The European Economy since 1945

I write a review in The Freeman of April 2008, volume 58 issue 3 about the The European Economy since 1945: Coordinated Capitalism and Beyond by Barry Eichengreen.

Read more in my review of the book.

Some topics might prove too daunting to write about even in tomes. Barry Eichengreen, professor of economics at the University of California, Berkeley, has undertaken a difficult task in this book—an economic history of the whole of Europe, a comparison with the United States, and some considerations for the future. The result is a clear and concise book that shakes up some preconceptions.

Recovering from World War II was not as problematic as many think. Eichengreen contradicts Mancur Olson’s view that Europe had to start from scratch and free itself from its historical institutions. He argues that it was precisely this historical continuity that enabled the recovery; just a few years after the war, Europe’s production capacity was back at prewar levels, even considering Germany’s devastation.

It was not a time of technological breakthroughs, but rather of steady recovery, mobilizing the resources unused during the war and implementing some innovations from the United States. This was possible through the political consensus found in the corporativist collaboration among government, industry, and unions, with banks ready to provide the corporations that had survived the war with investments from small-time savers.

The lessons learned from the 1930s were that unions had to agree to hold back demands for wage increases and that governments needed to eliminate trade barriers. The European Economic Community (EEC) was born because it was clear that Europe had been falling behind the United States even before the war. The balkanized and closed economies were unable to exploit economies of scale and scope, and were slow to develop mass-production methods. The EEC provided a regional market appropriate to make best use of the new technologies. With the financial assistance and the export markets of the United States, this proved to be a successful strategy.

But corporativist policies started to founder in the 1970s. The OPEC oil crisis was part of the problem, but the main issue, Eichengreen writes, was that the postwar generations had forgotten the lessons of the past. Unions demanded ever-higher wages and militant strikes pressured corporate profits and investments. Governments tried to calm the economy by expanding the already-extensive welfare state, thereby worsening the high rate of inflation.

Meanwhile, most of Eastern Europe, which had been agricultural, was pushed by the Soviet Union into rapid industrialization. But that region was poorly endowed with energy and industrial raw materials, and its industrial output poorly tailored to the needs of the downstream users. Without the proper price mechanism of a market economy, managers sought to minimize plan targets while maximizing planned allocation of resources. Those economies stagnated in the 1960s, either trying autarky or reforming to “market socialism”. Both paths proved fruitless. The socialist systems made it through the ’70s because loans by Western banks delayed their ultimate collapse.

While Europe struggled, the United States asserted itself. Eichengreen places great importance on the differences in financial institutions. Europe’s banks were geared toward supporting well-established corporations concentrated on producing “more of the same,” while the reliance of American corporations on venture capital favored what Eichengreen calls the “intensive growth” of startups and innovations.

The ’90s proved to be a mixed success for Europe. Liberalization and structural change proved difficult, and rigid labor markets, excessive public spending, and high taxation are still present. But the European Union (EU) was able to weed out some of the worst policies and succeeded in the difficult integration of Eastern Europe.

The book’s analysis is on target. The structures and institutions of the European economies were suited to fine-tuning and applying existing technologies. They were tailored for a world with little international competition, not for the close integration and intense competition following globalization. The EU was designed for a half a dozen countries with complementary economic structures in order to achieve limited economic goals: expanding heavy industry, liberalizing trade, deregulating product markets. It was not designed to support 27 member states with widely different economic structures, political cultures, and visions of the future.

Eichengreen foresees that continuing economic integration and technological advancement will make Europe adapt to a more dynamic model. While arguing for some important reforms, he fails to draw the key conclusion—that Europe was successful in its incremental growth not because of but despite its alliance of big government, big business, and big labor. Europe would be wise to follow its own path, but it would be unwise to think that the European path should retain its high degree of corporativism and government economic planning rather than moving toward free markets.

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