Trade Liberalization

The inflow of American capital also meant a growing availability of dollars, and an end to the dollar shortage that some economists in the late 1940s had believed to be a permanent European predicament. The balancing of international accounts made moves to trade liberalization easier. This ensured the continuation of the expansionary mechanism.

Parallel to the liberalization of exchange controls, the six European countries (Belgium, France, West Germany, Italy, Luxembourg, and The Netherlands) who had previously formed the ECSC on 25 March 1957 signed the Treaty of Rome creating a broader concept of economic co-operation, a trading area known as the European Economic Community. It came into effect at the beginning of 1958. The EEC’s objectives included the progressive dismantling of internal tariffs, and the creation of a common external tariff. As a framework for liberalization, it was hugely successful. Trade within the EEC expanded. Trade within the EEC area grew much quicker even than world trade, which was also expanding very quickly at this time. In 1960, the six members of the EEC accounted for 22.9 per cent of world trade, and 7.9 per cent of world trade was within the EEC. In 1970, 20 per cent of world trade was inter-EEC; but the trade of the EEC with the rest of the world also expanded, indicating that the effects of the tariff area had not been primarily simply to divert trade, as some sceptics had feared. In all, 39.8 per cent of world trade involved the member countries of the EEC.

The Treaty of Rome (in Articles 104 and 105) also provided for the co-ordination of national economic policies in order to maintain equilibrium in balance of payments, a high degree of employment, and price stability. The EEC also created a mechanism to insulate its members’ politically very sensitive farm populations from the effects of economic change. The Common Agricultural Policy (CAP) developed after 1962 as a way of systematizing six quite different national sets of legislation protecting agriculture. It involved a mixture of threshold prices at which import restrictions would be imposed with intervention prices intended to stabilize markets. By the end of the 1960s,

EEC food prices were over double those on world markets; and they remained at this level until the 1980s. They imposed an additional cost on consumers, perhaps as much as 5 per cent of the income of poorer families. But as incomes generally rose, agrarian protection was no longer as sensitive a political issue as it had been in the late nineteenth century or in the 1920s. In the context of the EEC, it may well have been a price worth paying to prevent farmers supporting parties of political extremism. In this way, farm policy had its own role to play in creating the new European consensus.

Governments and Growth

How far was the spectacular economic performance of the 1950s a result of government policy? Governments are often eager to take responsibility for successful economic outcomes. Yet the dynamism of this period occurred in very different policy frameworks. Britain, where growth was least dynamic, had in practice committed herself to the macro-management of demand. France had an extensive planning system, relying on ‘indicative’ plans rather than direct controls: the most important institutional feature was the allocation of credit through organized auctions. Germany and Italy, probably because of their recent painful experiences with interventionist approaches, liberalized prices quickly and very successfully. Ludwig Erhard remained for many as an inspiring example of the benefits to be achieved through far-reaching liberalization: he was, for instance, widely regarded as the model for the reform of centrally planned economies in central Europe after 1989. But even in the centrally planned economies of central and eastern Europe, spectacular growth rates were achieved. In all cases, growth rates of over 7 per cent of net physical product were achieved. However, the rate of growth fell off significantly in the 1960s, as inefficiencies created by the planning mechanism became increasingly apparent.

The result of this brief comparison may initially suggest that there are some occasions in which circumstances are so favourable that policy plays a fundamentally subordinate role in determining the outcome. But there is also another way of reading the evidence. Liberalization had little impact on the immediate outcome: indeed, in some cases, as in Germany in 1948 at the outset of Erhard’s experiment, it may have brought considerable social costs. In the long run, however, it created a better incentive structure for sustained growth.

Liberalization produced its most dramatic effects in economies that had previously been tightly controlled. The most striking instance of the benefits of liberalization and an open economy was provided by Spain. Under General Franco, Spain had implemented an autarkic planning, and suffered in the 1950s from industrial decline and accelerating inflation. At the end of the decade, after widespread urban unrest, a complete change of course took place. Spain joined the OEEC and the IMF, and dismantled her external tariffs faster than any other European country. Initially there was a major acceleration of imports; but they were financed through capital flows associated with technology transfers. Growth in the 1960s and 1970s was very fast; and the 1960s are generally reckoned to be the period of Spain’s industrialization.

In the 1960s, confidence that appropriate policy could always produce the right economic response reached the point of hubris. The rates of growth achieved during the post-war recovery had been exceptional: the consequence of a catching up on growth that had been missed earlier. (The basic factors of production had always been available: a skilled and literate labour force; capital; and improved technology. But inappropriate institutional arrangements had made it impossible for these factors to come together.) The 1960s discovered that European growth rates, like female hemlines, could not go on rising for ever.

The response to the first signs of flagging growth involved new forms of government activism. Governments began to see the new industrial revolution (the British prime minister Harold Wilson called it the ‘white hot technological revolution’) in terms of state guidance. This required investment guidance and target projections. In Britain this role was to be co-ordinated by Neddy (NEDC: National Economic Development Council). Even previously liberal Germany developed new institutions, a

Mifrifri (midterm financial planning) and a Mamiflex (economic policy of moderation and flexibility). In 1967 the new Great Coalition government of Christian Democrats and Social Democrats passed a Law on Stability and Growth, which adopted the basics of Keynesian macroeconomic management.

Increased levels of inflation indicated rather more than a simple problem in monetary management: they showed that the circumstances of what came retrospectively to be called the ‘golden age’ had changed. The long post-war boom in continental Europe had been sustained by the movement of labour from low-productivity agriculture into much higher-productivity occupations in manufacturing and services. By the middle of the 1960s, the rural source of the labour supply had been largely exhausted, and the continental European economies reached the position Britain had been in since the beginning of the century. There were no more domestic supplies of cheap labour (although foreign workers or ‘guest workers’ now contributed to the sustaining of the economic boom). The pace of productivity growth and income growth slowed.