ECO The European and World Economy in the Twen:eth Century

Transcription

1 ECO 4220 The European and World Economy in the Twen:eth Century

2 The Fall and Rise of the European Economy The economic history of Europe in this century reflects the changing posi:on of Europe in the global economic system Before 1914 è Europe was the dynamo behind the economic development of the world Supplied capital, goods, and services, as well as people to the other con:nents

3 The Fall and Rise of the European Results: Economy Some Europeans clipped coupons on bonds or equity cer:ficates that brought them financial rewards from South American railways More found that they could consume tropical fruits as occasional luxuries, sold in palaces of consump:on known as department stores The early years of the century brought security and op:mism about the future

4 The Fall and Rise of the European Economy The passage of :me meant human progress the increase of material rewards This Europe of the belle époque doubtless appeared even more charming than the reality had been That comfortable era vanished for ever with the guns of August 1914

5 The Effects of War The subsequent economic history of Europe was shaped by the shocks of the World Wars The First destroyed the old Europe The Second made clear to Europeans how they would have to change and adapt The response to the First World War, the desire for what was called a return to normalcy, proved a recipe for disaster è It was as if the further catastrophe of the Great Depression had already been programmed on the fields of the Great War

6 Europe and the Global Economy A new pasern of financial and trading rela:onships Industrial produc:on outside Europe had increased drama:cally: the tex:le mills of Japan and India brought the beginning of a new compe::on Agricultural output in the South American plains also rose to meet the food deficits of war:me Europe The First World War made it apparent that the United States was now the fastest growing and most powerful center of economic growth è The loca:on of the world s economic dynamo had shiwed across the Atlan:c ocean

7 Europe and the Global Economy The role of the United States became very apparent at the poli:cal level of discussions about interna:onal economic rela:ons è The United States new status as a major inter- governmental creditor The United States had lent the money ($10.3 billion in all) which allowed France and Britain to con:nue figh:ng in the war The Bri:sh and French posi:ons were further weakened as they had also lent money to the Russian government But the revolu:on of 1917 meant that these debts had lisle chance of being repaid

8 Domes:c Financial Problems A large part of the war had inevitably been paid through domes:c borrowing The service of that debt produced unbalanced budgets Choice about paying the war debt through deficits that were mone:zed by central banks The consequent infla:ons would erode the value of claims against the government and undermine the household finances of the coupon clippers In the early 1920s, the west European governments chose to stabilize their budgets and reward the ren:ers The cost was a severe defla:on, and high levels of unemployment in Britain and France

9 Domes:c Financial Problems The choice of central European governments not to stabilize quickly had its own consequences Austria, Hungary, Poland, and Germany experienced first infla:on and then hyper- infla:on The absence of price stability made business planning and long- term investment strategies impossible The hope of all par:cipants in the stabiliza:on arrangements (external assistance) The return of economic order to bring a return of confidence An inflow of foreign money for reconstruc:on

10 Short- lived Prosperity These hopes were soon realized In the later half of the 1920s, American investment flooded into Europe Some of it helped European business to reorganize itself on more modern lines The great American automobile producers acquired European firms Ford built a plant in Cologne General Motors acquired the Adam Opel factory

11 Short- lived Prosperity Much of the American investment was misdirected Europe was not ready for such an inflow The low- price automobile producers found that the European market had not been sufficiently developed A great deal of American investment took the form of bond purchases: of government or municipal authori:es The proceeds for the provision of municipal infrastructures, housing, roads, recrea:on facili:es, etc., Had a high social benefit but brought no immediate return

12 The Great Depression The flow of American capital dried up at the end of the 1920s due to Doubts about European developments Returns on US investment were higher AWer the crash of the New York stock market in October 1929, some flows resumed, but Europe obtained lisle capital from the United States By the end of the 1920s, European prospects had already deteriorated due to The worsening trade situa:on The problems caused by financial stabiliza:on

13 The Great Depression The return to the gold standard but Why? The best way of guaranteeing ren:ers against expropria:on Laying the basis for a revival of interna:onal trade By the early 1930s, all European currencies, with the excep:on of Spain, had established a parity in gold What happened? The overvalued Bri:sh exchange rate required the pursuit of defla:onary monetary policies in order to prevent a run on sterling The system developed a defla:onary bias: Britain, as a deficit country (because of the overvalued rate), was forced to contract

14 The Great Depression The use of tariffs was a logical response to defla:on as part of a strategy of preven:ng the interna:onal transmission of defla:on The spread of protec:onism received an addi:onal impetus when in 1930 the United States adopted the Smoot- Hawley tariff Gains in produc:vity due to electrifica:on, which was a cri:cal factor in mass produc:on Although nominal and real wages had increased, they did not keep up with the produc:vity gains As a result the ability to produce exceeded market demand, a condi:on that was variously termed overproduc:on and underconsump:on Solu%on: Raising the tariff on imports would alleviate the overproduc:on problem; however, the US had actually been running a trade account surplus

15 The Great Depression Other countries responded by raising tariffs and by imposing quotas and other restric:ve measures The monetary problems of Europe had helped to produce a trading war From the point of view of each country, the response was quite ra:onal But the overall result was that everyone had to pay a high price in terms of reduced output, unused capacity, and falling investment and consump:on The effects of the depression were felt un:l the outbreak of the Second World War Produc:on recovered Unemployment remained at high levels

16 The Great Depression The interna:onal depression was made more intense by two addi:onal mechanisms First, agricultural prices on the world market had begun to fall from 1925 European produc:on recovered from the fer:lizer and manpower shortages of war:me The surplus on world markets forced prices down The only way to service external debt (for capital- impor:ng indebted countries) lay in the export of agricultural products As prices fell, the producers needed to sell more As they sold more, prices fell s:ll further

17 The Great Depression Second, the development of the real economy disturbed the financial sector, which in turn provided further shocks to output The drama:c fall in prices reduced the value of bank- held assets and made many European banks insolvent at current prices They responded by cuing back their credits to their customers When depositors realized the extent of the problem, panic developed, and withdrawals led to bank closures Bank collapses in Austria, then in Hungary and Germany, as well as in the United States, intensified the defla:onary process As banks tried to save themselves by calling in credits, they drove many vulnerable manufacturing enterprises to bankruptcy

18 Responses to the Depression An immediate reac:on was to blame the interna:onal economy for the problems of each country The Bri:sh economist, John Maynard Keynes, wrote a widely quoted ar:cle in 1933, whose :tle indicates the import of the message: Na4onal Self- Sufficiency Tariffs might stop the spread of defla:on Countries should undo the link with the interna:onal monetary standard, gold

19 Responses to the Depression Britain lew the gold standard in September 1931 The Bri:sh authori:es were free to determine their own monetary policy Low interest rates in the 1930s then helped to contribute to a recovery based on a rise in consumer spending and consumer credit It became easier to finance house purchases, and house construc:on, led to a boom in the sale of consumer durables: automobiles, refrigerators, radios

20 Responses to the Depression Countries which remained longest on the gold standard, Belgium (un:l 1935), France, The Netherlands, and Switzerland (un:l 1936) suffered from low confidence and financial panics The depression lasted longest in the so- called gold bloc Germany also went on a separate route to recovery She did not formally abandon the old parity of the mark against gold, but imposed such :ght exchange controls Lower interest rates were supplemented by large- scale public orders from the Na:onal Socialist government awer 1933 For construc:on projects è crea:on of a network of divided highways (autobahns) and party and government buildings For military spending

21 Responses to the Depression The Soviet answer was the most complete expression of the principle of autarky, or disengagement from the world economy Stalin referred to this as building socialism in one country He reacted to falling agricultural prices with the collec:viza:on of peasant agriculture The Soviet response lay in an industrializa:on drive, planned on the basis of Five Year Plans Low levels of investment in the 1920s could be paid for by depressing industrial incomes One of the effects of collec:viza:on was to mobilize large numbers of displaced peasants from the countryside as new industrial workers that were badly paid The price paid by Russia in the present was heavy, however, and the legacy for the future quite disastrous

22 Keynesianism The most important and influen:al policy prescrip:on that followed from the depression is associated with Keynes, and calls for a policy of demand management The cause of the depression lay in insufficient demand Solu%ons: addi:onal government expenditure, or redistribu:ve measures to raise the incomes of those more likely to consume In 1936, The General Theory of Employment, Interest and Money which became both an instant classic and an object of controversy

23 Keynesianism The German and the Soviet experiments were both viewed with mixed feelings by Keynes, who recognized in military expenditure a form of demand crea:on, but also disapproved of both the methods The country which came closest to realizing Keynes s prescrip:on in the 1930s was Sweden, where a poli:cal alliance between the par:es represen:ng labor and farmers carried out a demand- oriented and income- raising policy Agreements between union and employers organiza:ons in 1938 provided the founda:on for a new social harmonious development

24 The Collapse of Economic Interna:onalism World trade remained depressed, and few countries could manage an effec:ve recovery in the 1930s In :me, Keynes himself came to believe that the neglect of interna:onal aspects of the economy had had disastrous implica:ons The considera:ons that propelled Keynes into a new advocacy of interna:onalism, however, were primarily poli:cal The economic weakness of countries in south- eastern Europe propelled them into bilateral trading arrangements with Germany They sold goods at higher prices than they might have done on world markets BUT These economic advantages created a form of poli:cal dependence

25 The Collapse of Economic Interna:onalism Interna:onal economic co- opera:on appeared asrac:ve as a way of cemen:ng an alliance against Germany In 1936, the United States and Britain concluded a currency stabiliza:on agreement with France (the tripar:te pact) primarily for the purpose of assuring France of their poli:cal support Did not bring a return to the gold standard or to permanently fixed pari:es Bring an agreement not to engage in mutual economic warfare by using devalua:ons as a means to increase exports

26 The Second World War The Second World War shiwed the global economic balance even more decisively than the First Both physical destruc:on and loss of life in central and eastern Europe, in Russia, and in East Asia were far higher than in The apparent physical destruc:on went hand in hand with increases in produc:ve capacity (Germany) But the infrastructure was in ruins, transporta:on had broken down, the financial system was effec:vely destroyed by the combina:on of war:me infla:on and price controls

27 The Second World War Britain had been obliged to sell her overseas assets to pay for the combat, and was a net debtor at the end of the war The victor of the economic side of the war was the United States At the end of the 1940s, half of the world s manufactured goods were made in America The merchant navy had cons:tuted 17 per cent of world tonnage in 1939; at the end of the war it was 52 per cent As Life magazine announced, the Second World War had produced the American century

28 The Second World War AWer the Second World War, the United States played a much more direct role in the recas:ng of the world and the European economy than awer the First (as a creditor) Underlying American proposals was the belief that the collapse of the interna:onal economy in the 1930s had been a major cause of war Preserving peace in the future would require an open interna:onal system, in which currencies should be conver:ble and trade should be non- discriminatory The most difficult parts of the Anglo- American Lend- Lease nego:a:ons of the post- war economic seslement The commitment that the United States wished to impose on Britain to avoid discrimina:on in either the United States of America or the United Kingdom against the importa:on of any product origina:ng in the other

29 BreSon Woods At the BreSon Woods conference of July 1944, the outcome of the Anglo- American nego:a:ons, accepted in principle by forty- four na:ons, was presented to the world The vision of a liberal economic order remained Membership in the Interna:onal Monetary Fund and the World Bank imposed on surplus countries an obliga:on to assist development elsewhere Currencies would be fixed in rela:on to each other (a system of fixed par values ) in order to prevent the compe::ve devalua:on One clause in the IMF Ar:cles of Agreement was viewed by the Bri:sh nego:ators as their greatest triumph: it gave permission to member countries to discriminate against the products of countries with scarce currencies (i.e. against the products of the United States)

30 European Recovery The actual course of European recovery bore only a slight rela:on to the mechanisms created at BreSon Woods, the Interna:onal Monetary Fund and the Interna:onal Bank for Reconstruc:on and Development (World Bank) The United States made it clear that it would never permit the dollar to be declared a scarce currency Also insisted on the fulfillment of the promises given at BreSon Woods to currency conver:bility This looked impossible to most par:cipants Instead the United States began working on a plan for the economic revival of Europe

31 European Recovery The European Recovery Program, or Marshall Plan, was launched in June 1947 è A quite new poli:cal world in the western part of the European con:nent The tradi:onal and destruc:ve Franco- German rela:onship should be replaced by a federal structure, a United States of Europe paserned awer the American example Only a combina:on of poli:cal strength and material sa:sfac:on could create a society that might resist Soviet expansionism The Organiza:on for European Economic Co- opera:on (OEEC) created as part of the Marshall Plan was envisioned as a focal point around which closer Western European economic cohesion should be built

32 European Recovery In order to bring about a European recovery, Europe needed to be treated as a unit Instead of establishing currency conver:bility with the dollar, Europeans worked through a mul:lateral clearing system (European Payments Union) which allowed them to discriminate against imports from dollar countries It was a version of BreSon Woods scaled down to European requirements: Members commised themselves to the elimina:on of trade discrimina:on There was also a (rather limited) amount of credit available through the clearing union è The process of trade liberaliza:on within Europe played a significant part in the European recovery

33 European Recovery European integra:on in the 1950s The key to solving both the European poli:cal and economic problem was seen as the establishment and then the ins:tu:onaliza:on of Franco- German co- opera:on A solu:on to the poli:cal problem could be accomplished by finding a way of securing economic co- opera:on In addi%on, the process of establishing a post- war economic recovery plan in France required a reliable coal supply The plan proposed in 1950 by the French foreign minister, Robert Schuman, for the integra:on of the French and German heavy industrial sectors It was eventually realized in 1952, with the crea:on of the six- member European Coal and Steel Community (ECSC)

34 European Recovery During the 1950s, Europe experienced an economic miracle Rates of growth were faster than in any previous or subsequent period German real growth of GNP amounted to 7.8 per cent in the 1950s, that of Italy 6.4 per cent, France 4.5 per cent, and that of Britain 2.6 per cent HOW? The European miracle due to repressed consumer demand awer the depression The post- war recovery benefited from a ready supply both of labor and of capital Before the Second World War, most countries in con:nental Europe had large popula:ons in rural areas, engaged in low- produc:vity agriculture Mobility of workers brought large gains

35 The Baby Boom The demographic upsurge (or baby boom ) was a product of a new confidence, and added to the upswing in consump:on It reversed the long- run decline of birth rates in most western European countries since the beginning of the century The availability of a labor supply alone need not produce growth (ALSO labor conflicts) Labor and capital had seen their interests as fundamentally opposed Labor owen tried to use its poli:cal muscle to extract a larger wage share Employers reacted by making pessimis:c assessments of the future and cuing back investment The post- war miracle depended on a new approach to labor rela:ons, in which both sides realized that they could benefit from growth (co- opera:on)

36 Interna:onal Capital Movements The post- war miracle was characterized by a mixture of confidence but also of lingering doubts (high savings ra:os) The ini:al high savings levels generated a major domes:c source of investment Major inflows came from abroad: first the governmental assistance, through United Na:ons Relief and Rehabilita:on, and then through the Marshall Plan Marshall aid allowed specific boglenecks to be overcome Without American machine tools in 1948 and later, the re- equipping of European industry would have been impossible The supplies of food allowed workers to return to high- energy occupa:ons such as mining and metal working: without adequate supplies of food, they were much beser off conserving their energy by huddling at home

37 Interna:onal Capital Movements AWer Marshall aid ended in 1952, private American capital flows to Europe resumed This was a very different lending than in the 1920s (that capital movement had taken the form of bond purchases) In the 1950s, US capital came as direct investment in European factories It was linked to flows of technological and managerial experience It was heaviest in science and knowledge- based industries: computers, electronics, and instruments Innova:ons brought produc:vity gains to a much wider range of business, and completely transformed the nature of economic ac:vity This was an industrial revolu:on or more appropriately perhaps a knowledge revolu4on

38 New Technology The basic breakthrough came as a result of war:me scien:fic research conducted in the world s leading universi:es and research ins:tu:ons: the universi:es of Cambridge and Manchester in Britain, and in the United States the university of Pennsylvania and the Princeton Ins:tute for Advanced Study Transla:ng this high- level research into prac:cal produc:on required immense resources, which could only be supplied by large corpora:ons working across na:onal fron:ers With the introduc:on of the IBM 360 series in 1964, affordable and powerful enough for widespread commercial use, the computeriza:on of Europe began States realized very quickly that they could not afford to miss out on this technology; but much more slowly that they could not afford to imitate it or subs%tute for it by themselves The case of IBM in Europe is telling: in order to ajempt to meet the poten%al American monopoly, support own electronics industry Technology had clearly overtaken the economic capaci%es of the na%on- state

39 Mass Consump:on of Goods and Services 1950s marked the beginning of a new phase in economic development: the spread to Europe of a truly democra4zed mass consump4on The symbol of the new Europe was the automobile: from being a luxury item driven by a rela:vely small élite, it came within the purchasing range of average families The Volkswagen, originally designed as the Na:onal Socialist People s Car, but never made in general produc:on in Hitler s Germany, began to roll off assembly lines run by the Bri:sh military occupa:on authori:es The architect of what became known as the economic miracle or WirtschaAswunder, Ludwig Erhard, spoke of refrigerators in every house and that dream was soon accomplished

40 Mass Consump:on of Goods and Services Economic moderniza:on also meant the development of services Whereas tradi:onal industrial employment stagnated and declined, the supply and exchange of services rose as Europeans became more prosperous The consump:on of services, from adver:sing and banking to tourism, became as much a feature of the so- called consumer society as the purchase of goods One of the most expensive of all services was generally taken in a socialized form Medical services began to figure increasingly prominently as a source of expense, but usually indirectly through tax and insurance systems The improvement of medical provision had been one of the most important reforms proposed by poli:cians as part of making a beser world awer the war

41 Mass Consump:on of Goods and Services The Americaniza:on of European business and consump:on prac:ce in the 1950s was some:mes opposed as the cocacoloniza4on of Europe In the end, Europe was as unable to do without the culture embodied by Coca Cola as without computers

42 Trade Liberaliza:on 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 interna:onal accounts made moves to trade liberaliza:on easier This ensured the con:nua:on of the expansionary mechanism

43 Trade Liberaliza:on Parallel to the liberaliza:on 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 crea:ng a broader concept of economic co- opera:on, a trading area known as the European Economic Community The EEC s objec:ves included the progressive dismantling of internal tariffs, and the crea:on of a common external tariff As a framework for liberaliza:on, it was hugely successful Trade within the EEC expanded

44 Trade Liberaliza:on The Treaty of Rome also provided for the co- ordina:on of na:onal 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 poli:cally very sensi:ve farm popula:ons from the effects of economic change The Common Agricultural Policy (CAP) developed awer 1962 as a way of systema:zing six quite different na:onal sets of legisla:on protec:ng agriculture It involved a mixture of threshold prices at which import restric:ons would be imposed with interven:on 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 un:l the 1980s But as incomes generally rose, agrarian protec:on was no longer as sensi:ve a poli:cal issue as it had been in the late nineteenth century or in the 1920s

45 Governments and Growth How far was the spectacular economic performance of the 1950s a result of government policy? Britain, where growth was least dynamic, had in prac:ce commised herself to the macro- management of demand France had an extensive planning system, relying on indica:ve plans rather than direct controls: the most important ins:tu:onal feature was the alloca:on of credit through organized auc:ons Germany and Italy, probably because of their recent painful experiences with interven:onist approaches, liberalized prices quickly and very successfully But even in the centrally planned economies of central and eastern Europe, spectacular growth rates were achieved However, the rate of growth fell off significantly in the 1960s, as inefficiencies created by the planning mechanism became increasingly apparent

46 Governments and Growth The most striking instance of the benefits of liberaliza:on and an open economy was provided by Spain that had previously been :ghtly controlled Under General Franco, Spain had implemented an autarkic planning, and suffered in the 1950s from industrial decline and accelera:ng infla:on At the end of the decade, Spain joined the OEEC and the IMF, and dismantled her external tariffs faster than any other European country Ini:ally there was a major accelera:on of imports; but they were financed through capital flows associated with technology transfers è Growth in the 1960s and 1970s was very fast; and the 1960s are generally reckoned to be the period of Spain s industrializa:on

47 Governments and Growth The 1960s discovered that European growth rates could not go on rising for ever The response to the first signs of flagging growth involved new forms of government ac:vism Governments began to see the new industrial revolu:on (the Bri:sh prime minister Harold Wilson called it the white hot technological revolu:on ) in terms of state guidance This required investment guidance and target projec:ons Increased levels of infla:on indicated rather more than a simple problem in monetary management: they showed that the circumstances of what came retrospec:vely to be called the golden age had changed

48 Governments and Growth The long post- war boom in con:nental Europe had been sustained by the movement of labor from low- produc:vity agriculture into much higher- produc:vity occupa:ons in manufacturing and services By the middle of the 1960s, the rural source of the labor supply had been largely exhausted, and the con:nental European economies reached the posi:on Britain had been in since the beginning of the century There were no more domes:c supplies of cheap labor (although foreign workers or guest workers now contributed to the sustaining of the economic boom) The pace of produc:vity growth and income growth slowed

49 The End of the Post- War Miracle? The sustained full employment that had been the result of golden age growth increased the bargaining posi:on of labor, led to an increase in wage demands, and then to an accommoda:ng monetary policy Given the labor bargaining environment, any other op:on on the part of policy- makers would have produced higher levels of unemployment, and ended or at least challenged the social compromise on which the golden age had been founded The labor- market encouraged a new wave of trade union militancy In 1968, two- thirds of the French labor force was involved in strikes; in Germany 1 million workers went on strike, in Italy 4 million As a concession to labor, almost every European country at this :me introduced legisla:on making redundancy harder, and thus strengthened further the posi:on of labor and encouraged the infla:onary momentum.

50 The End of the Post- War Miracle? On an interna:onal level, the strains created by developing infla:on in all major industrial countries (including the United States) helped to end the par value system Between August 1971 (when President Nixon suspended the gold conver:bility of the dollar) and 1973, when European currencies went over to a generalized floa:ng exchange rate system, the world moved to monetary anarchy At the same :me, a general global move to increased levels of tariff The immediate awermath of the collapse of the classical BreSon Woods system, however, only accelerated infla:on even further, and contributed to a spectacular boom in commodity prices The most drama:c increases took place in the case of oil prices At the end of 1973 Middle East oil producers used their control of the oil supply as a poli:cal weapon

51 The End of the Post- War Miracle? The oil shock brought a defini:ve end to the golden age, the high growth period of the post- war era It made Europeans realize how vulnerable their apparent economic strength had been The oil trauma also brought a new discussion of the possibility of interna:onal policy co- ordina:on in the face of the new challenges This was the background to the first world economic summit, held in Rambouillet in November 1975 The ini:a:ve came primarily from the French and German leaders è AWer the mee:ng, the leaders of the five largest industrial countries announced that they had made efforts to restore greater stability in underlying economic and financial condi:ons in the world economy

52 Closer European Co- opera:on Faced by erra:c American policy and unsure whether they could rely on the United States, the European leaders proceeded with prepara:ons for closer European co- opera:on in a purely European framework In 1978 Giscard and Schmidt prepared plans for what they envisaged as a zone of monetary stability in Europe to be achieved through the European Monetary System, a system of fixed exchange rates analogous to the BreSon Woods par value system The first years of the system were extremely turbulent It had barely begun working in 1979, when the world was hit by a second oil price shock

53 Closer European Co- opera:on The most important relaunching of the European concept occurred in 1986, with agreement on the Single European Act This provided a new departure in two significant respects First, it solved a long- las:ng cons:tu:onal problem as it depended on the acceptance of a new mechanism to overcome the problems of nego:a:on between what were now twelve member states At a mee:ng of the European Council in December 1985, the Treaty of Rome was amended to allow vo:ng by qualified majority (rather than unanimity) for measures required to create a single internal market Secondly, the Single European Act overcame the problem of crea:ng a single set of Community standards by extending exis:ng na:onal standards throughout the Community rather than imposing a common code

54 Closer European Co- opera:on It provided for the crea:on of a unified internal market by the end of 1992 It included a reference to an earlier statement of 1972 approving the objec4ve of the progressive achievement of economic and monetary union The concept of a single market was also extended through a Council decision of 1988 to liberalize capital movements by 1990, and by the prepara:on in 1989 of the report of the Delors CommiSee, seing out a three- stage mechanism for monetary union This was accepted in 1991 at the mee:ng of the Council in Maastricht, which prepared a treaty renaming the Community as the European Union

55 Closer European Co- opera:on Soon awer Maastricht, however, the integra:on process began to show cracks Danish voters ini:ally rejected the Maastricht treaty in a referendum in 1992 The liberaliza:on of capital markets proved to be incompa:ble with the working of the European Monetary System A series of specula:ve movements, first against the Italian, Spanish, and Bri:sh currencies, then against the French franc, effec:vely destroyed the European Monetary System between September 1992 and July 1993

56 Deindustrializa:on The debates about increased integra:on took place against the backdrop of fears and hopes about Europe s place in the world Since the oil shocks of the 1970s, much of European industry had been in a chronic structural crisis The tradi:onal heavy industries, the veterans of the period of classical industrializa:on in the mid- nineteenth century steel and coal were the worst hit They had been at the heart of the early European post- war efforts to obtain greater economic co- opera:on

57 Deindustrializa:on The fears of the 1970s and 1980s led to a Euro- pessimism which believed that it had iden:fied a Euro- sclerosis The impetus given by the Single European Act generated a brief Europhoria The problems of the Maastricht treaty, and the belief that jobs would be lost to the formerly socialist and newly marke:zed economies of central Europe or to the dynamic economies of East Asia, generated a new round of skep:cism and gloom

58 Deindustrializa:on Although awer the sharp recession of economic growth in the 1980s was generally stronger than it had been in the 1970s, recovery created surprisingly few jobs Unemployment at high levels appeared to have become an endemic problem Economists constantly revised upward their calcula:on of the non- infla:onary unemployment level (the level which could only be reduced by an accelera:on of infla:on) Like the mass unemployment of inter- war Europe, this seemed to indicate the failure of markets But dealing with this failure could not be tackled in the conven:onal way any longer The large fiscal deficits that had built up in all European states ruled out tradi:onal Keynesian- style approaches to the unemployment problem