Published by EH.NET (May 2007)

Barry Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond. Princeton: Princeton University Press, 2006. xx + 495 pp. $35 (cloth), ISBN: 978-0-691-12710-1.

Reviewed for EH.NET by Stephen Broadberry, Department of Economics, University of Warwick.

In 1996, Barry Eichengreen published an influential article in a book edited by Nick Crafts and Gianni Toniolo, Economic Growth in Europe since 1945, (Cambridge University Press). Eichengreen argued that the same institutions which facilitated postwar recovery in western Europe during the 1950s and 1960s, also exerted a drag on growth from the 1970s. The high growth of the 1950s and 1960s was seen as a result of the particular suitability of western Europe’s institutions of co-ordinated capitalism to catching-up on the United States through capital investment and the absorption of technology and organizational forms from abroad. However, as the frontier was approached, the unsuitability of those same institutions for innovation was seen as creating a crisis of adjustment. This excellent volume can be seen as expanding on the ideas first developed there, updating them to take account of the experience of the last decade, and bringing the centrally planned economies of eastern Europe into the picture. The picture is now much more nuanced than the earlier article, and the author has become more ambivalent about Europe’s economic prospects.

The links to the earlier article are still very visible in chapter 2 on the mainsprings of growth, which sets out the basic analytical framework. A great deal of emphasis is still placed on the “neocorporatist bargain” or postwar settlement between employers, trade unions and governments, which is seen as underpinning high levels of investment. Workers agree to wage restraint so long as employers commit to high levels of investment, and employers commit to high levels of investment so long as workers agree to wage restraint, with the whole bargain being overseen by an interventionist state committed to maintaining full employment through Keynesian policies. The establishment and more or less successful functioning of these neocorporatist bargains in individual west European countries is analyzed in chapters 3, 4 and 7 on the 1940s, 1950s and 1960s respectively. Chapters 7 and 9 focus on the difficulties which these institutions faced in the 1970s and 1980s. The problem can be seen as the breakdown of wage restraint as growth slowed down with the exhaustion of the potential for rapid catch-up growth, and as memories of the mass unemployment of the interwar years began to fade.

Superimposed on this general framework are a number of sub-themes which amplify the central argument of the importance of institutions. First, the author is able to draw on his unrivalled expertise in the area of international monetary systems to show in chapter 3 how Europe’s neocorporatist bargains were facilitated by the Marshall Plan, German economic and monetary reform, the 1949 devaluations and the European Payments Union. Then in chapter 8, he argues that the institutions of the international monetary system exacerbated the breakdown of the neocorporatist bargains as payments problems mounted and the Bretton Woods system collapsed.

A second sub-theme concerns the role of economic and political integration in western Europe, with the initial impetus to co-operation to avoid a return to the conflict of the previous half-century seen in chapter 6 as bolstering the institutions of coordinated capitalism in western Europe. In chapter 11, the further integration pursued since the 1980s is seen as identified with liberalization, and thus helping to overcome the crisis of adjustment by undermining the institutions of coordinated capitalism.

A third sub-theme is the application of the basic approach to eastern Europe, the most extreme case of coordinated capitalism, where the market economy was all but eliminated. Here, of course, the specifics need some modification, but even eastern Europe conformed to the pattern of rapid growth during the 1950s and 1960s, followed by slow-down from the 1970s. Large firms and unions were organs of the state, so there can be no equivalent of the neocorporatist bargain. However, in discussing western Europe, Eichengreen counters criticism that his earlier work was too focused on the highly unionized manufacturing sector by noting that the 1970s saw not just a breakdown of the neocorporatist bargain on wages and investment, but a major technological shift associated with the decline in the cost of information processing, with radical implications for the organization of services as well as industry. This shift towards information and communications intensive technologies, allowing much greater customization of output to individual consumer tastes, can be seen as creating difficulties for the institutions of organized capitalism in western Europe, geared towards large-scale production of standardized products and provision of standardized services in regulated markets. But for eastern Europe, where governments relied for their survival on limiting the free flow of information, it proved fatal. The experiences of the centrally planned economies are discussed in chapter 5, covering the rapid growth of the early postwar period, and chapter 10 on the collapse at the end of the 1980s and the subsequent transition.

The book ends with the author hedging his bets about Europe’s economic future, depending on whether the most appropriate indicator of economic performance is GDP per capita or GDP per hour worked. Although GDP per capita in Europe is only around two-thirds of the U.S. level, GDP per hour worked is about equal to, and in some countries higher than in the US. The MIT view of this is that Europeans simply enjoy their leisure more than Americans, who are caught in a rat race. However, the Minnesotan view is that Europe is being held back by the institutions of coordinated capitalism, with high tax rates and regulations stopping people from working as much as they would like. If you accept the Minnesotan view, Europe is in for a tough period of liberalization or relative decline, but if you accept the MIT view, Europe can continue to enjoy its chosen combination of high productivity and leisure.

My main criticism of the earlier article was its bias towards manufacturing, and that has been dealt with to some extent here by the discussion of technology and its application to services. However, this has the effect of giving a much more central role to changes in technology, which are never really explained in any detail. Also, a place has been found for the importance of the shift of labor out of agriculture, but again agriculture is never really covered in sufficient depth. However, any shortcomings in the treatment of the major sectors should certainly not weigh heavily in the balance against the overwhelming list of positive features about this book, which is clearly structured and well-written, concise and clear. Above all, it strikes a masterly balance between a clear theoretical structure and sufficient attention to historical detail.

Stephen Broadberry is Professor of Economic History in the Department of Economics, University of Warwick, and co-organizer of the CEPR Economic History Initiative. His most recent book is Market Services and the Productivity Race, 1850-2000: British Performance in International Perspective (Cambridge University Press, 2006). He is currently co-editing (with Kevin O’Rourke) a 2-volume economic history of modern Europe.