Transcript EUROPEAN ECONOMIC AND MONETARY UNION

EUROPE’S ECONOMY SINCE 1945
INTRODUCTION
● 2nd half of the 20th century was a period of
unparalleled growth in Europe:
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Real GDP per capita more than tripled in the
Western countries and more than doubled in the
Eastern countries
Quality of life improved – hours worked per year
declined by more than one-third giving way to
leisure time and lengthening life expectantcy
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However – unemployment rose over the period and
taxes also soared
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BUT, by any standard, Europeans are better off today
than their parents and grandparents
Introduction (cont.)
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Southern Europe grew faster than Northern Europe
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Western Europe grew faster than Eastern Europe
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Growth was faster in the 2 decades before 1973
than the 2 decades after
HOWEVER, the postwar period is regarded as the
golden age of economic growth
Introduction (cont.)
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2 exogenous conditions stimulated growth in the second
half of the 20th century:
1.
Backlog of unexploited technological and organizational
knowledge with which Europe entered the period
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2.
Military had to innovate to survive the world wars (for ex. İt had to
invent jet engines, radar and computing)
The great power conflict between the USA and Soviet Union
forcing countries to conform to the form of economic
organization as their dominant partner
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Their choice determined their subsequent economic performance
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Western Europe – Market Capitalism
Eastern Europe – State Socialism
Introduction (cont.)
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Principal Features of the International Economic
Environment of the Postwar Period:
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Marshall Plan
Bretton Woods International Monetary System
General Agreement on Tariffs and Trade
These were all molded by the US – Soviet conflict
Exogenous Actions –
Endogenous Processes
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To the 2 exogenous actions there were 2
reactions – 2 endogenous processes
1.
Transition from extensive to intensive growth
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Extensive growth: growing on the basis of known
technologies – raising output by putting more people
to work at familiar tasks and raising labor
productivity by building more factories along the
lines of existing ones
Rising capital/labor ration = extensive growth
Intensive growth: growth through innovation
Europe relied more on extensive growth before 1973
and more on intensive growth thereafter
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Extensive Growth
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Facilitated by the backlog of technology
Less important to innovate so long as there were
known technologies still to be acquired and
commercialized
Easy as long as there were elastic supplies of labor
(refugees from the east; repatriates from the
colonies; underemployed workers from the
agricultural perihery) who could be added to the
industrial labor force without putting upward
pressure on wages
Extensive Growth (cont.)
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Extensive growth was what planned economies
organized on Soviet lines did best
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Government decides how many factories to build;
directs state banks to mobilize the resources; limits
consumption to what is left; decides what foreign
technologies to acquire...
This was a successful strategy for Eastern
European countries for a while
The more successfully European countries pursued
this model, the more quickly they exhausted the
backlog of technological and organizational
knowledge
Extensive Growth (cont.)
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As European countries depleted backlog of
technology and organizational knowledge – they
were forced to switch to intensive growth
The centrally-planned economies were the least
good at innovation because new knowledge
bubbled up from below instead of raining from
above
This became a problem for the centrally planned
economies once the technology was used and the
labor force was fully employed
Exogenous Actions –
Endogenous Processes (cont.)
2.
European Integration
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Globalization for Europe meant regional integration
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European integration was encouraged by the U.S. To
fight off the Soviet influence
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The Soviet Union prohibited the participation of
Eastern European countries to integrate with Western
Europe
How Can Europe Avoid Another War? –
The Question and Ideologies
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The solution to this problem differed on beliefs about the
cause of WWII and the three schools of thought in
existence were:
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Germany was to blame: The so-called Morgenthau plan of 1944
proposed to avoid future war by turning Germany into a country
primarily agricultural and pastoral in nature. The same thinking
existed after WWI where the victors were rewarded with
German territories and financial reparations – this led to the
German cycle of resentment and economic downturn that led to
WWII
Capitalism was to blame: Marxism-Leninism blamed capitalism
for WWI and II and offered communism as a solution
Nationalism was to blame: Excesses of destructive nationalism
was blamed for the war and European integration was offered as
a solution
The 3rd view ultimately prevailed but this was far from
clear in the 1940s
European Integration (cont.)
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Before 1913 – Western Europe was at the heart of
the global trade and financial system
World War I (1914-1918) – disrupted this
The Bolshevik Revolution (1917) and the Treaty
of Versailles (1919) also disrupted trade and
finance
World War II (1939-1945) – also had negative
effects
Europe had to rebuild its international economic
position from a very unfavorable starting point
PHASES OF GROWTH, 1820-1992
Europe’s Economic Growth
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Western Europe (Austria, Belgium, Denmark,
Finland, France, Germany, Italy, Netherlands,
Norway, Sweden, Switzerland and the UK)–
during 1950-1975 grew twice as fast as 1820-1970
Southern Europe (Greece, Portugal, Spain, Turkey
and Ireland) – acceleration and decelaration is
more dramatic
Eastern Europe (Bulgaria, Czechoslovakia,
Hungary, Poland, Romania, Yugoslavia and the
USSR) – grew faster than Western Europe before
1973 because this region lagged behind the West
in the 19th century

Growth halts after 1973 – not evident in any other
region
Per Capital Real GDP Growth in 56 Countries,
1820-1992
European Growth (cont.)
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Per Capita GDP Growth = (Rate of Growth of
Output) – (Rate of Growth of Population)
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Out of the 12 Western European countries
extensive growth was fastest in Germany, Austria
and Italy
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Per Capita GDP Growth is a better measure of the
change in living standards
Western Europe fares better due to lower rates of
population growth
The slowest in the UK – after 1973 the UK continued
to underperform the W. European average
1973-1992 : period of intensive growth
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Switzerland, Sweden and the Netherlands performed
even worse
European Growth (cont.)
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Southern Europe: Greece and Iberia (Spain and
Portugal) performed better than Turkey and Ireland
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But the post-1973 slowdown was the least dramatic in
Turkey and Ireland (best performers in S. Europe in the
years of intensive growth)
Eastern Europe: Growth of output per capita was
relatively uniform – reflects the heavy hand of
planning
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In the extensive growth years it was the slowest in
those countries that started out with high levels of
output per person (Czechoslovakia and the USSR)
Central planning and state trading were important in
this convergence
Intensive growth years led to stagnation in the region
Economic Impact of WWII
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WWII – destroyed economic capacity (persons,
factories, farms, roads, bridges, ...) and economic
relations
Roads and etc. could still be fixed but economic
organization was interrupted
During and after the war:
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There was rationing and controls
Labor and raw materials were directed to production of
critical commodities
Wages were frozen
Government froze the prices of consumer goods like
food, fuel and clothing and rationed purchases
Banks were regulated
Commodity imports and capital exports were
controlled
Effects of Rationing...
Early Post-War Period
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In 1945 a family almost anywhere in Europe found
themselves in a nation which was or had recently
been:
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Ruled by a brutal fascist dictator
Occupied by a foreign army OR
Both
As a result of these governmental failures thens of
millions of Europeans were dead and Europe’s
economy lay in ruins
The 2nd WW was the fourth time in 130 years that
France and Germany were at the core of
increasingly horrifying wars
Aftermath of WWII
(Germany 1945)
Aftermath of WWII
(London 1944)
Death and Destruction in WWII
Death Toll
Austria
Belgium
Denmark
Finland
France
Germany
Italy
Netherlands
Norway
Sweden
Switzerland
UK
525.000
82.750
4.250
79.000
505.750
6.363.000
355.500
250.000
10.250
0
0
325.000
Source: Baldwin & Wyplosz, p. 5)
Pre-war year when
GDP equalled that
of 1945
1886
1924
1936
1938
1891
1908
1909
1912
1937
GDP grew during WWII
GDP grew during WWII
GDP grew during WWII
Europe,
Post-WWII
Economic Effects of WWII (cont.)
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At the conclusion of hostilities, industrial
production was no more than 40% of prewar levels
in Belgium, France and the Netherlands and less
than 20% in Germany and Italy
From this position it was possible to boost output
quickly by restoring essential infrastructure and
freeing resources for peacetime use
Production in Western Europe
Rebuilding Europe
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Building infrastructure was the easy part
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Making growth self-sustaining was a difficult task
3 obstacles to self-sustaining growth:
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2.
3.
Resource bottlenecks
Price controls
Political uncertainty
1. Resource Bottlenecks
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Europe tried to increase its “industrial capacity”
Due to national security issues industries like steel
and iron were given priority
Governments wanted to increase output and
capacity
Problem was that Europe produced limited inputs
of capital goods in this process
1. Resource Bottlenecks (cont.)
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Germany was the traditional producer and exporter
of capital goods and its production was now
limited by the occupying powers
Inputs could still be purchased from the U.S. – but
only for dollars
By 1947 – Europe had no dollar reserves
Since inputs need to come before outputs Europe
could not use its exports to finance inputs
Borrowing abroad was not possible due to the
uncertain political situation
2. Price Controls
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So long as prices of goods were frozen below freemarket levels, producers had little incentive to
bring their goods to market
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For ex. They fattened their cows instead of
slaughtering them
Workers were not able to purchase goods so they
spent their time not at work but with other
activities
Black market took off as governments ran deficits
and printed money
If governments left their control, then inflation
would come about
3. Political Uncertainty
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Communists had key positions in French and
Italian governments in 1947
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Denmark had a weak minority government
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UK had embarked upon industrial nationalization
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It was not clear that governments in these
countries would respect private property, resist to
temptation impose taxes and let markets work
Nationalization in Britain...
Rebuilding Europe (cont.)
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Because of resource bottlenecks, price controls
and political uncertainty, there were no individual
investments, bank lending was minimal and
companies did not invest in training their
employees
Marshall Plan
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Aid initiative launched by the US in 1947 –
removed all of these obstacles
U.S. Provided $13 billion of U.S. Government
grants over a period of 4 years
This solved the problem of having to export to
import but unable to import without first exporting
Countries accepting Marshall Plan aid had t osign
bilateral pacts with the U.S. Agreeing to:
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Decontrol prices
Stabilize exchange rates
Balance their budgets
This prepared them for the market economy
Marshall Plan
Map of ColdWar era
Europe and
the Near East
showing
countries that
received
Marshall Plan
aid. The red
columns show
the relative
amount of total
aid per nation.
Marshall Plan (cont.)
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Helped to resolve political uncertainty by tipping
the balance of political power toward centrist
parties
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The US did not want to give aid to socialist
governments so countries with communist and socialist
governments saw the exit of these politicians
Marshall Plan was the choice between plan and
market
The Plan’s effects on price decontrol were
immediate:
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Stores empty one day were fully stocked the next day
Absenteeism among workers fell
Import restrictions were slowly lifted
Marshall Plan (cont.)
The Plan became the
choice between plan and
market – USSR refused
to allow its satellites to
take any aid
Marshall Plan (cont.)
Those nations
accepting
Marshall Plan
aid saw the exit
of socialist and
communist
politicians and
policies ...
Marshall Plan (cont.)
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Also encouraged European integration
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Marshall planners envisioned a United States of
Europe where war would be inconceivable
European integration was a way of reconciling
other countries, France in particular to higher
levels of German industrial production and
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U.S. Aid was given on the basis of a collective strategy
for using the funds
Of disarming those who insisted on “pastoralizing” the
German economy
Marshall Plan helped to eliminate ceilings on
German industrial production and cancelling its
debt due to reparations
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Germany could now go back to being the heart of the
European economy
Marshall Plan (cont.)
As seen vividly in this
poster for Marshall
Plan aid, the aim was
European integration...
Marshall Plan (cont.)
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Marshall planners also wanted to stimulate
Europe’s trade
In the immediate postwar years, there was bilateral
trade
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But bilateral trade agreements made it hard to move
towards the free-market (multilateralism)
However, liberalization needed to be taken by all of the
European countries at once.
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If one liberalized and others did not, that one country would
be flooded with imports
 THIS PUT THE MARSHALL PLAN IN JEOPARDY!
European Payments Union (EPU)
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Each country’s net balances with each other
country were reported at the end of each month to
the Bank for International Settlements – the EPU’s
fiscal agent – which cancelled ofsetting claims
Country’s now had liabilities/claims not on other
countries but on the EPU as a whole
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Countries no longer cared who they did trade with
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Countries could also run temporary deficits
European Payments Union (cont.)
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U.S. Contributed $350 million of Marshall Plan
funds to the EPU
This helped to stimulate trade (from $10 billion in
1950 to $23 billion in 1959)
Also made sure that Germany committed to free
and open trade
EPU was a stepping stone toward collective
governance
The next move towards collective governance was
the European Coal and Steel Community (ECSC)
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Laid the seeds for the European Economic Community
European Payments Union (cont.)
100
20
A
A
B
B
120
290
30
40
520
320
C
470
Bilateral Settlements
Total payments: 90
C
A
Exports
Total Payments: 1820
B
10
EPU
20
10
C
Clearing
Total Payments: 40
Investment and the Labor Market
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If trade was needed for European growth, the
second thing that was needed was investment
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Countries used their money differently, for ex.:
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Plant and equipment were needed to implement new
technology – requires investment
Norway used its money to rebuild its infrastructure
Belgium used its money to keep declining industries
alive
Countries with high returns on investment
experienced high rates of growth of the labor force
Investment and the Labor Market
(cont.)
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Payoff on investment high where ther is expanding
labor force with which additional capital could be
put to work
Growing labor force also helped curb wage
increases
Firms could put the money saved back into the
company as investment
Investment and the Labor Market
(cont.)
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Germany had expanding labor force due to East
Germany until the erection of the Berlin Wall
Netherlands had expanding labor force due to the
return of Dutch settlers from the East Indies
colonies
France and Italy – underemployed agricultural
workers had the same effect as they shifted to
manufacturing and services
Postwar Social Contract
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European societies also developed corporatist
structures to restrain wage growth and see that
profits were put back into investment
Governments wanted to guarantee that the union
strikes over wages and work conditions would not
happen again
They needed to guarantee to the unions that in
exchange for a limit on their wage demands, the
industrialists would put the profit they received
back into the firm
Governments were concerned that if unions
pursued wage increases and management paid out
profits, investment and growth would suffer
Postwar Social Contract (cont.)
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1.
Government implemented a series of
negotiations with capital and labor resulting in a
few different institutions:
Firms agreed (by law) to put profits back into the
firm and workers had more say (both in
supervisory boarda dn investment policies of
firms)
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This was the set of institutions that monitored the
compliance of the parties to their agreement to
exchange wage moderation for the reinvestment of
profits
Postwar Social Contract (cont.)
2.
The second set of institutions created “bonds”
that would be lost in the event that either party
reneged on its agreement
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Firms received industrial input from government at
submarket prices, investment-friendly monetary
policies were implemented by the central banks to
encourage more investment
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Labor was also bonded by a parallel set of
government programs: paid vacations, limited work
hours and social security structures were adopted in
exchange for wage restraint – sick pay, retirement
incomes, tax and social insurance concessions...
Postwar Social Contract (cont.)
3.
Third set of institutions coordinated bargains
across firms and sectors
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Bargaining was centralized in the hands of a trade
union federation and national employers association
and governments intervened to harmonize the terms
of the bargains reached by different unions and
employers
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•
Departure from laissez-faire
There was a shift from low-production
agriculture to high-productivity manufacturing
and services in the Western European countries
Eastern Europe and
the Planned Economy
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Eastern Europe was more heavily agricultural than
the West
Eastern European State Planning Offices saw the
expansion of the industry as the most direct way of
raising labor productivity
Government did not support agriculture like the
West did
In fact, Eastern European planners set lower prices
for agriculture and high prices for manufacturing
to shift labor
Eastern Europe and
the Planned Economy (cont.)
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During the 1950s Eastern Europe started to report
impressive rates of growth
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However, those produced were not always of good
quality
By 1949 most major branches of industry and
finance were owned and operated by the state –
they allocated a majority of their investment to
industry
However, they built along the lines of existing
factories (extensive growth) – innovation was not
rewarded
Achievements and Limitations
of Central Planning
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The Cold War and Stalinist ideology led planners
to push the industrialization process too far
Traditionally Central and Eastern Europe had been
the continent’s agricultural resource – Planners
starved these regions of these resources
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Light crafts (like cobblers, masons, balcksmiths,
tailors...) also began to dissapear
In the West, increases in output also meant
increases in living standards – this was less so in
Eastern Europe
Achievements and Limitations
of Central Planning (cont.)
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Resources were wasted in central planning since
managers protected themselves against the risk of
missing production by over-ordering raw materials
and employing too many people
This over-production did not improve the quality
of the goods produced or the variety (ex. The
Hungarian footwear industry in the 1950s
produced just 16 different types of shoes)
Achievements and Limitations
of Central Planning (cont.)
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Public dissatisfaction, Stalin’s death and a slowdown of growth led planners to experiment with
decentralizing the planning mechanism
Managers were given more freedom and given
rewards on economizing resources
However, this did not increase innovation
Also, prices at home and abroad where free-market
principles dominated made free trade with the rest
of the world difficult if not impossible
Achievements and Limitations
of Central Planning (cont.)
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Self-sufficiency was also not desirable since each
country had different resources
The solution was to encourage trade within the
Eastern Bloc
The Council for Mutual Economic Assistance
(CMEA) or Comecon was established in reaction
to Western European integration under the
Marshall Plan
CMEA / Comecon
CMEA / Comecon (cont.)
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CMEA’s founding members:
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Moscows idea:
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Bulgaria, Czechoslovakia, Hungary, Poland, Romania
and the Soviet Union (in 1949)
East Germany joined in 1950
Czechoslovakia and E. Germany: concentrate on the
production and export of industrial goods
Romania and countries like it: concentrate on
agriculture in “international socialist division of labor”
Romanian leadership was not pleased
Relations within the CMEA were strained
However, intra-bloc trade expanded under the
CMEA
CMEA / Comecon (cont.)
A Soviet poster reading "COMECON: Unity of Goals, Unity of Action"
Regional Integration
in Western Europe
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Eastern Bloc’s commitment to Comecon was
strengthened by regional integration in the West
Western European Integration: European
Economic Community, established in 1958
allowing free trade among France, Germany, Italy
and the Benelux countries in less than 10 years
Free trade allowed these countries to specialize in
goods they had a comparative advantage in and to
better exploit economies of scale and scope
It eroded the power of monopolies and cartels
forcing sheltered producers to shape up or ship out
Regional Integration
in Western Europe (cont.)
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U.K. Declined to join the EEC rejecting the
Franco-German call for deeper integration
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Yet, attraction of a Common Market, proved
irresistable and Britain and 6 smaller European
countries (Austria, Denmark, Norway, Portugal,
Sweden and Switzerland) established the European
Free Trade Area (EFTA) in 1959 – a more limited
entity
Finalnd joined in 1961, Portugal also joined at a later
date
Spain and Greece negotiated with the EEC and the
EEC chose to open itself to these 2 countries
Growth accelerated in both the EEC and EFTA
Regional Integration
in Western Europe (cont.)
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Britain remained the sick man of Europe
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Poor wage constraint, resistance to the introduction of
new technologies and forms of work organization
produced poor results for Britain
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The corporatist system of wage restraint never took hold in
Britain
This was due to early industrialization which had left behind a
fragmented system of industrial relations
Many small trade unions fought the efforts to coordinate an
economy-wide wage bargain
Britain had the lowest investment rates in Western Europe
Government tried to get additional output but it led to
inflation and balance-of-payments deficit – so the
authorities raised interest rates
Economics of Intensive Growth
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As the backlog of technology inherited from
WWII dissapeared, the challenge became to
innovate new products and processes
The U.S. Had a leg up on this process. In 1963 it
devoted 3.5% of its GDP to R&D spending.
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By the mid-1960s the U.S. Was spending 5 times as
much as all of Western Europe on R&D in the
computer industry
European governments took steps to close the gap
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With increased spending the countries of Western
Europe increased their share of global exports of
research-intensive goods