A conference organized by the Civic Club Foundation with the support of the Friedrich Naumann Foundation for Liberty and the Dutch Haya Van Someren Foundation (VVD International)

Can a Country go Bankrupt?

Liberal Answers to the Economic Crisis in Europe

Warsaw, 23.10.2010 (Saturday), Hotel Radisson BLU, Grzybowska 24 street

Report on project

Context of the event

The phenomenon contemporarily called "the global financial crisis" had its origins in the crisis of the U.S. economy. For many years, this economy was dominated by a specific economic system, based on running a very expansive fiscal policy (increasing the budgetary deficit), monetary policy (very low level of interest rates set by the Fed in the USA) as well as increase of the public debt with avoidance of savings. As a result of such policy the crisis which began in the U.S. spread to other countries leading to a global economic crisis, which effects feel not only residents of the U.S., but people around the world. Governments throughout the world have taken measures to prevent, or at least slow down, the negative impacts of the crisis, by taking measures such as direct intervention in the economy. The United States itself plans to intervene in the economy to the amount of over 900 billion dollars, intended to help the economy get out of crisis. Unfortunately, the money will come from increasing the budget deficit while it should be noted that it is the budget deficit and public debt (created by that deficit) itself which were amongst the main reasons of the crisis. A conclusion may be easily made that governments around the world want to fight the crisis caused, inter alia, by the relaxed fiscal policy with an even more relaxed fiscal policy and with tacit approval of the public.

With the large-scale return of the state to the economy, many journalists and experts heralded the dusk of the concept of an economic system based on liberal principles. It was claimed that the so-called liberal economy did not pass the exam. Meanwhile, such an assertion can be easily challenged by looking at what lies at its foundation. The liberal economic system is not in favor of expansive fiscal and monetary policy (and that's what lay at the root of the crisis), the liberal economy (which Milton Friedman wrote about) assumes a balanced policy; both fiscal and monetary as well as a low share of state in GDP. Ronald Reagan’s remark that: "Government is not the solution for us, it is a problem for us," proved repeatedly to be true in economic reality. Despite this, governments still see themselves as the only source of solutions to problems faced by the economy in times of crisis. Unfortunately, historically speaking, economies were developing much better when there was “less state” in them. State influence on the economy accurately sums up another Reagan’s quote: "Government views on the economy can be summarized briefly: “If it is alive, tax it. If it’s still doing well, regulate it. If it stops working, introduce subsidies.” It perfectly illustrates a reality towards which we are heading.

Goals of the conference

We wanted to tackle questions and myths related to the phenomenon called the global financial crisis with a special emphasis on its effects on the European economy. The conference was intended to create space for lively discussion among specialists and politicians who are experts in their area of professional experience. We also wanted to educate the public (participants) by explaining that liberal thought and economical concepts are not responsible for the creation and eruption of the financial crisis.

Our another very important aim was giving the possibility to representatives of countries which are not members of the EU to voice their opinions on the current situation in their countries and on the global arena. Even though their countries are not in the mainstream of the current global turbulences, we wanted to learn how different are problems of economies of Moldova or Ukraine.

Conclusions from the conference

The answer to the question whether a country can go bankrupt gave at the beginning prof. Nowak-Far from the Warsaw School of Economics. He said that the state will always continue to exist, but would increase its debts. In addition, it will have problems with loans, and its position on the financial markets will deteriorate drastically. This could mean a departure of foreign investors and even further weakening of the economy. According to prof. Nowak-Far, the current situation in Greece is also partly a result of poor coverage of economic data by the statistical systems of the EU. Their improvement was regarded as one of the main tasks for Brussels, to be able to quickly identify potential sources of crisis.

Discussion in  Panel 1 : Dr. Rafał Antczak, Mr. Sergiy Kyselov, Mr. Bartłomiej Nowak, Prof Artur Nowak-Far (from left to right)

We also heard interesting remarks about Poland as it is often portrayed as a "green island", which was affected by the global financial and economic crisis not so hardly. According to the Vice President of the Polish branch of Deloitte Business Consulting, Rafal Antczak, the cause of a small impact of the crisis on Poland is that, among other things, there is a relatively limited banking system in the country, where no such complex and risk-burdened banking transactions are settled as in the U.S. or Western Europe. This way Poland avoided sudden insolvency of e.g. investment banks.

Antczak criticized in this context the Polish tax system as one of the main obstacles for further economic development and predicted that the relatively good economic situation in Poland would continue to prevail only on the condition of immediate essential reforms, particularly in public sector finances. Otherwise Poland, according to Antczak, is in two, three years going to fall into a deep economic crisis.

An example of the vital role of liberal principles for the economic growth of nations presented Sergiu Baltaga, deputy chairman of the coalition partner Liberal Party AMN, who discussed the latest development in the Republic of Moldova (Moldova). Since the parliamentary elections in 2009, a coalition of four democratic parties (two of them liberal) have been ruling. Moldova belongs to the poorest countries in Europe, however, thanks to the latest measures taken by the  government, the economy has gained momentum: the administrative structures were optimized and government spending was reduced drastically. Gross domestic product rose by 2.5 percent within a year, exports rose by 3.5 percent. The government in Chisinau is expecting within the next two years, investments with a volume of about 2.6 billion euros.

Maarten Smit of the Dutch Ministry of Finance added that only long and medium term planning activities in the economy could avoid a crisis, or at least weaken it. This includes a strict fiscal consolidation, as it is currently implemented in the Netherlands now, said Smit.

Peter Altman of the Liberal Institute of the Friedrich Naumann Foundation for Freedom highlighted the need to increase transparency in the banking sector and the improvement of internal risk assessment models of financial institutions. Whether they are in this case does not involve the introduction of completely new rules, but the improvement and adaptation of existing principles, said Altman.

The importance of private small businesses that generate, for example, in Poland over 70 percent of the gross domestic product was also highlighted by Mr Antczak. It is thanks to the majority of private company owners, that Poland's economy continues to grow and that the international financial and economic crisis left the country relatively unscathed.

Discussion in  Panel 2 : Mr. Sergiu Baltaga, Dr. Peter Altmiks, Mr. Marcin Piasecki, Mr. Maartn Smit, Prof. Katarzyna Żukrowska (from left to right)

Mr. Maarten Smit from the Dutch Ministry of Finance showed how the crisis has affected The Netherlands and what are the challenges for both Netherlands and the whole EU in the future.

One of the huge problems pointed by Mr. Smit is the ageing of the Dutch population. He noted that this problem was not addressed by the government before the crisis – no necessary structural reforms were made. And the ageing of the population has a direct impact on labour supply. Therefore we should not see the crisis as the reason for the problems with the Dutch labour market but as an additional factor.

In Mr. Smit’s opinion, no government should ever waste a good sustainability period and should take anti-cyclical measures when the economy is in period of good growth. The economic crisis, of course, adds to the economic gap and deepens problems in the economy, however, it has a much weaker effect when reforms have been made earlier.

Mr. Smit also noted that the key issue discussed now in the Netherlands is risk. He pointed out that risks should be transferred back to where they belong – to the market and state should not act as a constant intervening institution. In Mr Smit’s opinion another crucial point is that that every government in order to balance the budget should create buffers to address future shocks. State finances should therefore be consolidated because only long and medium term planning activities in the economy could avoid a crisis, or at least weaken it.

As regards the EMU, we have learned that its biggest failure lays in its incapacity of launching automatic and immediate protective or control mechanisms. The EMU should be reformed to be more economical and much less political; it should work in such a way that it should sometimes be more automatic and immediate in implementation of anti-deficit measures. Next, it should provide detailed ex ante scanning of the economies of the EMU Member States to quickly detect and counteract to the imbalances in the Euro area.

By inviting guests from Ukraine and Moldova we learned how drastically different Europe is when it comes to comparing those countries to other EU-Member states. The huge gap lays not only in economic indicators or simple calculations of the GDP but in the terrible and unimaginable heritage which the communist system has left in the mentality of the population and politicians, relations between the citizen and the state as well as functioning of the public institutions. The differences here are so dramatic that even a sudden injection of great amount of investment money as well as integration with the EU structures would still not enable those countries to quickly place themselves in the avant-garde of the democratic and free market economies of Europe. A changeover from the ruins of communist centrally-planned, totalitarian states to modern free-market ones might take many generations.