Orchestrating Europe (Text Only)

American wartime planning had aspired to a world multilateral trade and payments system. The Bretton Woods conference, held in July 1944, decided in favour of the restoration of the gold-exchange standard (based on gold and convertible reserve currencies) but with two important safeguards. Firstly, it created the International Monetary Fund (IMF) to aid countries against speculative attack. Secondly, it agreed a set of ‘rules’ to govern international monetary behaviour. In December 1945, the US proposed complementing the arrangements for world monetary order by the creation of the International Trade Organisation (ITO) to ease trade conditions and to co-ordinate national countercyclical policies. Its constitution, in a much watered-down form, was agreed in Havana in 1948. However, the ITO never came into existence because the US Congress, unwilling to surrender so much control over its protectionist arsenal, refused its ratification. This left the temporary and far less comprehensive General Agreement on Tariffs and Trade (GATT), agreed in 1947, as the main regulatory body for commodity trade. It is important to note that in both areas, the agenda for action was a global one. There was little place for new regional discrimination and every intention to eradicate existing trade preference areas, usually between colonial and metropolitan powers.6

Instead of a multilateral trading system, Europe’s trade and payments had returned to the pattern of bilateralism and autarky that had characterized the 1930s. Indeed the pervasiveness of frontier controls between countries and across products surpassed anything that had been seen in peacetime since the start of the free trade movement a century earlier. Europe’s commercial problems stemmed from several different sources. The effect of the dislocation of the War on many economies made it difficult to divert production to exports at the expense of investment or already low levels of consumption. Moreover, the liquidation or destruction of foreign investments which, even by 1950, were still earning 75% less in real terms than they had been in 1938, removed an important source for covering import requirements. These two developments aggravated trade imbalances but the problem was further complicated by shifts in the direction of trade. Germany had provided many countries with imports of fuel and raw materials, semi-manufactured and investment goods upon which their own industries had depended. Because German recovery was inhibited by the occupying Allies, this source of supply was much diminished. Moreover, agricultural goods, and particularly grain, were no longer available in the same quantities from eastern Europe. Indeed the only area capable of compensating for this shortfall in supply was North America. Thus the trade deficit with the dollar area increased enormously compared with before the War, at a time when the disruption of colonial economies also meant that Europe was no longer able to earn dollars from triangular trade. The scarcity of hard currencies forced countries to restrict imports and control trade through bilateral agreements, augmented with quantitative restrictions and exchange controls. The effects of these problems, and the measures chosen to cope with them, reduced the relative levels of internal trade in peacetime in western Europe to possibly their lowest point in the twentieth century. The share of internal trade as a proportion of Europe’s total imports and exports fell from almost 48% in 1938 to under 35% ten years later.7

It was against this background that, early in 1947, there occurred a sharp deterioration in western Europe’s balance of payments. It was probably occasioned primarily by the ambitious inflationary investment plans initiated in pursuit of domestic reconstruction but was aggravated by the impact of poor harvests on Europe’s terms of trade. Yet it was this second factor, with its associated images of hunger, high prices and social discontent, that formed the prime means publicly to legitimize the massive dollar investment programme announced by the American secretary of state, General George Marshall, at a speech at Harvard University in June 1947. The announcement of the Marshall Plan has often been associated with the ‘Truman Doctrine’ of March 1947, which pledged American help to the Greek government in their struggle against the Communists in the civil war. Together, they have come to symbolize the start of the Cold War. Yet Marshall Aid marked another fundamental shift in American policy. It represented a recognition that Europe’s reconstruction could not be managed within a global, multilateral framework, but rather that the continent’s rehabilitation was a prerequisite for the functioning of wider arrangements.8

The failure of a global strategy was underlined within months of the announcement of Marshall Aid. When, in 1945, the Anglo-American loan agreement had been signed, one of its clauses had stipulated that the United Kingdom would reintroduce sterling convertibility by mid–1947. This would allow countries to use their sterling reserves for multilateral settlements and thus reduce the pressures on the dollar. On the appointed day, supported by new loans, the British government duly announced the return to convertibility and found itself immediately confronted with a run on reserves. Within seven weeks, the experiment was abruptly curtailed. Nothing else could have demonstrated so eloquently that it was not currency or liquidity that the system needed, but one currency in particular (the US dollar) and in one area (western Europe).

Of course there was a realization that special transient arrangements would be needed to assist recovery from wartime destruction. In November 1943, for example, forty-four governments created the United Nations Relief and Rehabilitation Administration (UNRRA) for the provision of immediate relief in the form of food, clothing and shelter, as well as the raw materials and machinery necessary to restart agricultural and industrial production. In mid–1946, the UNRRA decided to wind up its operations by the spring of 1947. Before then, in June 1946, another Bretton Woods institution, the International Bank for Reconstruction and Development (IBRD or World Bank) had commenced operations, although it was another full year before it made its first loan. Marshall Aid, however, was an implicit acknowledgment that IBRD funds would be no match for the task at hand.

The United States began its active intervention in Europe’s structural problems with the European Recovery Program (ERP). In comparison with the $4 billion that the United States had contributed to European reconstruction in the first two years since the War through the UNRRA and other programmes, over the four years of its operation Marshall aid allocated to Europe nearly $12.5 billion: $10 billion in grants, $1 billion in loans and $1.5 billion in ‘conditional aid’, which was used to lubricate the limited intra-European Payments Agreement of 1948. Not only were the sums contributed far larger than had previously been considered necessary, but ERP was important in enabling countries to adopt longer-term and more secure planning frameworks for their investment strategies, by giving recipient countries a commitment to provide financial aid and other assistance on a four-year, rather than an ad hoc, basis. On the American side, the Economic Cooperation Agency (ECA) administered the scheme. In Europe, sixteen states formed the Committee for European Economic Cooperation (CEEC) to decide on accepting the aid and, in 1948, continued their existence as the Organisation for European Economic Cooperation (OEEC).

The dollars were made available for vital import requirements. Only 17% was spent directly on imports of ‘machinery and vehicles’, the rest went on raw materials and agricultural products. The importers, however, paid the equivalent in domestic currency to their governments who were free to use the money on capital projects. This mechanism freed domestic funds for capital formation and, since ECA approval was required before the funds could be spent, it allowed US planners to influence directly the direction of economic change. In addition, for example by refusing funds to Italian firms that dealt with non-’free’ (i.e., communist) trade unions, it also permitted their intrusion into the politics and societies of European states.

The macroeconomic impact of the ERP on European economies has recently been questioned. Certainly it did not save the continent from ruin and starvation since, by the time its funds came on stream in mid–1948, that moment had long passed. Instead, it contributed to the maintenance of already high investment levels, with the greatest relative impact in the first two years. However, funding was not on a scale sufficient to explain the super-growth of the 1950s. It is true that in 1948 and 1949, the contribution of ERP funds to gross domestic capital formation touched 30% in Germany and Italy, but in both countries the global figures were particularly low. The more usual level was around 10%, as it was also for Italy and Germany in 1950 and 1951; a useful but not decisive contribution. New calculations suggest that aid directly contributed only 0.5% per annum to annual growth in this period. Indirectly, the flow of funds for raw materials itself released resources for investment and the secure planning horizons might also have contributed to raising investment and output targets. The ERP also reduced the tension of the said structural adjustment. At a time when demand exceeded supply by 7.5%, an addition of 2.5% to GNP reduced the potential conflict about how wealth should be distributed between labour and capital.9

Not unnaturally, the Americans were reluctant to see their funds siphoned off into competing national schemes, each presumably demanding further measures of national protection. They insisted from the start that the funds be allocated according to pan-European criteria and in the service of a pan-European plan. The European criterion for aid assessment was adopted. It was taken as the size of the dollar gap rather than any estimate of size of income or degree of damage. A European plan also emerged, aimed at the previously prescribed goal of balance of payments equilibrium by 1952. However, a closer reading of the European plan demonstrates that it was little more than the aggregation of separate national plans. The Americans had more success in encouraging measures for the freeing of trade and payments from national constraints and protectionism. Although the causes of the economic growth of the 1950s, and the even more spectacular expansion of trade that accompanied it, are many and complex, at an institutional level it was the ERP, through the OEEC, that laid the foundations.

In October 1949, the ECA administrator, Paul Hoffman, made a major speech to the OEEC in which he called repeatedly for ‘integration’ as the price for a continued, generous level of dollar aid. ‘The substance of such integration’, he went on, ‘would be the formation of a single large market in which quantitative restriction on the movement of goods, monetary barriers to the flow of payments and, eventually, all tariffs are permanently swept away.’ Although the OEEC had experimented in 1948 and 1949 with some limited multilateral payments schemes and was at that moment considering a (modest) start to a programme of quota removal, Hoffman’s speech had the effect of concentrating minds wonderfully.

In case the OEEC was in doubt about the direction of American thinking, another ECA official, Richard Bissel, produced an outline for a European Payments Union (EPU), a discriminatory soft-currency zone, which in its detail went far beyond the usual policy advice. The Americans also pledged themselves to providing a sum of $350 million for the EPU’s working capital. It is interesting to note that the EPU was a recognition that another American creation, the IMF, was incapable of supervising Europe’s transition to convertibility. However, its rules and objectives were oriented towards the attainment of full, non-discriminatory currency convertibility. The sterling crisis of 1947 had demonstrated that any such move would rapidly have drained the IMF of its loanable funds. All the IMF could do was to recognize the serious structural problems facing the continent and sanction the discriminatory currency practices that were already commonplace.

The European Payments Union (EPU) embraced all OEEC members and came into operation in September 1950, its structure being an interesting innovation in the OEEC, which is commonly known as an ‘inter-governmental’ institution. In order to resolve conflicts, the EPU included a Special Restricted Committee of five persons chosen by lot from a list of nominees proposed by the member states, with the proviso that none of the committee members could be citizens of the countries involved in the dispute. The committee reported to the OEEC Council which then pronounced judgement. The Managing Board of the EPU, comprising seven representatives and one American observer, adjudicated using majority voting. This, too, was at odds with standard OEEC procedure, but since the Board was responsible to the OEEC Council, serious disputes were likely to end up before them anyway.

Of the initial $350 million granted to the EPU, some $80 million was immediately allocated to countries with ‘structural’ payments problems, while the remainder provided the working capital of the Union. This money was necessary to bridge the gap in the arrangements for debtors and those for creditors. The system worked thus: for each country, a margin of deficit was calculated (equivalent to 15% of the value of trade) that would receive some automatic credit on its intra-European transactions. This figure was demarcated according to five steps. In the first step, the debtor received 100% credit; in the second, he received 80% credit but had to pay the rest in gold or dollars. The amount of hard currency payable was increased until the fifth step, when only 20% was covered by credit and the rest in hard currency. Beyond that, all transactions took effect in hard currency. Overall, within the EPU allocation, a debtor could rely on a credit covering 60% of any deficit. A similar situation prevailed for creditors within the Union but although the overall position was the same (60:40), the steps were not synchronized, with the effect that creditors received hard currency from the Union earlier than the debtors were paying it in. It was to cover this gap that the dollar funding was intended.10

No sooner had the EPU been installed than it was put to the test. The German economy already had a huge deficit in autumn 1950 and the situation was rapidly deteriorating. With the exhaustion of its quota in sight, the EPU extended an extra credit line and, in February 1951 acknowledged the need for a reintroduction of quotas and the creation of state monopoly import agencies. By the summer of 1952, the crisis had been weathered and an upturn in exports allowed Germany to reopen its markets. Similar, though less violent, crises hit the United Kingdom and France in these early years and it was the EPU that provided the means whereby countries were not forced to adopt violent deflationary measures. Moreover, although in every case there was some backsliding in the commitment to hold back levels of import quotas, the fact that EPU and the OEEC’s ‘trade liberalization’ scheme (of which more below) were in existence, acted as a control over a more drastic and dislocating return to temporary protection.

From a low point in June 1952, when the combined reserves of the OEEC states stood at $7.8 billion, the position steadily improved until mid–1955 when they reached $13.4 billion. Against this background, the conditions within the EPU gradually ‘hardened’. In place of a ratio 60:40 between credit and gold, in mid–1954 the coverage was changed to 50:50 and in 1955 only 25:75. By this stage much of the EPU’s work had been done and many countries had introduced de facto convertibility on current account transactions (though this step was not formally taken until December 1958). Meanwhile, the EPU’s main customer was France and, although the job could equally have been done by the IMF, the operation held France within the European institutional orbit at a time of political upheaval fuelled by colonial unrest, and when more ‘integrationist’ experiments were being discussed.

The mirror of American concern on payments was its determination to remove quotas on intra-European trade. The obvious multilateral forum for dealing with the issue was the General Agreement on Tariffs and Trade (GATT) agreed in Havana in 1947. Yet GATT was fatally flawed. It was dependent for its existence on regular renewal by its members. Moreover, the rejection of the ITO had signalled that the US Congress was wary about agreeing to anything that might affect levels of protection for US industry. At a time when the major dysfunctional element in the world economy was seen to be the inability to pay for dollar imports through the sale of goods on the American market, it was inconceivable to envisage a reciprocal tariff negotiation that did not require for its success concessions by the United States. Although at Geneva, in 1947, GATT partners negotiated cuts of 19% in their registered tariffs on manufactured goods, at Annecy, only two years later, the meagre harvest was estimated at 2% while at Torquay, in 1950–51, it climbed marginally to reach 3%. In both these latter cases, a major factor was the reluctance of the USA to negotiate reciprocal tariff reductions. With success on tariffs beyond them, the members of GATT refrained, perhaps wisely, from tackling the enforcement of prohibitions on quotas, which were seen as even more harmful to trade than tariffs. It was for this reason that the USA accepted a regional solution to the removal of quantitative restrictions (QRs) or quotas on intra-European trade.11

At the end of 1949, the OEEC adopted the target for removing import quotas directed against each other, on 50% of their ‘private’ trade, by the end of the year. This target also applied separately to each of the three groups: food and food stuffs, raw materials and manufactured goods. Under prompting from ECA officials, who argued that something a little more spectacular was necessary to convince Congress to continue aid at the present high level, the target was raised first to 60% and subsequently to 75%. The ‘trade liberalization scheme’, as it became known, had several drawbacks that made the commitments, and the achievements, less than at first sight. Firstly, the operation referred to ‘private trade’ and exempted, therefore, imports on government account. This had been done so as not to interfere in ‘domestic’ political decisions but the effect was to remove from the operation of the scheme entire swathes of trade, mostly in agriculture but sometimes also in fuel, controlled by monopoly government purchasing agencies. Secondly this bias in the operation was compounded by the fact that the initial obligation to remove QRs evenly over broad product categories was dropped once the targets were further raised. An over-performance in raw materials, for example, could and usually did compensate for an under-achievement in agriculture. Furthermore, the Liberalization Code allowed a country with balance-of-payments difficulties unilaterally to reimpose restrictions if necessary, causing a rebound effect on its trading partners and undermining the EPU’s ‘discipline’ in the process. Finally, the whole operation excluded tariffs, which were considered the preserve of GATT, so that QR removal was often accompanied by the re-imposition of (partially) suspended tariffs. The initial agreement bore all the hall-marks of the compromises necessary to secure its passage through the OEEC Council.

In October 1950, the OEEC Council agreed that by February 1951, members should remove QRs on 75% of imports from other members, but it was there that further progress stalled. The crisis atmosphere engendered by the payments problems in Germany, the UK and France meant that for them even the 75% target had to be temporarily shelved. Such circumstances obviously inhibited the pressure for further advances. Discussions were also constrained by increasing disenchantment by the ‘low tariff’ countries of the Benelux, Scandinavia and Switzerland towards the failure to tackle tariffs, and therefore to deal with all frontier barriers to trade. Finally, as QR removal advanced, it threatened to touch the hard core of protectionism in sectors deemed by governments to be politically, socially or strategically vital to the national interest.

By the mid–1950s, reflecting their less strained balance of payments positions, most OEEC countries had satisfied their 75% targets. Many had also relaxed their quota regimes towards the dollar area, although not to the same extent. Yet when the decision was taken, in January 1955, to progress towards 90 per cent liberalization, the ‘low tariff’ countries made their agreement conditional upon action being taken by the Organisation to deal with high tariffs. Although they did not get their way, the target was nonetheless renewed and when, in December 1958, France finally attained it, private trading within western Europe had, to all intents and purposes, been purged of quantitative restrictions. There remained residual quota discrimination against the USA and, of course, state trading in agriculture was widespread. Nonetheless, for an experiment with such tentative beginnings, the achievement in reducing tariffs was remarkable.

Hoffman’s call for ‘integration’ back in October 1949 acted as a catalyst for a pan-European programme of action on trade and payments. Yet, even at the time, there was an awareness that there existed another path to ‘integration’ and that it might even be preferable. Whereas Hoffman sought to increase Europe’s degree of multilateral cooperation in carefully defined but meaningful areas, secretary of state Dean Acheson preferred a strengthening of political mechanisms that would weaken the ability of national veto-rights to prevent desirable initiatives. In fairness, one should add that he preferred this path because he considered that it would be easier for European countries to comply than it would be for them to accept a more concrete programme. For both men, the ultimate goal was a ‘Europe’ that mirrored more closely the political model of the United States of America. The ‘new’ continent could still show the old how to throw off the last shackles of its ancien régime.

The concept of ‘integration’ in political or institutional terms had also entered the mainstream of debate in western Europe. During the Second World War, Resistance movements had been forced, partly by the pan-European model espoused by the fascists and the Third Reich, to produce a cogent alternative that also transcended national frontiers. Their thinking was shaped by several factors that pointed the way towards international institutional reform. The failure of the Versailles Treaty and the League of Nations to prevent the reassertion of aggressive nationalism suggested that the foreign policies of nation states required stronger constraints. Similarly, the ‘beggar-thy-neighbour’ policies that characterized separate national responses towards the Great Depression suggested that there, too, some higher disciplinary force was necessary. These ideas had inspired the original surge of post-War institution-building, but for many observers the strengthening of inter-governmental organizations was not enough. They argued that national units were too small to guarantee security and prosperity in the modem world and too recalcitrant to guarantee freedom from assault. Solutions lay in the pooling of national sovereignties, thereby effectively proscribing the use of national means for economic or military aggression.

After the War almost every country witnessed the creation of national ‘European’ movements, even though they often disagreed on both aims and tactics. Some dedicated themselves to the task of leading opinion, while others had more populist aspirations. Some saw progress as incremental, like a ripple effect from a core of commitment; others wanted a swift adoption of new political structures; some took a view that it was good for others but not necessarily for themselves. Various national federalist groups, more geared towards mobilizing mass opinion and characterized in their approach by a certain ‘constitutionalism’, formed the European Union of Federalists in 1946. Another organization formed at this time, intent on mobilizing support for a new form of European political organisation, was the Socialist Movement for a United States of Europe. However, the lead in galvanizing public opinion was the United Europe Movement, inspired by Winston Churchill’s Zürich speech in September 1946, calling for a United States of Europe, and founded by his son-in-law, Duncan Sandys. It was this body that, in May 1948, sponsored the Congress of the European Movement, held in the Hague.12