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Europe and the ongoing financial crisis

English Pages, 16. 3. 2009

Thank you for the possibility to be with all of you here tonight because I do not very often speak in Milano. I am glad that the Istituto Bruno Leoni gave me this opportunity. I am aware that the institute plays an important role in Italy. I am also very pleased that my book “Pianeta blu, non verde”, in its Italian version, was officially launched today. 

As you probably know, it is not a book about climatology or about the technicalities of global warming. It is a book about an ideology called environmentalism and about the dangers behind the ambitions – based on this ideology - to fight the non-existent problem of global warming.  I will not go into these arguments here now. I know you wanted me to talk about the ongoing economic crisis, but a connection of the global warming hysteria with the crisis does exist and I have to mention it here. 

There is, of course, no connection between temperature and economic growth. We know that there are economically successful countries with both cold and hot climate. Nigel Lawson says in his recent book that “the average annual temperature in Helsinki is less than 5°C/41°F. That in Singapore is in excess of 27°C/81°F  – a difference of more than 22°C/40°F.“ * There is, however, a connection between policies, based on attempts to mitigate the allegedly dangerously growing temperatures, and long-term economic growth. 

These policies have been putting obstacles in the way of economic development and we can, therefore, argue that they do contribute to the depth of the current crisis and especially to its prolongation – despite the fact that they did not trigger it. 

The connection in the opposite direction is not that clear. I don't share the erroneous hope of some people that the current crisis will fundamentally change priorities and will make the debate about global warming more rational. I am afraid it is only a wishful thinking. The politicians and their “fellow travelers” have invested so much in global warming they are not willing to devalue this – for them – so precious political capital.

Nevertheless, the financial and economical crisis is here, and is here to stay for some time. There is no miraculous way to get rid of it even though some politicians in Europe and America promise to do it. Let me put this issue into a broader perspective.

A month ago, I spent three days discussing this topic with an important group of leading politicians at the World Economic Forum in Davos and my depressing feeling from these discussions is that both the elementary rationality and the economic science have been more or less excluded, suppressed or forgotten. 

I am surprised that no one was prepared for the crisis. To assume that good weather, blue skies, azzurro, will be here permanently is a short-sightedness, if not an intellectual defect. The very unpleasant, day by day deeper economic crisis should be treated as a standard, cyclically repeated economic phenomenon. We should also take it as an unavoidable consequence and hence a “just” price we have to pay for the long-term playing with the market by the politicians and their regulators. Their attempts to blame the market, instead of themselves, should be resolutely rejected. Their activities, aiming at “reforming”, which means re-regulating the economic system world-wide, are all very doubtful and I as said in Davos: “I am getting more afraid of reforms bringing in more rules and increased international regulation than of the crisis itself.” A large increase in the scope of financial regulation and protectionism, as is being proposed these days, will only prolong the recession in the short-run, and undermine the long-term growth potential. 

My country has not, luckily, experienced any financial crisis so far. We had one ten years ago, in the moment of the Asian financial turmoil, and it forced our banks to become very cautious. Only three OECD countries have not pumped money into their financial system now – Czech Republic, Slovakia and Mexico. That's the reason why we are frustrated when the West European media put us together with some of the visibly vulnerable countries of Eastern Europe.

What we did import is the economic crisis. This happened partly because of the fall of demand for our exports, and partly because of the behaviour of foreign banks which own our local banks. Due to the problems in their mother countries, and in the attempts to rebalance their portfolios, they dangerously restricted credits even in countries without apparent financial problems. This is the effect of globalization and of our rapid selling off our state-owned banks after the fall of communism when there was and could not be any domestic capital at our disposal.

Aggregate demand needs strengthening. One traditional way to do this is to increase government spending, mostly on public infrastructure projects, on condition these are available and the country is ready to massively increase its indebtedness. The Czech government has not yet decided to do so because we do not believe in this procedure. Not all of us are Keynesians, even now. We are well aware of the crowding-out effect. It would be much more helpful to initiate a radical reduction of all kinds of restrictions on private initiatives introduced in the last half a century during the era of the brave new world of the “social and ecological market economy”. The best thing to do right now would be to temporarily weaken, if not permanently repeal, politically correct labour, environmental, social, health and other “standards”, because they block economic activity more than anything else. 

The question which is raised these days wherever I come is whether the current financial and economic crisis has been caused by capitalism, perhaps by too much capitalism, or – on the contrary – whether it was caused by lack of capitalism, by suppressing its normal functioning, by introduction of policies that are not compatible with capitalism, of policies that undermine it. My answer is that we witness a government failure, not a market failure as some politicians try to tell us.

Not to be misunderstood, I am not in favor of anarchy or elimination of the state. But I don't believe in the capabilities and the motivations of the state. For most of my life – till twenty years ago - I lived in a system where political, social and all other non-economic arguments and claims of the state dictated the economy, not the other way round. This sequencing is crucial. The horse must always be in front of the carriage, not behind it.

The wrong sequence was the defining feature of the communist system, and the whole idea of our transformation from communism to freedom and market economy was to change this. Our aim was to let the market function, and to supplement market economy with rational social, and now also environmental policies. I stress supplement, which means to add ex-post, not to impose ex-ante. I am sorry to say that the current European, originally German, now also more and more American social and ecological market economy leads us into a totally different world. This is what bothers me.

Václav Klaus, Notes for Milano, Palazzo Realo, Istituto Bruno Leoni, March 16, 2009

* Nigel Lawson. An Appeal To Reason. A Cool Look At Global Warming. London, New York, Woodstock, Duckworth Overlook, 2008, p. 27.


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