EC120 2015 Week 22, topic 17, slide 0 EC120: The World Economy in Historical Perspective Topics Week 22: Europe’s Golden Age of Economic Growth (1950-1973)

EC120 2015 Week 22, topic 17, slide 1

EC120: The World Economy in Historical Perspective

Topics Week 22: Europe’s Golden Age of Economic Growth (1950-1973) and Its Disintegration.

• 1. Foundations of the Golden Age: More Than Trade.

• 2. Waning of the Golden Age: Was Its End Inevitable?

• 3. Early Attempts to Restore intra-European Exchange Rate Stability in the Wake of the Collapse of Bretton Woods: The “Snake” (1973- 79) and the European Monetary System, Phase 1 (1979-87).

Paris, c. 1965 Frankfurt a. Main, c. 1965



1a. Foundations of the Golden Age (see Maddison (2001) for evidence): Unusual Technological Opportunity

• Technological advances (particularly in factory electrification) made in the period 1914-1939, while widely known, had not been extensively deployed before 1939, especially (but not exclusively) in Europe and Japan.

• Remarkably, some R&D expenditure, in some places, increased even in the depressed 1930s.

Alexandra Palace Marconi television set


1a. Foundations of the Golden Age: Unusual Technological Opportunity [Con’t.]

• The pressures of war brought forth more technological gains potentially useful in peacetime, not least advances in communications, electronics (radar and computers), and the use of specialized equipment and machine tools for mass production.

• Large-scale reconstruction offered an unusually good opportunity to deploy widely modern plant and equipment

embodying new technologies. • Together these factors created an unusual backlog of technological

opportunity (especially in Europe and Japan) capable of fuelling atypically rapid growth, during which ‘learning-by-doing’ created further opportunities for productivity advance.

EC120 2015 week 22, topic 17, slide 3

Turing’s “bombe”Bletchley Park,Englandc. 1944

Me 262, first operational jet fighter, c.1944



1b. Foundations of the Golden Age: Recovery in Europe from the Traumatic Disequilibrium of 1945

• Much war damage to infrastructure, plant, and equipment could be repaired quickly, producing rapid gains in output.

• Reconstruction (as mentioned above) also created a favorable environment for technological advance as new

facilities were built. • Much labour was concentrated in the agricultural sector due to

pre-war protectionism, war-time autarchy, and refugee displacement. This labour could be drawn on to man factories without putting great upward pressure on wages.

• Emigration from Eastern Europe, the British Commonwealth, North Africa, and Turkey provided another source of cheap, often skilled, labour for western European economies.

Mercedes 190SL assembly line, c. 1955

Turkish GastarbeitersRuhrgebiet, c. 1955



1c. Foundations of the Golden Age: The “Post-War Settlement” and Systematic Policy Bias towards High Demand

Pressure • The “post-war settlement” secured high levels of capital formation. • Reaction to perceived policy errors of the inter-war years (especially high unemployment), reinforced by the ‘output miracle’ of the war.• Widespread extension of welfare benefits, especially in housing,

public utilities (including transportation), health, and education.• Political pressure to raise real incomes, contributing to high levels

of investment encouraged by public policy (notably tax incentives and subsidies, but also centralized wage and investment bargaining).

• Together, these factors combined led to persistently high levels of demand.

Golden Lane Council Estate, London, built c. 1955



1d. A Flexible, Effective International Monetary Regime• Systematic encouragement of international, especially intra-European, trade (ERP and EPU, followed by the ECSC and EEC), facilitated more efficient resource allocation through more effective competition and gains from specialization. • International trade, by widening markets, also facilitated the profitable deployment of scale-dependent mass-production techniques.

- A notable example: Japanese innovation in transistor radios in the early 1960s and the development of a strong semiconductor industry on the basis of the export of consumer electronics.

The Treaty of Rome 25 March 1957, creating the European Economic Community



2a. Waning of the Golden Age: Exhaustion of the Technological Backlog

• It was much easier to emulate and extend existing technologies than to invent new ones. Hence slowing growth was almost inevitable.

• By the 1960s there was a widespread slowdown of productivity growth, with attendant pressure on profitability (see

Marglin & Schor (1990), Figs. 2.1, 2.2, and 2.4).• Real input costs began rising in the 1960s.• Tighter labour markets, made worse in Europe by the fading of

surplus labour in the agricultural sector, combined with reduced immigration, served to increase real wages, putting

pressure on profitability and weakening incentives to invest. See Eichengreen (2007), Fig. 7.3.

• Intensified competition, especially in international trade.• Policy implications: could technological progress have been

accelerated? Could growth have been sustained by other (possibly inflationary) means?



2b. Waning of the Golden Age: The Elimination of Extreme Disequilibrium

• Much war damage was indeed quickly repaired, especially infrastructure and industrial facilities, resulting in a

one-off spurt in output. • As workers moved to (often back to) renovated urban areas,

the surplus labour remaining in the agricultural sector grew old and faded away.– Moreover, as recovery proceeded, demand grew particularly

rapidly for skilled labour, whereas much rural and immigrant labour was unskilled.

– Upward pressure on wages and reduced profitability, making capital formation both less attractive and harder to finance.

West Berlin, c. 1965, some 20 years after the end of the Second World War



2c. Waning of the Golden Age: Disillusionment with Systematic High-Demand Pressure

• By the 1960s, as productivity gains waned, high levels of demand came to produce more inflation and less real growth.

• Accelerating inflation. See Barsky & Kilian (2003), Figs. 6 & 9.• Distributional conflicts increased, especially in Europe, over the

incidence of taxation and the direction of government spending as growth slowed.

• Widespread social discontent manifested in strikes and political confrontation.

• Policy implications: have the costs of inflation been exaggerated?

R

Boulevard St. Michel Paris, May 1968Laying the groundwork for devaluation (August, 1969)

EC 120: The World Economy in Historical Perspective

2d. Waning of the Golden Age: Decline and Collapse of the Bretton Woods System

• Increased inflation as the global money supply increased, especially in the 1960s.

– Review in Extras for Week 22 Bordo (1993), Figs. 1.10 (Monetary gold and dollar holdings) and 1.15 (International reserves).

• The increasing threat of exchange rate volatility made trade riskier.

Deutsche Bundesbank Hauptverwaltung, Frankfurt




3a. The European Response to the End of the “Golden Age”: The First Step on the Long Road to the Euro – the “Snake”

• The end of Bretton Woods marked the end of the attempt to recreate a global system of fixed exchange rates, but not the end of attempts to peg exchange rates among close trading partners in Europe.

• The “Snake” a first, ultimately unsuccessful, attempt to create monetary stability in Europe in the context of the abandonment of fixed exchange rates globally. (See Eichengreen (2008), Table 5.1)

Pierre Werner, Prime Minister of Luxembourg, whose report on European monetary union was delivered in October, 1970


3b. Europe’s Second Attempt to Cope with Exchange Rate Instability: the European Monetary System

(EMS). • The experience with the “Snake” suggested that more systematic co-

operation was needed. • Thus the European Monetary System (EMS) was created to provide

more extensive mutual support among European Community central banks and joint management of exchange rate realignments. Before the removal of intra-European exchange controls in 1987, which fundamentally altered the dynamics of exchange rate adjustments in the System, the EMS went through two phases: (1) 1979-1983; and (2) 1984-1987.

Valéry Giscard d’Estaing (left)

with Helmut Schmidt, c. 1979


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EC120 2015 Week 22, topic 17, slide 0 EC120: The World Economy in Historical Perspective Topics Week 22: Europe’s Golden Age of Economic Growth (1950-1973)