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Václav Klaus: EU is not Europe

Many thanks for the invitation and for the opportunity to address this very distinguished audience. My thanks go especially to Otmar Issing, the President of the Center for Financial Studies, who asked me to deliver this year´s CFS Presidential Lecture. Thank you. It is a great honour for me.

When I looked at the list of the past speakers in this series, I was not at all sure if someone like me who spent the last thirty years in the political arena actually deserves it. Even though I have been all that time an active Professor of Finance at the Prague School of Economics, even though I continued teaching and writing economic texts even during my Presidential era, I am fully aware of the fact that my engagement in politics didn´t allow me to be fully involved in the academic activity and to follow the events in the economic science on every day basis. Nevertheless, I believe in the general validity of the law of diminishing marginal returns even as regards the returns of the new contributions to the economic science. I am, therefore, convinced that the old proven pillars of economics are still there and that most of the new, sometimes very promising, highly appraised, allegedly revolutionary ideas in the economic theory don´t look so great as they pretend to be.

As a side remark, I should say that I am not that often in Frankfurt, in this “bastion” of banking, in this very modern and flourishing city. The wealth of the city is not surprising. The high purchasing power of the bankers who work here and spend their huge incomes in this city is no doubt the main reason behind its prosperity. 

 We are here at the gathering of economists or of people from the economic, financial and banking community but I will not confine my talk to the narrow field of economics. The topic of my today´s speech is not strictly an economic one. In addition to it, we, the economists, should admit that the economic discourse ceased to be the main and the most relevant issue of the current highly controversial and ideologically divided era.  Whether we like it or not, the people in our countries don´t pay that much attention to us[1]. This is partly because the people reflect their relative very high level of affluence and partly because the era of charismatic exponent of freedom and of free markets is over.

In the communist era, travel to the West was almost impossible for someone like me in Czechoslovakia and as a result, it was not until January 1990 that I was allowed to come here for the first time. It was two months after the fall of communism in my country and I was a newly appointed Minister of Finance in the first non-communist government. I was invited by Karl Otto Pöhl to have lunch with the board of the Bundesbank. It gave me a fascinating opportunity to discuss the challenges of the post-communist transition in Central and Eastern Europe, as well as the economic aspects of the forthcoming German unification (Wiedervereinigung) with this highly distinguished group of people.

I remember our very close views as regards the topic of the day, which was the search for the appropriate exchange rate between the two German currencies in case of unification. As some of you remember, the German politicians of that era didn´t listen sufficiently to what the economists had to say. They chose the exchange rate which was neither in conformity with reality, nor with the majority view of German economists. The politicians were, as it is often the case, wrong.  I am, however, not sure that the economists used all their arguments and presented them in a strongly enough way.

Let me say that I allowed myself to explicitly warn the German politicians and economists already in January 1990 that the German unification shouldn’t be done as a substitute for the fundamental systemic transformation of the East German society and economy. Based on my strong belief in the economic theory, I was convinced already at that time that unification without transformation would be very costly and for many East Germans extremely frustrating. I can use many convincing arguments in this respect but let me remind you that the annual fiscal transfers from the West to the East of Germany in the 1990s reached on the average the level of the Czech GDP at that time (in some years were higher)! Many times I found out that not even many German economists are aware of the magnitude of these transfers.[2] 

As I said, my first visit to Frankfurt took place still in the Velvet Revolution era. I dare say that some of us in the ex-communist countries were prepared for what happened. We spent decades in the irrational and oppressive communist economic and political system but we tried to use this time at least partly efficiently. Some of us – instead of only criticising the reality – spent these years studying contemporary economics and especially the literature in the field of comparative economic systems.  

We also learned a lot by living in such an irrational and inefficient system. We were frustrated by seeing the tragic consequences of the absence of the autonomy of economic thinking and economic decision-making in our part of the world. The politics dictated the topics and principally predetermined the answers to all kinds of economic questions and issues. Due to it, one of our first tasks after the fall of communism was to get rid of the dominance of politics and to establish the autonomy of economic decision-making. Only in such a situation it is possible to think clearly and without understatements. The political compromises are, of course, necessary – but only ex-post, not ex-ante. The thinking has to be done without compromises.  

This idea should be repeated again and again because this problem has become relevant in the current era again. These days, in the “brave new world” of the European Union and of political correctness, even more. In my country we were aware of the relevance of this idea since the very beginning and succeeded in making a radical change in this respect very soon. We see now, however, that we have been losing this favourable state of affairs once again. 

I would like to be very explicit by stressing that I don´t have in mind the former communist countries in Central and Eastern Europe only or mostly but the whole Western Europe and America. This time, the politicization of economic life has not been organized by the communist apparatchiks or by the emissaries from Moscow. It has arisen from inside, it is a home-made problem. These shifts have been relatively silently, slowly and incrementally growing inside the contemporary Western society during the last decades, especially after the fall of communism. The threat of communism blocked the emergence, the expansion and the dissemination of such views and ideas. The change has come from the West itself this time. It has not been imported (neither officially imported, nor illegally smuggled) from the East now. It is different now.

It hasn´t been accidental. We live in the era of a new authoritarianism of illiberal elites, of neomarxists of the Frankfurter Schule, of so called “experts”, of bureaucrats of international organizations, of IT protagonists and lobbyists[3], of loud and noisy exponents of political NGOs. As a result of it, we are the witnesses of an important institutional change, of a shift in power from elected representatives to permanent functionaries, from local councils to central bureaucracies, from legislators to executives, from national parliaments to Brussels and Strasbourg, from the citizen to the state. The form and substance of political discourse have changed substantially as a result.        

Let me once again mention the name of Otmar Issing, one of the most distinguished German economists and bankers whom I have been privileged to repeatedly meet on many occasions at different places of the world in the last thirty years. We sometimes held and expressed similar views on various economic issues but – not to undermine his reputation in the politically correct world of current Germany – I want to say very loudly that he has always been much more pro-European and much more pro-establishment than myself.     

In spite of that, the title of my today´s speech – EU is not Europe – was suggested by him. I only accepted it, but I did it with a great pleasure, because the title has a meaning. It sends a very clear message to all those who see these two terms as perfect substitutes. It is a message to the European political elites, to the uncritical admirers of the EU in politics, media and academia as well as to the EU huge and permanently growing nomenclature. All of them behave as if these two terms were identical.

They are wrong, but I understand why – they have a vested interest in pretending the EU and Europe are identical. They want to be the owners of Europe. They want to be recognized as the authentic heirs of all European historic events and achievements. They believe they have a right to authoritatively interpret current events and to decide whether they are European or un- or anti-European. For them the EU is the personification of Europe.

This is, of course, untenable. All democrats should oppose this way of thinking. Europe is a historically evolved cultural and civilizational entity (with more or less widely accepted geographical borders), whereas the EU is a man-made construct which has its well-defined beginning and will have – undoubtedly – its glorious or not so glorious end.

The only superficial attention to the European issues leads to the underestimation of the fact that the EU is not a constant structure. It is a moving and variable entity[4]. Every EU summit redefines its substance – some of them only marginally, some fundamentally. The changes go, however, all in one direction. The well-known ratchet effect functions in this field as well as in many others: every treaty or summit takes Europe closer to a centralised European state. This is not surprising because the main goal of the European political elites (and their fellow-travellers) is the dislocation of national sovereignty and the overcoming of the state. These people consider the sovereign nation-state as an obsolete historical anachronism which should be defeated.

 Last decades were characterized by the consequences of two such fundamental systemic and institutional restructurings. Both the Maastricht Treaty and the Lisbon Treaty brought about significant changes in the EU (originally EC) arrangements. I have to say quite resolutely that I see it as a very negative development.

We were not yet members of the EU in the moment of the Maastricht Treaty and had no “voice” in European debates then. We couldn´t express our disapproval or disagreement. However, as it is well known, I was the last President of all EU member-states who – under tremendous pressure both at home and abroad – capitulated and signed the Lisbon Treaty.  I remember that even Otmar Issing wrote several years ago that “the Maastricht Treaty was the triumph of political ambitions over economic reservations”.[5] This is also my position but I stress the political reservations as well.

Both of these treaties – neither of which was fully democratically approved and implemented – were in my opinion historic mistakes. They transformed the original concept of integration into something else, into unification. They pushed the heterogeneous community of sovereign European states into a union of subordinated regions and provinces (Länder in German terminology). They substantially augmented the power of the bureaucratic central agency in Brussels. They supressed democracy and turned it into a post-democracy (misleadingly called liberal democracy). I agree with John Laughland that these treaties created “a mechanism which allows governments to pass laws for which they would prefer not to argue in public, safely away from the glare of democratic scrutiny and parliamentary opposition”.[6]

By unifying (by means of averaging) important economic parameters (currency, exchange rates, interests rates, all kinds of obligatory non-economic standards, etc.) these two treaties turned some regions of the EU into the position of winners, some into losers. The level of these parameters was advantageous for some parts of Europe only, especially for the North of the continent. They proved to be detrimental for the European South.  

Instead of facilitating the mutually advantageous cooperation of European countries, these – economic realities not respecting – unification measures created deep disparities inside Europe. These disparities asked for the unwanted and unplanned emergence of a transfer union, which exists without authentic solidarity and is based on a non-voluntary redistribution.

Another unification measure, the liquidation of internal borders inside Europe, was supposed to facilitate the movements of the Europeans inside Europe and to create a new European Man, Homo Europeus[7]. It had an important side-effect. It led to the mass migration of non-Europeans who mostly didn´t come to Europe as future Europeans or as a labour force, who don’t intend to be assimilated and who don´t want to accept European culture, religion, values, habits, ways of life[8].

I can continue in the same spirit and extend the briefly stated arguments, but I know that we are in an economic institution and should pay more attention to the economic aspects of these processes. The EU – in its doctrine which I call Europeism – builds its policy on the very debatable non-traditional ideas and doctrines and presents them as “undisputable truths”. To oppose them is considered politically incorrect. I will briefly touch upon some of them:

1) One of the most important (and most detrimental) aprioristic prejudices which have been aggressively pushed forward in the EU is the almost religious belief that the environmental imperatives should be put before any economic considerations. It is not relevant that these ideas never succeeded in winning elections. They are presented as eternal truths.  This way of thinking has a long tradition, especially here in Germany, but the decisive breaking point was the formation of the Club of Rome fifty years ago and its aggressive denial of long established fundamental pillars of the economic theory and of the economic way of thinking[9].

I will mention – just as examples, without analysing them – the main pillars which have been undermined – the concept of the non-exhaustibility of economic resources, the understanding of the role of prices in any rational decision-making, the role of economic incentives in human behaviour, the proper dealing with externalities, the seeing of the environmental protection as a luxury good, etc. All of them deserve to be discussed in detail and especially they deserve to be returned to their fundamental place in political and economic discourse where they belong.[10]

2) Not less important and not less detrimental is the almost religious belief in the global warming (or climate change) doctrine and the economic consequences of that belief. This doctrine represents the victory of the non-economic thinking by underestimating the information hidden in politically unmanipulated prices and the decisive impact of the long-term growth of income and of technical progress on the outcomes of economic decision-making. This doctrine set us back two centuries to the old Malthusian fallacies.  

The arbitrarily chosen size of the discount rate in climatology (both implicitly in the climatologists´ thinking and explicitly in the climatological modelling) denies the role of time and of opportunity costs as the economists see them. By using a low discount rate, the exponents of these doctrines harm current generations. By claiming to fight for future generations, they pursue only their own political agendas. The war against oil, coal and cars impoverishes millions of people in spite of the fact that there is no measurable effect of human production of carbon dioxide on global temperature. All of that are, however, topics for serious lectures.

3) By claiming that we live in a knowledge economy, in an information economy, in an IT world, the EU apostles misinterpret the true sources of economic growth and development, they disregard the Adam Smith´s theory of the causes of The Wealth of Nations and they deny the fundamental contribution of the genuine creative behaviour of the free, unregulated and unmanipulated people to the economic performance. By adoring the role of formal education (and especially of mass high education), they underestimate the role of the quality of the economic system and – as a side-effect – produce the unemployable army of holders of university degrees in useless disciplines (or produce formally overeducated workers). It reminds me of the way of thinking and the rhetoric of the Leonid Brezhnev´s era.      

4) By believing that it is possible to have a common currency in a non-optimal currency area, the EU political elites contribute to the evident economic decline of Europe and to the slow economic growth of the Eurozone countries in the last decades. The recent 20th anniversary of the euro was not used as a basis for a serious debate about the advantages and disadvantages of the European common currency. This is inexcusable, because the already 20 years’ long experience gives us sufficient data.  One conclusion is clear: the single currency in Europe needs either an explicit or an implicit transfer union.

The explicit transfer union is not politically feasible (for many of us also undesirable), but the euro hasn´t yet collapsed because of the existence of an implicit transfer union in the form of the ECB´s “target balances”. This “union” was very innovatively described by the first Presidential Lecture speaker Hans-Werner Sinn[11] in many of his writings. It is now well-known that – within the current European monetary system – the governments can finance themselves via the European Central Bank. They cannot, of course, directly print euros but can issue their own government bonds which can be bought by the ECB.[12] This is also a transfer union.

5) My last remark relates to the still existing belief in the idealistic hypothesis of the so called “Great Moderation”, in the doctrine about the possibility to avoid economic fluctuations by clever, technocratically, not politically oriented macroeconomic policies. This idea rather surprisingly survived the undisputable reality of the 2008-2009 crisis. The students of Schumpeter should always remind us of the significance of the process of creative destruction.[13] Thanks to Schumpeter, we know that there is no growth without the previous destruction of obsolete equipment, machines, businesses, the whole industries. We witness it currently in the Czech Republic – the lowest rate of unemployment in Europe is not just a victory. It reveals the rigidity of our economy.

Conclusion: The Never-Ending Struggle for Free Economy and Society

I didn´t come here to start a revolution. I am, nevertheless, convinced that Europe needs to be liberated. To be liberated again. The ingenuity of free people should be made possible to bring fruits. We need a change, wir brauchen eine Wende. The dictate of the status quo is very powerful.

It may sound too ambitious but we shouldn´t capitulate to the intellectual trends of the time. I know that it takes political courage to admit that the eventual change will be slow and painful. I know that it is easier to say that in a position of a retired politician whose oversensitivity stems from his life in communism and who sharply sees the signs of the coming dangers. In a position of someone who knows that the growing politicization of economic life increases rent-seeking and creates low growth equilibrium. In a position of someone who is afraid of the consequences of the end of the malignant quantitative easing. 

But the change has to be done.    

Václav Klaus, CFS Presidential Lectures, Center for Financial Studies, Goethe University, Frankfurt, March 12, 2019

[1] This is also due to the fact that we economists have stopped focusing on big economic issues, on what people really care about. Our science is focused on very partial, esoteric research.

[2] I discussed this issue on the occasion of receiving the honorary doctorate degree at the Technische Universität Dresden 12 years ago, see my “Komparative Analyse der Transformation im Multavialand und Albisland”, Dresden, 2007, https://www.klaus.cz/clanky/15 The economic decline in the former GDR was much deeper than in my country (the output in the former GDR was for about 25 years roughly at the pre-transition level), unemployment has been all three decades substantially higher, etc.

[3] See my recent speech in Vienna, „Europas wirtschaftliche Zukunft in Zeiten der Digitalisierung und Globalisierung“, Wiener com.sult Kongress, Vienna, January 28, 2018 https://www.klaus.cz/clanky/4356

[4] Paradoxically, its protagonists claim that the EU development has always been following the commitment to subsidiarity. This concept is close to the communist concept of “democratic centralism”. 

[5] The International Economy, Winter, 2014

[6] John Laughland, „European Integration: A Marxist Utopia?“, The Monist, No. 2, 2009.

[7] I discovered recently that I spoke critically about “Homo Europeus” already in my article in The Economist, September, 1994.

[8] See my book “Völkerwanderung” written together with Jiří Weigl, Manuscriptum Verlagsbuchhandlung, Leipzig, 2016. Its English version has a title „Europe all inclusive“, IVK, Prague, 2017.

[9] I have to claim that I saw this new danger very clearly already in the – in many respects hopeless and frustrating – situation in Czechoslovakia after the Warsaw Pact invasion in August 1968 when we had totally different worries.

[10] I tried to do it in my book ”Blue Planet in Green Shackles“, Competitive Enterprise Institute, Washington, D. C., 2008 (The German version ”Blauer Planet in grünen Fesseln“, Carl Gerold´s Sohn, Vienna, 2007).

[11] H. W. Sinn, „Die reale Seite der Krise und der Rettungsschirm der EZB“, CFS Presidential Lecture, Frankfurt, 26 February 2014. More about it in his book „Die Target-Falle – Gefahren für unser Kinder“, Hanser: München, 2012.

[12] My critical views on the European common currency can be found in ” First Five Years since the Outbreak of the Greek Crisis”, Notes for Le Cercle Washington Meeting, The Fairfax at Embassy Row, Washington, D.C., June 28, 2015, https://www.klaus.cz/clanky/3771.

[13] I consider it very important that even Alan Greenspan in his recent book “Capitalism in Amerika: A History”, Allen Lane, 2018, written together with A. Wooldridge, reminds contemporary readers of this concept and says that “the central mechanism of progress has been creative destruction”. I suppose, however, that the banking community here in Frankfurt doesn´t like his recommendation that the capital/asset ratios should be radically increased.

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