The European Economy since 1945: Coordinated Capitalism and Beyond

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Overview

"Encompassing all of Europe, this magisterial book tells the story of how, during the second half of the twentieth century, high growth based on capital formation changed to low growth based on innovation. Eichengreen's masterful narrative never loses its focus while ranging far to integrate successfully international political contexts and informal economic conventions."—Peter J. Katzenstein, Cornell University

A magisterial achievement. This book shows in detail how institutions and policies explain the miraculous postwar recovery and the subsequent economic growth of Western Europe, how they flavored the economic experience of different countries, and how they determined and shaped the nature of coordination and cooperation among the European economies. It is deeply learned, using a huge variety of sources and data, always informed about the facts and at the same time based on sound economic analysis."—Joel Mokyr, Northwestern University, author of The Gifts of Athena

"Barry Eichengreen has written a powerful book that is central to any understanding of the differences and strains over economic issues between Europe and the United States. He examines the fit between social and political institutions and technology and innovation, and judiciously avoids both the depths of pessimism and the optimistic fantasies about Europe that are at the center of other and more facile analyses."—Harold James, Princeton University, author of A History of International Monetary Cooperation since 1945

"The European Economy Since 1945 features a unique blend of modern economics, good history, and a deep understanding of the role of institutions in shaping economic success. Eichengreen's book is about the future of Europe. In the late 1970s, Japan was the model, and the United States looked doomed. Will we be saying the same thing in twenty years about the predictions of European doom and gloom so common today? To avoid that mistake we need to understand where Europe is coming from, and to think hard about the factors that will determine economic success in coming decades. This book is where we should start from."—Francesco Giavazzi, Bocconi University, Milan, and visiting professor, Massachusetts Institute of Technology

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Editorial Reviews

Journal of European Economic History
The book's strength lies in its ability to create an economic macro-history based on an excellent processing of well-selected statistical data chosen with good reason that is often represented in carefully constructed diagrams. It is in this fusion of 'narrating' with 'showing', consisting of documentation processed on the basis of economic theory that the book, is uncommonly effective. . . . There is a lot to read and to think about in this ambitious book, which is constructed with precision and a notable ability for synthesis. To encourage the reader, it should be added that an excellent bibliography, a series of statistical data that is convincingly treated and adequately explained in the Appendix, and a very wide-ranging and carefully constructed index of subjects and authors quoted, facilitate his labours.
— Piero Barucci
New York Times Book Review - Sheri Berman
In The European Economy Since 1945, Barry Eichengreen . . . presents not only a comprehensive account of Europe's postwar economic experience but also an important analysis of capitalist development more generally. . . . [B]y demonstrating how institutions helpful in one era can be counterproductive in another, Eichengreen has important lessons about the future to teach both policy makers and publics.
Times Higher Education Supplement - Huw Dixon
Eichengreen, even as he presents a lot of evidence, proves himself to be a master of exposition of the big story. And none could be bigger than the one contained in this book. History will judge it one of the most amazing achievements of the 20th century.
Marginal Revolution - Tyler Cowen
An excellent book. . . . I have never read a better [book] on what the European economies have done right and subsequently did wrong. . . . Eichengreen . . . believes that Europe can turn things around, without chucking the basic model, but he doesn't for a moment deny that Europe faces an economic crisis relative to the American model.
Financial Times - Wolfgang Munchau
A characteristic of the best histories is not just a good narrative but a compelling thread that runs through it. Barry Eichengreen's tour de force of postwar European history is that kind of book. . . . His thesis is that Europe's much maligned corporatist institutions played a significant role in achieving the postwar economic miracle, but that these institutions are insufficiently flexible to meet the 21st century's demands. . . . While there can be no such thing as a definitive history of Europe's postwar economy, Eichengreen at least comes close to providing a definitive history of European economic performance, a subject in which he excels. This is in itself no mean achievement.
The Economist - Daniel Pudles
For both Americans who want to understand Europe's successes and failures, and for Europeans who want to know where their continent was right and where it has gone wrong, Mr. Eichengreen has provided an excellent summary.
Finance & Development - Nicholas Crafts
This is a splendidly delivered analysis that helps us make sense of the reversal of growth fortunes experienced by the United States and Europe since the mid-1990s. . . . The European Economy is beautifully written and will be widely read.
American.com - Jurgen Reinhoudt
It is rare indeed for an academic book on the fundamentals of European economic growth to be widely read and circulated outside of academic circles, but if any book deserves to be, it surely is Barry Eichengreen's The European Economy Since 1945. The book is an eloquently written analysis of how the economic and governmental institutions that formerly undergirded European economic growth have become, since the early 1970s, severe impediments to its growth. It is a must-read.
American Historical Review - Kenneth Moure
This book sets a new standard for surveys of the period, outclassing the essay collections that have concentrated on Western European experience and single-author narratives that have tended to make dreary reading. Eichengreen has produced an invigorating blend of synthesis and analysis that poses major questions about the nature and evolution of European economic growth, surveys economic arguments, and delivers sharp analysis and clear explanation for the major phases of economic growth and integration. . . . This is a landmark volume, by far the best available synthesis explaining European economic history since 1945, one ring pertinent comparison to U. S. experience that respect institutional differences and cultural preferences between countries. Its explanations and analysis are clear, concise, and engaging. Readers wishing more detail on the economic debates and national economic experiences red will appreciate the state-of-the-art bibliography. Don't miss it.
Independent Review - Enrico Colombatto
Barry Eichengreen's book The European Economy since 1945 presents a detailed introduction to the economic history of western Europe since World War II, plus a chapter on the history of central planning in eastern Europe and another on the process of transition from the economic environment typical of the Soviet Empire to a free-market environment and the European Union. Those who read it all will not be disappointed. They will find comprehensive information on the postwar situation and the reconstruction, as well as a thorough description of the integration process led to the Treaty of Rome (1957) and the European Union, with particular emphasis on the monetary aspects. The hurried reader will be satisfied, too, because each of Eichengreen's chapters can also be approached as a self-contained, well-researched, and thought-provoking essay in its own right, dealing clearly yet comprehensively with periods and episodes in recent western European history.
International Affairs - Adam Fleisher
Eichengreen's elegant history shows that Europe's economic performance in the second half of the twentieth century was a success because labour, capital and government committed to achieving both economic growth and stability.
The Historian - Michael H. Creswell
Eichengreen has produced a readable and informative account of Europe's post-1945 economy. Drawing on a lengthy and up-to-date bibliography, he embeds a wealth of economic theories into a political and social context in a way that an intelligent layperson can understand. These strengths should enable the book to find its way into graduate courses on economic history.
Journal of European Economic History - Piero Barucci
The book's strength lies in its ability to create an economic macro-history based on an excellent processing of well-selected statistical data chosen with good reason that is often represented in carefully constructed diagrams. It is in this fusion of 'narrating' with 'showing', consisting of documentation processed on the basis of economic theory that the book, is uncommonly effective. . . . There is a lot to read and to think about in this ambitious book, which is constructed with precision and a notable ability for synthesis. To encourage the reader, it should be added that an excellent bibliography, a series of statistical data that is convincingly treated and adequately explained in the Appendix, and a very wide-ranging and carefully constructed index of subjects and authors quoted, facilitate his labours.
American Historical Review - Kenneth Mouré
This book sets a new standard for surveys of the period, outclassing the essay collections that have concentrated on Western European experience and single-author narratives that have tended to make dreary reading. Eichengreen has produced an invigorating blend of synthesis and analysis that poses major questions about the nature and evolution of European economic growth, surveys economic arguments, and delivers sharp analysis and clear explanation for the major phases of economic growth and integration. . . . This is a landmark volume, by far the best available synthesis explaining European economic history since 1945, one ring pertinent comparison to U. S. experience that respect institutional differences and cultural preferences between countries. Its explanations and analysis are clear, concise, and engaging. Readers wishing more detail on the economic debates and national economic experiences red will appreciate the state-of-the-art bibliography. Don't miss it.
From the Publisher
"The book's strength lies in its ability to create an economic macro-history based on an excellent processing of well-selected statistical data chosen with good reason that is often represented in carefully constructed diagrams. It is in this fusion of 'narrating' with 'showing', consisting of documentation processed on the basis of economic theory that the book, is uncommonly effective. . . . There is a lot to read and to think about in this ambitious book, which is constructed with precision and a notable ability for synthesis. To encourage the reader, it should be added that an excellent bibliography, a series of statistical data that is convincingly treated and adequately explained in the Appendix, and a very wide-ranging and carefully constructed index of subjects and authors quoted, facilitate his labours."—Piero Barucci, Journal of European Economic History
New York Times Book Review
In The European Economy Since 1945, Barry Eichengreen . . . presents not only a comprehensive account of Europe's postwar economic experience but also an important analysis of capitalist development more generally. . . . [B]y demonstrating how institutions helpful in one era can be counterproductive in another, Eichengreen has important lessons about the future to teach both policy makers and publics.
— Sheri Berman
Times Higher Education Supplement
Eichengreen, even as he presents a lot of evidence, proves himself to be a master of exposition of the big story. And none could be bigger than the one contained in this book. History will judge it one of the most amazing achievements of the 20th century.
— Huw Dixon
Choice
Many Eastern states have now joined the EU and made economic progress. Ambitions are high, but the author questions whether Europe can maintain its traditional communitarian ideals as global competition intensifies. Useful notes and bibliography.
Marginal Revolution
An excellent book. . . . I have never read a better [book] on what the European economies have done right and subsequently did wrong. . . . Eichengreen . . . believes that Europe can turn things around, without chucking the basic model, but he doesn't for a moment deny that Europe faces an economic crisis relative to the American model.
— Tyler Cowen
Financial Times
A characteristic of the best histories is not just a good narrative but a compelling thread that runs through it. Barry Eichengreen's tour de force of postwar European history is that kind of book. . . . His thesis is that Europe's much maligned corporatist institutions played a significant role in achieving the postwar economic miracle, but that these institutions are insufficiently flexible to meet the 21st century's demands. . . . While there can be no such thing as a definitive history of Europe's postwar economy, Eichengreen at least comes close to providing a definitive history of European economic performance, a subject in which he excels. This is in itself no mean achievement.
— Wolfgang Munchau
Finance & Development
This is a splendidly delivered analysis that helps us make sense of the reversal of growth fortunes experienced by the United States and Europe since the mid-1990s. . . . The European Economy is beautifully written and will be widely read.
— Nicholas Crafts
American.com
It is rare indeed for an academic book on the fundamentals of European economic growth to be widely read and circulated outside of academic circles, but if any book deserves to be, it surely is Barry Eichengreen's The European Economy Since 1945. The book is an eloquently written analysis of how the economic and governmental institutions that formerly undergirded European economic growth have become, since the early 1970s, severe impediments to its growth. It is a must-read.
— Jurgen Reinhoudt
American Historical Review
This book sets a new standard for surveys of the period, outclassing the essay collections that have concentrated on Western European experience and single-author narratives that have tended to make dreary reading. Eichengreen has produced an invigorating blend of synthesis and analysis that poses major questions about the nature and evolution of European economic growth, surveys economic arguments, and delivers sharp analysis and clear explanation for the major phases of economic growth and integration. . . . This is a landmark volume, by far the best available synthesis explaining European economic history since 1945, one ring pertinent comparison to U. S. experience that respect institutional differences and cultural preferences between countries. Its explanations and analysis are clear, concise, and engaging. Readers wishing more detail on the economic debates and national economic experiences red will appreciate the state-of-the-art bibliography. Don't miss it.
— Kenneth Mouré
Independent Review
Barry Eichengreen's book The European Economy since 1945 presents a detailed introduction to the economic history of western Europe since World War II, plus a chapter on the history of central planning in eastern Europe and another on the process of transition from the economic environment typical of the Soviet Empire to a free-market environment and the European Union. Those who read it all will not be disappointed. They will find comprehensive information on the postwar situation and the reconstruction, as well as a thorough description of the integration process led to the Treaty of Rome (1957) and the European Union, with particular emphasis on the monetary aspects. The hurried reader will be satisfied, too, because each of Eichengreen's chapters can also be approached as a self-contained, well-researched, and thought-provoking essay in its own right, dealing clearly yet comprehensively with periods and episodes in recent western European history.
— Enrico Colombatto
International Affairs
Eichengreen's elegant history shows that Europe's economic performance in the second half of the twentieth century was a success because labour, capital and government committed to achieving both economic growth and stability.
— Adam Fleisher
The Economist
For both Americans who want to understand Europe's successes and failures, and for Europeans who want to know where their continent was right and where it has gone wrong, Mr. Eichengreen has provided an excellent summary.
— Daniel Pudles
The Historian
Eichengreen has produced a readable and informative account of Europe's post-1945 economy. Drawing on a lengthy and up-to-date bibliography, he embeds a wealth of economic theories into a political and social context in a way that an intelligent layperson can understand. These strengths should enable the book to find its way into graduate courses on economic history.
— Michael H. Creswell
New York Times Book Review
In The European Economy Since 1945, Barry Eichengreen . . . presents not only a comprehensive account of Europe's postwar economic experience but also an important analysis of capitalist development more generally. . . . [B]y demonstrating how institutions helpful in one era can be counterproductive in another, Eichengreen has important lessons about the future to teach both policy makers and publics.
— Sheri Berman
American Historical Review
This book sets a new standard for surveys of the period, outclassing the essay collections that have concentrated on Western European experience and single-author narratives that have tended to make dreary reading. Eichengreen has produced an invigorating blend of synthesis and analysis that poses major questions about the nature and evolution of European economic growth, surveys economic arguments, and delivers sharp analysis and clear explanation for the major phases of economic growth and integration. . . . This is a landmark volume, by far the best available synthesis explaining European economic history since 1945, one ring pertinent comparison to U. S. experience that respect institutional differences and cultural preferences between countries. Its explanations and analysis are clear, concise, and engaging. Readers wishing more detail on the economic debates and national economic experiences red will appreciate the state-of-the-art bibliography. Don't miss it.
— Kenneth Moure
Finance & Development
This is a splendidly delivered analysis that helps us make sense of the reversal of growth fortunes experienced by the United States and Europe since the mid-1990s. . . . The European Economy is beautifully written and will be widely read.
— Nicholas Crafts
Independent Review
Barry Eichengreen's book The European Economy since 1945 presents a detailed introduction to the economic history of western Europe since World War II, plus a chapter on the history of central planning in eastern Europe and another on the process of transition from the economic environment typical of the Soviet Empire to a free-market environment and the European Union. Those who read it all will not be disappointed. They will find comprehensive information on the postwar situation and the reconstruction, as well as a thorough description of the integration process led to the Treaty of Rome (1957) and the European Union, with particular emphasis on the monetary aspects. The hurried reader will be satisfied, too, because each of Eichengreen's chapters can also be approached as a self-contained, well-researched, and thought-provoking essay in its own right, dealing clearly yet comprehensively with periods and episodes in recent western European history.
— Enrico Colombatto
American.com
It is rare indeed for an academic book on the fundamentals of European economic growth to be widely read and circulated outside of academic circles, but if any book deserves to be, it surely is Barry Eichengreen's The European Economy Since 1945. The book is an eloquently written analysis of how the economic and governmental institutions that formerly undergirded European economic growth have become, since the early 1970s, severe impediments to its growth. It is a must-read.
— Jurgen Reinhoudt
Foreign Affairs
Like much modern history writing, this book is as much interpretiveessay as it is descriptive and narrative history, and its interpretive tools are those of the economist. Eichengreen's key thesis is that in the postwar era, most European countries had a workable corporatist system of social bargaining among government, business, and organized labor. That system assured enough business investment for "extensive" growth, providing increasingly skilled labor to close the productivity gap with the United States, and was very successful for a quarter century; it is too often forgotten how poor much of Europe was in 1950. But as the productivity gap narrowed, further growth depended on innovation rather than simply installing high-quality physical capacity. European values, customs, and institutions were less suited than those in the more decentralized and flexible U.S. economy to the uncertainties, risk taking, and volatility required for "intensive" growth through innovation. This thesis is used to explain not only the relative slowdown in European growth but also the rise in European unemployment in the subsequent quarter century. Europeans are now struggling to adapt their incentives to foster innovation — the Lisbon agenda of 2000 — without jettisoning their greater commitment to equality and stability. All in all, this is a superb overview of a half century of European economic development.
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Product Details

Meet the Author

Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. His books include "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939" and "Globalizing Capital: A History of the International Monetary System" (Princeton).

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Read an Excerpt

The European Economy since 1945 Coordinated Capitalism and Beyond
By Barry Eichengreen Princeton University Press
Copyright © 2006
Princeton University Press
All right reserved.

ISBN: 978-0-691-13848-0


Chapter One INTRODUCTION

In the second half of the twentieth century, the lives of Europeans were transformed almost beyond recognition. In 1950, many of the continent's residents heated their homes with coal, cooled their food with ice, and lacked even rudimentary forms of indoor plumbing. Today, their lives are eased and enriched by natural-gas furnaces, electric refrigerators, and an array of electronic gadgets that boggles the mind. Gross domestic product per capita, what the income of a typical resident of Europe will buy, tripled in the second half of the twentieth century. The quality of life improved even more than suggested by this simple measure. Hours worked declined by one-third, providing an enormous increase in leisure time. Life expectancy lengthened as a result of improved nutrition and advances in medical science. To be sure, not all was sweetness and light. Unemployment rose. Tax burdens soared. Environmental degradation, political repression, and limits on consumer sovereignty were pervasive under the authoritarian regimes that dominated Eastern Europe for four decades after World War II. But by any objective standard, the last half century has left Europeans today enormously better off than their grandparents were fifty years ago.

Not all parts of thecontinent shared equally in this prosperity, of course, and not all portions of the last half century were characterized by equally rapid growth. Southern Europe grew faster than Northern Europe. Western Europe grew faster than Eastern Europe. Growth was slower after 1973 than before. This slowdown was most pronounced in Eastern Europe, where it culminated in a crisis of central planning that brought down not just the command economy but its authoritarian political superstructure as well. These are important qualifications, but they do not change the fact that the post- World War II period, and specifically the quarter century from 1948 to 1973, was a period of extraordinarily rapid change and a veritable golden age of economic growth.

What made possible the rapid economic growth of a continent that was devastated by World War II? Initially, Europe could grow rapidly simply by repairing wartime damage, rebuilding its capital stock, and redeploying men drafted into the wartime task of destroying output and productive capacity to the normal peacetime job of creating them. The rapid economic expansion of the early postwar years largely reflected this process of "catch-up growth." The continent could then sustain its rapid growth by exploiting the backlog of new technologies developed between the two world wars but not yet put to commercial use. The 1920s and 1930s had been decades of instability and crisis, to be sure, but they were also a period of rapid technical change. Among other things, they saw the development of Lucite, Teflon, and nylon, improvements in the design of the internal combustion engine, and organizational changes such as the spread of assembly-line methods and modern personnel-management practices. Most of these innovations were developed in the United States. But a depressed investment climate and then the disruptions of war made the 1930s and 1940s less than propitious times for Europe to emulate America's example. Consequently, by the end of World War II, the United States had opened up a huge lead in levels of output and productivity. But this also meant that there existed an extraordinary backlog of technological and organizational knowledge ready for Europe's commercial use. By licensing American technology, capitalizing on American produ ers' knowledge of mass-production methods, and adopting American personnel-management practices, Europe could close the gap. This aspect of growth in the second half of the twentieth century is known as "convergence," the tendency for levels of per capita income and productivity to converge toward those prevailing in the United States.

For all these reasons, 1945 was a favorable jumping-off point for the European economy. Looking back on the extraordinary economic progress of the subsequent fifty years encourages a tendency to regard what followed as preordained. In fact, many things had to go right, and there was considerable uncertainty about whether they would. Catch-up, which entailed capital formation, the reallocation of labor, and the efficient use of these factors of production, required Europe to mobilize savings, finance investment, and maintain wages consistent with full employment and respectable profit rates. It required getting a range of complementary industries, each of which was necessary for the viability of the others, up and running simultaneously. Convergence required mechanisms for transferring to Europe and adapting to its circumstances the backlog of technological and organizational knowledge developed in the United States.

These were complex tasks. When we place ourselves in the position of contemporaries at the start of the period, as we will do in chapter 3, it becomes clear that any number of things could have gone wrong, as they had in the 1920s and 1930s.

That they did not go wrong now reflected the fact that Europe possessed a set of institutions singularly well suited to the task at hand. Catch-up was facilitated by solidaristic trade unions, cohesive employers associations, and growth-minded governments working together to mobilize savings, finance investment, and stabilize wages at levels consistent with full employment. The problem of getting a set of interdependent industries up and running simultaneously was solved by extramarket mechanisms ranging from government planning agencies, state holding companies, and industrial conglomerates in Western Europe to wholesale nationalization and central direction of the economy in the East. The capacity expansion needed to efficiently operate these scale-intensive technologies was financed by patient banks in long-standing relationships with their industrial clients.

In a nutshell, then, opportunities for catch-up and convergence were realized because of the conformance, or more colloquially the "fit," between the structure of the Western European economy and the economic and technological imperatives of the day. The result was a period of exceptionally rapid growth from the end of World War II through the 1960s.

Critical to Western Europe's success was the security of private property rights and reliance on the price mechanism. But the rapid growth of the postwar golden age depended on more than just the free play of market forces; in addition it required a set of norms and conventions, some informal, others embodied in law, to coordinate the actions of the social partners and solve a set of problems that decentralized markets could not. Hence the "coordinated capitalism" of this book's title.

This codified set of norms and understandings-what economists mean when they refer to institutions-did not materialize overnight. To a large extent it was inherited from the past. It is not surprising that inherited institutions could be adapted to the needs of post-World War II growth, since the challenges of this period resembled those that had confronted Europe in earlier years. Modern industry had developed later on the continent than in Britain and the United States, at a time when the capital intensity of industrial technology was greater. These more demanding capital needs were met by great banks capable of mobilizing resources on a large scale. As industrial production grew more complex and industrial sectors grew increasingly interdependent, it became more pressing to get a range of industries up and running simultaneously; hence the more prominent role of the state. Late-industrializing economies whose 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. Thus, it was no coincidence that Europe had in place following World War II a set of institutions useful for relaxing the constraints on growth. It was also fortuitous that the inheritance was favorable, since these kinds of deeply embedded social institutions are slow to change.

Catch-up was similarly the forte of planned economies organized along Soviet lines. Bureaucrats decided how many factories to build, instructed state banks to mobilize the necessary resources, and limited consumption to what was left. They decided what foreign technologies to acquire, whether through licensing or industrial espionage. Because success measured in tons of steel production depended more on brute-force capital formation and the assimilation of standard technologies than on entrepreneurship and innovation, the centrally planned economies of Eastern Europe were able, initially at least, to perform tolerably well. The institutions of the command economy had severe limitations, as we will see, but they were best suited to the circumstances of catch-up growth.

Just as this inheritance of economic and social institutions contributed to the extraordinarily successful performance of the European economy in the third quarter of the twentieth century, it was equally part of the explanation for Europe's less satisfactory performance in the subsequent twenty-five years. As the early opportunities for catch-up and convergence were exhausted, the continent had to find other ways of sustaining its growth. It had to switch from growth based on brute-force capital accumulation and the acquisition of known technologies to growth based on increases in efficiency and internally generated innovation. This transition is sometimes described as the shift from extensive to intensive growth. By extensive growth I mean growth based on capital formation and the existing stock of technological knowledge. It is the process of 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, in contrast, means growth through innovation. A larger share of the increase in output is accounted for by technical change, and less by the growth of factor inputs.

Thus Europe, which had relied on extensive growth in the 1950s and 1960s, had no choice but to switch to intensive growth from the 1970s on. The problem was that institutions tailored to the needs of extensive growth were less suited to the challenges of intensive growth. Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty. Now the role of finance was to take bets on competing technologies, something for which financial markets were better adapted. The generous employment protections and heavy welfare-state charges that had given labor the security to accept the installation of mass-production technologies now became an obstacle to growth as new firms seeking to explore the viability of unfamiliar technologies became the agents of job creation and productivity improvement. Systems of worker co-determination, in which union representatives occupied seats on big firms' supervisory boards, had been ideal for helping labor to verify that owners were investing the profits resulting from its wage restraint but now discouraged bosses from taking the tough measures needed to restructure in preparation for the 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 in this new era of heightened technological uncertainty. They were increasingly captured by special interests and used to bail out loss-making firms and prop up declining industries.

Increasingly, then, the same institutions of coordinated capitalism that had worked to Europe's advantage in the age of extensive growth now posed obstacles to successful economic performance. In this sense, the continent's very success at exploiting the opportunities for catch-up and convergence after World War II doomed it to difficulties thereafter. And the durability and persistence of institutions, which had worked to Europe's advantage after World War II, were now less positive attributes than impediments to growth.

Eastern Europe manifested this problem in its most extreme form. The centrally planned economies were particularly inept at innovation, since new knowledge generally bubbles up from below rather than raining down from above. More than nearly any other activity, innovation responds to incentives, which were in chronic short supply in the command economies. This weakness of central planning came back to haunt the Eastern bloc once the party was over, the technological pantry was bare, and a premium was placed on innovation.

This, in bare-bones form, is the story told in this book. It is a way of understanding the golden age of growth that prevailed for twenty-five years after World War II and the subsequent slowdown. It explains how the average annual rate of growth of gross domestic product (GDP) per capita in Western Europe could have fallen by more than half between the 1950-1973 period and the 1973-2000 period. It similarly explains why the deceleration between these periods was even more dramatic in Eastern Europe and why the planned economies collapsed at the end of the 1980s. To be sure, no single explanation for these complex phenomena can possibly be complete. For example, Europe's growth deceleration was surely also affected by global factors beyond its control. It is revealing, though, that the rate of growth of output per hour declined more sharply in Europe than in the United States, which was affected by the same global forces. The exhaustion of the technological backlog and the difficulty of adapting inherited institutions to changed circumstances go a long way toward explaining this fact.

As these last sentences remind us, the story of Europe's postwar growth-indeed, the story of its growth over the entire second half of the twentieth century-cannot be told in isolation from developments in the rest of the world. This directs our attention to another aspect of the inheritance shaping growth in the third quarter of the twentieth century: the Great Power conflict. Countries falling within the ambit of the United States or the Soviet Union came under pressure to adopt the same form of economic and social organization as the power under whose security umbrella they sheltered. After a brief period of uncertainty, Western Europe was decisively propelled toward market capitalism and Eastern Europe toward state socialism. This choice became the single most important determinant of growth performance in the two halves of the European continent.

The nature of the conflict permitted Western Europe to free ride on the security system provided by the United States. Less defense spending allowed Western European countries to devote more government revenues and investment to private ends. In effect, the subsidiary role that Europe played in the Great Power conflict yielded a peace dividend that freed up resources for productive capital formation. Eastern Europe was the recipient of an analogous dividend; it imported energy and raw materials at submarket prices from the Soviet Union in return for the stationing of Soviet troops in the region.

In addition, the Cold War provided an impetus for regional integration. The United States would not have acquiesced to the creation of a customs union of European nation-states capable of discriminating against American exports except for the priority it attached to building a bulwark against communism. And the Soviets would not have insisted so strongly on the integration of the Eastern bloc but for the example of Western Europe and the incompatibility of their own economy with those of Western European countries.

(Continues...)



Excerpted from The European Economy since 1945 by Barry Eichengreen
Copyright © 2006 by Princeton University Press. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
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Table of Contents

LIST OF FIGURES ix
LIST OF TABLES xi
PREFACE xv
LIST OF ABBREVIATIONS xix

CHAPTER ONE: Introduction 1

CHAPTER TWO: Mainsprings of Growth 15
Probing Deeper 20
Institutional Foundations of the Golden Age 31
Institutions and History 40
The End of the Golden Age 47

CHAPTER THREE: The Postwar Situation 52
Reconstruction 54
The Transition to Sustained Growth 59
Normalization and the Political Economy of the Marshall Plan 64
German Economic and Monetary Reform 70
Obstacles to Integration 73
The 1949 Devaluations 77
The European Payments Union 79

CHAPTER FOUR: Dawn of the Golden Age 86
Understanding Growth in the 1950s 89
Germany as Pacesetter 93
Next in Line 97
The Laggards 118
Toward the Golden Age 129

CHAPTER FIVE: Eastern Europe and the Planned Economy 131
The Strategy of Central Planning 133
Problems of Central Planning 142
Partial Reforms 146
Planning Innovation 154
Regional Integration 155
The End of Reform 160

CHAPTER SIX: The Integration of Western Europe 163
Initial Steps 167
EFTA and the British Dilemma 176
Economic Effects 178
The Common Agricultural Policy 182
The Luxembourg Compromise 185
Inklings of Monetary Integration 187
The Common Market as an Established Fact 195

CHAPTER SEVEN: The Apex of the Golden Age 198
The Heyday of Extensive Growth 199
The Incorporation of the European Periphery 204
Wage Explosion and Labor Conflict 216
The End of the Golden Age 223

CHAPTER EIGHT: Mounting Payments Problems 225
Italy's Crisis 226
Britain's Problems 229
The French Crisis and the German Response 238
The Collapse of Bretton Woods 242
The European Response 246

CHAPTER NINE: Declining Growth, Rising Rigidities 252
The Productivity Slowdown 253
Innovation 257
Unemployment 263
Stabilization in Britain 277
The EMS Initiative 282
The EMS in Operation 286
The Legacy 290

CHAPTER TEN: The Collapse of Central Planning 294
The Survival of Central Planning 296
The Collapse of Communism 301
Recession and Adjustment 303
Dilemmas of Transition 308
Economic Response 310
German Reunification 318
Normalization and Integration 328

CHAPTER ELEVEN: Integration and Adjustment 335
The Single Market 336
Integration in Practice 341
From the Delors Report to the Maastricht Treaty 346
The EMS Crisis 357
The Transition to Monetary Union 366
EMU and Its Implications 370
Adjustment and Growth 377

CHAPTER TWELVE: Europe at the Turn of the Twenty-first Century 379
Employment and Growth 381
Reducing Unemployment 388
Implications for European Unemployment 393
Productivity Growth 398
Eastern European Prospects and Western European Implications 406
Economic Prospects 412

CHAPTER THIRTEEN: The Future of the European Model 414
Battle of the Systems 419
The Shadow of History 423

APPENDIX: Sources of Growth 427

REFERENCES 433
INDEX 461

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