27/09/2018
Texts in English
The Fate of Central Europe: From Communism to the European Union


Many thanks for inviting me to the Fordham University and for giving me a chance to speak here. I feel honoured indeed. I haven´t made a speech in New York City for several years, last time – if I am not wrong – as President of the Czech Republic when speaking at the General Assembly of the United Nations. I discussed the international politics then, especially the – then undergoing – interventions in Syria and Libya. Don´t be afraid, this will not be my topic here today.

This time, I came to the U.S. to attend a conference in Washington D. C. with an interesting title: Ronald Reagan and John Paul II: The Partnership That Liberated Europe and Changed the World. I found it very interesting and stimulating. In my yesterday’s speech there called Europe Needs to Be Liberated Again,I tried to argue that “to my great regret the impact of this unique and exceptional duo of truly legendary personalities was not permanent. They succeeded in bringing about a short term, or perhaps medium term change only. Its original effect has already fully evaporated.”[1] Let me use this opportunity to explain my position, on Europe, on our dreams in the communist era, our expectations in the moment of its fall and the frustration we experience now when living in a world which is admittedly nominally free and democratic, but much less free and less democratic than we were hoping for three decades ago, in the moment of our Velvet Revolution which meant the end of communism in our country and in our part of the world.

In contrast with many observers who lived at the moment of the fall of communism in the free West, we were not entirely surprised that one of the most irrational, oppressive, cruel and inefficient systems in history ceased to exist so suddenly and so relatively quietly. By living there, we were well aware of the fact that the communist regime was at that moment in many respects already an empty shell. We also knew that in the final stages of communism practically no one in our countries believed in the original pillars of its ideology, in Marxism and in its derivative, the Communist doctrine.

Due to our sad communist experience, the word freedom was and still is for us absolutely fundamental. Its absence dramatically affected our daily lives, it was not just a topic in applied politology. It meant more for us than for people in Western Europe and America who lived their lives in freedom and therefore took it for granted. We were able to sufficiently appreciate its meaning. We are still sensitive to all symptoms of its weakening and undermining. This brings about our sometimes very critical views about the current world, which tend to surprise some of our Western friends and colleagues.

I am proud to say that we, in the Czech Republic, succeeded in radically dismantling the irrationality of communist economic system and in minimizing the inevitable transformation costs. Our transformation program had very Hayekian characteristics. Its basic features were:

-  to liberalize prices and to open the economy by liberalizing

foreign trade;

-  to massively deregulate the economy;

-  to privatize the fully state-owned economy;

- to get rid of all kinds of government interventions and to desubsidize the economy by dramatically decreasing the size and scope of all kind of redistribution processes.

I was – and still am – convinced that the transformation of any complex system (such as the economy) cannot be dictated from above. This process is inevitably a complicated mixture of spontaneity and constructivism and must follow the logic of Hayekian evolution rather than the dreams of all kinds of constructivists – hidden in all political parties, in all international organizations (starting with the IMF and the World Bank), in the academia[2].     

The radical systemic changes, accompanied by very cautious and prudent macroeconomic policy[3], brought visible and tangible improvements to our lives but the expectations-reality gap still exists and has grown even bigger in recent years. During the last 29 years after the fall of communism, we have slowly begun discovering that the undermining of freedom and of free markets and their weakening is not exclusively connected with communism. There are other non-democratic “isms” and institutional arrangements which lead to similar results and consequences.

There was no chance to avoid entering the European Union in our case, in a case of an ex-communist country. We had to do it, even though we were, always afraid of the consequences of EU membership. We were, however, not aware of the fact that by entering this post-democratic organization we'd become victims of the European disease of a regulated society, of an unproductive welfare state, of new, more sophisticated, more hidden, and more intrusive methods of government intervention, of the tenets of environmentalism, of political correctness, of humanrightism, of multiculturalism, etc. Six years ago, still in my presidential office, I wrote a book about it with the title “Europe: The Shattering of Illusions[4] .

The book reflects my deep frustration with the current developments in Europe, calls in question the naive and excessively optimistic expectations as regards the size of the economic benefits of territorial integration and of monetary unification of economically heterogeneous countries and criticizes the undemocratic consequences of the existing forms of the EU institutional arrangements.

As I see it, the present, rather gloomy situation in Europe is a consequence both of the non-efficient European economic and social system and of the increasingly centralistic and bureaucratically intrusive European Union institutions. They together represent a fundamental obstacle to any future positive development, an obstacle which cannot be removed by marginal corrections (or cosmetic changes) or by – eventually – more rational short term economic policies. The problems go much deeper.

For an economist, who understands – or at least hopes to understand – the dominant role of an economic system in shaping the economic performance, it is more than evident that the European economic and social system itself, the overregulated economy, additionally constrained by a heavy load of social and environmental requirements, operating in a paternalistic welfare state atmosphere, cannot lead to economic growth. This burden is too heavy and the incentives to a productive work are too weak. If Europe wants to restart its economic development, it has to undertake a fundamental transformation, a systemic change, something we had to organize three decades ago in our part of Europe: radical and far reaching depolitization, deregulation, liberalization and desubsidization of the economy.

The other part of the problem is the European integration model and, as its consequence, the undergoing de-democratization of Europe. The excessive and unnatural centralization, harmonization, standardization and unification of the European continent based on the concept of “an ever-closer Union” becomes a fundamental problem. The European Union conquered Europe and deprived it of its democracy.

After the fall of communism, my optimism was based on a strong belief in the power of the principles of free society, of free markets, of the idea of freedom, as well as on a belief in our ability to promote and safegard these ideas. Today, approaching slowly the end of the second decade of the 21st century, my feelings are different. Did we have wrong expectations? Were we naive? I don´t think so.

I accept that

- we did not fully appreciate the far-reaching implications of the 1960s, the fact that this “romantic” era was a period of the radical and destructive denial of the authority, of traditional values and social institutions;      

- we underestimated that the growing apothesis of human rights was in fact a revolutionary denial of civic rights and of many liberties and behavioral patterns connected with them. Human rights do not need any citizenship. That is why human-rightism calls for the destruction of the sovereignty of individual countries, particularly in today’s Europe;

- we didn´t see all the side-effects of the European integration process. 

I am frustrated that even now not many people in Western Europe see it sharply enough. Most of them see only what the EU propaganda wants them to see. They seemingly believe that the EU is

            - a peace-guaranteeing community of nations;

            - a democratically run grouping of countries, where the demos feels like a demos;

            - a coherent entity monoculturally based on European values and behavioural patterns;

            - an entity which centralizes only a small part of decision-making (only the issues that cannot be – because of existing externalities – solved efficiently at the level of individual countries);

            - a conglomerate of countries where all are equal (in the Orwellian sense);

            - a family-like institution where the weaker members are significantly helped by the stronger ones;

            - an institution where the opposition to official views is welcome, allowed and made possible;

            - an institution where there is a genuine, democratically formed and implemented policy, etc., etc.

Nothing can be farther from the truth than this propagandistic scheme. The current European Union is something else:

            - it is an entity without demos, which means without democracy;

            -  it is an entity with only a weak common identity. For many of us, being a European basically means a geographical delimitation. As regards our identity, we are primarily Czechs, Italians, or Swedes. And we are proud of it. There are some “European” commonalities, but Europe has never been a melting pot;

            -  it is an entity which misuses the term subsidiarity for disguising the actual state of affairs and the predominant tendency – the ever-growing centralization of the EU decision-making;

            -  it is – especially after the Lisbon Treaty – an entity with one dominant country, Germany;

            -  it is an entity without authentic, genuine solidarity;

            - it is an entity constrained and weakened by a non-functioning monetary union and by the irresponsible Schengen arrangements, etc.

As I said, the current state of affairs 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.

Especially the common currency experiment is a wrong project and a big problem for us. The euro evidently did not help practically anyone[5]. The euro 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 (which is not an authentic personal solidarity but the government-organized fiscal transfers.)

We all know the textbook definition of an optimal currency area, of an area which eventually deserves a monetary unification. It must be an area with a similar economic structure and wealth and with a free flow of capital and people (as originally defined by Robert Mundell). Fixing the exchange rate in a non-optimal currency area, and the EU is such an area, is nothing else than a political attempt to deny economic reality.

It cannot function efficiently. It increases, rather than decreases, economic differences among Eurozone countries. For Germany, swapping the deutschmark for the euro was a functional equivalent of devaluation. It created the current German economic and – with it connected – political dominance which undermines the coherence of the EU, etc.

We live in a much better world than 30 years ago. But we expected something else. We expected a free and democratic society. Unfortunately, it is not there.

Lecture at the Gabelli School of Business, Fordham University, New York City, September 27, 2018.



[1] The text of my speech can be found on my website: www.klaus.cz

[2] See my “Czechoslovakia and the Czech Republic: The Spirit and Main Contours of the Post-communist Transformation”, in The Great Rebirth, Peterson Institute for International Economics, Washington, DC, 2014

[3] I served as a Minister of Finance in the first three years.

[4] Originally in Czech, the English version was published under the title “Europe: the Shattering of Illusion”, Bloomsbury Publishing, London, 2011. Its English version was launched here in New York City at the Hudson Institute, Roosevelt House, New York City, September 24, 2012.

[5] My country, the Czech Republic, doesn´t use the euro and still has its our original currency, the Czech crown.


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