Book Review: Barry Eichengreen, The European Economy Since 1945, Princeton University Press 2006

munchau(at)eurointelligence.com

 

A characteristic of the best histories is not just a good narrative but a compelling thread that runs through it. Barry Eichengreen's tour de force of postwar European history is that kind of book. It tells us about Europe's reconstruction, its division and integration from the perspective of theeconomic system also known as co-ordinated capitalism. His thesis is that Europe's much maligned corporatist institutions played a significant role in achieving the postwar economic miracle, but that these institutions are insufficiently flexible to meet the 21st century's demands. It is not a book of the rise-and-fall variety. He does not advocate the adoption of the Anglo-American model or any other. Nor does he eulogise the European system.

 

His explanation of Europe's postwar success differs from those of other po-litical economists, notably Mancur Ol-son, who famously ascribed the success of Germany and Japan to the destruction of its elites. Eichengreen disputes this view. "One explanation for the high investment, rapid export growth and wage moderation that sustained the golden age is a set of institutions singularly suited to the growth imperatives of the day," he writes. He argues that in some of the best performing postwar economies, the neo-corporatist institutions had a strong prewar tradition, which would contradict Olson's theory of the rise and fall of nations.

 

 

Eichengreen's growth imperatives consisted of rapid investments in plant and machinery for the production of goods for exports. The corporatist institutions generated the combination of economy-wide wage moderation and a regulatory environment that allowed the export-led growth model to flourish over a long period. Germany is one of the most cited cases for co-ordinated capitalism, but Eichengreen is strong on presenting evidence and examples also from smaller European countries.

 

Would these countries have performed better under a laisser faire-style Anglo-American system? Politically, this was not on offer at the time. Germany's Christian Democrats were deeply hostile to the market economy during the late 1940s. Whatever the intellectual flaws of the social market economy may have been, it was the most market-oriented system that was politically feasible at the time.

 

The system, as it was created then, may already have contained the seeds of its own destruction and it may also have given two generations of Germans a false narrative of what constitutes good economic policy. But Eichengreen has a point when he attributes the success of postwar Europe directly to this institutional set-up. For all our criticisms of the system today, this was the best possible path that the continental countries could have chosen at the time, given the political circumstances.

 

Eichengreen is at his strongest when he debunks widely held myths, for example that the Irish or Dutch economic miracles were the direct result of free-market policies. In fact, the strong performance of Ireland since the 1990s and of the Netherlands since the 1980s is due to a large extent to the ability of employers' associations and trade unions to reach country-wide agreements for wage moderation. This story is consistent with research showing that the most efficient labour -market systems are those that are either highly co-ordinated, as in Ireland and the Netherlands, or highly decentralised, such as in the UK.

 

Eichengreen dismisses the notion that Europe can succeed only by adopting the Anglo-American, small government, low tax model: "There may be more than one way to crack a nut . . . more than one combination of labour market, product market and public sector institutions . . . capable of producing the same level of productive efficiency." He thinks Europe can maintain a bigger role for the state than the US, but that this would require Europeans to make other tough choices.

 

Eichengreen's book contains two chapters on central and eastern Europe, competently and crisply narrated, and a sketchy history of European monetary integration. Perhaps he could have made more of the underlying political differences between France and Germany that accompanied the negotiations on the Maastricht treaty and later the stability and growth pact, a set of rules enforcing fiscal discipline. These differences are still relevant for an understanding of some of today's controversies surrounding the euro. I am also not sure that I share his assessment that "it is hard to imagine that [a convention for a European constitution] would have been undertaken except for the perceived need to create an effective political counterweight to the European Central Bank and the other economic policymaking entities in the EU". This reflects an economist's thinking of the way the world should be. In fact, and most depressingly, economics played almost no part during the convention. It should have, but the constitution was primarily motivated by political, not economic, concerns.

 

While there can be no such thing as a definitive history of Europe's postwar economy, Eichengreen at least comes close to providing a definitive history of European economic performance, a subject at which he excels. This in itself is no mean achievement.

 

© Financial Times Limited

 

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