Orchestrating Europe (Text Only)

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

The Hague Congress, which created the Council of Europe, was supposed to create a new momentum towards higher federalist goals. Instead, its creation was its own greatest achievement. Whether the British government, or Churchill in opposition, had ever held more than a fleeting interest in actively associating themselves with the construction of a European federation is highly questionable. Embroiled in an organization with a federation as its goal, the government rapidly proceeded to distance itself from other countries’ impulses towards ‘integration’, and in the process became the focus of opposition. The Council of Europe became tom between the ‘federalists’, who wanted to move quickly towards new constitutional arrangements, and the ‘functionalists’, who believed that new arrangements would be workable only if the surrender of sovereignty were a functional necessity. The latter envisaged that progress would take place cautiously, on a step-by-step basis, but since the UK was the leading exponent of the functionalist school, the position boiled down to one of no progress at all.

These developments quickly paralysed developments in the Council of Europe and certainly robbed the European movement, in its various guises, of direct political influence. Only in Italy, under the leadership of Altiero Spinelli, was there an attempt to convert the federalist cause into a mass movement, the Movimento Federalista Europeo. Spinelli soon became disenchanted with the MFE, but his enthusiasm for supranationalism remained undiminished. When the head of the Italian government, Alcide de Gasperi, asked him to draft a federalist plan for controlling European institutions, Spinelli seized the chance. His efforts resulted in the introduction of the ‘federalist’ clause 38 into the European Defence Community treaty (see below). This, however, represented the pinnacle of the MFE’s achievements. As the EDC faded, so the movement’s influence began to ebb.¹³

Whilst popular movements cannot claim credit for initiating ‘the process of integration’, they nonetheless provided a pool of new ideas and a vocabulary that decision makers could draw upon when confronted by immediate political problems. This occurred most dramatically when, in May 1950, the French foreign minister, Robert Schuman, announced his plan to form a coal and steel pool which embraced Germany. When this call was answered by the Benelux countries and Italy as well, the way was cleared for the ‘Six’ to embark upon a series of institutional experiments built around the concepts of supranationality and surrender of sovereignty.

It was by no means preordained that six countries would become irrevocably associated with each other in a series of supranational communities, nor that those six would be France, Germany, Italy, the Netherlands, Belgium and Luxembourg. To appreciate how ‘the Six’ reached that stage, we have to go back to the creation of Benelux, and the reaction of France, especially, to that development.

Benelux was the oldest of the post-War experiments in regional integration in western Europe. It linked Belgium and Luxembourg (whose own economic union, the BLEU, dated back to 1921) to the Netherlands, first through a monetary agreement concluded in 1943, and then by a customs union treaty signed a year later by the three governments-in-exile in London. Before the War the BLEU and the Netherlands had conducted approximately 10% of their trade with each other, although there had increasingly been an imbalance in favour of the former. The greater wartime damage in the Netherlands served to accentuate the Dutch deficit, which doubled between 1947 and 1951. Despite the manifold difficulties, the customs union came into force in January 1948, when all tariffs were abolished to be replaced by a common external tariff. However, trade was still impeded by the widespread imposition of quotas, especially on the side of the Dutch. To remove these, even if only towards the BLEU, threatened to aggravate the deficit. Progress was only made possible by two further measures. Firstly, Belgium granted ever greater credit extensions (which it was willing to do if it meant securing the Dutch market from Germany, while the latter’s industry was still operating at artificially low levels) and eventually the problem was subsumed into the European Payments Union. Secondly, the Dutch were able to secure preferential access to the Belgian agricultural market. They had wanted completely free access, since this would have helped remedy their trade deficit, but they had to make do with a provision which left Belgium’s domestic protectionism intact.¹⁴

From its inception, the Benelux experiment attracted considerable attention from policy-makers in France. This should be no surprise since before the War Belgium had been France’s largest European trading partner. Just as Belgium hoped to supplant Germany in Dutch markets, so France to needed to expand into the German vacuum to fund its own modernization plans. However, whereas the Benelux tariffs lay close to each other at the lower end of the range when they agreed to a common external tariff, it was realized that any union with France would be behind highly protectionist walls. Moreover, the Netherlands required the German market for its agrarian exports and its traditional shipping services. This required a reciprocal ability to purchase German imports; something that would be impossible if the Netherlands agreed to the arrangements proposed by the French.

From 1944 onwards there was continuous French pressure to break open the Benelux. It was headed off by the creation of a joint consultative body, known as the Conseil Tripartite, which arranged swaps of raw materials in the early post-War months, attempted to co-ordinate policy towards Germany (difficult given the different national provisions) and provided a forum for French attempts for a customs union. These efforts to break open the Benelux were countered by a demand that the move could only be considered if West Germany were to be included; a demand that ran counter to the reason for the French wanting the union in the first place. In 1947 the French used the CEEC conference in Paris to bluff the Benelux partners into daring to turn down the option of a customs union. They had hoped to use American leverage, who themselves wanted to use dollar aid as a way of securing their goal of closer regional integration.

Instead the study group for a pan-European customs union was created to deflect some of the pressure. They deliberated until the end of 1948 but ultimately failed because no decision had yet been taken on the German economy and its position in any future schemes. More immediately, the French found their challenge to move to the immediate formation of a customs union accepted only by the Italians. The fact that France’s primary goal remained the Benelux was reflected in two further approaches in 1948 to persuade them to join. Both were refused.¹⁵

By December 1947 the first feasibility study for the Franco-Italian Customs Union was ready. It was surprisingly optimistic and a second commission was established to investigate how it could be implemented. In March 1949, Sforza and Schuman signed a treaty that would effectuate a customs union in a number of stages. A tariff union was already envisaged for 1950 and full economic union about six years later, but through fear of Italian competition, in particular in agriculture, the French Conseil Economique (a tripartite advisory body representing labour, industry and agriculture) thrice rejected the treaty. The government drew the inevitable conclusion and demurred from presenting it to parliament for ratification.¹⁶

It was whilst the issue of the Franco-Italian customs union was still alive that the French economy was confronted by a highly localized but serious problem; a balance-of-payments deficit with Belgium. From such unpromising beginnings was born FRITALUX, the name given to the grouping of France, Italy and the Benelux. The French solution to this trade imbalance had been a devaluation against the Belgian franc, with all the help from the Belgians in managing these ‘broken exchange rates’ that this move implied. From there the idea developed to a ‘mini payments union’ with a flexible exchange rate mechanism. Thinking in this direction was reinforced by the prospect that US dollars would be available to sponsor regional integration initiatives, which served to lubricate the discussions long after the exchange rate realignments of September 1949 had resolved France’s original problems. Given the advanced stage that the talks between France, Italy and Belgium had reached and the implications all of this would have had for Benelux, it is amazing that it was only in September 1949 that the Dutch were actually informed of what had been happening. They immediately declared that they disliked the idea and would only consider it if it were supplemented by a customs union, which would also embrace the newly sovereign West German state. The French, whilst not rejecting the idea out of hand, argued that the union would better be created first and that Germany could join later. The Dutch feared this would never materialize and that entry, if it were ever agreed, would be surrounded by so many exemptions and escape clauses that Germany might not be willing, or even able, to join. There the negotiations stuck until the spring of 1950, when it became clear that the Americans had decided to do something else with their cash – provide the initial capital for the EPU.¹⁷

With the exception of the Benelux itself, the episodes discussed in this section all ended in failure. Yet they reveal several imperatives guiding policy in the immediate post-War period. The first was the motivation in all the modernization programs to utilize the breathing space created by Allied control over the post-War German recovery, to supplant the German position in both domestic and in foreign markets. The second was the fear of unrestricted German competition. Towards the end of 1949, Allied controls were already being relaxed; yet the powers of the new supervisory authorities were ill-defined and as yet untested. With or without the complication of the Dutch insistence on surrendering frontier controls against Germany, which a customs union would imply, the re-emergence of German industry was already a certainty. It was upon meeting that challenge, either politically or economically, that the entire commercial future of Europe depended.

The coal and steel sectors of western Europe took time to recover from the War. These key industries figured prominently in governmental recovery programs, such as the Monnet Plan in France. It was not accidental that the first major broad-based plan to integrate a specific industrial sector was the European Coal and Steel Community (ECSC). Coal and steel were important traded goods and essential industrial resources. Since they were largely similar products, they were easy to control and had a long history of being subjects of international cooperation. However, neither the timing nor the authorship of the first proposals for integration was accidental. The French initiative stemmed from an acceptance that this plan would, realistically, be their only method of establishing any control over German re-industrialization. French plans for the reconstruction of their steel industry had been based on an attempt to secure markets which had previously been German and also upon guaranteed access to German coal supplies. In 1950, the US policy of relaxing controls threatened to release excess German steel capacity upon a market that was already showing signs of becoming glutted. If, at the same time, German coal was redirected towards German mills, and coal supplies to France were priced relatively unfavourably, the adverse effects on France would be compounded. The Benelux countries, and to a lesser extent Italy, were pulled into the arrangements because they could not afford to remain aloof from a powerful producer bloc being created on their borders.

The Schuman Plan, as it was known, had been prepared in the French Planning Commission by Jean Monnet’s staff. It was launched on 9 May 1950, on the eve of talks with the Americans and the British on future controls of the Ruhr’s industry, and was clearly aimed at seizing the policy agenda. The British had been neither consulted nor informed of the proposals beforehand, but quickly ascertained that the organizational form implied too great a surrender of sovereignty, and that they required an entanglement in continental Europe of a nature that was inconsistent with their other foreign obligations. French attempts to persuade them to participate, the sincerity of which has been questioned, were quickly abandoned and, in the summer of 1950, negotiations began. The treaty of Paris, establishing the European Coal and Steel Community, was signed in March 1951 and came into effect in July 1952.¹⁸

The stated goal of the treaty was to rationalize the production and sale of coal and steel. To this end, all import and export duties, subsidies and other discriminatory measures on the trade of coal and steel were immediately abolished. Although rules for pricing were established, in ‘normal’ circumstances the market was supposed to be competitive. The Community also managed funds for subsidizing firms hurt by the creation of the ECSC and for retraining workers. These were aimed particularly at the Belgian coal industry, some sectors of which were penalized by a combination of thin seams and high labour costs. Over a transitional period, efficient producers paid a levy to enable Belgian mines to adjust to the lower prices. Moreover, because of the heavy weight of fixed costs, the industry was extremely vulnerable to fluctuations in demand and therefore many of the remaining provisions were intended to come into effect in ‘abnormal’ circumstances; namely, to mitigate the impact of price falls in times of recession. It is curious that although cartel practices were prohibited within the community, the ECSC’s marketing policy in the rest of the world was identical to those that would have been followed by a private cartel.

The innovation in the treaty, and the reason why it inspired such interest among proponents of deeper ‘integration’, lay not in the settlement of a potential political and commercial problem but in the manner of its resolution. The ECSC was administered by an organizational structure which bore many outward similarities to that of the future EEC. It was controlled by the High Authority (HA), a supranational organization comprised of nine independent members assigned by each of the participating nations, which was free to initiate reaction where it had competence and rights to do so at extremes of the business cycle.

The HA co-operated with a Consultative Committee recruited from producer, labour, consumer and distributive interests. It also worked closely with a Special Council of Ministers, in which each country would have one vote, whose role was designed to increase as decisions on coal and steel impinged on wider economic and security issues. The HA was ultimately responsible to the Common Assembly comprising 78 members drawn from national parliaments. Although the HA was the most powerful governing body, the Council could block certain decisions and the Assembly could force the resignation of HA members.¹⁹

It is hard to judge the immediate economic impact of the ECSC. The overnight removal of trade controls, without the transitional periods common to most European agreements, was certainly a success. However, for coal and steel, traditional barriers were less important as regulators of trade than they had been in the past or than they were for other sectors of the economy. The coal trade was covered by international agreements in which tariffs did not really play a role; Italy, with a rate of 15%, was something of an exception. For steel, both France and Germany had already suspended tariffs before the treaty was signed and the Benelux tariff had long been fairly low. Again, only in Italy, where an ad valorem tariff of 11–23% had been levied (and which was allowed to remain intact over a transition period) did tariffs have a protectionist intent.