Governing Europe in a Globalizing World

Neoliberalism and its Alternatives following the 1973 Oil Crisis

Laurent Warlouzet

• Editorial: Routledge
• Año: 2017
• ISBN:
  9781351747400
• Edición: 1
• Categoría: Politics & International Relations
• Categoría: Politics

The complex relationship between globalization and European integration was largely shaped in the 1970s. During this decade, globalization began, for the first time, to threaten Western European prosperity.

Using an innovative approach, the book shows how western Europeans coped with the challenges of globalization during a time of deep economic crisis during the period 1973-1986. It examines the evolution of economic and social policies at the national, European and global level and expands beyond the European Economic Community (EEC) by analysing the various solutions envisaged by European decision-makers towards regulating globalization, including the creation of the Single Market. Based on extensively examined archives of transnational actors, international organizations and focusing on the governments of France, Germany and the UK, as well as the European Commission, the book uncovers deep, previously unknown, economic divisions among these actors and the roles they played in the success of the EEC.

This book will be of key interest to students, scholars and practitioners of political science, European studies, history, comparative politics, public policy and economic history.

1 Three responses to the Shock of the Global

This chapter will set the scene by defining first to what extent the 1973–86 period was characterized by a “Shock of the Global” (Ferguson et al., 2010) defined both as a major economic crisis, and as a new form of globalization. The expression “globalization” dates from this period and indeed the phenomenon took a new turn between 1973 and 1986 both in terms of international economic relations, as well as in terms of international economic organizations.

Following that, three different models for the regulation of globalization cited in the general introduction will be examined in successive order by placing them in a long-term perspective, mixing the history of public policies and the history of ideas. As will progressively be shown, this threefold classification has relevance beyond the 1973–86 period in Western Europe. The roots of some policies can be traced back to the nineteenth century, or even to the Early Modern period.

The Shock of the Global

The “Shock of the Global” was clearly visible in the macroeconomic figures. It translated into a renewed debate on the institutional regulation of globalization, on which the EEC took center stage.

The crisis in figures

The crisis of 1973 was caused by several factors. The most immediate factor was the decision by Arab oil producers to increase the price of oil after the Yom Kippur War in October 1973. Another oil shock ensued in late 1979. Oil prices increased tenfold between 1973 and 1980. Other causes of the crisis included rising inflation and the crisis of the monetary system since 1971, the end of European reconstruction and of the catching-up with the US, the rising competition from non-Western producers and the transition to postfordism – which destabilized traditional manufacturing.

Irrespective of the causes of the crisis, its consequences were plain in the macroeconomic figures. Growth rates plummeted all over the developing world in 1973 and in 1979, including in Japan (Figure 1.1). The evolution between 1960 and 1990 for Britain, France and West Germany clearly indicates two major shocks in 1974–75 and 1980–81 for all three countries. Likewise, the recovery of the growth rate was visible in 1983–84.

Figure 1.1 GDP growth rate per year, 1971–88 (6 countries).¹

Figure 1.2 GPD growth rate per year, 1960–89 (France, United Kingdom, and West Germany).²

The evolution of the unemployment rate was even more striking (Figure 1.3). It rose almost constantly in the three largest Western European countries following 1973. When inspected in detail, the evolution was slightly different between France, where unemployment rose regularly after 1973, Germany and the United Kingdom, where a small relapse in the late 1970s was followed by a sharp increase after the second oil shock.

A peculiarity of the 1970s compared to the 1929 crisis was the so-called “inflation fever” (Figure 1.4). While the crisis of 1929 triggered deflation, prices skyrocketed following the oil shocks.

Between 1973 and 1983, double-digit inflation became commonplace in most Western economies, except for West Germany, which maintained relatively low inflation. By contrast, inflation was massive in the United Kingdom, peaking at 27 percent (annualized rate) in August 1975 (Cairncross, 1995, 187). At this rate, prices would have doubled every three years. After a respite, another peak occurred in Spring 1980 at around 20 percent.

High inflation triggers several problems. First, when a country experiences stronger inflation than its neighbors, its competitiveness decreases, thereby fueling a trade balance deficit. This phenomenon can be offset by devaluation – however currency devaluation fuels inflation and increases the cost of imports and of external borrowing. Second, a high inflation creates uncertainties for consumers and companies alike, leading to the postponement of investment decisions. Third, the combination of high inflation and rising unemployment renders stimulus plans more difficult to implement since they tend to fuel the former without diminishing the latter (see Chapter 7). Fourth, inflation can have adverse social consequences if wages, pensions and welfare benefits are not indexed. Conversely, if they are indexed, profits and international competitiveness are affected, while public expenditures swell. Another detrimental social effect of inflation is the erosion of savings. Finally, in terms of international cooperation, strong differences in terms of inflation rates between neighboring countries, such as the EEC members, hamper trade and monetary cooperation. This difficulty is also visible in the subsequently diverging trade balances.

Figure 1.3 Unemployment rate, 1967–86.³

Figure 1.4 Inflation, 1960–90 (consumer price MEI OECD dataset, percentage change on the same period of the previous year).⁴

Figure 1.5 Trade balance, 1971–86, $ billion.⁵

The table on trade balance clearly shows the German exception. Germany’s path more resembled the Japanese one than it did the French or British ones. The first two countries managed to maintain a trade surplus during most of the period despite being large net importers of oil. By contrast, the last two countries’ trade balances were generally in deficit.

Beyond trade, the current account balance measures the net flow of capital with the rest of the world since it includes the balances of trade, services, income and current transfers. One of the most striking events was the German difficulties of 1979–80 (see Chapter 7). The considerable British surplus of the 1980s is explained by exports of North Sea oil. In France, the alternation of stimulus and cooling down plans is clearly visible.

The shock of 1973 was visible in a general deterioration of public finances. Under the center-right president, Valéry Giscard d’Estaing (1974–81), France’s public finances were in better shape than was the case in the UK or even Germany. The stimulus plan implemented by Mitterrand in 1981–82 allowed Germany to overtake France for a few years. The massive Italian public deficit (more than 10 percent of GNP from 1978 onwards) exemplifies how different its macroeconomic situation was compared to the three other big Western European countries.

Figure 1.6 Current account balance (in percentage of GDP), 1970–83.⁶

Figure 1.7 Budget balance of the central administration (in percentage of GNP), 1977–86.⁷

Finally, the fact that this crisis particularly hit Western capitalist countries is visible in the divergence in the share of world exports between 1973 and 1983 (see Figure 1.8). While the share of the US, France, West Germany and the UK fell, that of Japan and the South-Asian exporters rose. This global decline contrasted with the previous decade during which both Germany and France increased their share of world exports – and with the following decade when Germany, France but also the US improved their share of world exports. Only the UK maintained a pace of moderate decline.

In conclusion, 1973 clearly marked the end of the Golden Age, with a massive rise in unemployment for all three countries considered. Whereas the details of the situation varied from country to country (see Chapter 7), a general sense of crisis developed of a West confronted with a nascent challenge from globalization.

Globalization and its regulation

The word “globalization” was popularized in 1983 when it designated an integration of markets at the world scale driven by technology (the lowering of transportation and communication costs) and by the emergence of new industrial producers (Sargent, 2010, 53). The current application of the term goes beyond this narrow definition to include not only industrial goods but also, to some extent, agricultural products, services, people, ideas and cultural norms. Rather than a center-periphery dynamic, this phenomenon is characterized by multiple interactions which engender hybridization and cross-fertilization. Crucially, the notion of globalization put an emphasis on interconnectedness and on interdependence. This translates into opportunities but also constraints: globalization is imposing its rules on a large majority of people who cannot escape it. A first wave of contemporary globalization following this definition occurred between 1870 and 1914 (Berger, 2013; O’Rourke and Williamson, 2002). This contrasts with pre-nineteenth century transnational flows of goods, ideas, and people which concerned only a minority of actors, while ignoring vast swaths of the world population.

Figure 1.8 Share of world merchandise exports in percent.⁸

Note
The “Six East Asian Traders” according to the WTO statistics are Hong-Kong, Taiwan, Singapore, South Korea, Thailand, and Malaysia.

Post-1945, a new era of globalization progressively unfolded under a dominant American influence (Iriye, 2014). Its development accelerated sharply in the 1970s, a decade considered to be the eve of the “global epoch” (Mazlish, 1998, 391), and as a “critical juncture” leading to new regimes of territorialization (Middell and Naumann, 153–4). The mood of the decade was captured by the collective volume entitled “The shock of the global” (Ferguson et al., 2010).

It was mainly for the West that the 1970s were a shock. The decline of the US (with its retreat from Vietnam and the Watergate scandal), the rising price of raw materials and the newfound assertiveness of some countries from the South, all fed into a pessimistic mood in the early 1970s. In 1971, the US president, Nixon commented on the first US trade deficit for years: “I think of what happened to Greece and to Rome … what is left – only the pillars.”⁹ The famous Trilateral report of 1975 was entitled “The Crisis of Democracy.” It opened with a dramatic question: “Is political democracy, as it exists today, a viable form of government for the industrialized countries of Europe, North America and Asia?” (Crozier et al., 1975, 2). The mood was often somber during global meetings. During the London G7 meeting of 1977, the Japanese prime minister, Takeo Fukuda sought to sway countries to renounce protectionism by recalling his personal memories of the 1930s, which he was the only leader to have personally witnessed (Suzuki, 2014, 161).

The mood changed in the 1980s. The economic revival of 1983–84, combined with the gradual opening of the Soviet Union following the election of Mikhaïl Gorbachev in 1985, as well as the debt crisis of many Eastern and Southern countries (starting with Poland and Mexico) allowed for a comeback of the West.

The regulation of globalization

Western Europe tried to cope with globalization by regulating it through international cooperation. Five degrees of cooperation can be distinguished. The first was the use of international law and international summits by the most important states, such as the “Concert of Europe” set up in 1815. In addition, international arbitration procedures were set up following two conferences held in The Hague in 1899 and in 1907. This system was perpetuated in the twentieth century through conferences (Locarno in 1925) and collective agreements (Potsdam 1945 on Germany) (Soutou, 2000). Then, in a second step, international organizations were created to manage technical issues, such as standards or the sharing of costs and revenues in specific sectors affected by the globalization process (such as international transport and communication) (Kaiser and Schot, 2014). The League of Nations, created in 1919, represented a third type of regulation since it was the first global organization with a universal remit. The refusal of the US to take part in it, combined with the rise of nationalism in the 1930s, doomed the League to failure. It was replaced by the United Nations (UN) in 1945. Those general organizations (League of Nations and then UN) were then matched by sectoral organizations: the International Labour Organization (ILO, 1919), the Bank of International Settlements (BIS, 1931), the International Monetary fund (IMF, 1944), and then countless other sectoral organizations regrouped under the UN umbrella (such as the World Health Organization in 1948, etc.). The UN Conference for Trade and Development (UNCTAD) was created in 1964 to serve as a forum for developing countries. Outside the UN umbrella, the International Energy Agency was set up to deal with energy issues in 1974.

A fourth type of international organization emerged in 1948: European ones. The first was the Organiza...