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The European Union is not a peace project

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Some topics might actually prove too daunting to write about even in tomes. Barry Eichengreen, professor at the University of California at Berkeley has undertaken a difficult task in his book The European Economy since 1945: Coordinated Capitalism and Beyond. It entails the economic history of the whole of Europe (east and west), a comparison with the US and some considerations for the future.

The result is a very clear and concise book, which also shakes up quite a few preconceptions.

Recovering from World War II was not as problematic as many think. Indeed many countries were blown back to their early 20th century GDPs, but Eichengreen contradicts the popular view that Europe had to start from scratch and free itself from its historical institutions. Eichengreen argues that it was precisely this historical continuity that enabled the recovery, and just a few years after the end of the war Europe’s production capacity was back at pre-war levels, even considering war-torn Germany.

It was not a time of technological breakthroughs, but of forceful recovery, in order to mobilize the resources unused under the war and implement innovations from the US. This was possible through the political consensus found in the corporativist collaboration between government, industry and the unions, and with banks ready to provide the corporations that had survived the war with investments from small time savers.

The lessons learned from the 1930’s were that unions had to agree to hold back the increases in wages and that governments understood that barriers to trade had to be eliminated. The European Economic Community (the forerunner of the present European Union) was born not primarily to promote peace, but because it was clear that Europe had been falling behind 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 of a scale appropriate to make best use of the new technologies received. With the assistance and the export markets of the US, this proved to be a very successful strategy.

But corporativist solutions started to flutter in the 70’s. The OPEC oil crisis was part of the problem but the main issue according to Eichengreen was that the post-war generations had forgotten the lessons of the past. Unions demanded higher wages in compensation for the recovery’s austerity, and militant strikes started to pressure the corporations’ profits and investments. Governments tried to calm down the economy by expanding the already extensive welfare state, worsening the high rate of inflation.

Meanwhile most of Eastern Europe had been agricultural economies, and was now pushed by the Soviet Union into rapid industrialization. For a time, incremental growth worked there too, but the region was poorly endowed with energy and industrial raw materials, and the industrial output was poorly tailored to the needs of the downstream users. Without the proper price mechanisms of a market economy, managers turned into minimizing plan targets while maximizing planned allocation resources. The economies started to stagnate in the 60’s, either trying autarky or reforming to “market socialism”. Both paths proved fruitless, and the reason the socialist system made it through the 70’s was the support of loans by Western banks delaying the ultimate collapse.

The US was able to capitalize on the new information technology, creating new global corporations and products opening up entirely new markets. While Europe struggled, the US asserted itself. Eichengreen gives great importance to the differences in financial institutions. Europe’s banks were geared towards supporting well-established corporations concentrated on producing “more of the same”, while the reliance of American corporations on venture capital in shares and bonds favoured what Eichengreen calls the “intensive growth” of start ups and innovations.

The 90’s proved to be a mixed success for Europe. Liberalizations and structural change proved difficult, and rigid labour markets, excessive public spending and high taxation are still present. But the EU was able to at least weed out some of the worst policies and succeeded in the very difficult integration of Eastern Europe by setting benchmarks to be achieved for accession.

Eichengreen is right on target in his final analysis. The structures and institutions of the European economies were better suited to incremental growth and to an environment were the challenge for growth was to fine-tune and apply existing technologies. They were tailored for a world with little international competition, not to the close integration and intense competition following globalization. The institutions of the EU were designed for a half a dozen countries with complementary economic structures in order to achieve limited economic goals- expanding heavy industry, liberalize trade, deregulating product markets. They were not designed to support a huge organization of 27 member states with widely different economic structures, political cultures and visions of the future. Neither was it designed to cope with the wide variety of policy issues covered by the EU today.

Eichengreen foresees that the continuing economic integration and technological advancement will make Europe adapt to a more dynamic model, but that it would be unwise to merely copy the US. After all, Eichengreen writes, there were many voices saying that the US should copy Japan in the early 80's. Today, with the decline of the Japanese economy, this seems absurd. Hence Europe has to acknowledge that the situation has changed and start thinking in new directions.

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