Golden Age, Structural Crisis Europe in International Economy 2015 Growing productivity and employment •GB, GER, FRA – fully industrialized, with similar living standard and strong export sector –> convergence; •Fluctuations of the business cycle still detectable but no absolute contractions – growth at rates unknown; • •Biggest shock Korean war 1950 - less disturbing than feared – WE exported military goods to US; • •Participation in the Cold War helped secure full employment and encouraged technology (electronics, jet engines…): •WE NATO members spent between ½ and 2/3 of US military expenditures (peace dividend); • •France 1960: nuclear weapons; withdrew from NATO 1966 – different path, expanding its exports of arms on basis independent on US technology; valued by third world countries – international respect: •Anti US character something new – suggesting E might develop as an independent political force (Gaulle resigned 1973); By mid1950s fears of depression dispelled – confidence had grown in the economic control policies linked to Keynes macro policies – promoted by the US (Publ. <-> Priv. Demand + Infl. <-> Growth/Empl.); • Germany •German refugees flooded allied zones (10 mill. 1945): •little work in cities, lived on farms – labor for lodging; •enhanced labor force; when moved into factories proved hard-working and easy to train; • •Existing industrial workers equally cooperative - long hours, low wages; •New industry-wide unions reinforced this attitude – encouraging cooperation between employers and the workers; • •Educational system flourished during war (to avoid military service) + high unemployment after war; • •Industrial structure leaned since 1900 towards producer goods: •historicaly exported largely to EE; •supplies of coal, iron, steel – Ruhr basin– fitted to produce cheap producer goods – most of Europe in need; •big exports – railway engines, transport equipment, machine tools; •imported consumer goods especially form SE; • •High quality – created secure markets in Europe, from 1950 exporting outside Europe – big reserves of sterling and USD; •maintained the value of DM with low inflations – GER increased exports when GB beginning to struggle with uncompetitive export prices; •1950-1973 export increased annual 12,4% – highest between AIC; •living standards overtooking GB 1960; •GER unique product of the war – new housing (urbanism, infrastrucute). File:Bundesarchiv Bild 183-B0527-0001-753, Krefeld, Hungerwinter, Demonstration.jpg D:\23120\Desktop\WIK_De-Gaulle+Adenauer.jpg France •Defense of strong Franc between wars on expense of industrial growth –> national perception that France was economically weak and backward; •Modernization strategy (Germany still feared); –Modernization pushed forward by civil servants in cooperation with number of big firms (indicative planing); •Monnet plan since 1946; •control of German coal-producing areas: to redirect the production away from GER industry and into FRA; •sought to coordinate basic production and infrastructural investment – business+ government + labor representatives in committees; •5 years targets (investment and workforce training - confidence); • •Growth proceeded rapidly –> improvements in transport and power networks –> extended scope for industrialization to remote areas; •Big surplus of labor - high birth rate, transfered from agriculture; •Colonial empire with big French population: market + export of lifestyle; •In North Africa oil reserves developed 1950s to compensate lack of coal + nuclear power programe; • •1960 third industrial power in WE;; Great Britain •Less damaged than GER – leading European economy; •In 1945 still more military bases worldwide than US + nuclear capacity; •For US major European foothold; • •Problems: •BoP: industrial export have to be maximized to secure USD and domestic production expanded to limit imports; •At the same time – people were seen to need reward for wartime efforts (welfare state); • •1960 GB loosing competiveness, investment held back, firms struggled with old equipment; •Government still aiming at full employment, wages much higher than on continent: •Trade unions able to prevent substitution of labor by technology and new capital goods (neither lower wages nor shorter hours); • •Very low growth – only 2,9% 1950-55; 2,5% to 1955-1960; •First industrializer -> moving on to a stage of maturity: •hard manual work no longer optimal; •most best careers seen in tertiary sector, industry did no attract people of advanced education; •workers not as grateful for job as GER; • •With large home market producers did not need to secure foreign markets -> many products not competitive abroad (Commonwealth – easy and conservative market; vs. EEC+GATT); •Few fully aware – till 1960 living standards still highest in E + consumer boom and leisure culture; •These years of relative decline – reduced role and influence of GB. Italy •Partial modernization affecting north; •US main modernizing force (danger of Communism); •Inability to develop mass markets and exports even in traditional cotton textiles; •State intervention in industry retained in the interest of directing effort into dollar earning export – cotton first (US designed policies); •Eventually low production costs and emphasis on consumer goods – methods and equipment derived from US; Marshall plan bigger impact than elsevere; •Promotion of education, especially in rural areas; •Election 1948 –> centrist government –> GOV reduced price controls and regulations form fascist age; •Transition from Mare Nostra to European integration – outstanding formula for progress – example for the modernization of SE; •GOV encouraged home market products at the same time as boosted exports (fridge, scooters – competitive in SE); • Spain, Port, Greece •POR – colonial empire, conservative colonial policy; •SPA – still under facist – big national companies – most economy held down by small-scale unproductive agriculture; •GRE paralyzed by civil war 1947-1949. Interpretation of European succes (Eichengreen) • •Catch-up was facilitated by solidaristic trade unions, cohesive employers associations, growth-minded governments working together to mobilize savings, finance investment, and stabilize wages at levels consistent with full employment; •Coordination problem in industrial sector was solved by extra market mechanisms – government planning agencies, state holding companies, industrial conglomerates, nationalization; •Financed by patient banks in long-standing relationships with their industrial clients; • •This codified set of norms + understandings (institutions) – inherited from the past (corporativism); • –Challenges of this period resembled those that had E confronted earlier – modern industry had developed later on the continent than in GB and US; • •Prominent role of the state: late-industrializing economies –> initial growth spurt depended as much on assimilating and adapting existing technologies as on pioneering new ones; • •Naturally developed systems of human capital formation emphasizing apprenticeship training and vocational skills as much as university education; Decolonization and immigration • •US advised to liberate colonies; apart of FRA (POR) progress quick; •Found that can maintain economic links - reluctance weakened; • •FRA - colonies as cultural extension of homeland – defeat by Germany made case for overseas territories - young residents form colonies encouraged to study in France; •French empire decolonized 1958 (war in Indochina lost 1954; war in Algeria which gained independence 1962); •Influx of arab immigrants– hostility among indigenous French; • •Decolonizaiton – ex-col. people allowed to live in their home country in Europe; •Few Europeans crossing iron curtain – composition of industrial population towards non-white/non-Europeans by the 60s. • •GER – sources of labor in EE blocked off - began import labor; •First drew on SE – workers (returning home) – few problems of cultural assimilation; •1960s started to draw heavily on Turkey and Iran; • •Moslem workers difficult to absorb – third world transplant; •Most uneducated, unskilled – low pay limited them to degraded housing; •Europe - new racial structure – low paid industrial workers helped sustain E growth, but remained isolated social force. Deceleration • •Late 60s inflation increased – partially function of investment cycle – but long term factors were at work; • •As US and GB experienced slow growth after war owing to the completion of their industrialization process – WE industrialization approaching completion by 1970; •Land developed, infrastructure completed - workers moving form low to industrial wages; •Agriculture – formerly subsidized, now overproduction + further productivity gains hard to achieve; • •WE labor shortage cannot be solved by inexperienced non-Europeans; •Growing demands by organized labor – discouraging investment; •Political pressure form left – FRA, ITA, GER ; •Students: aspirations boosted by post-war boom - turned against capitalism and liberal democracy late 1960s; • •Opposition to US intervention in Vietnam – threatened European confidence in US; •Student riots in Paris 1968; post war WE consensus under serious threat; •(OPEC dragged WE towards international cooperation in the energy field…) •Irony – US now too weak to revive WE; D:\23120\Desktop\GRR-085_Paris-police-storming-student-barricades_1968.jpg Oil shocks •Resource shock 1973-74 exacerbated already inflationary environment; •Cheapness of crude oil major factor of the boom – 1966 oil supplanted coal as most significant energy resource (except in GB); • •Increasingly from Middle East: •Insignificant producer 1939; lions share after WWII – Kuwait, SA, Iran, Iraq; •Risks of overdependence from region driven by antagonisms Arabs vs Jews; •Prolonged enclosure of Suez 1967-1975, rise of OPEC since 1960; • •Dependence grew: 1972 2/3 WE energy consumption (France 72,5% primary resources energy petroleum based, Italy 78,6%): •Bargain prices and abundant supplies - development of energy intensive sectors – cars, consumer durables and chemical products, fuel and heating in industry; •6.10 1973 war Israel and Arabs – OPEC doubled crude oil prices and imposed an oil embargo (Oil Decade 1973-82); •Foreign companies – exclusive rights through concessions dating from 1920s replaced by national companies; •Vienna summit 6.11.1973: EEC backed Arab demand on Israel to withdraw to its pre 1967 boarders; •OPEC ministers: further increase 11,65 USD/barel (400% increase compared pre crisis 2,59USD); •1970s oil prices increased 10x, EEC inflation 17,5% and remained 13,5% between 1975-78, further up with second oil shock 1979; •Energy conservation and efficiency became key themes (North Sea, Alaska, North Africa, USSR); • http://akorra.com/blog/wp-content/uploads/2009/03/the-oil-crisis-of-1973.jpg •Although first oil shock seen as a principal factor in terminating the long boom – preceded by number of worrying developments: •collapse of B-W and return to free floating currencies; •labor market constraints; •exhaustion of catch up effect; •competitive newly industrialized countries (JAP, Korea, Taiwan, LATAM); •Eichengreen: Oil shocks cannot explain why growth failed to recover subsequently: •no evidence of larger falls in energy intensive industries; •real price of energy not significantly higher after 1985 than before 1973; •Wages explosion - major destabilizing factor: •rising income as a norm and expectation – labor markets tightened as AGRI reserves depleted, shorter hours, more holidays, higher pay – requests of unions – labor no longer willing to bear the consequences of downturn; •Narrowing technological gap Europe – US: limited scope for substituting capital for labor – rise in real wages ran ahead of productivity increases – falling profit levels – employers responded by rising prices; 1951–1960 1961–1970 1971–1980 1981–1990 1992–2000 USA GDP growth 3,4 4,2 3,3 3,2 3,6 Inflation 2,1 2,8 7,9 4,7 2,6 EU-15 GDP growth 4,8 4,8 3,0 2,4 2,1 Inflation 3,6 3,9 10,8 6,7 2,4 Explanation of Problems of European Economy (Eichengreen) • •Just as this inheritance of economic and social institutions contributed to the extraordinarily successful performance of European economy after 1950 – it was equally part of the explanation for European less satisfactory performance in the subsequent 25 years; • •As the early opportunities for catch-up and convergence were exhausted, the continent had to find other ways of sustaining its growth; • •Had to switch form growth based on brute force capital accumulation and the acquisition of known technologies to growth based on increase in efficiency and internally generated innovation; • •Shift from extensive to intensive growth •Extensive: based on capital formation and the existing stock of technological knowledge – 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; •Intensive growth – through innovation - more of the increase in output is accounted for by technical change and less by the growth of factor inputs; • •Europe had no choice but to switch to intensive growth from the 70s on; •Bank-based financial systems had been effective at mobilizing resources for investment by existing enterprises using known technologies – less conductive to growth in a period of heightened technological uncertainty; •The role of finance was to take bets on competing technologies something for which financial markets were better adapted; • •Generous employment protections and heavy welfare – given labor the security to accept the installation of mass-production technologies – now become an obstacle to growth as new firms seeking to explore the viability of unfamiliar technologies…; • •System of worker co-determination: union representative on big firms supervisory boards – ideal for helping labor to verify that owners were investing the profits resulting from wage restraint - but now discouraged bosses form taking the tough measures needed to reconstruct in preparation for adoption of radical new technologies; • •State holding companies that had been engines of investment and technical progress were no longer efficient mechanisms for allocating resources; •They were increasingly captured by special interests and used to bail out loss-making firms and prop up declining industries; • •This explains how the average annual rate of growth GDP/C in WE could have fallen by more than half between the 1950-1973 and the 1973-2000 period.