KLAUS ON EUROPE

So far, so good

SUMMARY: Five years after the "velvet revolutions" of Central and Eastern Europe, Vaclav Klaus, prime minister of the Czech Republic, assesses the progress of the postcommunist countries and the prospects for wider European integration.

(The Economist, September 10th 1994)

Discussing Europe in the middle of 1994, we should decline to accept as our starting point the sort of pessimistic headlines common in the media, or the various catastrophe-scenarios proposed by people who tend to see the world as a playground for the artificial and elaborate schemes that they would like to impose. We should attempt an unbiased and unprejudiced analysis, proceed to an identification of real problems, and hope to suggest some feasible solutions. So let us put down our rose-tinted spectacles and pick up our most ruthlessly analytical pen.

Only five years ago the countries of Central and Eastern Europe were launching their "velvet revolutions". Communism was in the throes of an unforeseen collapse. The iron curtain was coming down. The death-knell was sounding for Comecon and the Warsaw Pact. Thanks to those great historical events - even, in some ways, in spite of them - Europe as a whole has become more free, more democratic, more open, more integrated, more united, less ideological and more pragmatic than at any time in living memory.

Now, five years on, the countries of Central and Eastern Europe differ markedly from one another in the degree to which they have succeeded in institutionalising free societies and market economies. But overall, their progress has been surprisingly fast. To suggest otherwise is to underestimate, or to forget, the damage that communism wrought. Communism was so evil, so oppressive and so ineffective a system of government that no country which had suffered it could ever hope to move on and create a normally functioning society and economy until it had undergone a comprehensive and painful transformation. Such a change takes years to complete; it cannot be accomplished merely with some sort of overnight shocktherapy. Taking that into account, it seems to me undeniable that the transition is proving a successful one. The people of Europe's post-communist countries are demonstrating that they are no less "European" in their habits and their aspirations than are their neighbours who were fortunate enough not to l

ive through the communist trauma.

The countries emerging from communism have done so by their own efforts; they understood quickly that they had to plan and carry out for themselves the inevitable systemic change involved in creating new societies and economies. There would be little if anything that the rest of the world could or would do to help them. The exception to that generalisation, the former East Germany, the only country to receive massive external help, has probably had the most problems with its transition.

Everyone knows that the success story of Central and Eastern Europe includes at least one catastrophic failure: the case of ex-Yugoslavia. However, it is difficult for me at least to accept the inference often then drawn that the tragedy epitomised by Sarajevo is the product of some sort of post-communist "syndrome" which is liable to repeat itself in every other post-communist country and thus endanger the whole of Europe. The break-up of Yugoslavia was not part of the "velvet revolution" process; it should be recognised as a unique event with exceptional causes. I have tried repeatedly to caution West Europeans against looking at everything through "Sarajevo glasses"; doing so will impede any normal evolution of European relations and institutions. It would be a similar mistake to demonise Russia and in doing so to disregard Russia's internal stabilising instincts and its capacity for "muddling through".

The challenge of reform

For the countries of Central and Eastern Europe, the important thing now is to push ahead with the process of self-transformation, and to resist any temptation to settle for half-measures or to make useless political and social concessions. The reforming politician must guard against "reform fatigue". He must be able to formulate a clear and lucid vision of a future which is both attractive and achievable; he must explain this vision to his citizens and defend it against populists of all shades; he must implement a consistent reform strategy and introduce unpopular and painful measures as and when they are needed; and he must not defer to rent-seekers and lobbyists who pursue their own short-term advantage to the detriment of society as a whole.

The reforming politician must take into account the fact that radical transformation of any society is a complex and dynamic process, not merely an exercise in applied economics or political science. The people that such change affects are not passive objects, but are human beings with their own preferences and priorities. They must be offered a fair deal politically as well as economically. A system of political parties has to be created as the means for achieving a basic political and social consensus.

To privatise, deregulate and liberalise, and yet to retain an appropriate degree of macroeconomic stability: such is the essential aim. Most of Europe's post-communist countries have already introduced a first set of reform measures. Unfortunately, some have done so hesitantly or inconsistently, falling short of the critical mass of reforms needed to change the basic system and so deliver some tangible results. Where that is so, initial euphoria has evaporated and with it the early mood of national unity; in some cases there is a high degree of political instability. This is a real Central and East European problem - and, because of that, an all-European problem. But still, the solution cannot be imported from outside. It has to be tackled at and from the roots.

Western worries

Reform is not a matter for Eastern Europe alone. The countries of Western Europe face challenges of their own. With the collapse of Soviet-style communism, the enduring question of how far the state should regulate the lives of free and responsible individuals shifts its ground from a relatively simple argument to a much more complicated one. The totalitarian practices of communism and the irrationalities of the state-owned and centrally planned economy were easy to criticise. That does not mean, however, that it is now easy to find an optimal equilibrium point in the real world between the freedom of individuals and the need for regulation by the state - not to mention by supranational institutions.

The available evidence suggests that Western Europe does not provide an optimal model for balancing freedom with regulation. The system that prevails there is too weighed down with over-regulation and over-control. The welfare state, with its generous transfer payments unconnected to achievement, undermines the basic workethic and thus individual responsibility. There is too much protectionism. There is too much bureaucracy. I do not pretend that there is anything particularly new in this critique; but it is fair to observe that the Thatcherite (or anti-Keynesian, or liberal) revolution stopped at best half-way in Western Europe, and is yet to be completed.

The visible manifestations of Western Europe's failure to reform include a wasteful and socially explosive rate of unemployment - and one which seems, moreover, to respond little to changes in the rate of economic growth and in the business cycle. The main cause lies not in an excessive supply of labour, nor in a lack of demand for labour, nor in immigration, nor in a lack of technological progress, nor in excessive imports of South-East Asian products, nor in the cheap labour of Eastern Europe. The factor which comes closest to explaining the problem is the excessively high rate of domestic wages relative to workforce productivity. The wage-rate is high because it has broken from its microeconomic foundation at the level of the firm, to be determined instead at a macroeconomic level between the state and labour unions; and it is then raised higher still by the addition of mandatory costs imposed by the state. Put simply, Europeans have to reconcile their rewards with their achievements, otherwise some of th

em will be out of work forever.

Another proof of the need for reform is that various European countries have pushed budget deficits to the limit. Budget deficits, an unpleasant Keynesian relic, are a product of the logic and structure of the European welfare state, not of any accidental fiscal mismanagement. They reflect the misplaced emphasis on redistributive (instead of productive) processes favoured by a significant proportion of European politicians and their constituents. Spending rises inexorably; taxes cannot be increased any further; and to move backwards along the Laffer curve seems too great a risk.

Integration, not unification

At a time when many European countries are moving towards a deeper formal integration than this continent has ever experienced, it is important to note that none of the problems identified above can be said to arise mainly from the small size of a typical European country; and hence none of them will be solved by shifting a search for solutions to the level of a supranational European entity. We cannot escape responsibility to solve our problems at home, where they have arisen.

Nor should we be surprised if the form and pace of Europe's integration prove to be determined by the real interests of the countries concerned and of their citizens, rather than by artificial blueprints approved at various inter-governmental summits. Successful integration will have to be dictated more by human action than by human design, to use Hayek's famous dictum.

"Integration" means eliminating barriers to the movement of people, ideas, goods, services, labour and capital. It does not imply the remaking of Europeans into a new breed of "homo europeus". And I believe that whereas integration enjoys widespread support in Europe, "unification" (which I use here to mean a vision that extends beyond integration to cover the structure and organisation of human society) is an ideal that Europeans find more difficult to share. It represents a different and more ambitious goal. Labels such as "Euro-sceptic" and "Euro-optimist", or "Euro-realist" and "Euro-idealist", can mislead unless we define clearly what we are talking about. I am a Euro-optimist when it comes to the probability of achieving European integration and the benefits that will flow from it; I am a Euro-realist when it comes to both the likelihood and the necessity of having Europe united under one ideological banner.

What matters most of all is that, despite resistance from bureaucrats, lobbyists and rent-seekers, the barriers between countries are getting smaller, while the freedoms and the well-being of all Europeans, especially those within the European Union, are increasing; I cannot see any reason why they should not continue to do so. But let the European institutions resist any temptation to favour the division of Europe into two parts, a luckier one and a less lucky one, as in the days of the cold war. Rather, they should be creating an umbrella for all the democratic Europeans who want to be an active part of an old but free, diverse, peaceful and efficient continent.

Vaclav KLAUS