Vaclav Klaus, Europe: The Shattering of Illusions, trans by Ondrej Hejma,Forward by Christopher Booker, London, Bloomsbury, 2012.

Wolfgang Schäuble, Germany’s Finance Minister, recently proposed giving  the EU monetary affairs commissioner powers to veto Eurozone deficits and debts. The idea was not warmly received, but as Chancellor Merkel observed, Germany “will continue to push for it”. And for good measure, she added, 
“I am astonished that, no sooner does someone make a progressive proposal … the cry immediately comes that this won’t work, Germany is isolated, we can’t do it.”

It has long been Germany diplomatic habit to advance bold ideas for Europe’s future, in the reasonable expectation that they would be turned down. The device enables Germany to don a European halo, while distracting attention from baser pursuit of national interests. In this case, she once again rejected the pooling of countries’ debts, an idea favoured by Club Med countries, and also by France, admittedly less noisily, prestige oblige.

The tone of Klaus’ book is set in the introduction by Christopher Booker, who recalls the visit in December 1988 of a group pf European parliamentarians, led by Hans-Gert Pöttering to Hradcany Castle, the seat of the Czeck President. Klaus was given the full treatment: there was no EU flag over the presidential palace; he had to back EU  climate change policies, because they were right and good; and he had insulted the Irish by expressing sympathy for the No vote to the Lisbon Treaty.

Hans-Gert Pöttering rounded off the proceedings by saying he wanted to leave “on good terms”, but that he found it unacceptable that he and his colleagues be compared to the Soviet Union. Whereupon Klaus said he had not mentioned the Soviet Union, but that he had  stated that he had not experienced such a style of debate since the Velvet Revolution in 1989, when the communist party-state collapsed.

Klaus is clearly a square peg in an EU hole, and his book makes quite clear why. As Booker points out, the confrontation between Klaus and the MEPs illustrates the EU élites inability to accept that anyone can hold different views to their own.

This raises a number of questions: what is Klaus’ conception of the proper sphere of politics; what are his economics; how does he consider that the European mosaic of peoples and states should work, to ensure peace and prosperity; and most importantly, what is the criticism that he raises against the present direction of the EU, and what alternatives does he propose.

The proper sphere of politics for Klaus is provided best by limited government within the boundaries of the nation state. The survival of the nation state is the condition for the survival of a liberal and democratic society, and the state budget is the axis of its governance. Nation states are the core of Europe and the guarantee of its good future.

Klaus is a fan of Hayek, the liberal Austrian economist, who argued in magisterial style against the pretensions of socialists to know as much or more than the de-centralized information mechanism linking customers and suppliers through the price mechanism of the market. Wider markets are beneficial to all, with important provisos, and in a Klausian world, governments are strongly advised to run balanced budgets. Although budgetary policy is not the heart of his thesis here, Klaus lays much of the blame for the democracies fiscal incontinence at the feet of Lord Keynes.

It follows from these premises that his preferred way to manage the European mosaic is for nation states to foster democracy and liberalism at home, and to co-operate abroad wherever it be desirable to promote mutual benefit. His vision for the mosaic is an Organization of European States, with a light bureaucracy manned with a telephone to ring around and set the next agenda. This alternative to the present EU–he writes poignantly as a Czech who must be more than aware of Chamberlain’s betrayal of Czechoslovakia at Munich in 1938–was doomed in 1973 as soon as Edward Heath ditched EFTA, the European Free Trade Area, for membership in the European Community.

The EU, Klaus argues, is now on the path to become the Union of European Post Democratic Republics (UEPDR). The defining moment when the EU élites  shed any pretension of considering co-operative arrangements between nation states came when they opted for monetary union.  The chief ideologue, Klaus considers, is Jacques Delors, who presided in the mid-1980s over the launch of the “internal market” programme, based then on the principle of mutual recognition, but with a clear intent to move to monetary union.

As Nigel Lawson has written, monetary union is the most irresponsible initiative in the post-war world. The initial 11 members, since expanded to 17, share none of the characteristics required of an optimal currency area. They are not homogeneous, having distinct languages, histories and state traditions. Prices and wages are definitely not flexible either way across the single currency. Most importantly, products were free to move across frontiers freely, as initially did financial  flows. But there is next to no trans-national labour movement. Not least, there is no fiscal union.

As Klaus rightly points out, those present at the creation of the Euro knew that it was an incomplete construction. Romano Prodi, President of the European Commission, told the FT in an interview in December 2001, that it had not been possible to reach agreement on everything. There would be an inevitable crisis, which would provide the next opportunity for a great leap forward towards European unity.

To the Prodis of the EU, nation states are the relic of Europe’s sinister past and have to be subsumed in a more enlightened post-national entity. One Europe would supercede the region’s inherited “kleinstaaterei”-the phrase comes from Germany’s experience after the Thirty Year war. And just as unification in 1870 placed Germany on a footing of equality with the great powers of the time, so only a united Europe can stand up to competition from the world powers of the 21st century.

The EU attracts, Klaus considers, because it is a gravy train. As more powers accrue through the rolling process of summits and treaties to the EU institutions, the political and financial beneficiaries became ever more deeply entrenched, and ever more interested in drawing further powers to the centre. As Klaus points out, the EU as presently constituted, is a Franco-German creation, deeply anti-liberal and definitely post-democratic, with a strong inbuilt drive to harmonize, standardize, and mastermind markets.

The word he uses to describe this process is Gleichschaltung, the method whereby Hitler centralized powers in Berlin and smashed the independence of the German states. Being President of his country, Hitler gets only one mention, but there can be little doubt that Klaus considers the EU in the light of the world war. As he points out, German imperialism crushed those who opposed it; the EU method is just not to listen to alternatives.

In short, Klaus considers the EU is sailing its member states into very dangerous seas. He agrees with an American interlocutor in New York who suggests that the progenitor of the EU’s extreme secularism is Jean-Jacques Rousseau. Although he does not say it here, what he is stating is that Jacobinism has received a new lease of life at European level, just as it began to fade in its homeland of France.

The next step, Klaus indicates, on the forward march of “europeism”—the phrase he uses to describe the EU ideology—is to centralize control of budgets. Such a step would hollow out the powers of the states, and lay the foundations for a European Political Union. The alternative, he suggests, is for a one time transfer of funds from northern Europe to the south.

There is a snowball’s chance in hell for that to happen. Ms Merkel knows that. She also knows that asking the states to submit their budgets to centralized control and oversight can only be achieved by fudge.

My bet is that France will agree to fudge in the hope of steering some of the funds its way. But Germany is not in the mood to play at partners with unequals any more. Merkel is saying on my terms only. That or the implication is we, Germany, go it alone, or with the Dutch, Austrians and Finns.

Arguably, that would be the best thing to happen to the interdependent European economies. A Germany-centred Euro would revalue sharply, and competitiveness would return to Club Med countries and France.

But that won’t happen either. France’s pride is at stake. Germany is getting used to saying Nein. And the UEPDR is unpopular.

One would assume that now is the time for alternatives. But Klaus is pessimistic. The EU élites don’t listen, opposition to the Europeists is weak. As Ms Merkel observes, “our” ideas are “progressive”. Who can possibly say nay to progress?



About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) ( His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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