1952—1955
1955—1957
1958—1959
1959-1963
1963—1967
Jean Monnet
René Mayer
Paul Finet
Piero Malvestiti
Rinaldo Del Do
Table 1: Presidents of the High Authority of the European Coal and Steel
Community. Source: Spierenburg and Poidevin (1994).
1
Institutions
• European Parliament: 732 members; joint power to adopt legislation;
approves budget, international treaties, commission; power of inquiry
• Council of the European Union (ex Council of Ministers): ministers of
member state governments; joint power to adopt legislation
— Committee of Permanent Representatives (COREPER) (of the
member states), with formal status from the Merger Treaty
• European Commission: 24 Commissioners, of which one is President
• Court of Justice of the European Communities
• European Council: heads of government, meeting twice yearly, with
formal status from the Single European Act onward.
• Other
— European Court of Auditors
— European Central Bank
— European Investment Bank
— Economic and Social Committee: 222 representatives of interest
groups (unions, consumer groups, ecologists)
1
1958—1967
1967—1970
1970—1972
1973
1973—1977
1977—1981
1981—1985
1985—1995
1995—1999
1999—2004.
2004—
Walter Hallstein
Jean Rey
Franco Maria Malfatti
Sicco Mansholt
François-Xavier Ortoli
Roy Jenkins
Gaston Thorn
Jacques Delors
Jacques Santer
Romano Prodi
José Manuel Barroso
Table 2: Presidents of the European Commission.
Policies
Agriculture: the Common Agricultural Policy (CAP)
Competition policy (à la U.S. antitrust policy, plus control of regional
and business aid by the member states
Energy policy
Environmental policy
Fisheries policy
Internal market policy
Labor market policies
Monetary policy, monitoring adherence to Stability and Growth Pact
(SGP)
Regional policy, social cohesion
Science and technology policy
Trade policy
Transportation policy
It is remarkable that these 15 countries have set about and largely succeeded in integrating what were distinct national economies, with every reason to think that the 10 new member states to the East will do so as well.
But it is also remarkable that integration has led to a much greater reliance on the market, and a much more limited role for the public sector,
than might have been predicted, given the size of the public sectors in the
earliest Member States of what has become the European Union.
2
1840 1850
Belgium
334
854
France
410 2,915
Germany
469 5,856
Great Britain 2,390 9,797
Italy
20
620
Netherlands
17
176
United States 4,508 14,434
1860
1,729
9,167
11,089
14,603
2,404
335
49,001
1870
1880
1890
2,897
4,112
4,526
15,544 23,089 33,280
18,876 33,838 42,869
21,558 25,060 27,828
6,429
9,290 13,629
1,419
1,841
2,610
84,675 149,219 266,724
Table 3: Length of railroad line open, selected countries (kilometers).
Sources: Mitchell (1975, Table G1; 1870 UK figure is for 1871); Historical
Statistics of the United States (1975, Series Q321-328).
1840
Belgium
7.38
France
1.23
Germany
1.09
Great Britain 8.59
Italy
0.15
Netherlands
0.65
United States 1.69
1850
18.87
8.76
13.67
35.21
4.55
6.74
5.41
1860
38.20
27.55
25.87
52.48
17.64
12.84
18.37
1870
64.0
46.71
44.03
77.47
47.17
54.37
31.75
1880
90.85
69.38
78.93
90.05
68.16
70.54
55.95
1890
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Table 4: Per cent of 1900 railroad line installed, selected countries (kilometers). Sources: from Mitchell (1975, Table G1; 1870 UK figure is for 1871);
Historical Statistics of the United States (1975, Series Q321-328).
To explain this aspect of EU development, we will review the economic
situations of Germany, France, and the United Kingdom.
2
National Backgrounds
One point is that industrialization began at different times in different European countries.
The UK was the home of the industrial revolution.
Railroad infrastructure is a crude but convenient index of the pace of
industrialization.
In absolute and in relative terms, the United Kingdom and Belgium were
3
Figure 1: The German Confederation in 1815, showing Prussian acquisitions.
Source: Tipton (2003, Map 1).
early leaders in developing railroad networks.1
France lagged behind Germany; both lagged behind the UK.
2.1
Germany
German culture is ancient.
Germany is younger than the United States.
1
I have ended Tables 3 and 4 with 1890 largely because the available data for the United
States suffers a break at that point, with later data not comparable to earlier data.
4
Figure 1 shows the hodgepodge of German principalities in 1815 (the year
the Battle of Waterloo sent Napoleon into exile at St. Helena and fixed the
map of Europe for some 50 years).
1834: Prussia established the Zollverein (customs union), collecting most
German states behind a common external tariff.
1850s & 1860s: steam power, first used on barge canals, then railroads.
Early on, the Prussian government was cautious about promoting the
development of railroads:
• finance ministers feared budget deficits
• suspicion railroads would enable social instability
1860s & 1870s: investment in railroads rose at nearly 8 per cent per year
Backward linkages to supplying industries: stone, bricks, cement, timber,
iron, steel, machinery, coal.
Forward linkages to the rest of the economy: more rapid and reliable
delivery of intermediate and final products, at lower cost for transportation
services; reduced inventory carrying costs.
The railroad network made the Zollverein an integrated economic region,
what would later be called a “single market.”
Steam power and railroad networks around the world integrated Germany
into what were becoming world markets.
German unification:
• 1864, a little war with Denmark (acquires Schleswig-Holstein)
• 1866, a little war with Austria (which lost Venice to what was becoming
Italy)
• 1870, a short but not-so-little war with France (the fall of the Second
Empire and beginning of the Third French Republic, which governed
until World War II; founding of the German Empire, German annexation of Alsace Lorraine)
Not the least important characteristic of these wars is that they were
short: a few months (late 1863—early 1864), 7 weeks, and 10 months, respectively.
1870s: speculation-fed boom.
5
Figure 2: The unification of Germany, 1864—71. Source: Tipton (2003, Map
3).
6
May 1873: financial collapse in Vienna. This triggered what was for
some time called the Great Depression.
Real output grew, but at a slower rate, over the period 1873—1895.
Some argue that the seeds of protectionism, nationalism, chauvinism, and
fascism can be traced to the 1870s.
But investment, particularly industrial investment (Figure 3) continued.
Moving into the 20th century, Germany was equipped with modern, upto-date capital equipment.
Figure 4: German industry increasingly organized in large plants, able to
take advantage of economies of large scale production (where these existed).
1890s:
• the second industrial revolution, chemistry, engineering, and electricity
– led by Germany, as the first industrial revolution had been led by
England
• decline of the share of agriculture in the work force
• widespread cartels; in contrast to the approach of U.S. antitrust, an
1897 German court decision made cartel agreements legally enforceable
contracts
Going into World War I, the German economy was
• up-to-date technically
• with a concentrated and fiscally conservative banking system
• a concentrated and cartel-ridden industrial sector
• a government limited in size by the unwillingness and inability to run
substantial budget deficits
and, drawing the incorrect lessons from the three short wars of the period
of German unification, the government expected World War I to be short.
As events unfolded, it became clear that the appropriate model for World
War I was the U.S. Civil War, trench warfare and stalemate, with the ability
or inability of the armies on the front lines to hold on determined largely by
the ability of the government to direct economic activity to the war effort.
7
Figure 3: Capital stock in Germany, 1850—1913 (billion 1913 marks). Source:
Tipton (2003, Figure 5.4).
8
Figure 4: Thousands of German workers in manufacturing, 1882 and 1907,
by size of establishment. Source: Tipton (2003, Figure 6.2).
9
Germany’s failure to plan for the right kind of war (if that is not an
oxymoron) was not unique: France, England, and Russia had similar expectations.
How did the German government react to the war-driven need to increase
its control over the economy?
“War raw materials corporations,” with stock owned by the government
and the largest firms in each industry.
By the end of the war, there were 200 of these, covering all German
industry.
In many cases, they were simply the cartels that had existed before, under
a new name.
Post-World War I: 1918—1933, the Weimar Republic
• attempts to pay unrealistic reparations imposed by the Treaty of Versailles led to massive inflation, collapse of the currency
• investment slowed, quality of capital fell, and productivity with it
• as the Great Depression (of 1929) spread around the world, German
cartels resisted cutting prices, which might have ameliorated the impact
of the economic downturn.
• active German participation in international cartels, notably steel.
From a modern perspective, it is difficult to find much good to say about
the interwar cartels.
The motivation, however, was not perverse.
The feeling was that cartels could organize international trade and allocate existing markets, however small they were, among producers.
Without some such allocation, it was thought that each government would
impose protectionist measures, protecting its own small market for domestic
producers.
As the worldwide economic downturn continued, international cartels collapsed, protectionist measures were imposed, and international trade flows
withered away, exacerbating the effect of the depression.
2.2
France
France: economic policy reflects two fundamentally opposite tendencies
10
• centralization: “L’Etat, c’est moi.”
• liberalism (in the 19th-century sense of the word): laissez-faire: the role
of the government is to provide public goods, enforce property rights
and the rules of the market, but otherwise stand aside from economic
activity.
“Infrastructure” may be thought of in several ways
• physical infrastructure – highway and railway systems
• educational system
• legal system
France from 1870 to 1914: predominantly liberal approach to economic
policy
• 1870: French defeat in the Franco-Prussian War, overthrow of Louis
Napoleon, establishment of the Third Republic
• 1914: World War I
There was state involvement in the economy, particularly in the development of railroads, but overall, the economic role of the French government
was a passive one.
World War I: massive government involvement in the economy, compelled
by the war effort.
• government promotion of mergers, cartels
— it is easier to deal with a small number of firms than with a large
number of firms
— belief in economies of large scale, in the greater efficiency of larger
firms (“catch up with the Americans”)
• plans for a continued high-profile government role after the end of the
war
Interwar period: conflict between advocates of modernization and advocates of a return to the prewar liberal regime.
11
• (Often, partial-)state ownership of “infrastructure” type firms – mines,
electric power generators, as well as the Compagnie Française des Pétroles,
which was created out of confiscated German firms and was seen as
having a national security characteristic (secure supply of oil)
• Among advocates of a continued or increased government role, conflict
between
— neocapitalists: government policy to correct imperfections of the
market
— socialists: government ownership of the means of production
• 1931: depression hit the French economy, widespread resort to cartels
in a futile attempt to manage economic collapse.
There was a brief resort to cartelization in the United States as well
(the National Recovery Act). This quickly became unpopular, was declared
unconstitutional, and support for this type of industrial policy fell as the
economy recovered. Simplistically, one can say that in France the economy did not recover in the way that it did in the United States, and that
the Second World War intervened before alternative approaches to economic
recovery could be tried.
Vichy government: wartime economic policy, with the northern third of
the country under German occupation.
• a 10-year plan (1942) and a 2-year plan (1944, aimed at the immediate
postwar period)
• underlying assumptions
— the prewar economic role of the state had been disorganized and
inadequate
— protection from foreign competition had allowed French industry
to become uncompetitive
— the capital equipment of French industry had been obsolete
— it would be necessary to raise investment levels and import stateof-the-art technology
— and to do this, consumption would need to be restrained.
12
The force of events meant that these paper plans were never implemented.
But they had an eventual impact.
Postwar France: from the interwar period, continued debate between
• neocapitalists: government policy to correct imperfections of the market
• socialists: government ownership of the means of production
Postwar nationalizations: more disparate responses to specific situations
than a systematic program to adopt a system of public ownership.
• 1944 coal strike protesting collaborationist owners and worsening work
conditions obliged government to begin steps to nationalization
• Louis Renault thought to have collaborated, his auto company nationalized
• December 1945: banks nationalized in belief that credit was critical for
reconstructing the economy
• March 1946: electric power and gas nationalized, a response to power
interruptions 1944—1946, oligopolistic structure, importance for overall
development
Monnet Plan
• Planning Commission began work summer 1945, produced a four-year
plan (1947—1950) by autumn 1946
• Goals (vaguely specified)
— reach 1938 industrial levels by end 1946 (reached April 1947)
— reach 1929 levels (25% greater than 1938 levels) by mid-1948
— reach 125% of 1929 levels in 1950.
• The second stage proved too ambitious, given a shortage of investment
funds; plan extended by two years (1947—52 instead of 1947—50), with
total planned investment about the same, concentrated on coal and
electricity.
13
American influence:
• Monnet had spent time in the United States, and the French Plan was
influenced by U.S. wartime planning
• the U.S. insisted on some formal policy as a precondition of aid (as a
way of demonstrating that the aid would be used in a serious way)
• Initial financing: a $650 million loan from the United States on 28 May
1946, with the promise of another $250 million a year later.
Methodology
• have those who were to execute the plan participate in its formulation
• direct control in nationalized sectors, otherwise allocation of funds for
investment
• continuation of wartime controls to restrain demand for consumer goods,
inflation
Initial target: six infrastructure sectors
• coal
• electricity
• steel
• transport
• cement
• farm machinery
After revision, focus on coal, electricity, and steel.
Kuisel (1981, p. 245):
14
The planners made mistakes in forecasting demand for certain items like coal and rail service and thus erred in investment
choices. And they discovered that transforming French agriculture required something other than forcing the pace of mechanization. Finally, the choice of a large-scale investment program
made the French people wait longer for reconstruction and housing, although it probably had little effect on lowering the output
of consumption goods even in the short run.
. . . It launched vast investment programs in basic industries,
especially in the nationalized enterprises. The commissariat ably
maneuvered a reluctant sector like steel to modernize.
Planning became a central aspect of French economic policy in the 1950s.
But the first plan became intertwined with the Marshall Plan and with the
European Coal and Steel Community.
2.3
United Kingdom
• 1776—1815: (first) industrial revolution
— 1776: the Wealth of Nations, an argument for free trade
— 1815: defeat of Napoleon
• 1815—1845: rise of industry at the expense of agriculture
— “Around 1810 agriculture’s contribution to British GNP exceeded
that of industry by 70 per cent; around 1840, the contribution of
industry exceeded that of agriculture by 60 per cent.”
— 15 May 1845, repeal of the Corn Law (tariff on imported grain),
Britain adopts free trade.
• 1845—1874: Liberalism and growth, 1845—1879
— the fact that Britain followed a free trade policy and Britain grew
faster than other countries was used by advocates of free trade
around Europe (and the world) as an argument in favor of free
trade
15
— spread of free trade on the continent from Anglo-French treaty of
1860 (triggering round of most-favored-nation tariff reductions)
— but: did Britain grow because it pursued a free trade policy, or
was Britain able to indulge in a free draw policy because it had
grown?
— Great Depression of 1873
— July 1879, German tariff marks retreat from free trade; other continental nations followed Germany’s lead. In the UK, the Conservative party called for the reintroduction of tariffs, but it was
the Liberal party that was in power.
Figure 5: Per capita GDP for eight European countries and the UK, 1913—
1944; 1913 = 100. Source: Eichengreen (1994).
Why did relative UK growth rates decline in the run-up to World War I?
• Industrial maturity, 1874—1914
• 1914: World War I
— massive government involvement in the economy, engaged in on a
largely ad hoc basis
— first, a need to mobilize resources for the war effort and a realization that reliance on prices in free markets would not be sufficient.
16
National product per head
1700-1760
0.31
1760-1780
0.01
1780-1801
0.35
1801-1831
0.52
Real GDP per worker
1831-1860
1.10
1856-1873
1.32
1873-1882
0.90
1882-1899
1.43
1899-1913
0.31
GDP per man-year
1913-1924
0.3
1924-1937
1.0
1937-1951
1.0
1951-1964
2.3
1964-1973
2.6
Table 5: The long-term growth of the British economy, 1700—1973 (annual
percentage rates). Source: Floud (1994, Table 1.4).
1873-1899
1899-1913
1873-1951
1873-1973
UK USA Sweden France Germany Italy Japan
1.2 1.9
1.5
1.3
1.5
0.3
1.1
0.5 1.3
2.1
1.6
1.5
2.5
1.8
0.9 1.7
1.7
1.4
1.3
1.3
1.4
1.2 1.8
1.9
2.0
2.0
2.4
2.6
Table 6: Growth of gross domestic product per man-year in the United Kingdom compared with six other industrial countries, 1873—1973 (annual percentage rates).
17
— recognition that British industry had fallen behind Germany in the
high-tech industries of the day: electrical engineering, chemicals;
— in some critical sectors (scientific instruments, ball bearings,chemical
and laboratory glassware, tungsten, chemical products) British
firms simply did not exist; the country had depended on imports
from Germany.
— consequent encouragement of business R&D cooperation
— reliance on trade associations to allocate raw materials
— real wages constant or even falling while profits rose → seeds of
long-lasting labor discontent (railways, docks, coal mining)
• UK slides into depression, 1920 or 1921
• loss of pre-war export markets, often to US (Latin America) or Japanese
(Asia) suppliers, who had moved in during the war; as Britain relied
more on export markets than other nations, this effect was particularly
severe
• decline of the industries that had driven the first industrial revolution
– coal, iron & steel, textiles – and failure to lead the sectors that
drove the second industrial revolution
• a failure of management? Continuation of family-run firms long after
they had generally been supplanted by professionally-managed corporations in the U.S. (but not in France or Germany)
• highly specific physical capital and labor skills (sunk investments) could
not easily be transferred out of declining sectors
• that declining industries were regionally concentrated meant the burden
of depression was concentrated as well (in the North) and led government to undertake (largely ineffective) regional development programs
• retreat from competition as a public policy or standard of business
conduct, reliance on continued cooperation of the kind that had been
encouraged during WW I
• 1932 10 per tariff on imported final goods (not raw materials), with
preference from Commonwealth nations on a “reciprocity” basis (thus,
the effect of tying the British economy to the Commonwealth)
18
• government promotion of mergers, consolidation, often with the slogan
but not the reality of “rationalization” (scrapping inefficient plants,
reorganizing production along more efficient lines)
Pollard (1983, p. 106):
p. 106:
In the course of the 1930s, the State thus played an active part
in the cartelization of industry and it intervened directly to provide a monopolistic framework where firms were too weak or too
scattered, as in the old staples of coal, cotton, iron and steel,
shipbuilding, and agriculture. For a third type of industry, the
public utility, the country groped its way through to a new and
significant form of organization, the Public Corporation.
and
[The Public Corporation] was a compromise, to avoid both the
exploitation of the public by a private monopoly, and the day-today political interference to which ordinary Departments of State
are normally subjected.
p. 107:
The nineteenth-century belief in an unlimited extension of markets was shattered by the experience of declining export markets in the 1920s and world-wide deficiency of purchasing power
in the 1930s. Technical and organizational problems were thus
transformed, and the main task was, not how to supply everextending markets at the lowest cost, but how to cater for a stagnant demand without an excess of unemployment. . . . It seemed
as though the country was moving inexorably into a [corporatist]
economic structure, the solution tried in several fascist countries.
Foreman-Peck (1994)
pp. 403—404:
19
Year Consumption War Non-war investment Government
1938
87
7
5
16
1939
83
15
2
25
1940
71
44
-15
51
1941
62
53
-15
61
1942
59
52
-11
60
1943
55
55
-11
64
1944
56
53
-10
62
Table 7: Source: The distribution of UK net national expenditure, 1938—44
(per cent). National expenditure is the sum of expenditure on consumption,
war and non-war capital formation. Government expenditure is the sum of
government expenditure on non-war current services (part of consumption)
and government war expenditure (part of war). Source: Howlett (1994, Table
1.1).
. . . neither the law courts nor the government were convinced of
the virtues of competition. The contrast with the US may have
emerged because foreign competition was more pervasive in the
UK, and fear of monopoly therefore less strong. . . . Of greater official concern in inter-war Britain was unemployment and overcapacity in industry, neither of which competition appeared capable
of eliminating over an acceptable time scale.
World War II
• Once again, massive government involvement in the economy
• consumer goods sectors: to control inflation
— on the supply side, government designation of “nucleus firms”
which were to absorb the productive capacity of other firms (indirectly, by purchasing the output of other firms, or directly, by
simply buying the other firms)
— on the demand side, increased taxation, compulsory saving, rationing
• 1942 Beveridge Report: mapped out the future welfare state – three
assumptions:
20
— family allowances would be paid for all children
— a National Health Service would be set up
— full employment would be guaranteed by the state
The direct result is what is called the post-war settlement (Howlett, 1994,
pp. 27—28):
The post-war settlement is broadly defined as the consensus that
emerged in the post-war period between trade unionists, industry
and the government, a consensus that had its origins in the growth
of tripartite organizations, both formal and informal, during the
war. In simple terms the basis of this consensus was the willingness of trade unionists to restrain real wage growth in exchange
for a full employment pledge by the government. . . . in many ways
the post-war settlement was not simply a consequence of the war
but a continuation of restrictive practices, by both employers and
trade unionists, that had evolved in the 1930s; indeed, its precedents could be even traced back to the First World War.
Accompanied by widespread nationalization, although the extent of nationalization in Britain was by no means greater than that in other industrialized countries (Table 8)
Why public enterprise?
Traditional public utilities: network natural monopolies, unsuited for private enterprise – in the UK
• municipal ownership of gas and water
• electricity distribution grid
Declining industries: coal, steel, shipbuilding: the state as lending of last
resort.
Telegraph: handed over to the post office in 1868 to replace a private
cartel.
Nationalizations were carried out by all political parties.
(Disappointing performance followed by privatization under the Thatcher
government, beginning in 1979, but that is a later story.)
What was the economic basis of the post-war settlement, and what forces
caused it to break down?
21
Figure 6: Source: Hannah (1994, p. 169).
22
France (1982)
Austria (1978—9)
Italy (1982)
Sweden (1982)
UK (1978)
Australia (1970—74)
West Germany (1982)
Portugal (1976)
Spain (1979)
Netherlands (1971—3)
Canada (1970—4)
USA (1983)
Output Employment
16.5
14.6
14.5
13.0
14.0
15.0
—
10.5
11.1
8.2
10.7
—
10.7
7.8
9.7
—
4.1
—
3.6
8.0
—
4.4
1.3
1.8
Table 8: Per cent share of state-owned enterprise in selected OECD
economies. Source: Hannah (1994, Table 6.1).
• Unions restrained demand for higher wages in return for full employment
• Government commitment to maintain full employment
• Business practices restricting competition (often through trade associations), wage moderation → high profits.
But:
• restrictive labor market practices mean low productivity growth
• UK wages fell behind those of other European countries (in particular,
Germany); worker pressure for higher wages
• leading to upward pressure on prices
• and a loss of domestic market share to foreign suppliers (of higherquality goods at lower prices)
23