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Weekly UpdatesThe European Economy Since 1945. Coordinated Capitalism and Beyond
Barry Eichengreen
Princeton University Press: Princeton, NJ, 2007, pp. 495; index.
doi:10.1057/ces.2008.39
This major work by a well-known international economist examines how Western Europe's peculiar institutions, including cohesive employers' organisations and countrywide trade unions, may have helped countries achieve their remarkable growth from 1945 to 1973. Growth-minded governments, acting through planning agencies and holding companies, did mobilise savings and target investments, as did Europe's 'universal banks' and conglomerates.
This is a familiar story in outline, told previously by Professor Eichengreen himself, among others. Eichengreen then questions whether these institutions are suitable for the most recent decades. Western Europeans themselves have recognised the need to switch to more intensive growth based on increased efficiency, restructuring, and innovation. Increased product-market competition and monetary integration have been two steps forward already taken, but popular labour protections remain problematic. Eastern Europe manifested similar 'catch-up' extensive growth under state socialism, followed by even more apparent difficulties in the 1980s, but has resumed its advance, helped along by proximity to and assistance from more developed part of the Continent.
In this volume, Professor Eichengreen sets out to demonstrate a more debatable proposition: a decentralised market mechanism could not have solved the problems Europe faced after World War II. It required 'coordinated capitalism', developed earlier in its history, to assimilate existing technologies--for example, apprenticeship and vocational training. Solidaristic institutions were certainly present in northwest Europe and Scandinavia, but how much did they help? After all, world economic growth accelerated remarkably in 1950-1973, then fell back about as much as it did in Western Europe. Indeed, 'peripheral' European states (Iberia, Ireland, Greece, and Turkey), which did not share the same non-governmental institutions as the original EU members, accelerated even more, as Eichengreen reports, and they fell back, too, although continuing to converge with the richer neighbours. This 'cohesion' of the peripheral economies to the central ones may be owing to faster shrinkage of agriculture in the south and 'catch-up' without coordinating institutions. The neo-classical theory of conditional convergence was strongly confirmed by the relative growth records in the 1960s.
European productivity per worker hour continued to converge with the American level through the early 1990s. Part of Europe's convergence likely came from significant increases in gross domestic capital formation (excluding housing), as Angus Maddison has argued, which permitted introduction of assembly line methods and adoption of improved technologies such as the internal combustion engine, radio, artificial fibres, and jet airplanes--in which the USA had build up a lead. Profits were high in Europe, and labour migration and memories of a depressed interwar period kept wage demands manageable until the 1970s. With real exchange rates kept moderate and the European Payments Union providing finance for liberalisation, export-led growth resulted.
One important piece of evidence Eichengreen presents in favour of his thesis is the fact that Germany and Austria, with their neo-corporatist societies, grew much faster during the 1950s than predicted by their GDP starting point, while Belgium, and the UK did not, supposedly because they did not control union wage demands and unit labour costs and therefore could not assure profitability for modernising investments. France, Italy, Spain, Sweden, and Portugal all coordinated industrial development through various devices (indicative planning, state-holding companies, or conglomerates) to assure complementary domestic inputs in the lingering shortage of funds for imports. (But fast-growing Greece and Switzerland did not.) Germany alone was sufficiently diverse to dispense with such explicit coordination, although the Deutscher Gewerkschaftsbund and the leading metal workers union kept wage demands moderate throughout the economy. Tripartite incomes policy in the Netherlands and Austria had similar results, while France suffered from competitive unions, budget deficits, overvaluation of the franc (until 1958), and poor export growth. Italy's problems were comparable, despite some outstanding export specialties. Coordination helped the same Germanic and Scandinavian countries keep unemployment rates from rising even more than they did in the 1960s and 1970s, despite demand shocks and more generous unemployment benefits. Their more generous welfare benefits reflect communitarian values and sensitivity to externally caused instability. Part of Ireland's excellent employment record after 1987 apparently derives from a more corporatist approach.
At the other extreme, Margaret Thatcher's radical labour policies did succeed in raising Britain's formerly slow labour productivity growth. Market-based Britain and Ireland also accepted computerisation faster than did their Continental partners. Once unemployment reached very low levels in the 1970s, however, wage settlements throughout Europe increased appreciably to the expense of profits and growth. Incomes policies could not stop this. Furthermore, Eichengreen admits that labour immobility within Europe (as well as cultural norms against weekend and August work) has probably contributed to shorter hours, lesser participation, and thus lower GDP per capita relative to the USA, despite comparable hourly productivity.
At the behest of the Soviet Union, post-war Central and Eastern Europe had even higher rates of capital formation than the other peripheral economies. Besides the sacrifices in consumption and quality of life they endured, this emphasis on 'heavy' industry 'closed off the route to modern economic growth', which the author believes goes from textiles and other consumer goods and then to technologically sophisticated capital goods.
After the fall of Communism, the lack of market institutions and judicial enforcement have handicapped these countries even where democratic governments proceeded fastest to reform. These are well-known generalisations, and the story is well told. Helping the reform process, according to Eichengreen, were 'encompassing coalitions' which could make side payments to potential losers from reforms. On this point, however, his evidence (Figure 10.1) depends on including commonwealth of independent states economies outside his discussion. In another questionable argument, he attributes the rapid rise of post-reunification East German wages to union and employers' interests, rather than a government decision to prevent large-scale migration and court political support. The unions' insistence on replicating labour costs and legislation in the Eastern Lander is blamed by Eichengreen for the slow growth after 1997 and high unemployment in the former GDR despite their immediate conversion to FRG laws.
The history of the European Union is developed here more fully than any other I have seen. Eichengreen and his collaborators had already shown that reduced tariffs themselves increased intra-European trade significantly, adding some 4%-8% to members' GDP in the first two decades, without much trade diversion, except in temperate-zone agricultural products. A related benefit came from increased FDI and Kennedy-round tariff concessions from the USA. One beneficial side effect of the expensive Common Agricultural Policy was to force monetary integration, since agricultural subsidies had to be renegotiated every time an EEC member altered its exchange rate. Eichengreen believes the CAP also worked to encourage French and Italian farmers to rationalise and export, although a free market plan with side payments would have done so more effectively. When increased capital movements negated Bretton Woods fixed (but all too adjustable) rates and Europe could not manage an adequate substitute, the path to the euro was opened. Since withdrawing from the EC was impossible by 1979, the response to economic problems was to deepen integration in the Single European Act of 1987. The French Socialists' conversion from broad regulation to financial liberalisation was crucial in this move, as the blame for any pain could be shifted to the Community.
Eichengreen's long familiarity and distinguished publications about the international trade and monetary systems are amply evident in this book, as is his lesser experience with East-Central Europe. (The former Soviet Union is practically omitted.) Most of the judgments are sound, based on such experts as Ivan Berend, Janos Kornai, and Wlodzimerz Brus, but in my opinion he somewhat underrates the direct influence of the USSR, particularly on military matters and trade. Important contributions by J. Michael Montias, Michael Kaser, Paul Marer, and Josef Brada--among others--are not listed in the extensive bibliography.
Whether Europe can match American innovation is a topical question. The USA spends more of its GDP on R&D, although much of it goes for military and space programs, and has more effective university research. At the turn of the century, Europe was investing one-third less in information and communications technologies. But it is argued that Europe's strength in vocational training and stable industrial districts (Emilia-Romagna or Baden-Wurttemberg) favors incremental, 'medium-tech' innovations, such as flexible specialisation. European precision instruments, high-speed trains, and some pharmaceuticals are the class of the world. European venture capital firms are increasing, and small companies have better access to euro financing. On the other hand, multinational R&D projects like Esprit have not succeeded. On balance, Eichengreen doubts that global competition will soon force the West Europeans to adopt institutions more conducive to radical and discontinuous technological innovations.
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