On March 11, the Cato Institute hosted a very entertaining and informative presentation titled “The European Crisis Continues: No Solution on the Horizon,” by Vaclav Klaus, former two-term president of the Czech Republic who has joined Cato as distinguished senior fellow, certainly a coup for Cato. The expression “former” is quite literally; he left office only last week.
Klaus assured the audience that while he is being succeeded by his “arch enemy,” the close relationship with the United States will not be affected, but this would end his personal career in Czech politics. The immediate purpose of the presentation was to introduce Klaus’ new book. He playfully joked that he was disappointed to learn that the book was available for purchase at a discount after the program. Rather, he suggested, Cato should charge a premium, because of the value added by his personal appearance.
The book reflects his frustration with developments in the European Union up to the debt crisis and the very problematic reactions to it, along with the enormous costs. The book argues against naïve and excessive enthusiasm for the perceived benefits of integration and the undemocratic consequences of denationalization.
Roger Pilon, vice president of legal affairs at Cato, introduced the program, noting that no one in the European Union considers himself a European but rather identifies with his or her country.
After Klaus spoke, Uri Dadush, former consultant for McKinsey Europe who has also worked at the World Bank and is now director of the International Economics Program at the Carnegie Endowment for International Peace, offered a strong rebuttal, then each speaker was given another chance to comment.
Klaus said simply that he disagrees 100 percent with everything Dadush said, and Dadush then addressed Klaus’s charge that his defense of the euro was based on an academic perspective largely divorced from real-world experience. In addition to his extensive experience as a consultant, Dadush offered the fact that he has many relatives living in several EU countries and that some of them are unemployed, to refute the notion that his views are merely theoretical.
Klaus quipped that in one of the countries where his book has been published, the title was changed to “Shattered Illusions,” but his illusions could not have been shattered, because he never had any.
According to Klaus, the economic outlook is not good for those living in Europe. The Czech Republic is part of Europe and a member of the European Union, but not a member of the eurozone, and Americans tend to get these respective entities mixed up. Overall, 85 percent of Czech exports go to Europe, and this trade is vulnerable to the economic stagnation and debt crisis that prevail there. For the fourth quarter of 2012, gross domestic product is estimated to have contracted 0.2 percent.
This circumstance in Europe, Klaus proclaimed, is not accidental. Rather, it is the consequence of the deliberate choice of an economic and social system marked by more and more centralized and bureaucratically intrusive institutional arrangements. He called the International Monetary Fund an obstacle to economic development, one that cannot be overcome by mere marginal corrections or short-term policies, because the problems are deeper.
Overregulation and economic constriction by social and environmental requirements and paternalistic government can only be overcome by a fundamental transformation of policy through systemic change. He also blamed policies of excessive integration, centralization, harmonization, standardization and unification, thus turning practically every buzzword employed by advocates of closer economic integration against the proponents. He quoted one advocate, from the Italian Finance Ministry, as saying integration is a necessity, whereas Klaus finds that it is a historical accident.
Klaus called for a discussion of these issues from many aspects, climaxed by an examination of policy regarding the euro, for which the marginal costs have come to exceed the benefits. This failure was inevitable and well understood in advance, contrary to the complaints of some that they were not warned that the euro would fail.
The consequences for weaker countries will be devaluations, and this was well-known. All economists were aware that Greece and some other countries were doomed to fail in such a system. A look at the Argentine experience showed that it benefited from the ability to devalue.
For Europe, Klaus contended, the benefits of a common currency never arrived in terms of the expected increase in trade and reduction in transaction costs, and whatever benefits developed were more than offset by the costs. He observed that in good economic weather, the system appeared to work, but in adverse times, every weakness was revealed.
Bretton Woods was an example of a system that ultimately required adjustment. In Europe, the dreams that a very heterogeneous economy would be made homogeneous by means of a monetary union were proven wrong. The economies have diverged, not converged. Klaus referred to his personal experience as Finance Minister of Czechoslovakia, where the partners had to agree to split, because the monetary union could not overcome the economic differences.
So everyone was warned, but some chose not to listen. Greece was not the cause of the crisis — it was a victim of a flawed system. The tragic error for Greece was to enter the eurozone in the first place. Greece has a well-known propensity to issue large amounts of sovereign debt.
Klaus predicted that letting Greece leave the euro, as Slovakia left its union with the Czech Republic, would be the beginning of its long journey to a healthy economic future. The objective should not be to change Greece, but to change the European Union’s economic arrangements, because, to use a cliché, one size does not fit all.
Klaus offered the insight that an almost communistic reasoning prevails that politics dictates economics, and those who question this are considered enemies. Europe must decide whether to continue to believe in this dogma and defend the common currency at whatever cost or whether it will finally return to economic rationality.
European politicians have overwhelmingly chosen to continue on the same path, but Klaus argued that they need to be told that the costs are becoming unbearable, but the U.S. administration and think tanks fail to send this message to Europe. So what the European Union does not need is more frequent summits in Brussels. It needs a fundamental transformation of thinking and behavior, a systemic change, a paradigm shift. Any solution must arise out of a process of democratic debate within the member countries, but there are no demos in Europe.
While it is fashionable to speak of a “crisis,” late Czech economist Joseph Schumpeter, who was originally from Moravia, defined this as a process of “creative destruction” in which not everything can be saved and maintained, but some things must be destroyed or abandoned, including some ideas. Even some states must be left to fail.
Opponents contend this is costly, whereas Klaus asserted that prolongation of the current policies of muddling through would be more costly, and in any case, they are “sunk” costs.
The program was such an excellent treatment of the cases on both sides of the debate over the future of the European Union and the eurozone that readers may want to follow this link
and watch it themselves.
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