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Notes for Ambrosetti Forum

English Pages, 2. 9. 2006

1. It is very difficult to say here, to this distinguished audience, anything new, fundamental or surprising about the state of the European economy or about the measures which should be taken in order to achieve a radical change. We should, nevertheless, accept that the European economy needs a radical change. We should not cheat ourselves.

2. The data are clear and merciless. The European rate of growth is much slower than in all other relevant parts of the world (the average annual rate of growth of the Eurozone in the last six years is only 1,3 % as compared to 3,5 % in the USA, 2,7 % in Japan, not to speak about Asia) and the rate of growth in Europe in this decade is slower than in all other decades after the Second World War.

3. Some of us know that this is neither an accidental nor a temporary development. It reflects the very low long-term potential rate of growth of the European economy, at least in the „old Europe“ (it seems better in our part of Europe).

It is more than worrying that this year's rate of growth, which is not very fast, may be even higher than the potential rate. It will bring about tensions and pressures and – undoubtedly – rising inflation.

4. I don’t believe it can be made better by more sophisticated fine-tuning of the European monetary or fiscal policies, by cosmetic institutional changes, or by spending more public money on education or research and technology, because the poor economic performance of the major continental economies has been caused by fundamental systemic defects of the European economy (and society).

This fact is not the way how both the European politicians and the voters see it. The European „soziale Marktwirtschaft“ remains to be sacred. To touch it is not possible. The June EU summit in Brussels was for me a clear demonstration of that, which is very frustrating.

5. Not only soziale Marktwirtschaft with its redistribution, paternalism, and excessive regulation is sacred and untouchable. These systemic defects are strenghtened by the existing integration model which is based on harmonization, not on competition of systems. The marching to an “ever-closer”, supranationalist, harmonized and more and more regulated Europe is a mistaken ambition.

The consequences of such a system, of the shift from intergovernmentalism to supranationalism, as well as of the shift from liberalizing and removing of protectionist barriers to the massive regulation and harmonization are not seen and understood. They bring, however, heavy costs which we feel, see and pay.

6. There is not a need and time to give examples of unnecessary and unproductive harmonization of various economic and non-economic parameters in contemporary Europe (starting with labour regulation and social standards) but one of them – the common currency – should be mentioned. The existence of the Euro has proved to be part of the European economic problem, not part of its solution. The costs of the common currency in a non-optimal currency area are evidently bigger than its benefits.

7. We have to do something. We have to formulate new vision of where to go, we have to put together the relevant and feasible strategy how to get there and we have to convince the people that to do it is necessary and to their advantage.

Europe needs an economic system which must not be damaged by excessive government regulation, by fiscal deficits, by heavy bureaucratic control, by attempts to perfect markets by means of constructing “optimal” market structures, by huge subsidies to privileged or protected industries and firms, and by heavy labour market legislation.

Europe needs a social system which must not be wrecked by disincentives to work, by generous welfare payments, by large-scale income redistribution, by all other forms of government paternalism.

Europe needs competition, not harmonization. We should believe in markets and not in the importance and effectiveness of international (or supranational) institutions. Our objective should be to promote markets and economic freedom, not to introduce new versions of a soft international central planning.

Václav Klaus, Ambrosetti Forum, Villa d’Este, Panel: „The Agenda for the EU – Economy and Competitiveness“, September 2nd, 2006