by Tony Judt
The impact of economic slowdown was only just beginning to be felt when two external shocks brought the Western European economy to a shuddering halt. On August 15th 1971, US President Richard Nixon unilaterally announced that his country was abandoning the system of fixed exchange rates. The US dollar, the anchor of the international monetary system since Bretton Woods, would henceforth float against other currencies. The background to this decision was the huge military burden of the Vietnam War and a growing US Federal budget deficit. The dollar was tied to a gold standard, and there was a growing fear in Washington that foreign holders of US currency (including Europe’s central banks) would seek to exchange their dollars for gold, draining American reserves.192
The decision to float the dollar was not economically irrational. Having opted to fight an expensive war of attrition on the other side of the world—and pay for it with borrowed money—the US could not expect to maintain the dollar indefinitely at its fixed and increasingly over-valued rate. But the American move nonetheless came as a shock. If the dollar was to float, then so must the European currencies, and in that case all of the carefully constructed certainties of the postwar monetary and trading systems were called into question. The fixed rate system, established before the end of the Second World War in anticipation of a controlled network of national economies, was over. But what would replace it?
Following some months of confusion, two successive devaluations of the dollar, and the ‘floating’ of the British pound in 1972 (belatedly bringing to an inglorious end sterling’s ancient and burdensome role as an international ‘reserve’ currency), a conference in Paris, in March 1973, formally buried the financial arrangements so laboriously erected at Bretton Woods and agreed to establish in its place a new floating-rate system. The cost of this liberalization, predictably enough, was inflation. In the aftermath of the American move of August 1971 (and the subsequent fall in the value of the dollar) European governments, hoping to head off the anticipated economic downturn, adopted deliberately reflationary policies: allowing credit to ease, domestic prices to rise, and their own currencies to fall.
Under normal circumstances this controlled ‘Keynesian’ inflation might have succeeded: only in West Germany was there a deep-seated historical aversion to the very idea of price inflation. But the uncertainty produced by America’s retreat from a dollar-denominated system encouraged growing currency speculation, which international accords on floating-rate regimes were powerless to restrain. This in turn undermined the efforts of individual governments to manipulate local interest rates and maintain the value of their national currency. Currencies fell. And as they fell, so the cost of imports rose: between 1971 and 1973, the world price of non-fuel commodities increased by 70 percent, of food by 100 percent. And it was in this already unstable situation that the international economy was hit by the first of the two oil shocks of the 1970s.
On October 6th 1973, Yom Kippur (The Day of Atonement) in the Jewish calendar,Egypt and Syria attacked Israel. Within twenty-four hours major Arab oil-exporting states had announced plans to reduce oil production; ten days later they announced an oil embargo against the US in retaliation for its support for Israel and increased the price of petroleum by 70 percent. The Yom Kippur War itself ended with an Egyptian-Israeli cease-fire on October 25th, but Arab frustration at Western support for Israel did not abate. On December 23rd the oil-producing nations agreed to a further increase in the price of oil. Its cost had now more than doubled since the start of 1973.
To appreciate the significance of these developments for Western Europe especially, it is important to recall that the price of oil, unlike almost every other primary commodity on which the modern industrial economy rests, had remained virtually unchanged over the decades of economic growth. One barrel of Saudi light crude—a benchmark measure—cost $1.93 in 1955; in January 1971 it went for just $2.18. Given the modest price inflation of those years, this meant that in real terms oil had actually got cheaper. OPEC, formed in 1960, had been largely inert and showed no inclination to constrain its major producers to use their oil reserves as a political weapon. The West had grown accustomed to readily available and remarkably cheap fuel—a vital component in the long years of prosperity.
Just how vital can be seen from the steadily growing place of oil in the European economy. In 1950, solid fuel (overwhelmingly coal and coke) had accounted for 83 percent of Western Europe’s energy consumption; oil for just 8.5 percent. By 1970 the figures were 29 percent and 60 percent respectively. Seventy-five percent of Italy’s energy requirements in 1973 were met by importing oil; for Portugal the figure was 80 percent.193 The UK, which would for a while become self-sufficient thanks to newly discovered reserves of oil in the North Sea, had only begun production in 1971. The consumer boom of the late fifties and sixties had greatly increased European dependence on cheap oil: the tens of millions of new cars on the roads of Western Europe could not run on coal, nor on the electricity now being generated—in France especially—by nuclear power.
Hitherto, imported fuel had been priced in fixed dollars. Floating exchange rates and oil price increases thus introduced an unprecedented element of uncertainty. Whereas prices and wages had risen steadily, if moderately, over the course of the previous two decades—an acceptable price for social harmony in an age of rapid growth—monetary inflation now took off. According to the OECD, the inflation rate in non-Communist Europe for the years 1961-1969 was steady at 3.1 percent; from 1969-1973 it was 6.4 percent; from 1973-1979 it averaged 11.9 percent. Within this overall figure there was considerable national variation: whereas West Germany’s rate of inflation from 1973-1979 was held to a manageable 4.7 percent, Swedenexperienced a level twice as high. French prices inflated at an average of 10.7 percent per annum in those years. In Italy the inflation rate averaged 16.1 percent; in Spain over 18 percent. The UK average was 15.6 percent, but in its worst year (1975) the British inflation rate exceeded 24 percent per annum.
Price and wage inflation at these levels was not historically unprecedented. But after the stable rates of the fifties and sixties it was a new experience for most people—and for their governments. Worse still, the European inflation of the seventies—compounded by a second oil price rise in 1979, when the overthrow of the Shah of Iran produced panic in the oil markets and a 150 percent price increase between December 1979 and May 1980—did not conform to previous experience. In the past, inflation was associated with growth, often over-rapid growth. The great economic depressions of the late nineteenth century and the 1930s had been accompanied by deflation: precipitate falls in prices and wages caused, as it seemed to observers, by over-rigid currencies and chronic under-spending by governments and citizens alike. But in 1970s Europe the conventional pattern seemed no longer to apply.
Instead, western Europe began to experience what was inelegantly dubbed ‘stagflation’: wage/price inflation and economic slowdown at the same time. In retrospect this outcome is less surprising than it seemed to contemporaries. By 1970 the great European migration of surplus agricultural labor into productive urban industry was over; there was no more ‘slack’ to be taken up and rates of productivity increase began inexorably to decline. Full employment in Europe’s major industrial and service economies was still the norm—as late as 1971 unemployment in the UK was 3.6 percent, in France just 2.6 percent: but this meant that organized workers who had grown accustomed to bargaining from a position of strength were now facing employers whose generous profit margins were starting to shrink.
Pointing in justification to the increased rate of inflation from 1971, workers’ representatives were pressing their case for higher wages and other compensation upon economies that were already showing signs of exhaustion even before the crisis of 1973. Real wages had begun to outstrip productivity growth; profits were declining; new investment fell away. The excess capacity born of enthusiastic post-war investment strategies could only be absorbed by inflation or unemployment. Thanks to the Middle East cri
sis, Europeans got both.
The depression of the 1970s seemed worse than it was because of the contrast with what had gone before. By historical standards the average rates of Gross Domestic Product (GDP) growth in western Europe through the 1970s were not especially low. They ranged from 1.5 percent in the UK to 4.9 percent in Norway and were thus actually a distinct improvement over the 1.3 percent average growth rates achieved by France, Germany and the UK over the years 1913-1950. But they contrasted sharply with the figures of the immediate past: from 1950-1973 French growth per annum had averaged 5 percent, West Germany had grown at nearly 6 percent and even Britain had maintained an average rate above 3 percent. It was not the 1970s that were unusual so much as the ’50s and ’60s.194
Nevertheless, the pain was real, made worse by growing export competition from new industrial countries in Asia and ever more costly import bills as commodities (and not just oil) increased in price. Unemployment rates started to rise, steadily but inexorably. By the end of the decade the numbers out of work in France exceeded 7 percent of the workforce; in Italy 8 percent; in the UK 9 percent. In some countries—Belgium, Denmark—unemployment levels in the seventies and early eighties were comparable to those experienced in the 1930s; in France and Italy they were actually worse.
One immediate result of the economic down-turn was a hardening of attitudes towards ‘foreign’ workers of all sorts. If published unemployment rates in West Germany (close to zero in 1970) did not climb above 8 percent of the labor force despite a slump in demand for manufactured goods, it was because most of the unemployed workers in Germany were not German—and thus not officially recorded. When Audi and BMW, for example, laid off large numbers of their workforce in 1974 and 1975, it was the ‘guest workers’ who went first; four out of five BMW employees who lost their jobs were not German citizens. In 1975 the Federal Republic permanently closed its recruiting offices in North Africa, Portugal, Spain and Yugoslavia. As the 1977 Report of a Federal Commission expressed the point in its ‘Basic Principle #1’: ‘Germany is not an immigrant country. Germany is a place of residence for foreigners who will eventually return home voluntarily.’ Six years later the Federal Parliament would pass an Act to ‘Promote the Preparedness of Foreign Workers to Return’.
Voluntarily or otherwise, many of them did indeed return ‘home’. In 1975, 290,000 immigrant workers and their families left West Germany for Turkey, Yugoslavia, Greece and Italy. In that same year, 200,000 Spaniards returned to Spain in search of work; returnees to Italy now outnumbered emigrants for the first time in modern memory, as they were shortly to do in Greece and Portugal. By the mid-seventies, nearly a third of a million Yugoslav emigrants had been obliged to return to the Balkans, where their expectation of employment was no better than in Germany or France. The northern European jobs crisis was being re-exported to the Mediterranean. Meanwhile France imposed strict restrictions on immigration from Algeria and its former African colonies, and the United Kingdom placed ever tighter limits on would-be immigrants from the South Asian sub-continent.
The combination of structural unemployment, rising oil import bills, inflation and declining exports led to budget deficits and payments crises all across Western Europe. Even West Germany, the continent’s manufacturing capital and leading exporter, was not spared. The country’s balance-of-payments surplus of $9,481 million in 1973 fell within a year to a deficit of $692 million. The British national accounts were by now chronically in deficit—so much so that by December 1976 there appeared a serious risk of a national debt default and the International Monetary Fund was called in to bail Britain out. But others were little better off. French payments balances fell into the red in 1974 and remained there for most of the ensuing decade. Italy, like Britain, was forced in April 1977 to turn to the IMF for help. As in the British case its leaders could then blame ‘international forces’ for the unpopular domestic policy measures that ensued.
In Keynesian thinking, budget shortfalls and payments deficits—like inflation itself—were not inherently evil. In the Thirties they had represented a plausible prescription for ‘spending your way’ out of recession. But in the Seventies all Western European governments already spent heavily on welfare, social services, public utilities and infrastructure investment. As the British Labour Prime Minister James Callaghan glumly explained to his colleagues, ‘We used to think that you could just spend your way out of a recession . . . I tell you, in all candour, that that option no longer exists.’ Nor could they look to the liberalization of trade to save them, as it had done after World War Two: the recent Kennedy round of trade negotiations in the mid-Sixties had already taken industrial tariffs to a historic low. If anything, the risk now was of growing domestic pressure to re-impose protection against competition.
There was a further complicating element in the choices facing policymakers in the 1970s. The economic crisis, however circumstantial and conjunctural its triggers, coincided with a far-reaching transformation which governments could do little to arrest. In the course of a generation, Western Europe had undergone a third ‘industrial revolution’; the smokestack industries that had been so much a part of daily life just a few years before were on their way out. If steelworkers, miners, car workers and mill hands were losing jobs, it wasn’t just because of a cyclical downturn in the local economy, or even a by-product of the oil crisis. The venerable manufacturing economy of Western Europe was disappearing.
The evidence was incontrovertible, though policymakers had for some years been trying hard to ignore its implications. The number of miners had been slipping steadily ever since West European coal output peaked in the 1950s: the great Sambre-Meuse mining basin of southern Belgium, which generated 20.5 million tonnes of coal in 1955, produced just six million tonnes by 1968 and negligible amounts ten years later. Between 1955 and 1985 100,000 mining jobs disappeared in Belgium; ancillary trades of various kinds suffered accordingly. Even greater losses were experienced in British mining, though spread across a longer period. In 1947 the UK boasted 958 coal mines; forty-five years later just fifty of them remained. The mining workforce was to fall from 718,000 to 43,000: most of those jobs were lost in the course of the decade 1975-85.
Steel, the other staple industry of industrial Europe, suffered a similar fate. It was not that demand for steel had fallen so very dramatically—unlike coal, it could not so readily be replaced. But as more non-European countries entered the industrial ranks, competition increased, the price fell and the market for expensively produced European steel collapsed. Between 1974 and 1986 British steelworkers lost 166,000 jobs (though in the latter year the UK’s major manufacturer, the British Steel Corporation, made a profit for the first time in over a decade). Shipbuilding declined for similar reasons; motor car manufacturing and textiles likewise. Courtaulds, the UK’s leading textile and chemical combine, reduced its workforce by 50 percent in the years 1977-83.
The recession of the Seventies saw an acceleration of job losses in virtually every traditional industry. Before 1973 the transformation was already under way in coal, iron, steel, engineering; thereafter it spread to chemicals, textiles, paper and consumer goods. Whole regions were traumatized: between 1973 and 1981 the British West Midlands, home of small engineering firms and car plants, lost one in four of its workforce. The industrial zone of Lorraine, in north-east France, lost 28 percent of its manufacturing jobs. The industrial workforce in Lüneburg, West Germany, fell by 42 percent in the same years. When FIAT of Turin began its switch to robotization at the end of the 1970s, 65,000 jobs (out of a total of 165,000) were lost in just three years. In the city of Amsterdam, 40 percent of the workforce was employed in industry in the 1950s; a quarter of a century later the figure was just one employee in seven.
In the past, the social cost of economic change on this scale, and at this pace, would have been traumatic, with unpredictable political consequences. Thanks to the institutions of the welfare state—and perhaps the diminished political enthusiasms of the time�
��protest was contained. But it was far from absent. In the years 1969-1975 there were angry marches, sit-ins, strikes and petitions all across industrial Western Europe, from Spain (where 1.5 million days were lost to industrial strikes in the years 1973-75) to Britain, where two major strikes by coalminers—in 1972 and 1974—persuaded a nervous Conservative government that it might be the better part of valor to postpone major mine closures for a few more years, even at the cost of further subsidies charged to the population at large.
The miners and steelworkers were the best-known and perhaps the most desperate of the organized protesters of the time, but they were not the most militant. The decline in the number of workers in old industries had shifted the balance of strength in trade union movements to the service-sector unions, whose constituency was rapidly growing. In Italy, even as the older, Communist-led industrial organizations lost members, teachers and civil service unions grew in size and militancy. The old unions evinced scant sympathy for the unemployed: most were anxious above all to preserve jobs (and their own influence) and shied away from open confrontations. It was the combative service-sector unions—Force Ouvrière in France, NALGO, NUPE and ASTMS in Britain195—which enthusiastically took up the cause of the young and the jobless.