The Origins and Evolution of the Single Market in Europe

Bill Lucarelli

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9781138336377
• eBook ISBN:
  9780429810893
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1999, this work of economic history explores the evolution of the single market and of economic and political integration in Europe since World War II. Beginning with European integration and the genesis of the Customs Union, Bill Lucarelli then proceeds through the Trans-Atlantic Rivalry, the European Monetary Union (EMU) the European Monetary System (EMS) and on to Maastricht. The study intends to be a critique of the prevailing theories of negative integration, weighting economic integration against political integration, with a particular focus on the concept of 'spill-over'. Lucarelli argues against prevailing functionalist and neo-liberal interpretations of the process of economic integration. The conclusion is critical of the strategy toward European Monetary Union. The book is informed by Marxian and Post-Keynesian Economic theories.

PART I

EARLY ORIGINS AND EVOLUTION

1 The Restoration of European Capitalism

Introduction

The origins of the single market in Europe can be traced back to the early post-war years during the implementation of the American sponsored European Recovery Programme (ERP). From a purely geo-political standpoint, European economic integration was a creature of the Cold War. For European leaders at the time, economic co-operation was perceived as a necessary political means to prevent the possible “Balkanisation” of Western Europe in the wake of superpower rivalries. Despite the proliferation of influential federalist groups which had emerged from the Resistance movements throughout Europe, the real impetus for European economic and political union emanated from the United States. Quite simply, the imperatives of the ERP had demanded closer co-operation between European governments to resolve the issues of economic reconstruction. Similarly, the outbreak of the Cold War in 1947 which culminated in the division of Europe into western and eastern spheres of influence, made the task of reconstruction more urgent. It was in this historical context that the restoration of the West German economy and its political rehabilitation emerged as the central problem confronting the American architects of the recovery programme (Lipgens, 1982).

It became quite evident, as far as the Americans were concerned, that the pre-war system of competing autarchic blocs and economic nationalism could no longer be justified as the basis for the post-war economic order. For the US authorities, multilateralism and trade liberalisation were viewed as the guiding principles for the post-war international economic order. European economic integration would furnish the institutional framework to promote these objectives as well as providing markets and investment outlets for American firms. At the same time, the expansion of European markets would provide an outlet for the US economic surplus which had been accumulated during the war (Kolko, 1972).

From the very outset, therefore, European economic reconstruction was conceived by American economic planners as an essential precondition for the preservation of US prosperity and growth. The very real possibility of an economic depression in Europe would inevitably engulf the United States itself. Consequently, the restoration of European capitalism had become synonymous with the future growth of the European market. However, this did not imply the reconstitution of the pre-war regimes of economic autarchy, trade blocs, financial controls and other more benign forms of State intervention and regulation. The US authorities committed themselves to the reformation of European capitalism in conformity to their vision of free trade and market liberalisation (Ambrose, 1971). By reforming European capitalism, it was envisaged that American business could benefit by creating an outlet for their investment, a market for their exports and the acquisition of raw materials from the former European colonies (Emmanuel, 1972).

I. The Legacy of the Inter-War Crisis

The tragic experience of the inter-war crisis which had been characterised by the collapse of world trade, financial turmoil and a sudden curtailment of productive output and investment, had left an indelible imprint on the consciousness of the post-war political elite. According to J.M. Keynes, the causes to this economic malaise could be attributed, to a large degree, on the adverse repercussions of the peace settlement enshrined by the Treaty of Versailles (Keynes, 1920). Under the terms of this agreement, German financial reparations were estimated at about $33 billion. No attempt was made to either scale down these payments or link them to the economic capacity of the vanquished to service them. At the same time, the victors found themselves indebted to the United States which had provided them with loans during the war. As a result, a triangular debt pyramid emerged in which France and Britain imposed reparations on Germany in order to settle their debts with the US. The Americans could have directly settled their loan repayments with Germany but this was considered too much of a risk since there was a greater likelihood of Germany defaulting on its obligations than the Allies.

The legacy of the Versailles settlement was quite disastrous. Efforts to promote economic reconstruction were severely constrained by the shortage of foreign exchange and credit. The only alternative was an expansion of exports. Yet as each country sought to curtail imports and increase exports, a vicious circle developed in which the demand for foreign exchange earnings through exports induced a series of competitive devaluations. Successive devaluations might have promoted exports for one country but the “fallacy of composition” implied that each other European country curtailed their propensity to import. Competitive devaluations soon degenerated into trade wars which threatened the international system of trade and monetary relations. With the disintegration of the international monetary system, financial speculation caused widespread damage to productive output and employment.

After the First World War, successive US governments chose to disengage themselves from the economic crisis in Europe and retreated into a policy of isolation. As the largest creditor nation and possessing a considerable trade surplus, the US could have extended loans for reconstruction and allowed greater access for European exports. The maladjustment of international balances of payments during the inter-war years merely accentuated the drift toward economic autarchy. The policy of isolation, however, proved to be ultimately self-defeating. This became glaringly evident with the collapse of the structure of debt that had been amassed during the 1920s. As J.M. Keynes had perceptively observed, the crux of the matter could be identified with the inability of Germany to earn export income in order to pay their reparations (Keynes, 1920). Denied access to their traditional export markets, Germany became highly dependent on US loans (ie, the Dawes and Young Plans) to temporarily resolve their chronic budgetary and balance of payments problems. Between 1924 and 1930 German governments had borrowed about 28 billion marks of which 10.3 billion were allocated to the payment of reparations (Aldcroft, 1978, p.62). Quite clearly this situation could not be sustained. It was the stock market crash of 1929 that exposed the basic weakness of Germany’s financial position as US loans were terminated (Galbraith, 1981). Although the most indebted country, Germany’s plight was not unique. Most of continental Europe, most notably the eastern European countries, were faced with balance of payments crises and financial indebtedness. A “depressive spiral” was set in motion as each country was impelled to adopt quite severe deflationist policies accompanied by an assault on the level of real wages which only worsened unemployment and the under-utilisation of productive capacity. In the course of this severe economic slump, bankruptcies and loan defaults multiplied.

As the demand for primary exports was curtailed after the phase of post-war reconstruction, an overproduction crisis developed in these sectors. The collapse in agricultural and raw material prices caused a general contraction in the volume of world trade which only further increased the severity of the financial crisis as the deterioration in the terms of trade of these primary producing countries hastened a series of loan defaults. After the stock market crash of 1929, a scramble for liquidity ensued in which US investors recalled their funds from abroad. This action merely triggered a vicious cycle of protectionist “beggar-thy-neighbour” policies as the indebted countries of Europe and the primary producing countries sought to protect their own domestic markets. A cumulative process of severe deflation, accompanied by a sudden collapse in income and output, characterised this depressive spiral as each country imposed import restrictions and capital controls. The outbreak of this “tariff mania” after the Hawley-Smoot Tariff enacted by the US authorities in 1930, culminated in the emergence of protectionist trading blocs and the ascendancy of national autarchic policies. In the words of H.W. Arndt:

The combined effect of the fall in world prices, the contraction of international trade, the recall of short-term funds and the failure of continued American long-term investment brought about financial and economic crises in almost every country and in most of them set going cumulative processes of decline similar to that which was going on in the USA. The worst hit were the overseas primary producing countries which were brought to the verge of bankruptcy by the fall in agricultural and commodity prices, and the European debtor states, whose economic prosperity had been built up on continued foreign borrowing. Pressure on its gold and foreign exchange reserves forced one country after another to protect its currency by exchange rate depreciation or exchange control. At the same time, the efforts of every country to maintain its exports and protect its balance of payments by imposing increasing tariffs and import restrictions still further diminished the flow of international trade and increased the difficulties of every other country. The American slump and depression cannot be said to have caused the world depression, but they upset the unstable economic equilibrium of the world and gave the impetus to a similar economic decline in other countries (Arndt, 1963, p. 19).

The existence of the gold standard regime made it more difficult for deficit countries to adjust to these external shocks. Under this regime it was not possible, in theory at least, for countries to adjust their respective exchange rates in the event of a capital flight or an adverse terms of trade. Since the relative value of all currencies was kept stable in terms of the gold standard, any imbalances in their international payments could not be corrected by an adjustment in the exchange rate but had to be corrected by an adjustment of national price or income levels. In other words, the fixed exchange rate pegged to the gold standard, tended to impart a powerful deflationary tendency in the deficit countries. The whole edifice of the gold standard had been constructed on the foundations of a competitive market economy. In this regime, the price mechanism constituted the sole means of exchange rate adjustment. Before the First World War, the gold standard had functioned quite smoothly as the free convertibility of national currencies fostered a multilateral settlement of international payments. If a country incurred a trade deficit, it would automatically experience a deflationary adjustment and an outflow of gold reserves. Conversely, a trade surplus would attract an inflow of gold reserves and a rise in nominal incomes and prices (Tew, 1960).

After the First World War, however, this international trade and payments equilibrium had disappeared. The United States emerged as the principal creditor nation to replace Britain as the major international investor. Between 1919 and 1929, US long-term investment abroad increased by almost $9 billion, accounting for about two thirds of the international increase in investment and about one third of the total (Aldcroft, 1978, p.74). Despite the emergence of the United States as the principal creditor nation after the First World War, its status as a reserve currency nation and “central banker” for the international payments system did not evolve until after the Second World War with the signing of the Bretton Woods Agreements which established a fixed, though flexible exchange rate system based on gold/dollar convertibility. During the inter-war years, however, the decline of Britain and the gold standard had only accentuated the chronic instability in international monetary relations. The UK itself had become a net debtor country and could no longer act as the “central banker” for the international capitalist economy.

The inevitable breakdown of the gold standard in 1931-33 was caused by the acute disequilibrium in the international balances of payment which were themselves an expression of the underlying problem of indebtedness and the concomitant collapse in the volume of world trade highlighted in Table 1.1.

Table 1.1 The Volume of World Trade (billions in gold dollars), 1929-33

In the immediate aftermath of the stock market crash, an avalanche of highly mobile, short-term speculative capital contributed to the instability and volatility of exchange rates. National governments responded by imposing capital and exchange rate controls. Economic autarchy gave rise to the formation of currency blocs and detailed State intervention in trade and international payments. Planned and managed trade relations eventually superseded the former laissez-faire, gold standard regime. In central Europe, trade had acquired barter-like forms with the emergence of exclusive bilateral commodity agreements. The general drift towards economic autarchy only hastened the ascendancy of economic nationalism and its more extreme manifestation in the guise of fascism.

The collapse of the gold standard was the central event of the process. International trade was deprived of a universally accepted means of payment and took barter-like forms, subject to detailed state mediation. Economic competition between individuals and firms of different nationalities became a phenomenon wholly internal to political rivalry among their respective states - a rivalry which progressively rose until it overflowed into the Second World War (Arrighi, 1978, p.75).

II. Post-War Reconstruction

Even before the end of the Second World War, American economic planners had envisaged the dismantling of the British system of preferential trade and the convertibility of the sterling area. The US Treasury had stipulated under Section VII of the Lend-Lease Agreement that aid would be conditional on the British forgoing their commercial advantages which excluded American business in the sterling area (Maier, 1987, p. 135). During the war itself, the US had increased its exports from about $3b to $15b, most of which was destined to the Commonwealth markets (de Cecco, 1979, p.54). Before the war, the sterling area had accounted for over one third of the volume of world trade; its international cartels had controlled more than half of the share of the international commodity markets. The depletion of US domestic reserves of strategic raw materials, especially those of crude oil, had compelled them to seek access to new sources. In this sense, access to Middle East oil which had previously been dominated by British-Dutch cartels, became one of their overriding aims. To be sure, the whole basis of European reconstruction would be highly dependent on the importation of relatively inexpensive oil as these economies shifted away from coal-based industries. Between 1946 and 1953, the big five American oil corporations increased their share of Middle East oil output from 31 per cent to 60 per cent compared to a fall in the relative share of the British-Dutch cartels from 66 per cent to 31 per cent over the same period (Kolko, 1972, p.63).

After the war, the UK was technically bankrupt. The war itself had exhausted its foreign exchange reserves, while Britain’s exports were estimated at only 31 per cent of their pre-war level (Lipgens, 1982, p. 158). This burgeoning trade deficit was accompanied by the liquidation of their overseas assets and investments which had represented something of the order of a quarter of their pre-war wealth. According to Barratt-Brown: “Colonial holdings of sterling rose in the ten years after 1945 from 12 per cent to 32 per cent of the total holdings. To put it another way, British debts to the colonies rose from 450 million pounds in 1945 to nearly 1,300 million pounds in 1957” (Barratt-Brown, 1970, p.302). From its status as the world’s foremost creditor nation at the turn of the century, Britain had become the world’s largest debtor country in 1945. In order to cover their balance of payments deficit, estimated at about 2,100 million pounds, the British Treasury had no real alternative but to seek a major loan from the Americans.

Given the weak and vulnerable position of the British negotiators, they were compelled to succumb to American demands for trade and investment access in former British markets and the full convertibility of the pound/sterling area. In return, the US authorities would agree to finance a loan of $3.75b. With the signing of the Anglo-American Financial Agreement in December 1945, the US granted credits of $4.4b to the British government to be repaid over a fifty year period at 2 per cent per annum from 1951. Although the terms of the agreement were quite generous, the US had effectively dismantled the preferential sterling trade bloc. In this crucial sense, the agreement was to shed considerable insights into the modus operandi of US policy in the reconstruction of the European economies. Financial aid would become conditional on the willingness of European governments to agree to American demands for trade and market liberalisation. Within the Roosevelt administration, the State Department had seized the political initiative in advocating a system of free trade and multilateralism as the basis for the post-war economic order (Ikenberry, 1992). This ideological ascendancy over the economic planners and the architects of the New Deal Programme, had gained powerful allies in Wall Street financial circles who saw themselves as the natural heirs to the City of London. The whole tenor of this neo-liberal strategy asserted itself in the economic doctrines which informed the institutions and economic agreements of Pax Americana; from the IMF Charter, the GATT Agreements and most notably in the European Recovery Programme (ERP).

The American authorities were determined to avoid what they perceived to have been the bitter lessons of the inter-war crisis. They recognised quite perceptively that German economic recovery would constitute the essential precondition for...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Tables
• List of Figures
• Acknowledgments
• List of A bbreviations
• Introduction
• Part I: Early Origins and Evolution
• Part II: European Monetary Union
• Part III: The Internal Market Programme
• Conclusion
• Bibliography