Download The European Miracle

The European Miracle
1945-1973
The Marshall Plan
• Prevents a collapse in Europe and Soviet
takeover.
• U.S. transferred $13 billion to Europe.
• Aid provided short-term but immediate solution
to political-economic stalemate.
• “Conditionality” protects free market.
• Cooperation of labor and management to allow
industrial recovery and growth of productivity.
• BUT, this is only temporary. What kind of
institutions are required for Europe to recover.
Eichengreen Table 2.1
Annual Average Growth of Gross Domestic
Product
How Does Europe Recover?
The European Miracle: 1945-1973
The Collapse of the Global
Economy
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1929-1944: The global economy vanished.
Almost no trade.
Almost no capital flows.
Almost no labor flows.
How to restore the system among mutually
suspicious countries?
• Price levels have diverged. Huge distortions
under protectionism. Widely different wage
structures.
• “Convergence” had vanished.
Reviving the Global Economy:
the Bretton Woods Conference
• In 1944, the U.S. and the
U.K. convened a
conference in Bretton
Woods, New Hampshire
• All allies invited, but the
U.S. and the U.K.
dominate the conference
as they are the only
strong powers left.
• The conference designs
the international
institutions for the next 30
years.
Reviving the Global Economy:
1. Trade liberalization in the General Agreement
on Trade and Tariffs (GATT)
2. A fixed exchange rate system---the Bretton
Woods System---for settling international
payments
3. Creation of the International Monetary Fund
(IMF) and the World Bank
a. The IMF’s task is to act as an international lender of
last resort to assist countries with chronic
imbalances.
b. The World Bank’s task is to assist countries with
economic recovery.
1. GATT---precursor of the WTO
(World Trade Organization)
• Collapse of international trade during the depression
because of rise of trade barriers.
• U.S. Smoot-Hawley tariff of 1929 and retaliation.
• Decline of national incomes as trade shrinks.
• GATT has 23 countries signing the agreement.
• GATT—purpose is to set regular meetings of member
countries to coordinate a gradual reduction of tariffs.
• Based on unconditional “most favored nation” principle
• Rounds of small cuts that gradually liberalize trade--1947, 1949, 1951, 1955-59, 1960-62, 1964-67, “Tokyo
Round” 1973-79 for tariff and non-tariff barriers.
• “Uruguay Round” 1986-1993---tackles difficult barriers to
agriculture, textiles, services, capital and intellectual
property. These new tasks lead to reorganization of
GATT as the WTO in 1993.
• Results in slow revival of international trade
2. The Bretton Woods
Exchange Rate System, 1945-1973
• Experts at Bretton Woods agreed that a system
of fixed exchange rates needed to revive the
global economy.
• Believe that fixed exchange rates will guarantee
price stability and facilitate trade and capital
movement.
• BUT, understood that while gold standard of
1870-1913 worked well, the interwar gold
standard (1925-1936) did not.
• Problem was that huge imbalances are not
easily corrected by mechanism of the gold
standard.
2. The Bretton Woods
Exchange Rate System, 1945-1973
• What reserve and what parity?
• Countries abandon old prewar parities and try to set
parities that will leave trade roughly balanced.
• Problem in 1944 was that most European countries had
little if any gold—U.S. had most of the world’s monetary
gold. One ounce of gold = $35, is set as the U.S. parity.
• Result was that while Bretton Woods System had
countries peg their currencies to gold. It was effectively
a “dollar standard.” The U.S. had reserves in gold and
other countries (Britain was an exception) had most of
their reserves in U.S. dollars---which appeared to be as
good as gold.
• Benefit is that countries could earn interest on dollar
deposits or U.S. dollar securities.
• Dollar balances are also easier to transfer than gold.
3. The International Monetary Fund
• Huge imbalances---overvalued currencies, huge
war debts, reparations during the interwar period
had made adjustment after World War I difficult.
• When countries appeared to be unable to
maintain a parity---there were speculative
attacks, betting that a country would be forced to
go off gold. Result is that capital controls are
imposed. These controls are maintained after
World War I, even as trade is slowly liberalized.
• To manage the problem of imbalances that
would imperil a countries ability to maintain its
fixed exchange rate---the IMF was created in
1944.
3. The International Monetary Fund
• IMF is created in 1945 with 29 signing countries.
• It is intended to act as a quasi-international lender of last
resort.
• Each country contributes to the fund---by a capital
contribution.
• If a member country experiences a serious balance of
payments deficit and no correction appears to be
occurring, it may apply to the IMF for a loan.
• Lending was characterization in terms of “tranches.” The
first tranche of a loan has no conditions but further
borrowing carries conditions designed to guarantee
repayment of the loan.
• If circumstances are sufficiently extreme, the IMF may
agree to permit a country to devalue its currency.
• Current Account Convertibility (only for trade but not
capital) is achieved for Western Europe in 1958.
What Kind of European Institutions?
• Considerable bitterness after the war. Many
propose that Germany be split up or deindustrialized.
• However, many Europeans lay the blame on the
competitive national rivalries that included
everything from competition in trade, colonies
and ultimately war.
• Was the nation-state a useful institution for
solving European international conflicts?
• Answer?
European Coal and Steel Community
• Coal and Steel were at the heart of European countries
industries---and the basis for their war machines.
• Creation of the ECSC in 1951 to eliminate old rivalries by
creating a single market for coal and steel.
• Signed by “the Six:” France, Germany, Italy,
Netherlands, Belgium, and Luxembourg
• All trade barriers—tariffs, subsidies and discriminatory
policies were abolished among members.
• Administration was handle by a “High Authority”
composed of a council of ministers of the members
where each country had one vote and matters were
decided by unanimity.
• U.K. stays out: Prime Minister Clement Atlee: “We on this
side are not prepared to accept the principle that the
most vital economic forces of this country should be
handed over to an authority that is utterly undemocratic
and is responsible to nobody.” Britain had less trade
with Europe and a more free world trade ideology.
Treaty of Rome 1957
The European Economic Community
• “The Six” expanded the ECSC to all goods and
form the European Economic Community (EEC),
which is renamed the European Union in 1992
(Maastricht Treaty).
• Customs union that abolishes all tariffs and trade
restrictions among member countries and sets a
common tariff against the rest of the world.
• Aim is to cultivate trade and growth among the
member states.
• Who are the gainers and losers?
• A customs union has gains from trade creation
and losses from trade diversion
CUSTOMS UNION
Price
Supply
France
World Supply + Tariff
Pf = Pw +T
German Supply
Pg
World Supply
Pw
Demand France
O
Q3
Q1
Q2
Q4
Steel (tons)
2. Effects of a Customs Union--loss of tariff revenue and gains
from consumer and producers Supply
France
surplus
Price
World Supply + Tariff
Pf = Pw +T
German Supply
Pg
World Supply
Pw
Demand France
O
Q3
Q1
Q2
Q4
Steel (tons)
Effects of the EEC
• Early effects---trade creation had gains of
$11.3 billion and trade diversion $0.3
billion.
• Huge switch: in 1958 for the original Six
2/3 of imports for EEC from outside of
customs union, after 1990, 2/3 from inside
the customs union
The Bretton Woods System and the
European Economic Community:
Institutional Basis for Growth 1945-1973
• Extensive Growth (1945-1973) using the
available technology, oftentimes imported from
the technological leader, the U.S., Europe grew
fast as was “catching-up” or “converging.”
Growth based on growth of labor force and
capital. Huge technological gap with the U.S.
that had pioneered mass production,
continuous-process technology.
• Intensive Growth (1973-2000 and onwards),
growth from innovation rather than just growth of
factors of production. Problem for Europe is that
the political and economic institutions that
served it well in the first phase did not serve it
well in the second phase.
Institutional Foundations of the “Golden Age”
• Labor unrest and conflict of interwar period.
• Response: “neo-corporatist” bargain”:
governments ask unions to limit wage demands
to ensure profits available for modernization and
expansion, with promise that eventually wages
will rise.
• Unions agree because there is “codetermination” workers get seats on company
boards (especially in Germany) and dividends
are limited.
• Social benefits extended to labor in the 1950s—
reduction of workweek, unemployment
insurance, social security and health insurance.
The 1960s
• Growth begins to slow, as supplies of labor
exhausted and established technologies
fully exploited.
• Inflation begins to rise.
• Wage restraints break down, and there are
increased strikes.
• High taxes needed for the social pacts
begins to discourage investment and
effort.
The Problem of Agriculture
• The UK and Denmark in the 19th century had opened
their agriculture to free trade but not France or Germany
or Spain.
• Protectionism behind tariff barriers created inefficient
agriculture, especially in internationally trade products
like grain and meat.
• Increase protectionism after World War I and 1930s. By
the end of World War II, agricultural sector inefficient by
world standards. .
• Even among the Six there was substantial differences in
efficiency.
• Answer: 1962 set up the Common Agricultural Policy
(CAP).
• Set up a price support system where target prices set for
agricultural goods across EEC and a common tariff
against foreign goods.
COMMON AGRICULTURAL POLICY
Price
Supply
EEC
Peec = Pw +T
Export
Subsidy
World Supply
Pw
Dumping
Revenue
Demand EEC
O
Q1
Q2
Q4
Wheat (tons)
CAP
• Tariff on imports—frustrates producers in
North and South America, Africa and
Australia
• EEC budget must buy up product to
maintain the price target. By 1985, CAP
absorbs 75% of EEC budget.
• Fixed prices---farmers innovate, output
grows, but prices does fall.
• Result: “wine lake” and the “butter
mountain”
• 1970-74, EEC produced 90% of
consumption---1985 produced 127%
• Dumping of excess production on world
market drives down prices.
• 1980 study: Cost to consumers was $34.5
billion, cost to taxpayers $11.5 billion and
producers gain $30 billion, with a net loss
of $15.4 billion.