Thursday, 6 December 2012

Czech President Klaus: A process of creative destruction is needed to save Europe

Czech President Vaclav Klaus has again delivered a sharp criticism of the overregulated European economic and social system and integration model, which has led to economic stagnation and an acute sovereign debt crisis:

The benefits – promised as a result of accepting a common currency – never arrived. The assumed increase in international trade and in financial transaction was relatively small and was more than offset by the costs of this arrangement.
In good weather (in economic sense), even the non-optimal currency areas could function (as all kinds of fixed exchange rate regimes did for some time). When bad weather came – the financial and economic crisis at the end of the last decade – all the inconsistencies, weaknesses, inefficiencies, discrepancies, imbalances and disequilibria became evident and the monetary union ceased to properly function. This can´t be considered a surprise. In the past all fixed exchange rate regimes needed exchange rates realignments sooner or later which is another argument found in every elementary economic textbook.
The expectations, better to say wishes or dreams, that a very heterogeneous European economy would be made homogenous by means of monetary unification were proved to be wrong. The same is true about all – now proposed – banking and fiscal unions.The European economies have diverged, not converged since the introduction of euro. The elimination of one of the most important economic variables – of the exchange rate – from the existing economic system led to an inexcusable blindness of politicians, economists, bankers and all other economic agents.
Klaus laments the fact that the current European leaders still refuse to admit that "one size does not fit all":
The European Union decision-makers do not want to see it. Their way of thinking is based on an almost communist type of reasoning: economic laws do not exist, politics may dictate economics. People like me were raised in an era when such a mode of thinking was dominant in communist countries of Central and Eastern Europe. Some of us dared to express our disagreement with it already in the past. We were considered enemies then, we are considered enemies now.
Time is ripe for a fundamental decision: should we continue believing in the dogma that politics can dictate economics and continue defending the common currency at whatever costs or should we finally accept that we have to return to economic rationality?
The answer to such a question given by the overwhelming majority of European politicians until now has been YESwe should continue. Our task is to tell them that the consequences of such a policy will be higher and higher costs for all of us. At one moment, these costs will become intolerable and unbearable. We should say NOWe should accept that we find ourselves in a blind alley and in such a case the only possible way out is the way back.
As I said, what we need is not a new summit in Brussels, but a fundamental transformation of our thinking and of our behaviour. Europe has to undertake a systemic change. Coming to such a decision needs a genuine political process, not the approval of a document prepared behind closed doors by a group of EU bureaucrats. It must arise as an outcome of political debates in individual EU member countries. It must be generated by the people, the “demos” of these countries. (There is no demos in Europe, there are just “inhabitants” of Europe.)
We undergo a crisis. But crisis is – in Schumpeter’s definition – a process of creative destruction. Not everything can be saved and maintained. Something must be destroyed or left behind in this process, especially the wrong ideas. We should get rid of utopian dreams, of irrational economic activities and of their promotion by European governments. Part of this implies that even some states must be left to fall. The opponents of such positions keep saying that such a solution would be costly. It is not true. The prolongation of the current muddling through is more costly. The costs the Europeans are afraid of are already here. They are the so-called sunk costs.
Read the entire speech here
The current leaders of the EU countries are prisoners of their own failed policies, and will not be part of the solution. However, there will be a time when a new generation of European politicians are ready for wiser and more realistic ways to cooperate in Europe

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