Monnet’s Myth: European post-war economic growth

One of the persistent founding stories about the EU concerns the Coal & Steel Community. The tale goes like this: The Coal & Steel Community and subsequently the European Economic Community were the cause of not only the western European economic recovery after the Second World War but are also the cause of the German economic rise to greatness.

The Brexit dissidents, as I like to call them and here I include myself, call this constant attribution of prosperity and peace “myopia”. This is because these analyses rarely look at the wider picture, or in some cases, simply associate the European project with universal benevolence.

The simplest approach but one in which we can see the various changes in prosperity is by a comparative measure of GDP. In 1946, the British economy was almost twice as large at the French economy and more than twice as large as what was left of the German economy in the British, French and US Army zones of occupation.

By 1955, the West German economy had grown by 283% compared to 1946. Indeed by 1950, when the Coal & Steel pact was agreed, the West German economy had grown by 55% compared with 1946. It was already larger than the French economy before the first steps of Europeanist integration had taken place, which it had overtaken in size by 1948. From then on, at no point was the French economy to ever exceed in size the West German economy.

This should alert us to an essential fact in considering the economics of Western Europe: the German economy contained huge potential for economic expansion and continued to expand on the back of political stability, the excellent German school system and the existing expertise of German engineering and manufacturing. Another factor related to myself a long time before at university was that after the war with the major industrial cities and plants in ruins and with industrial machinery confiscated as part of the post-war settlement, West Germany replanned both its cities and the industrial plants. Sites were cleared and rationally laid out – this had long term benefits in creating smooth access to and from manufacturing sites.

Another aspect to consider is the international dimension. The post-war drive to facilitate trade and reduce tariff barriers under GATT also made it possible for international trade to flourish in a way not seen since the British trade expansion of the 19th Century.

The really damaged economy from the Second World War was that of France. The French economy in 1944 was 46% of the size it had been in 1939. It was not until 1949 that France returned to pre-war levels of prosperity.

Again, we can see that the economic recovery was well and dramatically under way before even the first steps of Jean Monnet’s project were adopted.

As we can see above, the West German economy had grown by 283% compared to 1946 but it had also exceeded the size of the British economy. By 1962, the West German economy was 28% larger than that of Britain. By 1981, it had become 54% larger than the British economy. Thereafter the British economy steady grew in size and reduced the gap with West Germany to 1989 and with the unified Germany in the years after until by 2008, the gap was 18%.

The French economy today is about 80% of the size of the German economy. The ratio has varied from 60% to 75% until the 1990s. This matches the ratios from the first half of the 20th Century with the exception of wartime figures.

What about the United Kingdom?

According to the story told by Europeanists, Britain struggled because it was locked out of the EEC until 1973. But the figures tell a different story.

The British economy shrank noticeably from 1944-1946 by 4% per year. Today this would be considered a major depression but this was the point at which the British government was gearing down from wartime spending levels.

By 1948, the economy recovered 3% on 1947, when it shrank by 1%. Thereafter until 1972, the British economy grew by an average of 3% per year. This was mild growth compared with French or German growth rates in the period, which were 7% and 6% respectively.

However, we should bare in mind that the problems with the British economy were a great deal more self-inflicted than due to geopolitical relationships. For much of the period into the 1950s for instance, the British government was spending heavily on defence. There were problems with industrial policy, increasingly with industrial unrest and the problem that British industry was not replaced or rebuilt as was German industry.

Yet, even with all the trouble and disruption of the 1970s, the economy still grew by 2% on average per year until 1980, when the economy entered a serious recession with the start of the liberalisation of the British economy and the closing of state-subsided industries. 2% per year was average growth until 2000 – 2008 which was 3% per year.

Compared to French and German growth rates in the 1980s & 1990s, Britain matched both countries and exceed both in the 2000-2008 period, where France experienced 2% average growth and Germany 1% average growth.

We cannot see in the data series any noticeable effect of EEC entry for Britain but we can see that Britain went from 7% growth in 1973 to -1% in 1974 and 0% in 1975 before returning to 2% growth in 1976. We could associate the return to growth with the end of EEC transition except that we also know this was the point at which Labour Party economic policy began to change with an reduction in subsidies, heavy cuts in welfare spending and the IMF Crisis.

Together with the Thatcher government of 1979-90’s supply side reforms and closure of inefficient industries, we can see that membership of the EC, as it was, was neither a noticeable help or hindrance to British economic performance. What was critical in Britain was the reintroduction of market economics and the end of the post-war economic consensus. Indeed, we can argue that Germany’s success was due much more to its effective labour and industrial policies and the economic stability and growth these enabled.

The last major recession in the British economy was partly caused by an overheated housing market (the result of market-liberalisation) but above all by the monetary dislocation of the ERM debaclé. Once the British currency floated again, the economy retuned in 1993 to 2% growth. On a side note, what is remarkable about the ERM is that the Europeanists attempted to return to a form of 1920s economics with exchange rate controls.

What this demonstrates is that economies have a “natural” size to which they return and from which they grow with the right policy mix from governments. What the Europeanists claim is the result of the European experiment is actually this natural tendency reasserting itself amidst political stability.

Links:
GDP Summary
Data Series as Analysed

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2 Responses to Monnet’s Myth: European post-war economic growth

  1. Nick Johnson says:

    Thanks for this informative and insightful post. Do you not think that political stability in Europe was helped by the drive for integration and the prosperity that it helped to generate? Also (maybe I am quibbling over semantics here) it is in some ways misleading to call some sort of economic outcome ‘natural’ when you state that it requires the right policy mix from governments. Your argument above shows that different policies worked in different countries. Industrial policies and labour cooperation worked better in West Germany than the UK for example, while in France there was some indicative planning. I am of the view that the institutions of economic management need to evolve as the structure of the economy changes over time, so what works in one era to support growth may then constrain it later on. Thanks again.

  2. Jody says:

    Very insightful piece, Richard. We have a tendency to look at numbers in a vacuum and the context you provide is enlightening. I agree with your assertion that economies return to a “natural” state, as the law of supply and demand says markets, if left to their own devices, will always achieve a state of equilibrium. This desired “natural” state is sometimes at odds with government policy, which can either help or hurt. For the most part, I believe limited government interference is best for economic growth.

    In light of the Brexit vote, I’m looking forward to seeing Great Britain take control of its own economy again and leave behind the market controls imposed on member states by the EU.

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