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Speeches of President Vaclav Klaus at Johns Hopkins University and at Cornell University

(This article expired 23.09.2013.)

On September 22, 2010, President of the Czech Republic Vaclav Klaus delivered remarks on “Europe, the Systemic Consequences of the Slowly Abating Crisis and the Need to Re-Formulate the Case for Capitalism“ at Johns Hopkins University in Washington, DC. On September 24, 2010, President Klaus delivered a speech on "A Return to Cornell: Personal Remarks of the President of the Czech Republic” at Cornell University in Ithaca, NY.

Johns Hopkins University, Washington, DC

September 22, 2010

The audio recording of the speech and the following discussion can be found on the website of Johns Hopkins University here

Text of President Klaus’ speech in full length:

I would like, first of all, to express my thanks for giving me the opportunity to be here. In spite of having visited tens of American universities in the past two decades that followed after the fall of communism when we became a part of the free world again, I have never been to Johns Hopkins, one of the most famous American universities, well-known for its high quality and its emphasis on research. Thank you for the invitation. 

In my early academic years in the 1960s, when I was research fellow at the Institute of Economics of the Czechoslovak Academy of Sciences in Prague, I came across the name of your university in connection with articles and books written by the world-renowned economist of Hungarian, which means Central European, origin, Béla Balassa. His name is most often mentioned in economic textbooks in connection with the so called Balassa-Samuelson effect, which tries to explain the relationship between purchasing power parity and cross-country productivity differences. But Professor Balassa also wrote one of the first theoretical books on the most important post-second world war development in Europe: “The Theory of Economic Integration” (1961).[1] Because the European integration is absolutely crucial for us now, I will start by addressing this issue first. 

Based on my many visits in this country, I have the feeling that Americans do not have a proper understanding of the European integration. Partly because they don’t care, partly because they a priori see it as a positive development bringing a chance of having a less complicated and more coherently behaving partner on the other side of the Atlantic, and partly because they do not have patience with small countries, often changing names and size of their territory. The famous remark by Henry Kissinger about Europe’s telephone number is still relevant. 

Americans usually underestimate what happened in Europe in the last 50 years. In the 1950s, the leading idea behind the European integration was to liberalize, to open-up, to remove barriers at the borders of individual countries, to enable free movement of not only goods and services but of people and ideas around the European continent. It was a positive concept. It should continue and be promoted by all those who have a liberal (in European terminology), which means not statist or nationalistic, world-view or Weltanschaung.  

It changed during the 1980s and the decisive breakthrough came with the Maastricht Treaty in December 1991. Political interests to unify Europe and to create a new superpower started to dominate. Integration had turned into unification, liberalization into centralization of decision making, into harmonization of rules and legislation, into the strengthening of European institutions at the expense of institutions in member states, into the enormous growth of democratic deficit, into post-democracy.  

The recent dispute over the Lisbon Treaty, which ended when I signed it as the last one in Europe, was about whether to go ahead with this – freedom and prosperity endangering – process or whether to interrupt it. Some of us are not happy to be brought back to the centrally organized and controlled world that we got rid of more than 20 years ago. 

Mentioning the past, we can say with confidence that as regards our country, the transition from communism to a free society is over, which is by no means a small achievement. We have become a normal – whatever it means – European country and as a consequence of this, we have to solve already standard “European” problems, not the specific problems of a country in transition. This seems to be, however, in many respects a mixed blessing.           

In the process of the gradual adjustment of our political, social and economic system to the rules and institutions of the European Union, we imported both its positive as well as its less positive attributes and features. Even though our post-communist era is being characterized by a complete disbelief in the ability of the government to intervene in the economy and by a belief in radical deregulation, liberalization, privatization and desubsidization of the economy, we – with some resistance and reluctance – came to accept the very rigid and demotivating European economic and social system and are – nowadays – confronted with its problems. 

We became EU-members in May 2004 because we wanted to participate in the European integration process. We did not want to stay aside, as we were forced to throughout the communist era. However, for many of us in Europe, and especially for those who spent most of their lives in a very authoritative, oppressive and non-functioning communist regime, the undergoing weakening of democracy and free markets on the European continent is an undesirable development.  

We witness a gradual shift from liberalizing and removing all kinds of barriers towards a massive introduction of regulation and harmonization from above, towards the ever-expanding, overgenerous welfare system, towards the new and more sophisticated forms of protectionism, towards the continuously growing legal and regulatory burdens on business, towards the markets undermining quasicompetition policies, etc. All of that weakens and restrains freedom, democracy and democratic accountability, not to speak about economic efficiency, entrepreneurship and competitiveness.  

It brings me to the recent, only very slowly abating financial and economic crisis. It came as a surprise for most of the economists, for all the politicians, as well as for the public. Almost nobody expected it. The people shared the belief in the omnipotence of central banks and governments to control the macroeconomy and in the feasibility, rationality and productiveness of microeconomic regulation, especially in the financial and banking sectors. 

This belief proved to be wrong. The economists have slowly begun to understand the causes of the crisis and finally came to the conclusion that it was a consequence of a combination of failures. Searching for one simple reason was a mistaken strategy. On the macroeconomic side, it becomes more and more accepted that the origin of the crisis was connected with the unprecedented build-up of imbalances in the world economy, with the unusually long period of low real interest rates and of excessive money supply and with political playing with the mortgages. Especially in the United States of America. On the microeconomic side, it became clear that the existing partial and very imperfect regulation did not help. On the contrary, it distorted the rational behavior of banks and other financial institutions and motivated them to look for ways to escape it by means of various “financial innovations”.  

It is necessary to warn against the attempts to once again blame problems in the market as problems of the market. The current crisis was not the result of a market failure or of any inherent deficiency of capitalism. It was a government failure, resulting from the immodest ambitions to insensitively intervene in such a complex system as society and economy. Government actions and interventions caused, prolonged, and dramatically worsened the crisis.

The crisis will sooner or later be over. The long term damage, however, will stay. The adversaries of the market have managed to create a far-reaching mistrust in the system, but this time not only in the free market capitalism, in the laissez-faire system, in the capitalism of Adam Smith, Friedrich von Hayek and Milton Friedman, as it was the case 70-80 years ago, but in the highly regulated capitalism of the current era. And this is disturbing. 

As a small and highly open economy the Czech Republic could not isolate itself from the visible slowdown of the world economy and particularly from the recession in the countries of our main business partners. Our GDP fell by some 4% in the year 2009. 

We were lucky that our banking and financial system had not been overexposed to bad loans before the crisis, which helped and helps. We also have a big advantage in our own currency. The exchange rate of the Czech crown fluctuates; it is not a constant fixed for ever. The small open economies which accepted euro as their currency, or are firmly attached to euro through various rigid monetary arrangements, have been more affected by the current world-wide crisis. 

People like me understood very early that the idea of European single currency is a dangerous project which will either bring big economic problems or will lead to undemocratic centralization of Europe. Everyone sees now that the eurozone project has not succeeded in delivering the positive effects that had been rightly or wrongly expected from it. It was mistakenly and irresponsibly presented as an undisputable economic benefit to all the countries willing to give up their own “long treasured” currencies. Extensive studies that were published prior to the launch of the European single currency promised that the euro would help to accelerate economic growth and reduce inflation and stressed, in particular, that the member states of the eurozone would be protected against all kinds of external economic disruptions (the so-called exogenous shocks).  

It is quite evident that this has not happened. After the establishment of the eurozone, the economic growth of its member states had even slowed down compared to the previous decades, thus increasing the gap between the rate of growth in the eurozone countries and that in other major economies – such as the United States and China, smaller economies in Southeast Asia and other parts of the developing world, as well as Central and Eastern European countries that are not members of the eurozone.  

During its first 10 years, the eurozone has not led to any measurable homogenization of its member states’ economies. The eurozone, which comprises 16 European countries, is not an “optimum currency area” as defined by the economic theory. In such a situation, it is inevitable that the costs of establishing and maintaining it exceed its benefits.  

My choice of the words “establishing” and “maintaining” is not accidental. Most economic commentators were satisfied by the ease and apparent inexpensiveness of the first step (the establishment of the common monetary area). This helped to form the impression that everything was fine with this project. 

However, over the last decade, the economic performance of the eurozone countries diverged and the negative effects of the “straight-jacket” of a single currency have become more and more visible. When “good weather” (in the economic sense of the word) prevailed, no visible problems arose. Once the crisis (or “bad weather”) arrived, the lack of homogeneity manifested itself very clearly. In that sense, I dare say that – as a project that promised to be of considerable economic benefit to its members – the eurozone failed.  

Another issue is the possible collapse of the eurozone as an institution, the demise of the euro. To that question, my answer is no, it will not collapse. So much political capital had been invested in its existence and in its role as a “cement” that binds the EU on its way to supranationality that in the foreseeable future the euro will surely not be abandoned. It will continue to exist, but at a very high price – the low economic growth. 

I agree with Yuval Levin[2] who recently stated that we have to reformulate the case for capitalism. He sees that the system is under serious assault by two ruinous trends:

– “by a growing collusion between government and large corporations” and
– “by a welfare state expanding its reach well beyond the needy.” 

I agree with him that “the growing collusion of big business and government and the growing middle-class welfare state are expressions of a longstanding distaste for the market economy.” We, in the Czech Republic, based our transition from communism to a free society, to parliamentary democracy and market economy on radical liberalization, deregulation, privatization and desubsidization, on stressing that we are “pro-market” and not “pro-business” and I’m sorry to see that this fight is not yet over. It must be fought again and again. In America, in Europe, in the Czech Republic.

[1] R. D. Irwin, Homewood, Il, 1961. The book was translated into Czech very soon and published under the title “Teorie ekonomické integrace”, Svoboda, Praha, 1966.

[2] Y. Levin, “Recovering the Case for Capitalism”, National Affairs, No. 3, Spring 2010; www.nationalaffairs.com/publications/detail/recovering-the-case-for-capitalism

 

Cornell University, Ithaca, NY

September 24, 2010

It is almost an adventure for the President of a small Central European country, the Czech Republic, to be back at Cornell after more than 41 years. It has been a long time since I was here last time but the campus and the landscape around still look quite familiar to me. Just the autumn colors are different from those I could enjoy here in the spring of 1969. Since the fall of communism, I have been to the United States 50 – 60 times but I did not get a chance to come here. Mr. President, thank you for the invitation, I have been looking forward to it.

Let me start by looking back and by saying a few words about the time I happened to be here. It was not an accident that I was able to come at that particular period of time. The political and economic reforms carried out in my country in the second half of the 1960s which culminated in the well-known Prague Spring of 1968 opened up a unique, yet very narrow and short window of opportunity for the Czechs and Slovaks and made it possible – among other things – to travel to the capitalist West and even to study there. I was lucky to be able to use this opportunity.

I came here at the invitation of a Czech born, now late Prof. George Staller from the Department of Economics in the College of Arts and Sciences to spend the spring term of 1969 as his teaching assistant. I did some teaching but I used my stay here mostly for studying, for attending various courses in the field of economics and for looking around in an attempt to better understand this great and for us – especially at that time – uncritically admired country.

I came here from communist Czechoslovakia shortly after the country was occupied by the Soviet Union and other Warsaw Pact countries, which occurred in August 1968. It is an irony of history that the invasion of Czechoslovakia was the only military act in the existence of the Warsaw Pact. The Moscow politicians decided to do it because they – rightly – understood that we wanted to get rid of communism and that fear motivated them to act. As a result of it, we lost another twenty years, many of us the best years of our lives.

It led to a feeling of deep frustration, which lasted in my country until the ultimate fall of communism in 1989. But the beginning was the worst. By a coincidence, I left Prague at the end of January 1969, only a day after the very sad and despairing funeral of the Czech student Jan Palach who burned himself to death in the center of Prague in protest against the Soviet occupation of the country. It was an unheard of act, especially in the relatively mild and unexalted Central European civilizational setting. It has become part of our history and will never be forgotten.

To leave Prague at that moment was fascinating, a sort of relief. I hoped I’d come to a quiet campus with an Ivory tower atmosphere, I hoped I’d come to a country where politics is not omnipotent and omnipresent, to a country where students are supposed to study and professors to teach. Something we were deprived of during those years. But that was not what I found here. I came to a country in the era of SDS (Students for Democratic Society), of Hair and Aquarius, of Bob Dylan and Joan Baez, of Flower Children, of Berkeley’s People’s Park protests, etc. Short time after my arrival the black students here at Cornell occupied Willard Straight Hall, for the first time at a university campus with rifles, and Cornell made headlines in the national media. I must confess, I had the feeling it was not much more quiet here than in Prague at that time and some of the views and arguments used by the radical students here sounded quite familiar. And quite alarming and dangerous. In spite of being from a communist country, I was here, at that moment of history, ideologically firmly on the right.

I happened to be here also in the moment of a fundamental dispute in the economic theory and especially in economic policy between monetarism and Keynesianism and – more from sitting in the library than from the courses I took – I left Cornell as a devoted monetarist. After years of living in an oppressive and inefficient communist society and economy, people like me had a built-in mistrust in the possibility of the state (and government) to successfully and productively control, direct, regulate, or plan the economy. That led to my lifelong preference for market failure rather than for government failure. I personally experienced that the government failure is always much bigger and much worse.

My using of the word “always” is deliberate. As a result of that experience of mine, I look at the current attempts to fight the financial and economic crisis here and elsewhere with the same eyes. That is why I am more afraid of the consequences of the measures used to mitigate the crisis than of the crisis itself. I will talk about it also tomorrow at the UN General Assembly meeting in New York City.

When I left Cornell and returned home in June 1969, the country was different than when I left it less than five months before. The communist regime, strengthened by the presence of the Soviet soldiers, succeeded to tighten its overwhelming control over our personal lives, an example of which was my dismissal from the Institute of Economics of the Czechoslovak Academy of Sciences after being labeled a leading non-Marxist economist of the country. On the one hand, it was a nice and flattering title, but on the other, it very much complicated my life in the following two decades. My Greyhound bus trip from Ithaca to the New York City Kennedy Airport was my last touch with American soil for the next 20 years. There is not much to say about these years now[1] and I am afraid that nobody cares. Sovietology is completely out of fashion now.

After our Velvet Revolution in November 1989, we started a process of a radical dismantling of all kinds of communist institutions and of building a pluralistic parliamentary democracy and market economy. We did not want to reform communism, we wanted to get rid of it. We were not flirting with various “third ways”. As the first postcommunist minister of finance, I was in charge of the economic side of the transformation process. It was a fascinating challenge. In the first half of the 1990s, our experience was an interesting topic. I was often invited to speak here in America and in many other countries all over the world about this unique metamorphosis, about the transformation of the whole political, social and economic system. But that is also all over now, and the interest has – rightly – shifted to other topics.[2]

In a relatively short period of time, the Czech Republic has become a full-fledged political democracy and market economy, member of NATO and of the European Union. We consider it a success. We can proudly claim to be a “normal” European country again. As a result, we already face standard “European” problems, not problems of a post communist society. They are certainly easier to live with but are more serious than we expected. We were dreaming of introducing American style capitalism, but have been – step by step, together with our preparations for the EU membership – importing the European model of an over-regulated welfare state which is neither a very productive, nor a progressive, or a dynamic system.[3]

That’s not all. The European socio-economic model, the so called “soziale Marktwirtschaft”, is not the only problem we face. After half a century of communism, we wanted to be a free, sovereign, independent country but we became a part of the very dominant and more and more centralized European Union instead.

Originally, in the 1950s, the European integration was based on the concept of intergovernmentalism, but in the last two decades it turned into supranationalism with the autonomy of individual member-states probably smaller now than in the American “Union.”[4] This is not what I wanted and I am glad not to be alone in this position. Neither in my country, nor in Europe. Rather than being pushed into a position of being a European, which is something I don’t authentically feel, I prefer to remain a Czech, but making such a simple and innocent statement is not politically correct in Europe these days. You are immediately considered an anti-European.

Having been deprived of freedom for half a century, we are sensitive, if not oversensitive when it comes to freedom and react quite strongly and rapidly to all the slightest symptoms of its endangering. For that reason, we are nervous to see various new “isms” emerging around us, “isms” which become more relevant now than the forgotten and already almost no one inspiring old communism. The one I consider particularly dangerous today is the statist ideology of environmentalism, and especially its extreme variant, the global warming alarmism. That is why I wrote a book on this topic several years ago entitled “Blue Planet in Green Shackles”[5] with the subtitle: “What is Endangered: Climate or Freedom?” My answer to this question is clear and straightforward: “Freedom is endangered, climate is OK.”[6]

To be here after such a long time, a relevant question would be which of my views and to what extent have been shaped or influenced by my stay here in Ithaca? It is difficult to say, I came here already as an adult, not as a teenager, but I can argue with conviction that I had been very productively using what I had learned here for many years which followed and that the whole stay here, studying and meeting co-students and professors, was a great experience for me. I learned a lot. I have not had a chance to say thank you yet, so I do it now.

Václav Klaus, Statler Auditorium, Cornell University, Ithaca, NY, USA, September 24, 2010.

[1] I recently wrote a book about it in the Czech language under the title “Kde začíná zítřek” (Where Tomorrow Begins), Knižní klub, Prague, 2009.

[2] See my speech “20 Years after the Collapse of Communism,” Reform Club, London, November 12, 2009; online at: http://www.klaus.cz/clanky/1787.

[3] See my “Reflections on Potential Global Power Shifts: Notes for Lago Maggiore”. The Ditchley IIF Conference, Stresa, Italy, July 1, 2010. Available at www.klaus.cz/clanky/2637

[4] See my “Criticism of the Current Form of the European Integration Process”. Walter Hallstein Institute of European Constitutional Law, Humboldt University, Berlin, April 29, 2010; translation from German. Available at www.klaus.cz/clanky/2580

[5] Blue Planet in Green Shackles. What Is Endangered: Climate or Freedom? Competitive Enterprise Institute, Washington DC, 2008. Its Czech original version was published in 2007. The book has already been published in 16 different languages all over the world.

[6] Short summary of my position can be found in a recent speech in Palm Beach, Florida, entitled “Global Warming Alarmism is a Grave Threat to our Liberty”, 2010 Club for Growth Economic Winter Conference, March 5, 2010; http://www.klaus.cz/clanky/2529.

retrieved from: www.klaus.cz