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Home , Franco Maria Malfatti, Gaston Thorn, Jacques Delors, Jean Rey (politician), Paul Finet, Piero Malvestiti

1952—1955 1955—1957 René Mayer 1958—1959 1959-1963 1963—1967 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 (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 • : heads of government, meeting twice yearly, with • formal status from the onward.

Other • — European Court of Auditors — — 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 François-Xavier Ortoli 1977—1981 1981—1985 1985—1995 1995—1999 1999—2004. 2004— José Manuel Barroso Table 2: Presidents of the .

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 suc- ceeded in integrating what were distinct national economies, with every rea- son to think that the 10 new member states to the East will do so as well. Butitisalsoremarkablethatintegrationhasledtoamuchgreaterre- liance 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 1860 1870 1880 1890 334 854 1,729 2,897 4,112 4,526 410 2,915 9,167 15,544 23,089 33,280 Germany 469 5,856 11,089 18,876 33,838 42,869 Great Britain 2,390 9,797 14,603 21,558 25,060 27,828 20 620 2,404 6,429 9,290 13,629 Netherlands 17 176 335 1,419 1,841 2,610 United States 4,508 14,434 49,001 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 1850 1860 1870 1880 1890 Belgium 7.38 18.87 38.20 64.0 90.85 100.0 France 1.23 8.76 27.55 46.71 69.38 100.0 Germany 1.09 13.67 25.87 44.03 78.93 100.0 Great Britain 8.59 35.21 52.48 77.47 90.05 100.0 Italy 0.15 4.55 17.64 47.17 68.16 100.0 Netherlands 0.65 6.74 12.84 54.37 70.54 100.0 United States 1.69 5.41 18.37 31.75 55.95 100.0

Table 4: Per cent of 1900 railroad line installed, selected countries (kilome- ters). 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 .

2 National Backgrounds

One point is that industrialization began at different times in different Eu- ropean 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 Germancultureisancient. 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. 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.” SteampowerandrailroadnetworksaroundtheworldintegratedGermany into what were becoming world markets. German unification:

1864, a little war with (acquires Schleswig-Holstein) • 1866,alittlewarwithAustria(whichlostVenicetowhatwasbecoming • 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 annexa- tion 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, respec- tively. 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, up- to-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 kind of war (if that is not an oxymoron) was not unique: France, England, and Russia had similar expec- tations. 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 firmsineachindustry. 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 anewname. Post-World War I: 1918—1933, the Weimar Republic

attempts to pay unrealistic reparations imposed by the Treaty of Ver- • sailles 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 allo- cate existing markets, however small they were, among producers. Withoutsomesuchallocation,itwasthoughtthateachgovernmentwould impose protectionist measures, protecting its own small market for domestic producers. As the worldwide economic downturn continued, international cartels col- lapsed, 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:therole • 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 develop- ment 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 firmsthanwithalarge 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 advo- cates 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 econ- omy 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 state- of-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 mar- • ket

socialists: government ownership of the means of production • Postwar : more disparate responses to specificsituations 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

Louis Renault thought to have collaborated, his auto company nation- • alized

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 cer- tain items like coal and rail service and thus erred in investment choices. And they discovered that transforming French agricul- ture required something other than forcing the pace of mecha- nization. Finally, the choice of a large-scale investment program made the French people wait longer for reconstruction and hous- ing, although it probably had little effect on lowering the output of consumption goods even in the short run. ...Itlaunchedvastinvestmentprogramsinbasicindustries, 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), Britainadoptsfreetrade.

1845—1874: Liberalism and growth, 1845—1879 • — thefactthatBritainfollowedafreetradepolicyandBritaingrew 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 con- tinental nations followed Germany’s lead. In the UK, the Con- servative party called for the reintroduction of tariffs, but it was the 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 realiza- tion 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).

UK USA Sweden France Germany Italy 1873-1899 1.2 1.9 1.5 1.3 1.5 0.3 1.1 1899-1913 0.5 1.3 2.1 1.6 1.5 2.5 1.8 1873-1951 0.9 1.7 1.7 1.4 1.3 1.3 1.4 1873-1973 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 King- dom compared with six other industrial countries, 1873—1973 (annual per- centage 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 corpo- rations 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 govern- ment 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 pro- vide 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-to- day political interference to which ordinary Departments of State are normally subjected. p. 107:

The nineteenth-century belief in an unlimited extension of mar- kets was shattered by the experience of declining export mar- kets 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 ever- extending markets at the lowest cost, but how to cater for a stag- nant 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 of- ficial concern in inter-war Britain was unemployment and overca- pacity 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 (in- directly, by purchasing the output of other firms, or directly, by simply buying the other firms) — on the demand side, increased taxation, compulsory saving, ra- tioning

1942 Beveridge Report: mapped out the future – 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 willing- ness 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 prece- dents could be even traced back to the First World War.

Accompanied by widespread nationalization, although the extent of na- tionalization in Britain was by no means greater than that in other industri- alized countries (Table 8) Why public enterprise? Traditional public utilities: network natural monopolies, unsuited for pri- vate 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 Output Employment France (1982) 16.5 14.6 Austria (1978—9) 14.5 13.0 Italy (1982) 14.0 15.0 Sweden (1982) — 10.5 UK (1978) 11.1 8.2 Australia (1970—74) 10.7 — West Germany (1982) 10.7 7.8 Portugal (1976) 9.7 — (1979) 4.1 — Netherlands (1971—3) 3.6 8.0 (1970—4) — 4.4 USA (1983) 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 higherwagesinreturnforfullemploy- • ment

Government commitment to maintain full employment • Business practices restricting competition (often through trade associ- • ations), 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 higher- • quality goods at lower prices)

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