The Economic Issues Concerning the EU´s Future
This is not my first visit at your university. I was here 17 years ago, in the spring of 1989, in the moment of already unstoppable meltdown of the communist regime in my country and in other parts of Central and Eastern Europe. The regime was so soft and weak at that time that it allowed me to make a trip to the University of Aarhus, to meet professors and students and to make a speech here.
I am sorry to say that I have no documents, names, addresses, notes, texts connected with that visit of mine. The Velvet Revolution in November 1989 was so rapid and our personal life so discontinuous that we did not succeed in making a smooth transition – I remember I left my office in the Academy of Sciences one day and entered the Ministry of Finance the next day. I asked my secretary to put all my things in my old office in the boxes and bring them to the ministry. I am afraid they are still there, but I don´t know where they are.
Nevertheless, the topic of my presentation here today is not transition from communism to free society and market economy. This is already over. My topic is the EU and its economic performance, because this is not over.
1. It is very difficult to say 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 so much needed change. I have to, nevertheless, start with saying that the European economic system needs a radical change. We should not cheat ourselves, as many European politicians keep doing.
2. The economic data are 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 (4,8%, 3%, 2,4%, 1,9%, resp. 1,3%.)
3. I am convinced 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 higher than the potential rate. It will bring about tensions and pressures, rising inflation, and a slowdown next year.
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.
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. For me, the June EU summit in Brussels or the recent summit in Lahti were clear demonstrations 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 strengthened by the existing European integration model which is based on harmonization, not on competition of systems with the result that not the best, more efficient, more demanding system is selected, but the opposite.
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 no 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. Your country was rational to stay out.
7. We need a real change. Europe needs an economic system without excessive government regulation, without fiscal deficits, without heavy bureaucratic control, without attempts to perfect the markets by means of constructing “optimal” market structures, without huge subsidies to privileged or protected industries and firms, and without heavy labour market legislation.
We need a social system without disincentives to work, without generous welfare payments, without large-scale income redistribution, without government paternalism.
We need 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, University of Aarhus, Denmark, November 10, 2006
www.klaus.cz