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European Economy since 1945: Coordinated Capitalism and Beyond

European Economy since 1945: Coordinated Capitalism and Beyond

by Barry Eichengreen
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In 1945, many Europeans still heated with coal, cooled their food with ice, and lacked indoor plumbing. Today, things could hardly be more different. The European Economy since 1945 is an accessible account of the extraordinary development of Europe's economy since the end of World War II. Barry Eichengreen argues that the continent's history has been critical to its economic performance and that it will continue to be so going forward. He notes, however, that the key questions for the future are whether Europe and its constituent nations can adapt their institutions to the needs of a globalized knowledge economy, and whether in doing so, the continent's distinctive history will be an obstacle or an asset.

About the Author:
Barry Eichengreen is the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. His books include Golden Fetters and Globalizing Capital (Princeton)

Product Details

ISBN-13: 2900691138489
Publisher: Princeton University Press
Publication date: 07/21/2008
Series: The Princeton Economic History of the Western World
Edition description: New Edition
Pages: 520
Product dimensions: 6.00(w) x 1.25(h) x 9.00(d)

About 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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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


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.


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.

Table of Contents

List of Figures     ix
List of Tables     xi
Preface     xv
List of Abbreviations     xix
Introduction     1
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
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
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
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
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
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
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
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
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
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
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
The Future of the European Model     414
Battle of the Systems     419
The Shadow of History      423
Sources of Growth     427
References     433
Index     461

What People are Saying About This

Joel Mokyr

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"

Harold James

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"

Francesco Giavazzi

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


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

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