Nicholas Walls B00595105
November 23, 2012
Econ 2239-Professor Paul Huber
Europe was economically in tatters following World War II, as a result of excess spending , the loss of manpower and the destruction of its’ industrial facilities due to bombing during the war. Despite these grim circumstances , the economies in western Europe surged during the years from 1948-1973 in an era that has been called “The Golden Age of Growth” .This paper will explore how western Europe was able to recover so rapidly and soar economically in such a short period of time from the devastation caused by World War ll.
To provide some context to the amazing recovery that occurred in Western Europe, it should be noted that after the end of World War ll , the GDPs of France ,the Netherlands, and the Axis countries of Europe (Italy and Germany) had reverted to pre World War One levels (Crafts and Toniolo, page 3). Furthermore, many European countries attempted to rebuild after the war by using public funding to finance reconstruction and increase industrial output, while simultaneously freezing prices of essential goods and commodities. This had the unfortunate effect of causing many European countries to run high annual deficits, as well as providing a disincentive for many entrepreneurs to invest in these economies. However, the U.S. came to the aid of its European allies by going forward with the Marshall plan, a series of cash grants designed by U.S. Secretary of State George Marshall to aid in the recovery of Western Europe, and halt the spread of communism, by granting thirteen billion dollars in grants over a period of four years from 1948 to 1951. As Stated By Eichengreen, ” The Marshall Plan thus unraveled the gordian knot of having to first export in order to import but being unable to import with first exporting. Europe’s strategy of investment-led growth was sustained”(Eichengreen, page 14). The Marshall plan further paved the way for Europe to fully embrace a market economy by requiring that countries balance their budgets and stabilize price controls. During the period from 1950 to 1973, the average growth rate in Western Europe was 4.6 percent (Crafts and Toniolo, page 2). Furthermore, these high growth rates were experienced by all countries of Western Europe, and were not confined to a lucky few. A possible reason for the rapid growth rate of Europe can be attributed to a “traditional catch-up pattern based on the imitation and adaptation of foreign technology, coupled with strong investment and supporting institutions” (Timmer et al, page 4). Western Europe was also aided by consisting of countries that contained a history of industrialization, which in turn allowed them to utilize a much more educated populace, allowing them to take full advantage of these imported technologies. Nevertheless, while “traditional catch up” had a role to play, it does not fully explain the growth experienced in Western Europe. Further investigations make it clear that other salient factors helped to support Western Europe’s “Golden Age of Growth”. Besides the “catch up effect” , another major factor in the growth of Europe during its golden age was a much higher rate of investment, coupled with an elastic supply of labour which fueled European growth in this period. “Net Investment rates in Europe were nearly twice as high in the 1950s and 1960s as before or since.” (Crafts and Toniolo, page 38). Further fueling growth in Western Europe was the presence of a large and growing supply of labour. Countries with a large amount of available labour saw much more rapid growth from investment than those without, ”The payoff on investment was high where there was an expanding labor force with which the additional capital could be put to work.” (Eichengreen, page 23). Large supplies of experienced labour also allowed businesses to keep wages fairly low, and reinvest larger amounts of capital back into...