As some of you may know, this is not my first contact with Hillsdale College. I vividly remember my visit to Hillsdale more than ten years ago, in March, 2000. The Winter temperatures the evening I arrived, the sudden Spring the next morning, and the Summer the following day can’t be forgotten, at least for a Central European who lives — together with Antonio Vivaldi — in le quattro stagioni. My more important and long-lasting connection with Hillsdale is my regular and careful reading of Imprimis. I have always considered the texts published there very stimulating and persuasive.

The title of my previous speech at Hillsdale was “The Problems of Liberty in a Newly-Born Democracy and Market Economy.” At that time, we were only ten years after the fall of Communism, and the topic was relevant. It is different now. Not only is Communism over, our radical transition from Communism to a free society is over, too. We face different challenges and see new dangers on the horizon. So, let me say a few words about the continent of Europe today, which you’ve been visiting on your cruise.

You may like the old Europe — full of history, full of culture, full of decadence, full of fading beauty — and I do as well. But the political, social, and economic developments here bother me. Unlike you, I am neither a visitor to Europe nor an uninvolved observer of it. I live here, and I do not see any reason to describe the current Europe in a propagandistic way, using rosy colors or glasses. Many of us in Europe are aware of the fact that the continent faces serious problems and dangers, which are not short-term or medium-term business cycle-like phenomena. Nor are they the consequence of the recent financial and economic crisis. This crisis only made Europe's problems more visible. As an economist, I would call them structural problems, which will not, by themselves, wither away. We will not simply outgrow the problems, as some people hope or believe.

It used to look quite different here. The question is when things started to change. The post-World War II reconstruction of Europe was a success because the war eliminated, or at least weakened, all kinds of special-interest coalitions and pressure groups. In the following decades, Europe was growing, peaceful, stable, and relevant. Why is Europe less successful and less relevant today?

I see it basically as a result of two interrelated phenomena — the European integration process on the one hand, and the evolution of the European economic and social system on the other — both of which have been undergoing a fundamental change in the context of the “brave new world” of our permissive, anti-market, redistributive society, a society that has forgotten the ideas on which the greatness of Europe was built.

I will start with the first issue, because I repeatedly see that people on other continents do not have a proper understanding of the European integration process — of its effects and consequences. It is partly because they do not care — which is quite rational — and partly because they accept a priori the idea that a regional integration is — regardless of its form, style, methods, and ambitions — an exclusively positive, progressive, and politically correct project. They also very often accept the conventional wisdom that the weakening of nation-states, and the strengthening of supranational institutions, is a movement in the right direction. I know there are many opponents of such a view in your country — at such places as Hillsdale — but it has many supporters as well.

A positive evaluation of developments in Europe over the past 50 years can be explained only as an underestimation of what has been going on recently. In the 1950s, the leading idea behind the European integration was to liberalize, to open up, to remove all kinds of barriers which existed at the borders of individual countries, to enable the free movement of goods, services, people, and ideas across the European continent. This was undisputedly a step forward, and it helped Europe significantly.

But European integration took a different course during the 1980s, and the decisive breakthrough came with the Maastricht Treaty in December, 1991. Political interests that sought to unify and create a new superpower out of Europe started to dominate. Integration had turned into unification, and liberalization had turned into centralization of decision making, the harmonization of rules and legislation, the strengthening of European institutions at the expense of institutions in the member states, and what can even be called post-democracy. Since then, Europe’s constituting elements — the states — have been consistently and systematically undermined. It was forgotten that states are the only institutions where real democracy is possible.

After the fall of Communism, the Czech Republic wanted to reassume its place among European constitutional democracies. We did not want to sit aside — as we were forced to do throughout the Communist era — and European Union membership was the only alternative. Nothing else legitimizes a country in Europe these days. Therefore, we joined the EU in May, 2004. However, for those of us who spent most of our lives in the authoritarian, oppressive, and non-functioning Communist regime, the ongoing weakening of constitutional democracy and of free markets on the European continent represents something we did not expect and did not wish for in the moment of the fall of Communism.

The most visible European problem today is the European monetary union, which was presented as the most important unification achievement following the Maastricht Treaty. The realization of this monetary union has not delivered the positive effects that — rightly or wrongly — had been expected from it. It was intended to accelerate economic growth, reduce inflation, and protect member states against external economic disruptions or socalled exogenous shocks. It has not worked. After the establishment of the Euro Zone, the economic growth of its member states slowed down relative to previous decades, thus increasing the gap between the rate of growth in the Euro Zone countries and that in other major economies. The internal disequilibria — such as trade imbalances and state budget imbalances — became larger, not smaller. And there is no indicator pointing towards a growing convergence in the Euro Zone countries. During its first decade of existence, a common currency has not led to any measurable homogenization of the member states’ economies.

It should have been clear to all, as it was to me, that the idea of a single European currency was essentially wrong — that it would create huge economic problems and lead inevitably to an undemocratic centralization of Europe. To my great regret, this is exactly what has been happening. The Euro Zone, which comprises 17 countries, is not an “optimum currency area,” as defined by economic theory. In a currency or monetary union — which amounts to an extreme form of fixed exchange rates — it is inevitable that the costs of establishing the union, and especially of maintaining it, exceed its benefits. Most economic commentators were satisfied by the ease and apparent inexpensiveness of the establishment of Europe’s common monetary area. In recent years, however, the negative effects of the straightjacket of a single currency have become more and more evident. When good economic weather prevailed, no visible problems arose. But when bad economic weather set in, the lack of homogeneity manifested itself quite strongly.

It is difficult to speculate about the future of the Euro. I suppose that it will not collapse, because a huge amount of political capital was invested in its existence. It will continue to exist, but at a very high price in terms of large-scale fiscal transfers — the shuffling around of problems between countries, which amounts to a non-solution — and of low economic growth rates.

The second reason for European economic problems — not specifically European, but worse in Europe than elsewhere — has to do with the quality, productivity, and efficiency of its economic and social system. Europe is characterized by a seemingly people-friendly, non-demanding, paternalistic and — in consequence — insufficiently productive economic and social system called die Soziale Markwirtschaft, or social market economy. This system — with its generous social benefits, weakened motivation, shortened working hours, prolonged years of study, and lowered retirement ages — diminished the supply of labor — both at the macro level and structurally — and led to very slow economic growth.

In Europe, we have witnessed a gradual shift away from liberalizing and removing barriers and towards a massive introduction of regulation from above, an ever-expanding welfare system, new and more sophisticated forms of protectionism, and continuously growing legal and regulatory burdens on business. All of these weaken and restrain freedom, constitutional democracy and democratic accountability, not to mention economic efficiency, entrepreneurship, and competitiveness.

Europeans today prefer leisure to performance, security to risk-taking, paternalism to free markets, collectivism and group entitlements to individualism. They have always been more risk-averse than Americans, but the difference continues to grow. Economic freedom has a very low priority here. It seems that Europeans are not interested in capitalism and free markets and do not understand that their current behavior undermines the very institutions that made their past success possible. They are eager to defend their non-economic freedoms — the easiness, looseness, laxity, and permissiveness of modern or post-modern European society — but, when it comes to their economic freedoms, they are quite indifferent.

The critical situation in Europe today is visible to everybody. It is not possible to hide it. I had believed that this spectacle would be a help to the cause of political and economic freedom in Europe, but this is not proving to be the case. Of course, with the way your American government has been going, you might be able to catch up with us — in terms of our problems — very soon. But you are not as far along yet. So, maybe seeing Europe’s crisis today will at least help you in America turn back toward freedom.

Dr. Václav Klaus is the President of the Czech Republic, and has served twice as its Prime Minister. He was born in Prague in 1941, and holds his doctorate in economics from the University of Economics in Prague, where he still teaches. He also studied in Italy in 1966 and in the United States in 1969.

In 1989, large events began to unfold in the world, including events right outside this hotel where the Berlin Wall stood. These events were terribly significant in the native country of our speaker, who had begun his career as an academic, worked for a long time in a state bank, and eventually returned to the academy. In the month in which the prospect of freedom came in the Czech Republic — or Czechoslovakia as it was then — he was immediately appointed its Finance minister, in which role he set out to restructure his nation’s economy.

Dr. Klaus is a believer in the free market and a member of the Mont Pelerin Society, a society dedicated to freedom that was founded in 1947 by people like Friedrich Hayek and Milton Friedman. Lately, he has been something incredible and unique in the context of European politics — a person in high authority who is critical of the steady advance of centralized power in the European Union, and of the absence of accountability in its government to the peoples who are ruled by it.

Dr. Klaus is part of one of the greatest stories in modern times. The people of Czechoslovakia and the Czech Republic are among the handful of peoples who had the disaster strike them of being ruled first by the German Nazis and then by the Soviet Communists. Nothing could be more abusive than to have either of those things happen, except to have both of them happen. And there is something about the Czech Republic that it has always stood up against such rule. Winston Churchill thought that one of the worst tragedies of the 1930s was to abandon that brave place to Hitler. When the Iron Curtain fell, it would be one of the first places to rally.

Dr. Klaus is a man who came forward to show the alternative to collectivist rule, based on a distinction that Churchill loved. It had been a government where the government owned the people. How then could it become a government where the people own the government? I think it is no exaggeration to say that one of the most clear-sighted, deeply learned, and steadily courageous of all of the servants of human freedom in our age is the President of the Czech Republic, Václav Klaus. [Dr. Larry P. Arnn, President, Hillsdale College]

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