The European Economy since 1945: Coordinated Capitalism and Beyond

The Princeton Economic History of the Western World #23

by Barry Eichengreen

In 1945, many Europeans still heated with coal, cooled their food with ice, and lacked indoor plumbing. Today, things could hardly be more different. Over the second half of the twentieth century, the average European's buying power tripled, while working hours fell by a third. The European Economy since 1945 is a broad, accessible, forthright account of the extraordinary development of Europe's economy since the end of World War II. Barry Eichengreen argues that the continent's history has been critical to its economic performance, and that it will continue to be so going forward.
Challenging standard views that basic economic forces were behind postwar Europe's success, Eichengreen shows how Western Europe in particular inherited a set of institutions singularly well suited to the economic circumstances that reigned for almost three decades. Economic growth was facilitated by solidarity-centered trade unions, cohesive employers' associations, and growth-minded governments--all legacies of Europe's earlier history. For example, these institutions worked together to mobilize savings, finance investment, and stabilize wages.
However, this inheritance of economic and social institutions that was the solution until around 1973--when Europe had to switch from growth based on brute-force investment and the acquisition of known technologies to growth based on increased efficiency and innovation--then became the problem.
Thus, the key questions for the future are whether Europe and its constituent nations can now adapt their institutions to the needs of a globalized knowledge economy, and whether in doing so, the continent's distinctive history will be an obstacle or an asset.

Genres: Economics, History, Nonfiction, European History, Academic

520 pages, Hardcover

First published January 1, 2006

About the author

Barry Eichengreen* is the George C. Pardee and Helen N. Pardee Professor of Economics and Professor of Political Science at the University of California, Berkeley, where he has taught since 1987. He is a Research Associate of the National Bureau of Economic Research (Cambridge, Massachusetts) and Research Fellow of the Centre for Economic Policy Research (London, England). In 1997-98 he was Senior Policy Advisor at the International Monetary Fund. He is a fellow of the American Academy of Arts and Sciences (class of 1997).

Professor Eichengreen is the convener of the Bellagio Group of academics and economic officials and chair of the Academic Advisory Committee of the Peterson Institute of International Economics. He has held Guggenheim and Fulbright Fellowships and has been a fellow of the Center for Advanced Study in the Behavioral Sciences (Palo Alto) and the Institute for Advanced Study (Berlin). He is a regular monthly columnist for Project Syndicate.

His most recent books are Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (January 2011)(shortlisted for the Financial Times and Goldman Sachs Business Book of the Year Award in 2011), Emerging Giants: China and India in the World Economy, co-edited with Poonam Gupta and Ranjiv Kumar (2010), Labor in the Era of Globalization, co-edited with Clair Brown and Michael Reich (2009), Institutions for Regionalism: Enhancing Asia's Economic Cooperation and Integration, coedited with Jong-Wha Lee (2009), and Fostering Monetary & Financial Cooperation in East Asia, co-edited with Duck-Koo Chung (2009). Other books include Globalizing Capital: A History of the International Monetary System, Second Edition (2008), The European Economy since 1945: Coordinated Capitalism and Beyond (updated paperback edition, 2008), Bond Markets in Latin America: On the Verge of a Big Bang?, co-edited with Eduardo Borensztein, Kevin Cowan, and Ugo Panizza (2008), and China, Asia, and the New World Economy, co-edited with Charles Wyplosz and Yung Chul Park (2008).

Professor Eichengreen was awarded the Economic History Association's Jonathan R.T. Hughes Prize for Excellence in Teaching in 2002 and the University of California at Berkeley Social Science Division's Distinguished Teaching Award in 2004. He is the recipient of a doctor honoris causa from the American University in Paris, and the 2010 recipient of the Schumpeter Prize from the International Schumpeter Society. He was named one of Foreign Policy Magazine 's 100 Leading Global Thinkers in 2011. He is Immediate Past President of the Economic History Association (2010-11 academic year).

* This is the biosketch available at his faculty page.

Reviews

[Brecht Rogissart · Rating 4 out of 5]

This is a very decent overview of European economic history since 1945. It is written from an American perspective and is heavily centered around an Atlantic view, which is the most appropriate way of writing about Europe after 1945. It is especially good because Eichengreen is a financial historian and brings much insights from this angle.

In essence, Eichengreen argues that large European growth after 1945 was done through “catch-up” growth to the US economy, after 30 years of intense destruction and lagging implementation of new production methods (most notably the belated incorporation of the Fordist factory). Convergence happened because the US allowed for technological export and trade integration, in exchange for political loyalty in the context of the Cold War. Europe grew faster than the US and was able to close the gap. Eichengreen often refers to “extensive growth”, meaning growth “based on capital formation and the existing stock of technological knowledge. It is the process of raising output by putting more people to work at familiar tasks and raising labor productivity by building more factories along the lines of existing factories.” (p. 6).

This process of “extensive growth” was facilitated by solidaristic trade unions, employers associations, growth-minded governments working together to mobilise savings, finance investments, and stabilize wages to ensure full employment (according to Eichengreen, it also had a history in the fascist-corporatist recent past of Europe). A larger role was taken up by government, who could easily oversee this catching up process (as it was fairly easy to decide what had to be implemented). Fast growth was done by freeing labor from agriculture into new avenues of industry and services. In Belgium though, this was initially channeled into declining industries (coal, metallurgy, glass… in which global competition was intense), resulting in low profits.

The role of America to create a new global economy was essential. In 1947, all European dollar and gold reserves were depleted, what was left had to be devoted to importing food. Borrowing abroad was hard because of the incertain political situation and the bad performance of interwar loans. The solution was found with the Marshallplan, which was agreed by the US despite that it might discriminate against its own US exports. It strengthened the hand of moderates (in a period where a lot of communists were in government), and convinced the French Socialists that the US was a better partner than the USSR (and in Belgium, it quickly led to the dismissal of communists from government). It also lead to a first integration of the European states, in which Germany had to be stabilized and rebuilt as the heart of the Euroepan economy.

This was a major challenge for the European future, and politicians quickly realised it could only be done through restoring intra-European trade. A major problem was that the various currencies were still inconvertible (they could not be converted into dollars or other currencies without permission of the issuing government). It restricted imports from other countries, as they did not want to lose their precious hard currency. Even though quick steps were made for monetary integration, as long as there was a dollar constraint caused by the lack of competitive production in Europe, governments would be wary to open up their currencies. For example, in the first monetary agreements, they refused to allow for short-term credits for debtor nations.

The 1949 devaluation finally did much in undoing the imbalances. Almost all European currencies devalued and monetary integration could proceed. Shortly afterwards, for example, the EPU Managing Board extended an exceptional large dollar credit to Germany in exchange for policies designed to bring its accounts into balance. However, current-account convertibility (the removal of exchange controls that countries used to bottle up the demand for imports) only came at the end of 1958! From the very beginning on, these monetary and trade issues were coordinated at the level of European technocrats, playing an important role in the regional integration.

Atlantic and European integration helped Europe to restructure along export-oriented lines. Eichengreen thus concludes that European growth was decisively export-led. Competitive wages encouraged American multinationals to invest in Europe, while limiting consumption strengthened the current account and balance-of-payment constraint. Thus, alongside export-led growth, European growth was also investment-led (two sides of the same coin!).

However, capital mobility was on the rise. It limited the scope for countries to peg their exchange rates while doing their own macroeconomic policies. Especially the growth of the Eurodollar markets did much. It uprooted the whole monetary system, which was summarized by Robbert Triffin, who said that the global needs for dollars outmatched the growth of gold reserves.

Next to the 1949 devaluations, we also had the 1961 revaluation of deutschmark and Dutch guilder (which alarmed policy makers as they caused massive capital flows which surprised them), the 1967 sterling devaluation (even though labour governments were reluctant to do this, as it would further erode the status as second reserve currency of the sterling, and would not fundamentally solve its productivity problems, so it had first borrowed from the IMF in 1961 and 1965, but the IMF then refused another round in 1967 causing a panic run and forcing devaluation), and the massive realignments in 1969 (in which the French had to devalue while Germany initially refused to revalue). I think Eichengreen shows well that the period of so-called “stable” exchange rates was in fact not that stable, and were increasingly unstable as international markets developed (he calls it “pegged but adjustable exchange rates”). After the trembling of the system in 1969, signs were clear that Bretton Woods would fall, and European partners started talking about monetary unification for a first time at the Hague Summit (1969). It was not clear whether monetary integration should be a priority, but then capital mobility, unstable US policies, and the ‘70s crisis would decide for them.

The 1967 sterling devaluation already signalled the end of Bretton Woods, as it was possible all of a sudden that the second reserve currency could lose value. In 1971, Nixon took the flight forward by shutting the gold window after France and Britain were preparing to convert dollars into gold. There were two responses to the dilemma: you could either accept that capital mobility had slammed Bretton Woods, or you could try to keep pegged rates to gold and ask of the US to be more responsible in their printing of dollars. But asking from the US to issue less dollars would have resulted pretty early in less accumulation on the other side of the Atlantic. The second response is what resulted in the European Snake (ironically strengthening the dollar as anchor) (pages 246-247).

However, the apex of the golden age in the 60s (in which all countries experienced rapid growth, and new countries such as Franco Spain and Portugal were incorporated in business) also undermined its own growth basis. Eichengreen argues that unemployment now fell to historic lows, while vacancies rose (nice graph on p. 219 here!), resulting in the anesthesia of the disciplined worker. Wage rises resulted in the end of the investment- and export-led growth schema.

Additionally, increasingly the question of political integration alongside economic integration came to the fore. Germany saw the European Community as a way to regain influence in foreign politics, for which it would accept monetary integration (reluctantly), while France wanted to offset its economic troubles by monetary integration so that it could co-control macroeconomic management without being forced to beg at the Germans’ door.

From the 1970s onwards, the phase of “extensive growth” shifted into “intensive growth”, which means growth through innovation. Here, the same institutions enabling catch-up growth were less adapted to facilitate innovative growth. They did try and adapt, such as with the European Monetary System of 1979 (to replace the monetary instability following the crumble of Bretton Woods), and the Single European Act of 1986 which integrated product markets and created competitive dynamics. Creating more flexible and competitive capital and labor markets was another goal of Europe to adapt to the necessary adjustments. Some countries could better cope, especially those with neocorporatist institutions such as Germany, Sweden and Austria, who could rely on stabilizing wages because of tightly coordinated unions and employers. In Austria, things were most perfect because of additional public investment (here, Eichengreen relies on the marvelous work of Scharpf!). In addition, Eichengreen also refers to Netherlands and Ireland to show how the social contract was kept by getting more people to work, broadening the tax base and thus being able to pay for the needs of the welfare state. He calls this “competitive corporatism” (p. 391), which is exactly what Frank Vandenbroucke wished for in Belgium at the time.

Importantly however, the US was less constructive in this period. European integration accelerated with the US being less of a reliable partner, and subsequently Europeans relied more on each other for trade and investments (this had been rising since the 1950s though!).

In this new global situation, Europe could not match the growth of the US. Eichengreen summarizes that the growth of the US over Europe can be explained for 1/3rd by differences in GDP per capita, 1/3rd by fewer hours worked by Europeans, and 1/3rd by lower employment rates. Europe focused more on further specialization in high-technology products, and Europeans indeed continued to dominate certain international markets. But they missed some of the new markets that were coming off the ground, for which you need more risk-taking institutions and capital markets. Eichengreen refers a lot to the ICT sector, but I wonder to which degree this renewed growth of the US was due to its new position as financial hegemon in this new period of globalisation.

There’s only one major omission from this history, and that was the colonial history of the European Great Powers. Eichengreen is right to have focused on the American-centred catch-up, in which colonialism is an increasingly anachronistic story. Still, the layers of history hadn’t been disentangled yet, and much of the political and economic concerns of Europe was still with Empire in mind. Eichengreen only refers to Britain missing the European train because of its attachments to the Commonwealth and Empire. This overall lack is a pity, especially because Eichengreen could have given more insights into general monetary and financial patterns of decolonization!

Moreover, Eichengreen does spend 2 chapters on Eastern Europe, but I wouldn’t think they were that insightful. In a way, it is interesting to see how much their trajectory was aligned with capitalist Europe (reminding me of Hobsbawm’s take that 20th century ideological debates might be the equivalent of the 16th and 17th centuries religious disputes – in the end ideological differences look bleak when you consider all other similarities). There’s a good summary of Eastern trade integration: the USSR imported machinery etc. from more advanced East-bloc economies such as Chzechoslovakia, Hungary, Poland, and the GDR, in return for petroleum, coal, iron ore. The USSR exported machinery to Bulgaria and Romania in exchange for agricultural products and raw materials. USSR was the center of a trading systems in which the periphery barely traded with each other. Kruschev, following the death of Stalin, installed commissions to promote an “international socialist division of labor”. (p. 157) They negotiated trade agreements annually, based on the “Bucharest Formula”, which were average world-prices on a 5-year period. However, in practice, these prices were politically determined. Moreover, they tried to keep trade balanced, only resorting to credit mechanisms in a limited way.

Eichengreen devotes a bit, but not much, attention to the search for hard currencies and credit lines on the global market, which is something that recent historiography on the subject highlights. When he does talk about it, his line is surprisingly Bartellian. What is funny though, is that the Soviets distinguished between ‘hard’ (which might have a market in the West) and ‘soft’ goods, which would not.

At last, in a short but interesting note on page 317, Eichengreen quickly reflects on the potential of introducing market institutions in the Soviet Union versus China. There were two differences: in the Soviet Union, 90% worked for the state, in China only 20%. Moreover, China was way more agricultural. Thus, marketization in China could be easily done just by giving farmers the right to their land and deregulating agricultural prices. In the Soviet Union, the protoprivate sector had long been starved of resources. Interesting!

[Georg Fabricius · Rating 5 out of 5]

Very educational, but for someone like me it's a bit complicated.

[Frank Stein · Rating 4 out of 5]

This book is less coherent than some of Eichengreen’s other works. Of course, any book which deals with dozens of countries over a period of over 50 years is going to have a lot of cross-cutting evidence. Also, the book is somewhat divided between a look at the macroeconomic statistics and policies of Europe in this period and a detailed narrative of the negotiations over the growth of the European Union. Nonetheless, one is unlikely to find a better overview of the period.

Insofar as the book has an overarching theme, it tries to argue that in the postwar period Europe’s corporatist institutions were well-suited for “extensive” growth, meaning growth in capital investment based on restrained wages and coordinated investment strategies. Yet beginning in the 1970s, when European countries approached the technological frontier, their corporatist institutions provided a barrier to innovation and dynamic growth, which explains why almost all countries in the West (except Portugal and Ireland, both of which had barely grown before) experienced no further growth miracles and stalled at a GDP per capita far below that of the US. The gradual expansion of the power of the European Union was first a way to ensure that coordinated investment and trade could allow for extensive growth, but in the post-1986 “Single Market” period it has tried to break down anti-competitive national structures.

All of this has some plausibility, but the most controversial claim, that corporatism was a pro-growth strategy in the 1950s and ‘60s, still seems questionable to me. The fact that a country like Austria tried to corral their unions into a single negotiating organization, and that, after 1958, a government Parity Commission helped set wages and prices, did seem to restrain wage growth there, as similar arrangements did elsewhere. It helps explain why European unemployment rates were kept around 2% up to the 1960s. But the idea that the Commissariat general du Plan in France and the four big nationalized banks and government approval of all floated corporate bonds somehow helped recovery there seems a stretch.

The post-1970s slowdown in Europe is examined in detail, especially the decline in labor force participation and the increase in unemployment (suddenly up to 8% in the 1970s and soon up to 10%). The breakdown of sectoral and national bargaining and a rise in militant unions and wildcat strikes led to real wages suddenly outpacing productivity increases, and led to decreased export competitiveness as well as increased unemployment. (Although, as Eichengreen points out, the productivity per hour worked continued increasing up to US levels.) Only beginning in the 1980s and onwards were national governments able to restrain wages. In 1982 the Netherlands Wassenaar Agreement meant frozen minimum wages and eliminated indexation and reduced public sector compensation and soon cut unemployment insurance replacement rates and time from 30 to 6 months. In 1988 Ireland created a Program for National Recovery which had trade unions agree to limit annual wages increases to 2.5% per year for three years, and caused cuts in income and social security taxes for low-wage workers to encourage more participation. The 1988 EU move to end capital controls also ensured that unions had to deal with competitive movement of industry, and the opening of the East after the Fall of Communism further cemented that competition.

On the whole, this book will give the reader the narrative and the facts about economic growth in a continent that endured extraordinary hardship and created a booming economy, albeit one whose reality fell far short of the dreams of its earlier proponents.

[Will · Rating 3 out of 5]

"Popular accounts portray Europe as either an economic phoenix or a basket case. The phoenix view observes that output per hour worked has risen from barely 50 percent of U.S. levels after World War II and two-thirds of those levels in 1970 to nearly 95 percent today and that labor productivity so measured is actually running above U.S. levels in a substantial number of Western European countries. Since the turn of the twenty-first century, the euro zone has created more new jobs than either the United States or the United Kingdom. Its exports have grown faster than those of the United States. It provides more of its citizens with health insurance, efficient public transportation, and protection from violent crime.

The basket-case view observes that the growth of aggregate output and output per hour have slowed relative to the United States since the mid-1990s. Between 1999, when EMU began, and 2005, euro-zone growth averaged just 1.8 percent, less than two-thirds the 3.1 percent recorded by the United States. Productivity growth has trended downward since the early 1990s, owing to labor-, product-, and capital-market rigidities, inadequate R&D spending, and high tax rates - in contrast to the United States, where productivity growth has been rising. The growth of the working-age population has fallen to zero and is projected to turn significantly negative in coming years. High old-age dependency ratios imply large increases in the share of national income devoted to health care, lower savings rates, potentially heavier fiscal burdens, and an aversion to risk taking. All these are reasons to worry about Europe's competitiveness and economic performance.

One way of reconciling these views is to distinguish the distant from the recent past and the past from the future. Comparing the European economy at the midpoint and the end of the twentieth century, there is no disputing the phoenix view. Economic performance over this half century was a shining success both absolutely and relative to the United States. More recently, however, Europe has tended to lag. Although this does nothing to put the past in a less positive light, it creates doubts about the future.

One way of understanding these changing fortunes is in terms of the transition from extensive to intensive growth. Europe could grow quickly for a quarter century after World War II and continue doing well relative to the United States for some additional years because the institutions it inherited and developed after World War II were well suited for importing technology, maintaining high levels of investment, and transferring large amounts of labor from agriculture to industry. Eventually, however, the scope for further growth on this basis was exhausted. Once the challenge was to develop new technologies, and once growth came to depend more on entrepreneurial initiative than on brute-force capital accumulation, the low rates of R&D spending, high taxes, conservative finance, and emphasis on vocational education delivered by those same institutions became more of a handicap than a spur to growth. Consistent with this view is the fact that Europe's economic difficulties seem to have coincided with the ICT revolution and the opportunities it affords to economies with a comparative advantage in pioneering innovation, as well as with globalization and growing competition from developing countries such as China that are moving into the production of the quality manufacturing goods that have been a traditional European stronghold.

The question is what to do about it. Is it necessary for Europe to remake its institutions along American lines? Or is there still a future for the European model?"

[Apostolis · Rating 3 out of 5]

Ένα αρκετά πυκνό βιβλίο, το οποίο διάλεξα να διαβάσω λόγω ενδιαφέροντος για τη μεταπολεμική ανάπτυξη της Ευρώπης. Προσωπικά βρήκα δύο μειονέκτηματα για το βιβλίο αυτό, που για ορισμένους, ειδικά ερευνητές, μπορεί να είναι πλεονεκτήματα. Πρώτον, ο συγγραφέας σε 450 σελίδες απομονώνει την πολιτική και επικεντρώνεται μόνο στην οικονομία, με αποτέλεσμα αν κάποιος δεν γνωρίζει το πολιτικό πλαίσιο των εποχών μετά τον Β παγκόσμιο πόλεμο, ακολουθεί δύσκολα την αφήγηση. Δεύτερον, το βιβλίο έχει πολλές υποσημειώσεις, οι οποίες αποτελούν από μόνες τους ένα ξεχωριστό βιβλίο, οπότε ένας ανεξάρτητος αναγνώστης, ίσως να πανικοβληθεί από την πληθώρα πηγών και παραπομπών. Στα πλεονεκτήματα είναι το γεγονός, πως για κάποιον που έχει έχει μελετήσει την πολιτική σκοπιά του θέματος, η αμιγώς οικονομική συμπληρώνει πολλά εξειδικευμένα κενά.

[José Dias · Rating 4 out of 5]

a well structured book that brings together historical conditions, political constraints and need with economic decisions (tools and knowledge) in a essential reading for a deeper development plans/ polices to be taken/ proposed to any underdeveloped country (think also that be applicable for poor regions in any country)

[Reko Wenell · Rating 3 out of 5]

An overview of the postwar European economy with lots of information and good small frameworks to help understand aspects of it. It has been of great use, though I should probably skim it through to remind myself of everything.

[Waldemar Ingdahl · Rating 4 out of 5]

Read my review for FEE https://fee.org/articles/book-reviews...

[William · Rating 3 out of 5]

As Sergent Joe Friday used to say on the TV series Dragnet, "Just the facts, mam. Just the facts."