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Vaduz Speech: Lessons, a Former Communist Country Learned from Its EU Membership or Was It Vice Versa?

English Pages, 29. 5. 2015

Thank you for the invitation to visit again this beautiful place. Thank you for giving me an opportunity to attend the XI. Gottfried von Haberler conference and to address this distinguished audience, especially His Serene Highness Prince Alois.

I would like, first, to explain the title of my today´s speech as it was introduced in the program of the conference. It was suggested to me by Kurt Leube and I have to confess that I accepted it without much thinking about it. In principle, I like learning lessons. It seems to me, however, with passing of time, that the wording of the title is slightly misleading because I am afraid I didn´t learn any significant or my thinking changing lessons from our EU membership. The reason is that the EU membership of the Czech Republic is a mixed blessing I more or less expected.

I was always, even in the darkest communist days, aware of the inefficiencies and rigidities of the European economic and social systems and had always doubts about the would-be advantages of the political centralization of the European continent, about the inevitable consequences of the weakening of nation states in Europe, about the unfavourable effects of the non-genuine, artificially imposed harmonization and standardization of all kinds of economic and non-economic parameters in this – historically very heterogeneous – geographical area. I didn´t have, therefore, any improper or unwarranted expectations. In some respects, one should probably admit that the reality is even worse.

To speak about lessons I would put it the other way round. The more interesting question is to ask what lessons we learned in the communist era are helpful in judging our current EU experience. To live for almost half a century in an oppressive political system, in a frustration connected with the loss of national sovereignty, to be exposed to an irrational system of central planning, state ownership, rigid, administratively formed prices, shortage economy, etc. was a unique experience. We lost a lot during the communist era but – paradoxically – we also benefited from it. Some of us used this era as an unrepeatable opportunity for gaining profound and intimate understanding of a highly centralistic, dirigistic and interventionist political and economic system in its pure form. We found in the last two decades that the EU is another example of such a system. I am not that much interested in passively studying it again. I am angry that I have to go through a similar experience – even though in a milder form.

I know that this is a strong and controversial statement. But we are – due to our life in communism – sensitive, if not oversensitive to all, even the smallest indications of the loss of freedom, of all the attempts to mastermind our life, to politically manipulate the economy, to promote all kinds of utopian projects and ambitions. I do believe our past offers us a certain comparative advantage when looking at the current version of the European integration project.

Let me develop this argumentation more in detail. I will not return to the discussion of the communist era. I discussed the post-communist transformation of my country in a study “Czechoslovakia and the Czech Republic - The Spirit and Main Contours of the Postcommunist Transformation”, published in Washington D.C. last autumn by the Peterson Institute in a book under the title “The Great Rebirth - Lessons from the Victory of Capitalism over Communism”[1]. I will not repeat my arguments about it here now, that would ask for another speech.

I just want to say that despite all my criticism of some of its aspects, I dare arguing that the post-communist transition in my country (and in some other Central and East European countries as well) was a success. What is worth mentioning – especially in connection with today´s discussions about how to solve the untenable indebtedness of some EU countries – is the undeniable, but not often stressed fact that it was done without any meaningful external aid, without any quantitatively significant financial help from abroad, without fiscal transfers from anywhere.[2]

There is no doubt that 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 succeeded to establish the standard framework of a full-fledged parliamentary democracy very soon 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. This tendency 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 started moving away from standard politics to post-political, post-democratic arrangements. Our economy has become more regulated and subsidized (and harmonized and standardized) 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 significantly undermined our sovereignty and – with it – our ability to implement coherent and consistent domestic policies. Many foreign observers still do not see these tendencies, especially the Americans. Neither, the people connected with Brussels.

What I say is not a denial of all – among economists well-known and basically undisputed – positive arguments in favour of 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 not the problem. I criticize the way how Europe has been integrated and what kind of economic and social system has been gradually established there.

The original – less ambitious and less detrimental – integration project, which originated in the 1950s, has been in the last two-three 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 methodological difference between terms “integration” and “unification” is in this respect absolutely crucial.

Many of us who live in Europe are not convinced about the positivity of the role played by the current EU. As a former econometrician, 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. In the last eleven years 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. It can´t be disputed.

The EU membership brings us back from capitalism to a modern form of European socialism, to a new administratively organized society, 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 partial components, as basically flawed.

It is frustrating to see that nothing significant has changed 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 this constructivist, not Haberlerian experiment.

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 sufficiently innovative or courageous to criticize the European reality. It is more difficult to come up with ideas what to do with it. Let me briefly indicate several steps towards an eventual perspective solution.

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. This 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. To continue repeating the erroneous view of many would-be classical liberals or libertarians that the state is always wrong forgets that the new EU superstate is much worse than any old, basically democratically controlled nation state.

3. More than a year ago 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 (what we see 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.

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 them and these countries 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 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 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. It will – on the contrary – destabilize Europe. The European economic stagnation has not been caused by labour shortage. The unusually high rates of unemployment prove it. 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. Partial measures cannot change the substance of the system. The much needed change must start differently. It must start by acknowledging that the whole system has failed and that the system has to be changed. We need a fundamental transformation of our thinking and of our behaviour. We do need a “Paradigma Wechsel”. This is my proposal No. 6.

To conclude, we should accept 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.

Those of us who experienced communism have to keep saying 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.

How to tell it to the people in Europe remains to be a topic for our another meeting.

[1] V. Klaus, “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, D.C., November 2014.

[2] 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).

Václav Klaus, Speech at the XI. Gottfried von Haberler-Conference, Hochschule Liechtenstein, Vaduz, May 29, 2015. An earlier version of part of this paper was presented at the International Atlantic Economic Conference, Marriott Hotel, Milano, March 2015.