(FORTUNE Magazine) – Vaclav Klaus, 52, a free-market economist who is Prime Minister of the Czech Republic, is widely considered one of Eastern Europe's most effective political leaders. Says Prague entrepreneur Michael Horacek: ''He is, quite simply, one of the luckiest things that has happened to this country.'' Klaus talked for an hour recently with FORTUNE international editor Donald Holt and Bonn bureau chief Paul Hofheinz in his second-floor office overlooking Prague's Vltava River. Excerpts:

How are your relations with the European Community? I know that there is all this free-market rhetoric in Europe, but in reality it is not the case. Everybody talks about aid and assistance. But we don't ask for aid. For us, trade is crucial. It is funny, because I get one honorary degree, one prize, one award in the Western world after another. It has become my role to preach free trade and free markets in Western Europe. What an irony. This afternoon I just looked at my mail and discovered that I have been awarded the Ludwig Erhard Prize. Excellent. You are the first to know it. But for the country, a better thing would be to get entry into EC markets.

The Clinton Administration has been talking tough on trade. Does that worry you? Definitely -- the first signals were not very promising. And we were really -- I don't know the appropriate word in English -- offended, maybe, or just surprised by the fact that the Czech Republic was included in the list of countries the U.S. believes is blocking free trade. It is really such a stupid-minded misunderstanding. In our dramatic transformation, we have newly born investors, baby economic agents, people leading their own firms, struggling for survival, all of that, and we are privatizing faster than any country in the world. To include us in such a list is really curious. It misses the whole spirit and logic and atmosphere of the most radical transformation in the second half of this century.

Into what sectors should foreign investors be putting their money? I am a conservative economist. I don't think that a government bureaucrat, including the Prime Minister, should suggest areas for business success. It is the role of managers to find niches. My role is to prepare the conditions for their success. In this respect, the Czech Republic has the best conditions among the post-communist countries. If you compare such standard macro-economic indicators as the rate of inflation, it is incomparably lower than in any other post-communist country. ((We have)) a balanced budget, and we're the only ((post-communist)) country that can say this. Even the U.S. ((cannot claim this)). We devalued our currency on the 29th of December, 1989 ((one month after the fall of the communists)). Since then the rate has remained absolutely stable.

You're still experiencing a decline in GDP. When will it turn around? First, standard terminology in this respect is a little bit misleading. This is not simply a GDP decline, or a recession, that can be cured by standard macroeconomic measures. We are in what I call a transformation shakeout. Irrational, artificially created economic activities must stop, must disappear. There is no way to escape a decline in the basic macro variable of the GDP. Nevertheless, last year was already a mixed year. Minus 6.7% is the last estimate of GDP shrinkage for 1992 as a whole, but the economy did grow 1% in the third quarter, and 3.7% in the fourth quarter. We had expected growth this year, but then there was another blow -- the split of the country. ((Slovakia separated from the Czech Republic last January.)) So I am not sure 1993 will be a year of growth. ((The economy declined by 5.1% in the first quarter.)) But it is a special case.

How is privatization going? Are you satisfied with the pace of Western investment? And are you disappointed that some deals did not go through? First, I would really conceptually distinguish privatization from foreign investments. Those are two totally different processes. With foreign investments, I am quite happy. We welcome foreign investors. We don't create any complications for them. On the other hand, I don't see any reason to create artificial realities for them. There is no reason to give better terms to a strong Western firm than to a weak Czech firm existing here in this country. You mentioned some unsuccessful deals. But I would have to ask, how many deals are initiated every day in the U.S., and how many are completed? It is a standard process: The terms were simply such that the two sides were not able to make a deal. Nothing more, nothing less. Privatization is a very complex process -- with many victories and some losses. But I am really satisfied with it. We meet every week to approve privatizations. Tomorrow we will consider 40 or 50. Last week we approved 28, a bit below average. We do this every week without interruption. Is this slow? Is there any comparison with such a pace in any other country? Margaret Thatcher, my standard, privatized three firms a year. The enterprises that do not get privatized are usually difficult cases. There is a claim from Libya for a delivery five years ago ((left over from the communist period)) or something like that. Then there are the special companies -- call them the ''family silver.'' Look at it this way. Say I need money and decide to sell my library. The last 20 books I sell will be the ones I really value. It is my decision to start with some books and not to sell other books.

Some people worry that one result of privatization will be a wave of bankruptcies. Others think there might not be enough, that the government will keep losers afloat. What is your view? The country has no money, so that's a perfect way of blocking excessive attempts on the part of the government to bail out companies. We will try, however, to interrupt some domino effects, to interrupt unnecessary linkages or chains of bankruptcies.

The government issued vouchers ((worth $30 each)) to all citizens to buy stock in privatized companies. If some of these companies go bankrupt, do you fear a backlash among ordinary people who invested?

I don't think so. It seems to me that the voucher privatization was an extremely useful process in preparing people ((for capitalism)). People discovered for the first time what a share of stock is. You know, I have published maybe 20 articles in Western economic journals, sophisticated economic journals, but I have practically never had a share in my hands. I am pretty certain that people will simply understand that one firm went bankrupt, sorry, my decision was wrong, my vouchers should have been invested elsewhere.

Did Slovakia make a mistake in forcing the split? ((Long pause.)) This is a family divorce. You can't discuss it in a rigorous way, to speak of mistakes or miscalculations. Slovaks simply wanted to be alone, to have a Slovakian flag on their Washington embassy and a U.S. flag somewhere in Bratislava. That is all. I was the only Czech politician who was campaigning in Slovakia for Czechoslovakia, together with my wife, who is a Slovak. I am the last one who can be accused of trying to divide the country.

It is over. And I am afraid that there is much misunderstanding about this. To speak about nationalism in a negative tone is wrong. In the history of mankind people have done many positive things on behalf of nationalism. A nation is a standard frame of reference for people.

People get divorced and once in a while get remarried. Is there any chance that you might get back together? When you are just five minutes out of the court after being divorced, discussing remarriage is really nonsense. I don't want to say anything about it. Not to say ''no'' or ''maybe.'' It is simply not the right moment for this question.

How were you able to study free markets, a subject that was so out of step with the communists? The regime had many faces. If you decided not to participate in underground organizations attacking it, you were relatively free. In the 1970s I started to play tennis. This was unusual for a scientist. And I skied. When I was 35, in the 1970s, I became a ski instructor. It was a crazy, crazy world. You were not forced to work. Most people sat in cafes, or beer halls, doing no work. I was sitting in my office reading American economic literature.

Who among Western economists influenced you most? I am very often asked, ''Was it Hayek or Friedman or Karl Brunner?'' It was Samuelson. Paul Samuelson's textbook. Supply and demand. The graphs, the curves. I use it every day.