible of them is the more and more daunting immigration problem. It should be made clear that this is not an issue of an appropriate or sufficiently politically correct approach of Europeans to different cultures, religions, races, ethnicities as some people try to tell us. The acceptance and even promotion of massive immigration – don´t mix it with labour mobility – is a mistake which threatens not only to undermine the cohesion of countries in Europe and the social peace in them, but the future of freedom and democracy on our continent.

The economists should explain to politicians that the massive immigration is not a necessary precondition for restarting economic growth in Europe. The European economic stagnation has not been caused by labour shortage. The unusually high rates of unemployment prove it. It is very sad that the much needed public debate about this issue has been prematurely closed or – at least – strictly constrained. To hold a different than a politically correct view is considered unacceptable and the holders of such an opinion are demonized. To rehabilitate nation-states, to reintroduce some sort of borders, to get rid of overgenerous welfare state policies, to forget the destructive ideology of multiculturalism is my proposal No. 5.

6. I am often asked, what kind of concrete measures to implement in such situation. I consider this question wrong. It implies that such measures do exist which is not true. The much needed change must start differently. It must start by acknowledging that the whole system has failed and that the system must be changed. Partial measures are not significant because they cannot change its substance. We need a fundamental transformation of our thinking and of our behaviour. We do need a “Paradigma Wechsel”. This is my proposal No. 6.

The historical experience tells us quite convincingly that the European spending and borrowing culture (promoted by years of loose monetary and fiscal policies and by the progressively growing welfare state) is not tenable. We should accept that we have run out of monetary and fiscal ammunition and that what remains is a return to free-market principles, to a fundamental deregulation, liberalization and desubsidization of the European economy. We shouldn´t count on more regulation. We have already too much of it. We have been for a long time witnessing cumulative, exponentially growing regulation and all kinds of government interventionism in Europe. The problem is not the absence of regulation. Those of us who experienced communism have to say that we did not expect that such an extent of government interventionism as we see now could emerge again. It seemed to us that the masterminding of the economy from above was so discredited by the communist experience that it could never return. We were wrong.

We also wrongly assumed that everyone took for granted that government failure is inevitably much bigger than any imaginable market failure, that the visible hand of the government is always much more dangerous than the invisible hand of the market, that vertical relations in society are less productive (and less democratic) than horizontal relations.  We were also proved wrong.

As I said, we have to return to the first principles. Economics cannot be ruled by politics. This was one of the crucial characteristics and main defects of Communism. We are very close to falling into a similar trap again. To change this way of thinking asks not only for better monetary, fiscal, or exchange-rate policies, for usual modest structural reforms, for better regulation, for smarter finance ministers or central bank governors. As I said, it requires a fundamental “Paradigma Wechsel”.

The people in Europe need a “shock therapy” (something we didn´t have to go through after the fall of communism because people in our countries were fully awake back then. It was not necessary to tell them that the system was basically wrong – they knew it). I am afraid that the people in Europe are not sufficiently aware of it now. And that there are no political leaders able and ready to explain it to them. But this is not the topic of our academic gathering.

[1] Pianeta blu non verde. Cosa è in pericolo: il clima o la libertà? (Blue Planet in Green Shackles. What Is Endangered: Climate or Freedom?), IBL Libri, Milano, 2009. The original Czech text, published in 2007, was translated into 20 languages.

[2] See my ”Ke kritice používání konceptu solidarity a diskriminace v intertemporální analýze tzv. globálních problémů“ (Towards a Critique of the Concepts of Solidarity and Discrimination as Applied in Inter-Temporal Analyses of the So-Called Global Problems), Politická ekonomie No. 6, 2007 (in Czech).

[3] “Czechoslovakia and the Czech Republic - The Spirit and Main Contours of the Postcommunist Transformation” in “The Great Rebirth: Lessons from the Victory of Capitalism over Communism”, Peterson Institute for International Economics, Washington, DC, 2014. See also https://www.klaus.cz/clanky/3666.

[4] See my article “The post-communist transition should not be misinterpreted”, Economic Affairs, Volume 33, Number 3, October 2013, https://www.klaus.cz/clanky/3468. 

[5] See my comparative analysis of our and East German experience: „Komparative Analyse der Transformation im Multavialand und Albisland“, Dresden, 2007, https://www.klaus.cz/clanky/15 (in German).

[6] See his canonical “On the Theory of the Centrally Administered Economy: An Analysis of the German Experiment”, Economica, New Series, Vol. 15, No. 58, Wiley, May, 1948.

Václav Klaus, Speech at the International Atlantic Economic Conference, Marriott Hotel, Milano, Friday, March 13, 2015.