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 VOLUME34NUMBER3•PUBLISHEDBYTHECATOINSTITUTE•FALL2014 Editor JAMESA.DORN BookReviewEditor TREVORBURRUS EDITORIALBOARD TERRYL.ANDERSON STEVEH.HANKE SAMPELTZMAN PropertyandEnvironment JohnsHopkinsUniversity UniversityofChicago ResearchCenter RANDALLS.KROSZNER JUDYSHELTON CHARLESW.BAIRD UniversityofChicago Fredericksburg,Virginia CaliforniaStateUniversity, EastBay DEEPAKLAL VERNONL.SMITH UniversityofCalifornia, ChapmanUniversity RANDYE.BARNETT LosAngeles GeorgetownUniversitySchool JOHNB.TAYLOR ofLaw LEONARDP.LIGGIO StanfordUniversity AtlasFoundation JOHNH.COCHRANE ROLANDVAUBEL UniversityofChicago STEPHENMACEDO MannheimUniversity PrincetonUniversity KEVINDOWD RICHARDE.WAGNER UniversityofNottingham ANTONIOMARTINO GeorgeMasonUniversity UniversityofRome,Luiss RICHARDA.EPSTEIN LAWRENCEH.WHITE UniversityofChicago KEVINM.MURPHY GeorgeMasonUniversity UniversityofChicago JAGADEESHGOKHALE LELANDB.YEAGER CatoInstitute JEFFREYA.MIRON AuburnUniversity HarvardUniversity JAMESGWARTNEY FloridaStateUniversity GERALDP.O’DRISCOLLJR. 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Allrightsreserved. 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