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EUROPE

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Title: EUROPE


1
EUROPES ECONOMY SINCE 1945
  • INTRODUCTION
  • 2nd half of the 20th century was a period of
    unparalleled growth in Europe
  • 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
  • However unemployment rose over the period and
    taxes also soared
  • BUT, by any standard, Europeans are better off
    today than their parents and grandparents

2
Introduction (cont.)
  • Southern Europe grew faster than Northern Europe
  • Western Europe grew faster than Eastern Europe
  • 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

3
Introduction (cont.)
  • 2 exogenous conditions stimulated growth in the
    second half of the 20th century
  • Backlog of unexploited technological and
    organizational knowledge with which Europe
    entered the period
  • Military had to innovate to survive the world
    wars (for ex. It 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
  • Their choice determined their subsequent economic
    performance
  • Western Europe Market Capitalism
  • Eastern Europe State Socialism

4
Introduction (cont.)
  • Principal Features of the International Economic
    Environment of the Postwar Period
  • Marshall Plan
  • Bretton Woods International Monetary System
  • General Agreement on Tariffs and Trade
  • These were all molded by the US Soviet conflict

5
Exogenous Actions Endogenous Processes
  • To the 2 exogenous actions there were 2 reactions
    2 endogenous processes
  • Transition from extensive to intensive growth
  • 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

6
Extensive Growth
  • 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

7
Extensive Growth (cont.)
  • Extensive growth was what planned economies
    organized on Soviet lines did best
  • 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

8
Extensive Growth (cont.)
  • 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

9
Exogenous Actions Endogenous Processes (cont.)
  • European Integration
  • Globalization for Europe meant regional
    integration
  • European integration was encouraged by the U.S.
    To fight off the Soviet influence
  • The Soviet Union prohibited the participation of
    Eastern European countries to integrate with
    Western Europe

10
How Can Europe Avoid Another War? The Question
and Ideologies
  • The solution to this problem differed on beliefs
    about the cause of WWII and the three schools of
    thought in existence were
  • 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

11
European Integration (cont.)
  • 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

12
PHASES OF GROWTH, 1820-1992
13
Europes Economic Growth
  • 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

14
Per Capital Real GDP Growth in 56 Countries,
1820-1992
15
European Growth (cont.)
  • Per Capita GDP Growth (Rate of Growth of
    Output) (Rate of Growth of Population)
  • 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
  • Out of the 12 Western European countries
    extensive growth was fastest in Germany, Austria
    and Italy
  • The slowest in the UK after 1973 the UK
    continued to underperform the W. European average
  • 1973-1992 period of intensive growth
  • Switzerland, Sweden and the Netherlands performed
    even worse

16
European Growth (cont.)
  • Southern Europe Greece and Iberia (Spain and
    Portugal) performed better than Turkey and
    Ireland
  • 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
  • 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

17
Economic Impact of WWII
  • 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
  • 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

18
Effects of Rationing...
19
Early Post-War Period
  • In 1945 a family almost anywhere in Europe found
    themselves in a nation which was or had recently
    been
  • 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 Europes
    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

20
Aftermath of WWII (Germany 1945)
21
Aftermath of WWII (London 1944)
22
Death and Destruction in WWII
Death Toll Pre-war year when GDP equalled that of 1945
Austria 525.000 1886
Belgium 82.750 1924
Denmark 4.250 1936
Finland 79.000 1938
France 505.750 1891
Germany 6.363.000 1908
Italy 355.500 1909
Netherlands 250.000 1912
Norway 10.250 1937
Sweden 0 GDP grew during WWII
Switzerland 0 GDP grew during WWII
UK 325.000 GDP grew during WWII
Source Baldwin Wyplosz, p. 5)
23
Europe, Post-WWII
24
Economic Effects of WWII (cont.)
  • 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

25
Production in Western Europe
26
Rebuilding Europe
  • Building infrastructure was the easy part
  • Making growth self-sustaining was a difficult
    task
  • 3 obstacles to self-sustaining growth
  • Resource bottlenecks
  • Price controls
  • Political uncertainty

27
1. Resource Bottlenecks
  • 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

28
1. Resource Bottlenecks (cont.)
  • 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

29
2. Price Controls
  • So long as prices of goods were frozen below
    free-market levels, producers had little
    incentive to bring their goods to market
  • 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

30
3. Political Uncertainty
  • Communists had key positions in French and
    Italian governments in 1947
  • Denmark had a weak minority government
  • UK had embarked upon industrial nationalization
  • It was not clear that governments in these
    countries would respect private property, resist
    to temptation impose taxes and let markets work

31
Nationalization in Britain...
32
Rebuilding Europe (cont.)
  • 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

33
Marshall Plan
  • 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
  • Decontrol prices
  • Stabilize exchange rates
  • Balance their budgets

This prepared them for the market economy
34
Marshall Plan
Map of Cold-War 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.
35
Marshall Plan (cont.)
  • Helped to resolve political uncertainty by
    tipping the balance of political power toward
    centrist parties
  • 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 Plans effects on price decontrol were
    immediate
  • Stores empty one day were fully stocked the next
    day
  • Absenteeism among workers fell
  • Import restrictions were slowly lifted

36
Marshall Plan (cont.)
The Plan became the choice between plan and
market USSR refused to allow its satellites to
take any aid
37
Marshall Plan (cont.)
Those nations accepting Marshall Plan aid saw the
exit of socialist and communist politicians and
policies ...
38
Marshall Plan (cont.)
  • Also encouraged European integration
  • U.S. Aid was given on the basis of a collective
    strategy for using the funds
  • 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
  • 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
  • Germany could now go back to being the heart of
    the European economy

39
Marshall Plan (cont.)
As seen vividly in this poster for Marshall Plan
aid, the aim was European integration...
40
Marshall Plan (cont.)
  • Marshall planners also wanted to stimulate
    Europes trade
  • In the immediate postwar years, there was
    bilateral trade
  • 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.
  • If one liberalized and others did not, that one
    country would be flooded with imports
  • THIS PUT THE MARSHALL PLAN IN JEOPARDY!

41
European Payments Union (EPU)
  • Each countrys net balances with each other
    country were reported at the end of each month to
    the Bank for International Settlements the
    EPUs fiscal agent which cancelled ofsetting
    claims
  • Countrys now had liabilities/claims not on other
    countries but on the EPU as a whole
  • Countries no longer cared who they did trade with
  • Countries could also run temporary deficits

42
European Payments Union (cont.)
  • 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)
  • Laid the seeds for the European Economic Community

43
European Payments Union (cont.)
100
20
A
B
A
B
120
30
40
520
290
C
320
470
Bilateral Settlements Total payments 90
C
A
B
EPU
20
10
Exports Total Payments 1820
10
C
Clearing Total Payments 40
44
Investment and the Labor Market
  • If trade was needed for European growth, the
    second thing that was needed was investment
  • Plant and equipment were needed to implement new
    technology requires investment
  • Countries used their money differently, for ex.
  • 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

45
Investment and the Labor Market (cont.)
  • 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

46
Investment and the Labor Market (cont.)
  • 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

47
Postwar Social Contract
  • 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

48
Postwar Social Contract (cont.)
  • 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)
  • 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

49
Postwar Social Contract (cont.)
  • The second set of institutions created bonds
    that would be lost in the event that either party
    reneged on its agreement
  • Firms received industrial input from government
    at submarket prices, investment-friendly monetary
    policies were implemented by the central banks to
    encourage more investment
  • 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...

50
Postwar Social Contract (cont.)
  • Third set of institutions coordinated bargains
    across firms and sectors
  • 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
  • Departure from laissez-faire
  • There was a shift from low-production agriculture
    to high-productivity manufacturing and services
    in the Western European countries

51
Eastern Europe and the Planned Economy
  • 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

52
Eastern Europe and the Planned Economy (cont.)
  • During the 1950s Eastern Europe started to report
    impressive rates of growth
  • 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

53
Achievements and Limitations of Central Planning
  • The Cold War and Stalinist ideology led planners
    to push the industrialization process too far
  • Traditionally Central and Eastern Europe had been
    the continents agricultural resource Planners
    starved these regions of these resources
  • 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

54
Achievements and Limitations of Central Planning
(cont.)
  • 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)

55
Achievements and Limitations of Central Planning
(cont.)
  • Public dissatisfaction, Stalins death and a
    slow-down 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

56
Achievements and Limitations of Central Planning
(cont.)
  • 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

57
CMEA / Comecon
58
CMEA / Comecon (cont.)
  • CMEAs founding members
  • Bulgaria, Czechoslovakia, Hungary, Poland,
    Romania and the Soviet Union (in 1949)
  • East Germany joined in 1950
  • Moscows idea
  • 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

59
CMEA / Comecon (cont.)
A Soviet poster reading "COMECON Unity of Goals,
Unity of Action"
60
Regional Integration in Western Europe
  • Eastern Blocs 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

61
Regional Integration in Western Europe (cont.)
  • U.K. Declined to join the EEC rejecting the
    Franco-German call for deeper integration
  • 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

62
Regional Integration in Western Europe (cont.)
  • Britain remained the sick man of Europe
  • 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
  • Poor wage constraint, resistance to the
    introduction of new technologies and forms of
    work organization produced poor results for
    Britain
  • 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

63
Economics of Intensive Growth
  • 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 RD spending.
  • By the mid-1960s the U.S. Was spending 5 times as
    much as all of Western Europe on RD in the
    computer industry
  • European governments took steps to close the gap
  • With increased spending the countries of Western
    Europe increased their share of global exports of
    research-intensive goods
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