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The European Miracle 1945-1973

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.

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The European Miracle 1945-1973

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  1. The European Miracle1945-1973

  2. 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.

  3. Eichengreen Table 2.1 Annual Average Growth of Gross Domestic Product How Does Europe Recover? The European Miracle: 1945-1973

  4. The Collapse of the Global Economy • 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.

  5. 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.

  6. Reviving the Global Economy: • Trade liberalization in the General Agreement on Trade and Tariffs (GATT) • A fixed exchange rate system---the Bretton Woods System---for settling international payments • Creation of the International Monetary Fund (IMF) and the World Bank • The IMF’s task is to act as an international lender of last resort to assist countries with chronic imbalances. • The World Bank’s task is to assist countries with economic recovery.

  7. 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

  8. 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.

  9. 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.

  10. 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.

  11. 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.

  12. What Kind of European Institutions? • Considerable bitterness after the war. Many propose that Germany be split up or de-industrialized. • 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?

  13. 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.

  14. Treaty of Rome 1957The 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

  15. CUSTOMS UNION Price Supply France World Supply + Tariff Pf = Pw +T German Supply Pg World Supply Pw Demand France O Q4 Q3 Q1 Q2 Steel (tons)

  16. 2. Effects of a Customs Union---loss of tariff revenue and gains from consumer and producers surplus Price Supply France World Supply + Tariff Pf = Pw +T German Supply Pg World Supply Pw Demand France O Q4 Q3 Q1 Q2 Steel (tons)

  17. 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

  18. 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.

  19. 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 “co-determination” 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.

  20. 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.

  21. 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.

  22. COMMON AGRICULTURAL POLICY Price Supply EEC Peec = Pw +T Export Subsidy World Supply Pw Dumping Revenue Demand EEC O Q4 Q1 Q2 Wheat (tons)

  23. 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.

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