The Crisis of the European Union: Causes and Significance, continued

After the fall of communism, the Czech Republic wanted to reassume its place among European 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 authoritative, oppressive, and non-functioning communist regime, the ongoing weakening of 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 so-called 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 and especially 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 then 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 democracy. This system, with its generous social benefits, weakened motivation, shortened working hours, prolonged years of study, 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, 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.

Re-printed on this blog with permission from Imprimis.