ARTICLES Leszek Balcerowicz Euro Imbalances and Adjustment

245 Pages·2014·3.46 MB·English

AN INTERDISCIPLINARY JOURNAL OF PUBLIC POLICY ANALYSIS
ARTICLES
Leszek Balcerowicz Euro Imbalances and Adjustment:
A Comparative Analysis
Mao Yushi Lessons from China’s Great Famine
James A. Dorn Equality, Justice, and Freedom: A Constitutional
Perspective
Allan H. Meltzer Current Lessons from the Past: How the Fed
Repeats Its History
Richard Kovacevich The Financial Crisis: Why the Conventional Wisdom
Has It All Wrong
Norbert Michel Dodd-Frank’s Expansion of Fed Power:
A Historical Perspective
Randall G. Holcombe What Stiglitz and Stockman Have in Common
Alexander W. Salter and Celestial Anarchy: A Threat to Outer Space
Peter T. Leeson Commerce?
John M. Cobin Rare Coin Grading: A Case of Market-Based
Regulation
Milton Friedman Monetary Policy Structures
BOOK REVIEWS
Chris Edwards • Jason Kuznicki • Vern McKinley • Fred L. Smith Jr.
• •
VOLUME34NUMBER3 PUBLISHEDBYTHECATOINSTITUTE FALL2014

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catojournal •volume34number3 •fall2014
ARTICLES
Leszek Balcerowicz
EuroImbalancesandAdjustment:AComparativeAnalysis 453
MaoYushi
LessonsfromChina’sGreatFamine 483
James A.Dorn
Equality,Justice,andFreedom:AConstitutionalPerspective 491
Allan H.Meltzer
CurrentLessonsfromthePast:HowtheFedRepeatsItsHistory 519
Richard Kovacevich
TheFinancialCrisis:WhytheConventionalWisdom
HasItAllWrong 541
Norbert Michel
Dodd-Frank’sExpansionofFedPower:AHistoricalPerspective 557
Randall G.Holcombe
WhatStiglitzandStockmanHaveinCommon 569
AlexanderW.Salter andPeter T.Leeson
CelestialAnarchy:AThreattoOuterSpaceCommerce? 581
JohnM.Cobin
RareCoinGrading:ACaseofMarket-BasedRegulation 597
Milton Friedman
MonetaryPolicyStructures 631
BOOK REVIEWS
America’s Fiscal Constitution: ItsTriumph andCollapse
BillWhite
ReviewedbyChris Edwards 657
The Great Debate:Edmund Burke, Thomas Paine,
andtheBirth ofRight andLeft
YuvalLevin
ReviewedbyJason Kuznicki 660
Fragile byDesign: The PoliticalOrigins of
BankingCrises andScarce Credit
CharlesW.CalomirisandStephenH.Haber
ReviewedbyVern McKinley 664
Unstoppable: The Emerging Left-Right Alliance toDismantle
theCorporate State
RalphNader
ReviewedbyFred L. Smith Jr. 669
Euro Imbalances and Adjustment:
A Comparative Analysis
Leszek Balcerowicz
Thisarticledealswiththemainproblemsandproposedsolutions
withrespecttotheeuro.IstartwithwhatIperceivetobeconfusion
inthedebateontheeuro.Thenextsectionshowsalargevariationin
the growth performance in the eurozone, and more broadly in the
EuropeanUnion(EU).Thisshouldmakeusskepticalwhenhearing
aboutthecrisisoftheeuro,orofEurope.Ithenproceedtodiscuss
what the problem countries in the eurozone suffer from. The next
section deals with a more difficult question: What are the links
between the euro architecture and the accumulation of these
problems—that is, the imbalances and structural barriers to eco-
nomicgrowthinsomemembersoftheeurozone?Ithenproceedto
discuss the adjustment under the euro after 2008, focusing on the
weaknessesofthepoliciesofthecrisismanagement.Thearticleends
with a critical discussion of the problems and solutions put forward
inthedebateontheeuro.
Against this background and based on the previous diagnosis, I
sketchwhatIconsidertobetherightapproachtosolvingtheprob-
lemsoftheeurozone.ThroughoutthearticleIdiscusstheeuroasa
monetary arrangement, the weaknesses of which have to be identi-
fiedbytakingacomparativeperspective—namely,thatofothercur-
rencyunions.
CatoJournal,Vol.34,No.3(Fall2014).Copyright©CatoInstitute.Allrights
reserved.
Leszek Balcerowicz is Professor of Economics at the Warsaw School of
Economics. He is a former Deputy Prime Minister, Minister of Finance, and
PresidentoftheNationalBankofPoland.
453
Cato Journal
Confusion in the Debate on the Euro
There is a lot of confusion in the debate on the euro. First,
problems that have appeared in the eurozone are often confused
with those caused by the euro. As a result, the euro is blamed
for almost everything bad that emerged after the introduction of
the Economic and Monetary Union (EMU). In discussing the
impactontheeuro,littleeffortisusuallydedicatedtospellingout
what would have been the developments in the eurozone under
alternativemonetaryarrangements—thatis,ifEMUhadnotbeen
introduced.
Second, more general issues are mixed up with those specific to
theeurozone,oftenwithoutaclearseparationbetweenthetwocat-
egories.Thefirstgroupincludesdiscussionsonhard(fixed)pegsver-
susfreefloatsandonthecausesofthefinancialcrises.Italsoincludes
somenewerissuesliketheproperfiscalpolicyduringafinancialcri-
sis and the consequences of unconventional monetary policy.
Obviously,onecannotavoidconsideringgeneralissuesindiscussing
theproblemsintheeurozone.However,generalargumentsarenot
enoughfortheproperdiagnosisandthepropertherapywithrespect
totheeuro.Inaddition,onemustisolateandanalyzethespecificities
of the eurozone—for example, why differences in risk premiums
between such different countries as Greece and Germany were so
smalluntilrecently,andwhyfiscalconstraintsinthemembercoun-
triesoftheeurozonehaveprovensoweak.Moreover,toisolateand
discuss these specificities, one must compare the EMU with other
typesofhard-pegarrangements.
Third, there is a lot of verbiage in the debate on the necessary
solutions to the euro’s problems, exemplified by such popular, but
unclear,expressionsas“fiscalunion”or“politicalunion.”Thatrhet-
oric, used by the proponents of the further centralistic integration
intheeurozone,reflects,Ithink,wishfulthinkingandanunreflec-
tive belief that a monetary union necessarily requires a political
union.
Finally, there are excessive generalizations in the discussions on
theeurowhichmaskahugevariationintheeconomicperformance
of the member countries, especially since 2008. (The same goes for
therestoftheEU.)Noteverymemberhasturnedouttobeaprob-
lem country. The division into the center and the periphery has
emerged.
454
Euro Imbalances and Adjustment
The Variation in GDP Growth in the EU, 2008–13
Table1showsthelargevariationinthegrowthperformanceinthe
EU during 2008–13. The cumulative growth in the eurozone over
2008–13 ranged from 5.2 percent in Slovakia to –23.6 percent in
Greece;amongthenon-euroEUmembers,itrangedfrom12.5per-
centinPolandto–4.1percentinBritain.Itisinterestingtocompare
economic growth in the respective EU countries with that in the
United States over the same period. As one can see, nine countries
have outperformed the United States in terms of GDP per capita,
andthreeofthem(Poland,Slovakia,andSweden)inaggregateGDP
growth.Theninebestperformersincludedfreefloaters(Polandand
Sweden), countries with hard pegs, that is, members of the euro
(Germany and Malta), and four countries with euro-based currency
boards(Bulgaria,Estonia,Latvia,Lithuania—knownastheBELL).
Theworstperformersincludedtheproblemcountriesintheeuro-
zone (Portugal, Italy, Ireland, Greece, and Spain—known as the
PIIGS),alongwithCyprusandSlovenia.However,thefreefloaters
(Britain and Hungary) did not fare very well either. An interesting
contrastisvisiblebetweenthegrowthperformanceoftheBELLand
the PIIGS as well as other problem countries in the eurozone. The
example of the BELL shows that a hard peg (i.e., not being able to
usethenominaldevaluationofthedomesticcurrency)doesnotnec-
essarilypreventacountryfromhavingarelativelygoodgrowthper-
formance. The contrast between the BELL and the PIIGS is even
more interesting because all of the BELL and most of the PIIGS
(Greece,Ireland,Spain)developedthecreditboomsthatwentbust,
and the boom-bust episodes in the BELL were more intense than
among the PIIGS. This raises the question of what had allowed the
BELLtooutperformthePIIGSbysuchawidemargin.Iwilldiscuss
thatissueshortly.
What Problems Do the Problem Countries in the
Eurozone Suffer From?
In this section I will discuss the types of problems that appeared
inthePIIGS.AsthoseproblemsarenotspecifictothePIIGS,Iwill
alsotouchuponsomebroaderissues.
The problems that appeared in the PIIGS were (1) the
financialboomsthatresultedinlargeimbalancesanddecliningprice
455
Cato Journal
TABLE 1
Cumulative Changes in GDP per Capita
2008–13 2008Trough 2013Trough
Group1
Poland 12.5% 1.6% 10.8%
Slovakia 5.2% –5.1% 10.9%
Lithuania 5.2% –14.0% 22.2%
Bulgaria 3.6% –5.0% 9.0%
Sweden 3.4% –5.8% 9.8%
Germany 3.0% –4.8% 8.2%
Malta 2.7% –3.0% 5.9%
Estonia 2.5% –14.0% 19.3%
Latvia 1.6% –16.4% 21.5%
UnitedStates 1.2% –4.0% 5.4%
Group2
Austria 0.3% –4.1% 4.6%
Romania –2.5% –7.3% 5.2%
France –2.6% –3.7% 1.1%
EU-27 –2.6% –4.6% 2.1%
Belgium –2.7% –3.5% 0.9%
CzechRepublic –2.8% –5.1% 2.4%
Euroarea-17 –3.5% –4.7% 1.3%
UnitedKingdom –4.1% –4.6% 0.5%
Hungary –4.4% –6.6% 2.4%
Denmark –4.8% –6.2% 1.4%
Finland –5.0% –9.0% 4.3%
Netherlands –5.1% –4.2% –1.0%
Ireland –5.7% –7.5% 1.9%
Spain –7.4% –5.1% –2.4%
Portugal –7.5% –3.0% –4.6%
Luxembourg –8.1% –5.8% –2.5%
Italy –9.0% –6.1% –3.1%
Slovenia –11.8% –8.7% –3.4%
Cyprus –20.6%
Greece –23.6%
Other
Korea1997 22.1% –6.4% 30.5%
Turkey2000 17.1% –7.0% 25.9%
Sweden1990 2.4% –4.4% 7.1%
Finland1990 –5.3% –11.4% –5.3%
Chile1981 –11.7% –18.7% 8.6%
Note:thefiguresfor2013arebasedontheEuropeanCommission’sspring
forecast.TroughW2009,ifnotstatedotherwise.
Source:EuropeanCommissionAnnualMacroeconomicDatabase(AMECO).
456