Europe
2020.05.09 18:29 GMT+8

What lessons can be learned from the way Europe recovered after WW2?

Updated 2020.05.09 18:29 GMT+8
Giulia Carbonaro

 

With European economies immobilized and shrinking amid the COVID-19 crisis, Europe is facing the deepest recession since WW2.

Christine Lagarde, President of the European Central Bank (ECB), said that "The Euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime."

At the end of the Second World War, formally represented by the unconditional surrender of Germany's Third Reich on 8 May 1945, Europe was in ruins, its economy shattered.

Despite celebrating victory, the years right after the end of the conflict were still times of food rationing, poverty, homelessness, and displacement for millions of people. But in hindsight, 1945 is considered the year Europe started rebuilding its economy, and its new identity. 

At this point, that the history of Western Europe after the Second World War is radically different from the history of Eastern Europe, which largely fell under the control of the Soviet Union.

The 25 years that followed the end of WW2 are known in Western Europe as the European 'economic miracle', the most exceptional period of economic growth and social progress in Europe. How was such a recovery possible?

 

The Volkswagen Beetle was an icon of post-war West German reconstruction. This photo was taken in a factory in West Germany in 1954. Credits: AP Photo // Albert Riethausen

 

"Our best explanation for the post-war miracles is that they were not miracles," says Tamas Vonyo, professor of Economics History at University of Bocconi, Italy.

"First, fast growth in the 1950s and even the 1960s can be attributed to a simple reconstruction effect. Especially in western Europe, where the supply of both human capital and productive equipment was substantially greater at the end of the 1940s than ten years earlier, the potential to 'spring back' to normal levels of output and capacity utilization after the war generated very fast growth without any need for innovation.

"Second, the institutional foundations for economic growth after 1945 were much better than after 1918. Macroeconomic stability, relatively peaceful industrial relations, and restored international economic cooperation meant that European economies could implement investments in new technologies and new production capacities that they neglected in the previous three decades. This is why the post-war era was a period of convergence among advanced nations, as other industrialized economies began to catch up with the United States in productivity and, thanks to that, in living standards."

 

The economic recovery after WW2 involved redistributing the workforce that had been busy in the production of weapons into new sectors. Women working at Willys Overland Plant in Toledo, Ohio on 14 January, 1945. Credits: AP Photo

 

The importance of solidarity and public support

Asked about how many of these foundations for the European recovery still stand today, Vonyo answers: not very many. "The two main drivers of postwar growth, namely reconstruction and catch-up, obviously not. As for institutions, on the one hand, everything that we have is essentially the legacy of post-war reconstruction: international institutions like the UN or the IMF, or regional alliances like NATO and the EU. This international architecture was built after the disaster of the world wars on the promise of 'never again'. This is also true for the post-war constitutions of many western democracies that, essentially, still stand today."

According to Vonyo, the support of the people played an important role, which would still be necessary to foster the economic recovery of the post-pandemic. 

"The social contract between labour and capital, and a broad political consensus on prioritising reconstruction and economic growth were much stronger after the war than today. They required an exceptional degree of solidarity that could be expected from a generation that lived through the Great Depression and then the war but difficult to imagine today."

EU Commissioner Ursula von der Leyen coordinated the European relief deal to the countries most affected by the pandemic. Credits: Olivier Hoslet// Pool Photo via AP

 

The cause for integration

Winning peace, stability, and economic prosperity was a goal the European nations could only reach by working together.

"The experience of the Second World War, while very different in different parts of it, created a shared sense that whatever the political differences that existed between different states, particular political factions, there was still a very strong desire to avoid armed conflict and therefore to work together," says Guy Bud, a Belgian historian. 

"What was needed was a movement towards European unity," explains Martin Evans, professor in Modern European History at Sussex University. "This really takes off obviously in Western Europe in the context of the Cold War. You have French economists and politicians like Monnet that really believed that the solution to not repeat the state mistakes the 1920s and '30s is through European unity. The idea of pooling sovereignty will prevent people from going to war."

From this idea of integration, the European Union as we know it today was developed. And it's this institution that EU member states are looking to for their recovery plans. 

"I really wonder if out of this, we're going to see  a kind of resurgence of of the European Union, because ultimately the only way the virus is going to be overcome is through global cooperation," says Evans. "To follow the path of just following nation states, trying to do things on their own will only end in failure."

 

 

'A new Marshall plan for Europe'

At the end of April the EU agreed to a €540 billion emergency rescue fund, after EU commissioner Ursula von der Leyen said the EU should have modeled its rescue package on the Marshall Plan.

The Marshall Plan, the U.S. initiative to reinvigorate the European economies by sending the equivalent of $128 billion (€119 billion) in today's money in aid, including investments, food, fuel, and machinery, was key to the European recovery after the war.

"The impact of the Marshall aid from America - which obviously had an agenda about stopping the spread of communism in Europe - that really was crucial in kick-starting the Western European economic miracle," says Evans. 

As part of the European-coordinated response to the COVID-19 economic crisis, the ECB also announced on 18 March a new Pandemic Purchase Program with an envelope of over $800bn (€750bn), to add to the almost $130bn (€120bn) announced previously the same month, to address the unprecedented crisis the eurozone is facing.

 

U.S. President Harry Truman surrounded by school children from foreign countries aided by the Marshall Plan in Washington, on 3 February, 1949. Credits: AP Photo // Harvey Georges

 

Predicting the unprecedented

From a purely economic perspective, Vonyo believes that it's hard to compare the current pandemic with WW2.

"Hibernating economies for months is terra incognita, for government and business alike," he says. "World wars did nothing of this sort. Quite the contrary: the aim of total war was to exploit all production capacities and mobilize all workers beyond what was considered feasible in peacetime. Today, we do the opposite: we shut down all production that is not essential, using as little capacity and as few workers as possible, so that we can all stay at home.

"Total war maximised mobilization; now we minimize mobilization. We also know that this shutdown is temporary, indeed we are already emerging from it in several countries. It does not damage equipment, infrastructure, or human capital. Therefore, governments aim to keep businesses afloat so that they can restart when the crisis is over.

"This is why the wartime rhetoric today is so misleading, in politics as in business. This is a public health emergency, not war, no matter what some world leaders tell you. War-economy logic prevails only in the emergency services. Doctors, nurses, and police are ordered where to go and what to do, forced to work extra hours, and prevented from taking holidays, but they are also prioritized in the allocation of essential supplies and funds. Finally, remember, World War II lasted five years and incinerated 60 million souls. In the current pandemic, the worst may be over in a few months, with economies back on track within a few years. The scale of the shock for economy and society will be incomparable and thus the consequences will not last nearly as long as they did after 1945."

Asked about making a prediction for the unfolding of the pandemic on the European economy, Vonyo says it's impossible to anticipate exactly how this unprecedented scenario will develop. "We still know little about this crisis, most notably how long it will last end and how bad it will get.

"Any prediction about the economic consequences would depend on two other unknowns: how the major economies will finance their recovery, and how stable our political institutions will remain. Helicopter money is a short-term instrument. But will new monetary theory convince leading central banks to monetize excess debt indefinitely in the belief that the spending necessary to keep businesses and households above water will not create inflation?

"The majority of the population in western democracies rallied behind their governments in a collective effort to suppress the virus. But, does it mean they won't ask hard questions from their leaders once it's all over? And if these leaders cannot provide satisfactory answers, how will the people respond? History could offer very different, but equally plausible outcomes."

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