""\ " I

\)' r. '_---------r R:',! R

COl" F I D ~ 1T :r I :i L

Il1T3RliJATIOR4.L BAIJK FOR R3COHSTRUCTION Al'D DEV3LOP;@"!T

EconOMIC DEP.4RT:{:!:LJT

TEE PRO::BL3H 0:;: I :;tTRA-sJROPWT TRAD3 ABD P P.Y: r?FTS AIID ITS SIGl:U]'ICA:TC3 TO :!:u-POF3.A.:~ RJCOVERY

By

X. Varvaressos

And

R. Zaf1riou

December 31, 1948

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

conTENTS

IliITRODUCT I ON

A. EUROl'EA.lif TRADE BEFORE THE iiAli

B.

1. Europe t s Trade va th Other Regi ons (Excl udi ng Trade "Ii th Overseas Dependencies).

2. Trade \1[1 th European Overseas Dependencies.

J. Intra-European Trade.

4. Conclusions On Pre-i'Jar Features Of Zuropean Trade.

POST-IvAR ID1VELOPHEBTS Hr Il~RA-ET.JROPEA.N TRADE , -

1. Germany.

2. Eastern Europe.

J. The United Kingdom.

4. Continental "lestern 3u.rope.

5. Nature And Significance Of Post-war Developments In Intra-European Trade.

6. The Intra-European Payments Agreement.

c. COHCLUSIOl\TS

1. The Need For Early Independence From American Aid.

2. The Problem Of Intra-European Trade As Part Of The Problem Of European Economic Independence.

a. Intra-European Trade In Essentials.

b. Intra-European Trade In Luxuries And Less Essential Goods.

c. Bilateralism Or Convertibility?

d. Conditions For The Restoration Of Equilibrium In Intra-European 3xchanges.

J. The Possibility Of European Economic Integration.

U1TRODUCTION

The most urgent problem ",hieh today faces Europe is to restore

equilibrium to its external accounts and become independent of American

aid at the earliest possible moment. This is a vital Euro~ean interest

more than it is an American interest. For the United states, the

failure of Europe to recover '.vQuld involve the decision of , . .,hether to

conti~ue or not providing aid of the order of $3 billion at most per

annum, mainly in the form of cornmodi ties which may in any case be in

surplus su?ply by 1952. For the Europeans, continued dependence on

American aid ,·rould mean uncertainty, loss of confidence and of self-respect.

If this interpretation of Nhat is the real 3uropean interest is

correct, it follo,·!s that all other European issues should be subordi­

nated to this overriding need for early independence from American aid.

Vie\"ed in this ''lay. the problem of stimulating intra-European trade is

not a separate and unrelated issue but must be submitted to the test of

l;'lhether it contributes or not to the restoration of European economic

independence.

The thesis of this Hemorandum is that efforts to stimulate intra­

European trade, vrhich aim at indi soriminate increases in turnover '\'1i th­

out regard to the nature of the goods exchanged and involve the use of

American dollars, do not contribute to European recovery but rather

tend to postpone necessary adjustments in the European economy, solidify

existing disequilibria and prolong European dependence on American aid.

Intra-European trade absorbs scarce resources of manp0l',er and

materials and diverts goods that could be e:lq)orted overseas and earn

hard currencies. It must, therefore, be subjected to the Same scrutiny

-11-

\'IIi th regard to the degree of utility of the goods exchanged and to the

contribution of these goods to European recovery as is the case '-lith

imports from overseas regions. This requires concerted European acticn

that ,-,ill encourage the production and exchange of essential goods and

discourage exchanges of non-essentials \>Ihich are often not ",anted but

are forced by Europeans on each other. It also requires the establiShment

of monetary stability and appropriate exchange rates that ,-,ould elimine,te

the main cause of present disequilibria in intra-European exchanges.

Financial arrangements and dollar-suiJPorted schemes dee-ling Hith

total values and deficit or surplus balances offer no enduring solution

to the problem of intra-European exchanges because they address them­

selves to the symptoms and not the causes of present diseq,uilibl'iao

It must be recognized that even ':Then all the possible adjustments

have been made, a minimum of exchanges of less essential goods '!IIould

probablY be required in order to prevent extreme hardship in cases 't;rhere

resources cannot be shifted to more essential uses. Such exchar-gest

however, would be smaller than they are at present and certainly much

smaller than many Europeans are ,,,illing to contemplateo The resulting

volume of intra-European exchanges would probably be 1m'Jer than before

the ''far, ",hen trade in less essential goods constituted a substantial

part of intra-European exchanges, but this would only reflect the

impoverishment of the European Con~inent and especially the deterioration

in its external financial position, and could be remedied only by very

great increases in European productivi ty ,-rhieh are a long-term prospect.

It is daily becoming clearer that Europe cannot hope to consume and

exchange non-essentials \1hen a very large expansion in its exports to

overseas regions is required to enable it to pay for its essential

- iii -

imports of food and ra", materials.

ive have no,,! entered the fourth post-war year and European produc­

tion is back to pre-"rar levels. This means that emergency measures and

temporary expedients are no longer justified. The Payments Scheme

adopted last October in Europe is a measure of this type and cannot, there­

fore. provide a real solution to the problem of intra-European exchanges.

There is a real danger in assuming, as many Europeans tend to do,

that the time for adjustment 1tl111 only come at the end of the ::nOA

period and that meanwhile all difficulties are difficulties that can

be solved uith the use of dollars.

In our vim·!, if the adjustments in European production and trade

necessary for long-term equilibrium are not made soon, the end of the

EOA period is likely to find Euro:pe in the same state of unbalance '"7h1ch

existed at the beginningo

A. EUROPEAN TRADE BEFORE TH11l ~·1A.R

At the beginning of the 20th century Europe accountect for tv!o-thirds

of '''arlO. tr:->,de, and in 1913 her share ',!as over 60 !,er cent of the Horld

total. The decline in Europe's relative economic strength ~rhich ,·rna

he.stened by the "far of 1914-1918 redu.ced Euro1?8 Is sl18.re in worlel. trade

during the inter-Nar period to only slightly over 50 per cent.

In spite of this decline, Europe, on the eve of the Second ~·rorld

!1'ar, ,.,as still the "'orld's most important trading region, absorbing 50 :oer

cent of the !Jroclucts exnorteCl. by the other regions of the ":orld anet pro­

viding 40 per cent of the goods im!Jorted by these regions. Exchanges

among European countries rel')r€~ented one-third of total "torld trade.

This commercial import['~nce of Europe as a region 1;ta.S almost exclu­

sively due to the existence of lc,rge industrial centers in ivestern Europe.

The six largest industrial countries, namely, the U.K., GermrulY, Frence,

Belgium, the Netherlands and Italy, accounted for over 70 !ler cent of tot",l

European trade. Four other industrial countries, namely, 8,'reden, S'1!ritzer­

land, Czechoslovakia ~nd Austria. accounted for another 11 per cent of

Europe:m tr:-.de and the reme,ining 18 countries for less tha.n 20 per cent

of the total. Thus, it is true to say that European trt:1de "ras predomin­

antly concentrated in a small number of highly inclustrie.lized countries

and that, in spite of the existence in Europe of many agricul turD,l

countries, European trade as a \1hole Has typical of the trf:1.de of en

industrial region.

i'That '·ras the Significance of the excha,nges carried out bet1:reen Europe

and other regions ::>no. 1',i thin EurO!l9 i tselt? 1·7ha.t Nere the goods exchanged?

~lfw Here they e:x:cl1,'mged? Did all these exchanges he.ve the same economic

importance or ':lere there some \·'h1ch ;Jere more essential then others? It

-2-

is only by ansi·jering these questions that it is possible to e..etermine the

nature and significance of European tr1:'.a.e and intra-European exchangflS.

1. Europe's Trade ",i tlt Other Regions (e:wluding trade N1 th European Overseas Dependencies)

Although imports from non-European regions represented less tl18n 40 per

cent of total European imports, they consisted overt,rhe1mingly of b~sic food-

stuffs and rai" materials "rhich '!rere essential to tlle functioning of the

European economy and ~'!hich '!-Tere unobtainable in Europe in the needed quanti-

ties.

On the b8.sis of data compiled by the Leaf,ue of Nations the fol1o':!ing

commodities, all of an essential character, accounted for 72 per cent of

l' total European imports from overseas regions in 1905 0 :1

Heat and dairy products

1'1heat

Other cereals

Oil seeds and oils

Coffee, teat cocoa

Tobe.cco

Cotton

ivool

Other textile fibers

Petroleum

Base metals

Hides

Timber

400

285

300

175

240

115

530

370

75

210

180

65

150

See League of Nations Europe's Trade. The year 1935 "Tas chosen as the most representative pre-1·rar year. Total imports from overseas regions (excluding dependencies) in 1935 'lolere $4,300 million.

Of this total 35 per cent Here obt",ined in the British Dominions end

India, and the remaining 65 per cent in other overseas regions, mostly the

l'Testern Hemisphere.

The essential character of these im1')orts may be gauged. from the fact

that their volume sho'·'ed only a small decline, :!Jrobably not exceeding 10

per cent,Y betueen 1928 and 1938, i.e., during ~, period ~,rhen intra-Euro}?een

trade declined by some 30 per cent.

The industri21 countries absorbed 99 per cent of these im~orts. In

1938 five of these coun·~ries, the U.K., Germo,ny, France, Belgium f'.,nd the

Netherland.s accounted for 80 :!Jer cent of the total, the share of the United

Kingdom alone being 46 per cent.gj Thus the dependence on overseas supplies

was characteristic of the industrial countries 2,nd not of all Europee.n

countries. Host of the non-industrio,l Europec'.n countries relied almost

exclusively on the other Europea.n countries for their su~plies of imported

goods.

1I Estimated as folloNs:

Imports in 1928 Imports in 1938 Index of ?rices of primary products (1928 = 100) 1938 Imports at 1928 prices 1938 Volume of imports (1928 ~ 100)

gJ Imports from overseas regions (Nillion Dollars):

From British Dominions From

$7,800 IHllion $5,167 Million

73 $7,100 IIHlion

91

and India Rest of Horld Tot8l

~ 1938 1928 ~ 1928 1938 -U.K. 1000 1195 1850 1200 2850 2395 Germany 400 151 1100 650 1500 801 France 220 118 1070 350 1290 468 Belgium 75 63 190 200 865 263 Netherlands 50 31 270 200 320 231 Other industriCll 230 81 720 450 950 531 Other 110 78 515 400 625 478

TOTAL .::::,:,085 1,717 5,715 3 2450 7 z800 5 2167

-4-

As regards European exports to overseas regions, these consisted over-

\,lhelmingly of manufactured goods. In 1928 they amounted to $4,350 million,

representing 26.6 per cent of total European exports Q They had declin&d to

$2,850 million in 1938. when they r~presented 27.3 ~er cent of e~)ortso

Since prices of manufactures decreased by less than 20 per cent betl'.·een 1928

and 1938. the decline in volume "las about 20 :per cento Thus, EuZ'O'!'ean

exports to other regions during the period under examination declined con~

siderably more than European imports from those regions, but at the same

time, as in the case of imports, "Tere slightly better maintained than exports

\'Ii thin Europe.

A small number of European coun'l;rles again accounted for the bulk of

these exports. The five major industrial countries exported over 75

per cent of the total, Britain alone accounting for over 40 per cent of the

total.!!

Another characteri stic feature of Euro:pe 1 s overseas trade 'VJaS the, large

import surplus "ri th the overseas regions. This surplus amounted to. $3~450

million in 1928 and $2.321 million in 1938" These figures" ho"reveri include

freight and insurance, ",hleb involved payments in national or European

currencies and therefore exaggerate the size of the European trade deficit

with outside regions o Deducting some $800 million for freight in 1928 and

iI Exports to overseas regions (Nillion Dv11ars):

British Dominions al1d India Rel1t of ~'Torl.ii To~

1.228 ill§. 1928 19'38 J.2.?§. 12.:ill. U.K. 1120 767 860 440 1980 1207 Germany 110 107 660 460 770 567 France 60 18 300 123 360 141 Belgium 45 38 180 138 225 176 l~etherlands 35 23 65 68 100 91 Other Industrial 105 71 510 330 61.5 401 Other 25 19 -1:.7.S.. -2?~ :200 '26:2

TOTAL 11500 1,043 22 8.2Q. h80} 42 :250 2,846

-5-

$520 million in 1938 we may estimate the real import surplus at $2,650 million

in 1928 and $1,800 million in 1938~

In 1928 a considerable }Jart of thi s surplus reflected the inflm'T of

American capital in Europe uhioh was probablY of the order of $500 million

or moreel! In 1938, on the other hanel, there "ras some liquidation of

European forelg~ investments which probably met part of the deficitg The

remaining deficit 'ms covered by receiI)ts from invisibles, chiefly invest-

ment income and shiPIJingo A fell countries, among \1hich the United Eingdon

held a predominant position, accounted for the bulk of this trade deficit.

In 1928 the trade deficits of the United Kingdom, Germal'l-Y and France re,!:re­

sented 72 per cent of the totalo In 1938, more than half the total deficit

was on account of the UoXo aloneo y

The European trade deficit in 1938 "rould have been much larger if

prices of primary products had not fallen considerably more tban pric~s of

manufactures during the 1930' Sit At 1928 prices it 'I:iould have been $2,880

million instead of $1~800 million, i~eo. 60 per cent larger than it actually

was., It is clear that since even the smaller defiuit necess:i.tated some

liquidation of foreign assets 9 the much larger deficit Fould have created

a serious balance of payments problem for Europeo This is especially so

1.1 See Ib,!l_Uni te'~ St~tes in tlJtiQ:rld_F]cQ.:Q:JIEil:" po 91., In 1927 and. 1928 over $1",(\00 million was made available through ne"l issues of securities for foreign account in the United States marketo rt is assuned here that half of these issues 'Here on European accoun'c o There vias also a con­siderable repatriation of French funds Q

'1:.1 As follows: T1"i"l,de Deficit (Mliii';;;lD~ll~;s ) 1228 12J§.

UoIo - 870 - 1188 Germany - 730 234 France ~ 930 - 327 Other -' 220 - '5'72

TOTAL - 3~450 - 29321

-6-

since, as already sho,m, most of the commod! ties obtained from overseas

Nere of the nature of essentic,ls 1IThose inmortr-,tion could not be s\:1stantitl~ly

reduced. Thus it is true to say th~t, first, American lo~ns and, then, the

depression of the 1930. s helped to conceal the "Tealmess of the Euro;:>ean

financial po si tion resulting from a reduced ability to export and a gro1:Ting

demand for essential overse<?,s supplies.

It is also true to say that higher levels ox economic activity in the

"Tor1d, such as those obt"dning since the Nar, VTere bound to increase the

demand and raise the prices of ~rimary products, end thereby result in a

deteriorC'.tion of the extremely favorg,b1e terms of tre,de ,.,hich Europe enjoyed

during the last :r:>re-'lTar 0.ec8.(le. Finally, it is clear that EuropeDns cannot

hope for a return of the pre-v.,ar relationshiu bet"'een IJrices of primary pro-

ducts and prices of manufactures unless there is a serious depression in the

united States and unless deflationary conditions develop in the other over-

seas regions.

2. Trade 1:-rith European Overseas Deuendencies.

Traue Hi th coloni,<"1,l dependencies differs in many im')orkcnt respects

from trade "ri th other overse~s regions [l,nd should, therefore, be discussed

separately in any study of Europe f s trC',de :;roblem. Poli tic!),l domination,

common or closely connected monetary systens, sheltered m~.r!:ets and virtue.lly

exclusive access to sources of sup:yly are f'"1.ctors 1.rhic11 tend to encour~ge

trade bet~'Teen the metropolitan areas and the coloni es, even in times of

severe shrinkage of foreign tr9.cle. In fact t coloni~tl tr9,de is in many

respects more like intern:?.} tr,"'.de thc:n like foreign tr;:::.cle. Thi s eX:'Jlaj;::rs

",by co10ni9.1 trade actually increased in volume during the 1930's, i.e.,

during a,. period "'hen foreibn tr8.de shoved sharp declines. European imports

from the colonies increased from $1,200 ;>1illion in 1928 to :?l,416 million

in 1938, representing an increase in volume of some 40 per cent.1i Ex~orts i7 Assuming a fall in prices of 20 per cent.

I·

-7-

increased less because Euro:,?ep,n countries reduced the :f'lOi'l of ce.pital to these

regions. They "rere $1,150 million in 1928 and $924 million in 1938, "rhich,

taking into account the fdl in prices, suggests,no change in volume. Con-

sidering that exports to foreign countries decreased during tho.t :r;erioi by

20 per cent cmd tr?de uithin Europe by 30 per cent, it is clear that eX!Jorts

to the colonies '·rere better maintr.ined th['n ex:,?orts to other regions. This

happened because exports to the colonies benefited from the more sheltered

condl tions of colonial m?rkets anrl from increased discrimination agf-.inst

foreign goods in those ma.rJ.'Cets.li Colonial trade H8.S hee.vily concentra.ted in a fel-! European countries.

the U.X. alone accounting for one-third of this tr8ile.:?J

11 Percentage share of colonia~ trade in total trade of Coloni8~ P01·!ers:

U. K. (incl. :Br. Commom-reE'.l th) France :Belgium liTetherlands ItCl~

Imports 1929 JJill§.

30.2 12..,0

3.9 5.5 0.5

41.9 27.1 8.3 8.8 11>8

1938 Imnorts

(Hillion Dollars)

Per cent of Total

U.K. 468 33 Germany 227 16 France 383 27 :Belgium 101 7 Netherlands 97 7 Ite~y 47 3 Other 93 6

TOTAL 1,416 99

Exports 1929 1938 - .--44.4 49.9 18.8 27.5 2.6 1.9 9.4 10.7 2.1 23.3

Ex:norts

~ cent of Total

298 32 80 8.5

249 27 42 3 77 8

123 13 55 6

..--924 97.5

While the bulk of each count!"'J's tr9,de ~'!as Hith its e'm colonies, :British and Dutch colonies supplied the other Euro!,ean countries "'i th substv.ntial quantities of SUcll goods ns rubber, tin, oil seeds etc. This is especially true of GarmDn imnorts from the colonies since Germany had no colonies of its o1om.. In such ce,ses tr8.de uith colonies did not differ from other overseas trade.

-8-

'l'he main commodities ootnined in t!le colonies Nere f'oodstu.:ffs nncl rm"

materids. Data. have been com;?ile(l by the League of Nations for the folloF-

ing crmmodi ties iolhich accounted for 62 "1Jer cent of total Euro'Jeen i:rrmo:cts

from the colonies in 1935:

Meat and dairy products

Bananas ~Jld citrus fruit

Ooffee and cocoa

Oil seeds and oils

Tobacco

Hemp and cotton

Rubber

Timber

Petroleum

Hides

Base metals

Natur':.1 phosphates

TOTAL

10 Industrial _Countries

51

61

58

135

40

48

88

'(

7

103

15

684

Nil1ion Do113..r~

Other ;@.uro"01t

6

5

9

8

3

3

6

40

57

66

67

143

40

48

91

74

'7

21

724

-9-

Thus, "1h11e colon1::1.1 trade accounted. for only 10 per cent of totnJ.

European tracle, it "ras of great signific8,nce to the major European countries

because it provided them "ri th substantia,l quanti ties of essential commodities

and enabled t!lem to obte,in these coromodi ties under exceptionally fnvor~ble

conditions. The colonies "'ere also on important source of dolln.rs for the

Colonial Po'.,rers because they h~.d ex~)ort sur't)luses Hi th the United States

1'lhich accrued to the Europe!.m POl rers in the form of investment income or pe,y­

ment for Euro!,9an coromodi ti es. Thus in 1936-38 India and the Eri ti 9h and

Dutch colonies in South-East Asi::>. had an eX'!ort sur::rlus ~d th the United Stc'l,tes

of $270 million. Including the dollars earned by the Cc>,ribbe<:n possessions

and other areas the amount of dollars earned by Europep-n countries from their

colonies prob~,bly amounted to some $400 million per annum. It is clear, ho"/­

ever, th.?t the structure of colonial trade clepencled on continued poli tical

domina,tion, and the,t once their hold. on the colonies h<",d "'!eN::enecl, European

countries could not expect to be able to derive the same benefits from their

trade "ri th the colonies. This is '·!he.t has h8.ppened. since the end of the Har.

3. Intrfl,-Euronean Tr[lde.

In 1938 intra.-Europeen trade acco-:mted for 56 per cent of tot8,1 European

trl.?de. Imi')orts from Europe represented 52 per cent of total EuropeE'n imports

and exports to Europe 64 per cent of total Euro;?ean exyorts. As far as size

is concerned, intr?,-EuropeRU exchanges vere, therefore, more important than

those "lith outside l'8gions. It is only, hovT8ver, 'trhen the structure and

composition of that tr2',de is analyzed that it is possible to eVD,lut\te the

significance of intra-European 9-'{c;.lf',nGes for the European economy and

Euro:?ean foreign trade [>,s a 1.'1hole.

tH th rego,rct to structure, the l)redominance of the major inrlustrial

countries is agB,in in evidence. The exchanges of goods among the industrial

countries themselves represented 50 per cent of total intra-European trade and

the exchanges of goods Oet'·reen industrif',l a.nd a,,c;ricul tur::-,l countries another

47 per cent. vith only 3 per cent of intra-Eur01?ean trade consisti:1.g of trade

a.'l1ong the non-industri9,1 countries.. Fi ve countries, the Uni -'ced Kingd.om,

Germany, France, :Belgium and the :£letherlaucls, e,ccountetl for 55 per cent of

total intra-European trade.

Thus, it is true to say that intra-European tr~de "Ie,s built on tllB neec1.o

and resources of the major Europerul industrial mRI'kets"

The countries \o!hich todey belong to the Soviet-dominC'.tect region of

Europe accounted for some 15 per cent of total intra-Euro:l)ean tr:;,de. I]'l'~is

means thL'.t the bulk of intra-Europe~n trnde "'as concentrated in the group of

countries ",hic11 today form the group of ERP cO'U."'ltries)J

l"lk"1.t "!ere the coromodi ties exche,nged ~Hi thin Europe?

Trade bet1!een industrial A.nd a.:::;ri cuI tural c01.mtri es cons1 steel of aI).

1938 (Eillio;-D~llars)

11lmor ts

To To From From Indust .. Other Ind.ust. Other Coun- Ooun- Per 0,::>1.1.11'- C(..'Ul1·- Per fuQ.!L Tote.l Cent _tt:.:.ig,.s_ ~~:£l-~~ ~J)_TA!!. ~!1....t.

U .. Ko 390 415 805 12.0 670 570 1340 19,,3

Germany 865 590 1455 22,,0 6.;'bO 550 1190 17.0

France 410 70 480 7.2 380 680 4~:8 6.4

:Belgium 445 66 511 7~7 ::;70 46 416 50 8

Netherlands 355 46 401 6,,0 400 55 455 6,,5 -- -- ---TOTAL 2~465 1~187 3,652 55 0 2 2~460 1;389 849 55 .. 0

Other industri~l EOA countri es 710 267 977 1408 828 316 1144 16.4

Non-industrial EOA countries 710 74 784 11.8 808 112 920 13.2

Spain 65 7 72 1.1 70 12 82 1,,2

Soviet-c1.ominated countries 840 213 1053 15()8 733 165 898 13.0

:Baltic countries 94 7 101 1.5 80 8 88 1.3

GRAND TOTAL 4 1 884 1*755 61 639 i,9?9 2~002. ,6 z 981

-11-

exchange of manufe.cture8 and coal for fooo_ and rml materials. It did not,

therefore. differ from the trade of the industrie.l countries ""i th overseas

regions and colonial possessions. Similarly, as in the case of overseas

regions, the Euro:peDn aGricultural countries ha.d an export surplus "rith

industriC'l.l Europe re:9resenting :>rim['.rily payments for investment income and

shitrping. Thus, it may be se.id that ne:-.rly half of totaJ. intra-European

tr::tde Nas conducted on the same basis as tr~de Ni th non-European regions.

Trade among the industria.l countries themselves \rp.s of a more com:')lex

na.ture. Part of 1 t consisted of an exchence of essentie.l materi£'.ls, such as

coal, iron ore, timber, "!ooclpulr, chemj.cals., These e.monnted to some 30 per

cent of total exchanges ".'i thin tae grou~').. Another :>e.rt consisted of trade

in foodst-Jffs and beverages, but these '1:!ere mostly in the n['l.ture of semi­

luxuries ",hlch the 1'lestern European countries '1"ere 1')rosperous enough to

afford before the \>!ar, but "Thich could easily be sp['.red. in times of diffi­

culties. Thus, the fruits, veGetables, "rines, dc.iry products traded Nithin

the group of industri£l.l countries, although they technically belong to the

general category of foodstuffs, \'rere of a. different economic significance

than the imports of cereals, oilseeds, cheao mee,t ancl butter, Hhich v'ere

obtained from overseas or even from non-industrial Europe. .A rouga estime.te

of these foodstuffs tr9.ded uithin industri8~ Europe suggests that they relJre­

sented another 10 per cent of total exchanges \'1i thin th~ groU"). The remain­

ing exchanges, corresponding to 60 per cent of the tota~ consisted over­

~'1helmingly of an exchange of manufactures, such as textiles, various con­

sumer goods, steel, machinery, vel:.icles and ships.

In these exchf1r-ges 1·Ji thin inclustrir>.l Eu.rope the United Kingc..om ~)layed

a. decl 8i ve pB.rt, but r.t the seIDe time her posi ti on diif ered consl der~.bly from

the.t of the other industrial countries,

In 1938 the Un! ted Kinp;dom obtained only 16 :per cent of her i;rr')orts

from industri9l Europe <'>,nd eX'Jortecl onl~r 17 per cent of her eJQ?orts to it.

For all the other industria.l countries these :,?ercentry,ges "lere much higher,

ranging from 29 and 41 per cent respectively for Germany to over 50 per cent

for Belgium, the l'Ietherlcnd.s, S1'leden and s~.n tzerbnd.U

Not only ''1O,S the United Kingdom less dependent on tr2-de ':ri th industrial

Europe than the other industri~ European countries, but also her imports

from industrial Europe consisted of much less essenti8,1 goocts th2,n her

imports from overseas regions or from EuropeCln '1,griculturC',l countries. They

"'ere mostly foodstuffs of a semi-luxury type an it vB.rious consumer goods "'hieh

a prosperous mid.dIe class coulcl !:'lIford [I,nd "ras ?,llO"'ed to purchase and "'hich

could be financed ",i thout difficulty from Britain I s foreign e::cchrtnge

resources. On the other hC',nd, 131'1 ti 611. exports to inclustri:::.l Euro,e '\'ere

largely made up of such commodities e,S co:"l, steel, mr,chinery nJl.cl vehicles,

i. e. of procluction goods essential to the Continental inclustry. Finally,

the United :lCingclom im~lorted 30 per cent more from inclustri'),l Euro:r,>e than it

export eo. to it, e"nd thereby enabled the Continentfl,l inclustri:--,l C01l..'1ltries to

hnve an eX1JOrt sUl"nlus of some $150 million in their tr~de Ni th her.?J This

surplus Has an importent source of doll.3,r ~,nd sterling exchange for these

countries ld th "'hich they ,rere a,ble to settle pe,rt of' their deficits 1;1 th

11 As follot'Ts:

U.K. Germany France Belgium Netherlands Italy SI'leden S""itzerland Austria

Per cent of' ~otal

Im}?orts

16 29 29 48 52 46 60 65 31

~ Exuorts

17 41 47 61 62 38 57 60 44

?J The surplus 1.ras in f~,ct much hi(:;her since over $100 million of Bri Ush e:x.ports to industrial Euro}'€ consisted of re-ex;:no!'ts of such goo(ls'),$ tea, \1001, cotton, rubber 1-Thich Britain imported from overseas regions.

- 13 -

overseas regions.

Thus, for the United Kingdom, which provided industrial Europe with

essential commodities and foreign exchange in return for less essential

goods, trade with the other industrial countries of Et~ope was of much

smaller economic significance than trade with other regions from which

more essential goods were obtained.

The exchanges bet1.Jeen the other industrial countries were better

balanced both in terms of value and in terms of the types of commodities

exchanged. Part of these exch~iges consisted of essential and part of

less essential goods, but there was no such discrepancy between the

degree of utility of the goods exchanged as in the case of trade with

Britain, although Germany and to a smaller extent Belgium absorbed sub-

stantial quantities of less essential foodstuffs and other goods in ex-

change for such commodities as coal, metals, steel and machinery.

Similarly, trade balances were on the whole small and raised no serious

payments problems. 11 Finally, the non-industrial European countries, including the

oountries of Eastern E~ope, found in intra-European trade the main out-

11 Trade balances between major Continental industrial countries in

1935:

France Belgium Germany Netherlands Italy Switzerland Sweden

Million Doll~

f. 6.3 f. 34.8 f. 208.8 ... 118.3 - 47.6 - 63.3 - 62.2

The large balances of Germany and the Hetherlands reflect the export sur­plus of Germany (~100 million) to the Netherlands which was financed with Dutch receipts from transit trade. Similarly, the import surpluses of Italy and Swit~erland reflect receipts from tourist travel.

- 14-

let for their exports and the main source of supply for their imports. 11 In addition, their trade with the U.K. was probably a source of foreign

exchange for the settlement of overseas balances.

It may, therefore, be said that the significance of intra-European

trade was not the same for the various groups of countries: intra-European

exchanges were all-important for the non-industrial countries of Europe,

they were of considerable significance for the Continental industrial

countries and they were much less important for the United Kingdom.

Viewed as a whole, intra-European trade consisted in part of essen-

tial and in part of less essential exchanges. Data available for 1935

suggest that some 35 per cent of total intra-European exchanges involved

Denmark Norway Ireland Spain Portugal Greece Turkey Poland Finland Hungary Rumania Yugoslavia Bulgaria

Exports

To Industrial Countries

87 70 98 64 58 64 70 73 77 76 65 79 82

Per Cent of Total 19l§

Imports

From Industrial Countries

76 68 61 46 56 55 74 56 72 71 81 75 81

- 15 -

food and raw materials and the remaining 65 per cent manufactured goods. 11

1/ Imports of 10 Indust. Imports of Non-Indust. Countries from EuroEe Count~s Total

1. Foodstuffs (i-iillion Dollars) Meat & dairy products 390 14 404 vJheat 63 13 76 Other cereals 60 22 82 Potatoes 26 2 28 Citrus fruit 80 9 89 Sugar 10 10 20 Oilseeds & oil 62 23 85

TOTAL 691 93 784

2. ~nd Industrial Haterials Tobacco 50 9 59 Textile fibers 140 .32 162 Hides 27 8 35 Timber 206 .34 240 Hood pulp 93 10 103 Coke and coal 361 91 452 Petroleum 56 13 69 Base metals _._18a: .2§ 210

TOTAL 1,117 223 1,330

TOTAL - PRIMAHY PRODUCTS t280~ 316 2.1~ = 3. Major Manufacture~ *

Textiles and clothing ) 700 Chemicals and fertilizers ) 385 Iron and steel manufactures) n.a. n.a. 310 Nachinery ) 420 Vehicles ) ~Q

TOTAL 2,075

TOTAL OF GROUPS 1,2,3 !:r.!18~

4. 1'1iscel~aneous commodities, mostly manufactures n.a. n.a. 2.061

GRAND TOTAL n.a. n.a. ~.250

* Based on estimates contained in §urvey of the Economic Situat:i..Q!'!.~ Prosnects of Eurorul (Economic Commission for Europe), p. 47. These estimates refer to the year 1937 and are probably higher by$200 or

$300 million from the corresponding figures for 1935.

- 16 -

Half of these exchanges of manufactures took place within the group of

industrial countries themselves. This fact shows that a considerable

part of intra-European trade involved an exchange of commodities which,

unlike overseas imports or imports from agricultural Europe could, in

most cases, be produced in each of the importing countries themselves

or be dispensed with, and were, therefore, less essential to the function­

ing of the economies of these countries than imports of primary products.

These exchanges reflected the higher living standards and more diversified

demand of Western Europe as well as the existence of adequate capacity

to produce the goods exchanged. The advan'~age of exchanging manufactures

lay in the greater specialization in production and grea.ter diversi­

fication of consumption which such exchanges made possible.

It must, hOl-leVer, be pointed out that the exchanges of goods among

industrial countries 1,rould have been much J.arger than they were in 1938

if severe trade restrictions had not been in force in all these countries

against the importation of any goods that could be produced locally, even

though at higher cost. These restrictions were far more effective in

reducing the volume of trade runong industrial countries than in reducing

the volume of trade between industrial and agricultural countries because

there was greater scope for substituting local manufactures for Lmported

ones than there was for substituting locally produced prL~ary products

for imports of such products.

Comparing the situation in 1938 with that in 1928 we find that the

exchanges of goods among industrial European countries declined consider­

ably more than the exchanges between industrial European countries and

agricultural European countries or overseas regions. Thus, while the

- 17 -

volume of trade among industrial countries declined by some 30 per cent

the imports of European industrial countries from European agricultural

oountries declined by only 7 per cent and their imports from overseas

regions by less than 10 per cent. 11 It is clear that as a result of the trade restrictions adopted during

the 1930 l s there was a considerable change in the structure of European

industry in the direction of greater self-sufficiency and smaller de-

pendence on foreign trade. It is also clear that any relaxation of these

restrictions would have led to far-reaching changes in the structure of

European industry. Finally, it must be pointed out that the larger ex-

changes of manufactures among industrial European countries which were a

feature of the 1920 I S were not unconnected with the inflo", of foreign

capital to Europe during that period. Such an inflow enabled the European

countries to meet their needs from overseas regions without making corre-

sponding exports to these regions and thus devote their export capacity

to trading among themselves. France and Germany alone had an import sur-

plus with overseas regions of ~1400 million which was far in excess of

their income from invisibles and at the same time they had an export

Index of Index of Index of 11 Estimated as follows: 14illion Dollars Value .l1:1.~ Volulne -1928 1938 1 228;roo 1928;.::100 192~.::1Q.Q Trade among European indus-

trial countries 5940 3468 58 80 70

Imports of European indus-trial countries from non-industrial countries 2560 1770 69 75 93

Imports of European couIltries from overseas regions 7800 5167 66 73 91

- 18 -

surplus to Burope of $900 million. In other words, capital imports from

overseas during that period contributed to s~imulate the exchange of

manufactures within Europe. This suggests tha~in the absence of trade

restriction~exchanges within Europe tend to be more attractive than ex­

changes with overseas countries and that European industrial countries,

once relieved of the task of paying with exports for their current needs

from overseas have a tendency to exchange manufactures among themselves

rather than send them overseas. As will be shown below, we ~ave wit­

nessed a repetition of this phenomenon during the last three years w

4. Conclusions on Pre-war Features O~E~~Qp.~~l~~~

The main conclusions on pre-war European trade may be summarized as

follows:

(a) European trade was heavily concentrated in the major European

countries. These accounted for the bulk of intra-European exchanges and

were the main markets and sources of supply for the other European countries.

They were also responsible for the bulk of Europefs trade with overseas

regions.

(b) European imports from overseas accounted for less than 40 per

cent of total European imports, but they consisted of basic commodities

which were essential to the functioning of the European economyo Food,

textile fibers, petroleum and base metals accounted for over two-thirds

of European imports from overseas regions.

(c) More than one-third of these imports from overseas were financed

with receipts from investment income and shipping, the United Kingdom alone

accounting for more than half of the total deficit that was financed in

this way.

- 19 -

(d) Extremely favorable terms of trade during the 1930's, due to

the severe depression of world agriculture, enabled Europe in 1938 to

obtain almost the same volume of overseas commodities which, in 1928, re­

quired 25 per cent more exports and large foreign borrowing. At 1928

prices Europe would have had an additional deficit ~vith overseas regions

of over $1 billion~

(e) The possession of dependent overseas territories enabled the

major European countries to obtain substantial quantities of food and raw

materials under extremely favorable trade conditions. Thus, although

colonial trade accounted for anI)· 10 per cent of European trade its

contribution to the European economy was much more important than this

percentage suggests.

(f) Exchanges within Europe accounted for over half the total

European trade, but in contrast to overseas trade they included many

exchanges of less essential goods which could easily be spared in times

of difficulties. It may be roughly estimated that some 25 per cent of

intra-European exchanges consisted of trade in goods that '·Jere less

essential to the functioning of the European economy than imports from

overseas. These probably accounted for a large proportion of the total

exchanges wit~tn the group of countries which today form the group of

ERP countries. Therefore, as far as these countries are concerned, trade

among themselves, although representing some 40 per cent of their total

trade, was of smaller economic significance than their trade uith over­

seas regions and colonial possessions.

(g) The U.K. held a special position in intra-European trade.

British exchanges with Continental Europe accounted for less than 20 per

cent of the country's foreign trade, and on the whole provided her with

- 20-

less essential goods including many luxuries. Thus. intr~European trade

\,ras of secondary importance for the :British economy.. For Continental

industrial Europe, hm.,rever, trade Hi th :Britain was of very great signifi­

cance since the :British market absorbed nearly 2.5 per cent of the exports

(among \,!hich many less essen~ial goods) u1 thin the ~ou:p and provided in

return essential commod! ties~ such as coal and steel, as \.rell as dollar

and sterling exchange.. Any tightening up of :Bri tish imports ,,,as bound,

therefore, to affect adverselY not only the export possibilities of

Continental Europe, but also its ability to pay for imports of essential

supplies from overseas.

The change s brought about by the ,,,ar in Europe I s economic po si t ion

are well-knoun. Several factors have combined to prco.u:.;e a huge gap in

Europa!s balance of payments ,'lith overseas regiuns, and es"Oecially "1ith

the United States and the other countries of the l'les'bern Bemisphereo The

most important of these factors are: losses of investmen't income a.'1d

shipping? higher \'lorld prices for prima~y products, reduced European

production of such essenhials as grains, meat and dairy products, coal,

steel~ and timber, increased reqUirements of basic foodstuffs and in­

dustrial materials due to full employment conditions and so on. Many of

these factors are of more than temporary nature and call for a very great

expansion in European exports to overseas regions if Europe is to become

independent of Ame~ican aid and European living stanitards are to be Il':ain­

tainedo Similarlyp the coloniest far from con'~ributing to relieve Europe's

shortage of goods and foreign exchange, ltave in many cases become a heavy

burden on the resources of the Colonial Po\vers. Finally, the existence

- 21 -

of large accumulated needs in Europe has often resulted in a smaller

proportion of each country's output being devoted to exports than before

the war. 11 It is clear that the volume of intra-European trade could not have

remained unaffected by these developments. The smaller output and higher local

utilization of essential goods within Europe was bound to reduce the

volume of intra-European exchanges of such goods. The deterioration in

the European economic situation and the dependence on outside assistanoe

imposed upon the European countries the duty to import fewer non-essential

goods and divert the exports of such goods to those OY8rSeaS markets which

supply the bulk of Europe's essential imports. The fact that all

European countries had not been equally affeoted by the war was bound to

create serious dislocations in trade within Europe, the countries in the

relatively weaker position tending to overimport from and underexport to

the countries with stronger economies. Finally, the fact that the

British and German markets which before the war absorbed over one third

of the products of Europe, were no longer in a position to afford any but

the most essential goods, was bound to curtail drastically the export

opportQ~ities of many European countries.

1/ See §urve;;r of..2£2nomic Situation.~nd Pros'kects in,Eurooe op. cit. p. 37

France Belgium Netherlands Italy Sweden Norway U.K.

Ratio of exports to

Per cent of production commodities available

1938' 13.5 46 37 13.0 25.5 40 24

exported (production ~lus imports) 1946-:lJ.. J,93~ 1946-£;7

10.5 11 8 30 31 18 17 24 12 1205 12 10 16 20 12 18 24 17 24 17 18

- 22-

It was therefore to be expected that a reduction in the volume of

European trade and a considerable dislocation of intra-European exchanges

would have attended the over-all deterioration of Europefs economic

posl tion. Nor "'as it reasonable to expect that there could be any rea,l

improvement in intra-European exchanges before increased production had

provided the goods to be exchanged and the restoration of financial

stability and realistic exchange rates had removed one of the major

causes of dislocation in intra-European exchanges. Contrary to what is

so often repeated, increased intra-European trade under post-war c?n­

dUions, far from being a means of increasing production in Euro1")ell is

possible only afte~ production of the goods needed by European countries

has increased sutficiently to support a larger volume of exchangeso

ifuat has in fact happened to intra-European trade during the last

three years?

10 Germany

Germany~ \1hich before the war was the most important partner in

intra-European exchanges. dropped almost completely out of the picture

during the last three years. In 1947 commercial exports to :sRP countries

,.,ere only 10 ner cent of their pre-t'rar volume and imports less than 5

per cento In the first six months of 1948 exports were 20 per cent and

- 23 ....

imports 10 per cent o~ pre-war.li At present exports consist oveT\vhelming-

ly of coal and timber, while steel and machinery exports are negligible.

::aefore the \-,ar the latter met more than one-third of Western EurO',!')e' s needs

for imported steel and machlnery.£/

Finally, before the war Germany had an export surplus l'rith ives'l#ern

Europe of some $300 million per annum '\-,hich Europeans financed largely Hi th

services (transit trade. travel, shipping. investments)., At present

Germany's export surplus of over $200 million per annum has for the most

part to be settled in dollars. Thus~ European trade \-rith Germany has been

completely dislocated, not only ",i th regard to volume and to the type of

commodities exchanged, but alsO ''lith regard to the settlement of :!furone's

traditional import surplus from Germany",

if Mi11io~~ Do1,",1&~. First Half Firs'h Half

lmoorts 1948 .$:x;ports. 19L~8

~ 19J.}2 (lill.~.1Ja1 Rate) 19J.§. ~ (AnntlSL1l;tte) Austria 35 1 12 47 20 40 Belg1 um Lux .. 78 1 12 92 35 70 France 58 1 n"ao 88 23 58 Netherlands 80 3 26 180 21+ 56 Sweden 106 5 10 107 7 18 Sw! herland 42 1 8 8) 7 26 Deonark 67 .,., 4 81 15 26 NOl"i",ay 40 1 2 50 8 14 U.K. 113 48 82 140 55 70 Italy -22. ~ ~ J21 -1.Q. -SQ,.

TOTAL 718 63 162 989 204 398

Y Per cent of total imports in each gro\1p imported from Germany in 1936: Metals and

Manufactmos ~!.p.~ Veh~

Austria 40 0 5 28.5 57 .. 6 :Belgium 180 9 380 8 1908 France 1105 30.,6 33 .. 0 Netherlands 6800 26 .. 3 23.7 Denmark 43,,5 41 0 0 25.3 Sweden 27.6 4100 27.? 8"li tzer1and 38 0 5 45 .. 5 29.5 Norway 17,,5 27 .. 7 7.7 Italy 70.3 50,,1 36.5

According to Xbe Economist (December II. 1948, p. 981), before the'war German exports of machinery '-lere more than t1.dce tbe :British. Moreover~ lithe greater part of British exports of machinery went to distance overseas markets; Europe ''las mainly supplied by the Germansu•

- 24-

2. Eastern Euro]2e

As already stated, before the war the countries which today belong

to the group called "Eastern Europelt accounted for some 15 per cent of

total intra-European trade. During the last three years these countries

have been expanding trade among themselves, but their exchanges with

l'iestern Europe are considerably below pre-:-war. During the first six

months of 1948 trade with ~Testern Europe (including the U.K.) was pro­

bably no more than half its pre-war volume ,Y while trade .,i th Germany,

which before the war accounted for one-third of their total European

-----------------------------------------------11 Assuming that average prices were thrm::: t':.ii1i3S htghert:.han before the

war.

Value figures are as follows:

1238 From 10

1:Jestern European From Countries German;y

Czechoslovakia 82 52 Finland 95 30 Poland 84 45 Hungary 40 35 Rumania 45 40 Yugoslavia 33 34 Bulgaria 15 ~

TOTAL 394 261

To 10 \-Jestern European To

. Countries germap,J:: Czechoslovakia 124 59 Finland 122 27 Poland 119 44 Hungary 71 44 Rumania 61 30 Yugoslavia 41 42 Bulgaria .J.2.. 22

TOTAL 557 281

(Million Dollars)

First Half 1948

.... _--"'" (Annual Rate 1 From 10

Vlestern European Countrie.J -210

200 110

42 10 64 ~

640

EXI20rts {fob). To 10

\je stern European Countries

220 160 228 48 20 80 ~

762

From Germany

10 12 25

2 --

49

To German;y

8 4

30 2

... -44

- 25 -

trade, remains negligible. If Germany is included in ~Jestern Europe,

Eastern Europets trade with the region during the first six months of

1948 was only one-third of pre-war.

3. The United Kingdom

British imports from Western Europe are nearly half their pre-war

volume. This is the result of a decrease in European production of such

essential goods as foodstuffs and steel previously imported from the

Continent and of the elimination of luxuries and non-essentials from

the British import program. 1/ The 20 per cent reduction in the volume total

of/imports which has taken place in Britain has been made to a large

extent at the expense of imports from Europe. Imports from overseas are

not much below pre-war levels.

11 The share of British imports from j,jestern Europe has been reduced from 22 per cent of the total in 1938 to 15 per cent in 1947 and 1948.

British Imports from 1.Jestern Europ~ (cif)

(Million Dollars) First Half 1948

1938 19!..7 {Annual ~late l

Austria 8 4.0 10 Belgium 93 142.0 166 T.'rance 109 125.0 17L~ Netherlands 141 105.0 150 Sweden 119 16500 168 Switzerland 34 2740 36 Italy 33 102.0 90 Norway 51 60.0 72 Denmark 185 110.0 192 Portugal 18 ..lQ.& ~

TOTAL 791 870.0 1,104

Ireland 108 141.0 148 Germany 141 80,J1 58

G'i.A[m TOTAL 1,040 1,091.0 1,310

- 26 -

On the other hand, the volume of British eXports to T,Jestern Europe

is at or above pre-war levels, 11 with the result that the large import

surplus with Continental Europe which before the war was a source of

foreign exchange for Europeans has been converted into a sizeable export

surplus.

The high volume of British eXports to Europe is accounted for by a

very great eXpansion in eXports of machinery, vehicles, ships and chem-

icals, but also of miscellaneous conSlli~er goods. In 1947 exports of

1/ fi,ritish EXPorts to 'PesterI'), Europe (Inclw.Ung Be-exports)

(Million Dollars)

First Half 19L!.8

1938 1941 JAr,n;..1.u1 Rate l Austria 8 12.0 14 Belgium 62 145,0 160 France 114 115 0 0 156 Netherlands 72 130.0 164 Sweden 64 123.0 202 Switzerland 21 75.0 96 Italy 30 1200 0 44 Norway 38 122.0 100 Denmark 79 10300 88 Portugal 17 45,0 ~

TOTAL 505 990 0 0 1,106

Ireland 127 240.0 314 Germany 131 110."Q -1QQ

GRAND TOTAL 763 1,340,,0 1,520

- 27 -

these goods were nearly double their pre-war volume. 1/ Exports of coal,

steel and cotton textiles, which before the war represented 28 per cent

of total British exports to Hestern Europe, were only 8 per cent of the

total in the first half of 1947. ~ The greatest expansion in exports has

taken place in the exports to Sweden, Switzerland, Norway, Portugal,

Ireland, Belgium and the Netherlands. These accounted for 63 per cent

of total British exports to '\AJestern Europe in 1938, for 71 per cent in

1947 and for 74 per cent in 1948.

The large export surplus to Europe has been financed by British

credits and the use of sterling accumulated during the war. This means

that the bulk of the surplus belongs to the category of "unrequited" • ;Ii

11 As follows:

~~orts to 9 Major Countries of Western Europe *

(Million Dollars) First Half 1947

1938 ~ (Annual Rate)

Vehicles 37.0 129.0 150.0 Machinery 39.0 87.0 128.0 Electrical Goods 7.4 33.2 31.6 Non-ferrous metals 11.7 53.0 48.7 Chemicals 24.0 62.0 53.0 Apparel 6.4 50.0 46.0 Cutlery 5.7 17.0 20.3

TOTAL 131.2 431.2 477.6

No similar oompilation has been made for the second half of 1947 and the first half of 1948, but there oan be little doubt that the pattern has been maintained.

* Franoe, Belgium, Netherlands, Sweden, Switzerland, Denmark, Norway, Portugal, Ireland.

Exports of coal and coke to the nine major European countries were ~~lOO million in 1938, ~30 million in 1946, :~9 million in 1947 and $58 million in the first half of 1948 (annual rate).

- 28 -

exports, i.e. of exports which d~ not contribute to pay for current

imports. It also means that the pattern of trade between Britain and

Europe created during the last three years can be maintained only so

long as Britain continues to grant credits to ~~ope and sterling bal-

ances held by Europeans continue to be run down. It is not a pattern

that can be permanently maintained, since the European countries will

never have a surplus in hard currencies with which to pay for an excess

of imports from Britain. It must also be kept in mind that a large part

of the present European demand for British equipment, machinery and

chemicals arises from the fact that Germany, Europe's former main

supplier, is at present unable to meet European needs. With the recovery

of Germany, the European demand for the products of the British heavy

industry is certain to decline.

4~ Continental Western Purope

In this group trade has not merely been maintained but has also in-

creased above pre-war levels. In 1947 exch~~ges within Continental

tl/estern Europe were probably 15 to 20 per cent above their pre-war volume,

~nd in the first six months of 1948 10 to 15 per cent above pre-war o 11 11 Assuming an increase in prices of some 230 per cent of pre-war in

1947 and 250 per cent in 1948.

Value figures are as follows:

IMPORT~ m?.QP1.§ First Half First Half

1948 1948 1938 1947 {Annual Rat~ 1938 1947 (Annual Ratel

Belgium 228 550 586 267 715 750 France 209 410* 400* 259 525 432 Netherlands 175 402 542 146 211 370 Sweden 132 390 390 113 336 350 Switzerland 117 427 352 91 311 290 Denmark 72 194 190 46 176 192 Norway 93 218 210 64 153 144 Italy 70 185 142 75 249 250 Portugal 17 8~ 80 11 41 ~~

TOTAL 1,113 2,860 2,892 1,072 2,717 2,802 * French data underestimate imports by as much as

cross-trade figures). ~100 million (based on

- 29-

The proportion of their total exports "Thich theY' traded among themselves

increased from 2,5 per cent of the total in 1938 to ;8 per cent in 1947.

Thus, there has been a diversion of the exports of these countries from

the markets of overseas regions and the United Kingdom to the markets of

Continental Europe itself.

As an example of the shift of exports "'hich has taken place in this

group, one may mention the increase in the proportion of French exports

of the follo'tdng items going to Western European countries:

To Major i'lestern European

Silk Fabrics 14 WMl yarns & fabrics 33

Automobiles 26 Wines 22

Countr;es .

42 33

38.0 ,52 39 .. 0 32 30.0 29

E;eports

Per Cent of Total

To the U.'t. .. To U .. S"A. ... I 1918 1946 l2!!1..u 1218 1946 l2l!:Z

30 6~7 9.4 12 5.0 4

9 2.6 6.0 4.3 3.0 3.4 - ... 17.0 18.0 11 • .5

lQot only has trade ,.rithin Europe increased at the expense of trade

with overseas regions, but the expansion has taken place almost exclusive-

1y in the categcry of less essential goods. Exchanges of steel and raw

if Dased on data for first five months~

- 30-

materials have in most cases been considerably lOITer than before the 'T;1ar.li

jJ See A Survey of the Economic Situation and Prosnects of Eurone (Economic Commission for Euro~e , p. 95:

"Another element of lV'eakness in Europe's post-"Tar trade is the empha­sis on products of a luxury or semi-essential nature. A prominent example already mentioned is trade in automobiles~ Among other products in question are '!tlines and spirits, \01001, silk and rayon textiles of the more expensive varieties, cosmetics, artificial jewelry, and some of the costlier foodstuffs and confectionery~ ••• In general, there is a pronounced tendency in Europe and else­where for countries to retain their industrial materials for their O\'Tll use and to export only highly finished goods c The fo11o't'ling figures sho\,1 the importance of this shift:

101ume of E!]orts in Third ~uarter 1947

U.K. France Belgium

(1938 ::: 100)

Raw Materials,

56 34 36

Finished Product~

131 102

86"

As an example of this development one may refer to the change in the composition of French exports. During the first five months of 1947 32 per cent of French exports to eight major Western European countries consisted of the follO't,ring less essential consumer goods as compared "lith 14 per cent in 1938:

French Exoorts to 8 Countries

Textile manufactures Automobiles Wine MiscellaneGus

Per Cent of Total

122§.

~.5 2.5 3.6

...:h§. 1402

l2!l:.'Z.

13.5 8.5 6~5

-:h.§. 32.3

In terms of value exports of these goods to Western Europe increased from $27 million in 1938 to $152 in 1947.

- 31-

This larger volume of trade ,·Ii thin Western Continental EurO!>e at a

time Fhen exports to the "{estern Hemisphere "rere barely half of pre-'''ar

has been one of the factors making for the huge dollar deficit eXj')erienced

by these countries during the last three years.

The causes of this expansion of trade "lithin the group may be sum-

marized as follows:

(a) Prices in Europe are higher and selling conditions more

attractive than in the competitive markets of the 11estern

Hemisphere.

(b) Inflationary conditions have created an active demand for

luxuries and non-essentialsoll

See A Surve of the Economie S1 tuation and Prosnects of EurtY09

(Economic Commission for Europe, po-96:

liThe stimulus to\'rards intra-European trade in luxuries lies largely in inflation. In the first place, it oreates a strong demand for luxury goods, both because of high profit incomes and because of the desire tc purchase je,.,elrYt furs and similar items as a hedge against inflatione Secondly, since the prices of luxuries aTe not as closely regulated as those of basic necessities. their produc­tion becomes more lucrative and more attractive to the entrepreneur. Thirdly, inflation and the associated currency overvaluation tend to render luxury goods unsaleable in the more comoetitive of those overseas markets in which they could earn hard currencieso·

if

,- 32 ...

(0) ~rade in less essential goods has also been stimulated by bi-

lateral. agreements and the praotice of "tied" or combined

sales under l,'lhich an export country agrees to su:,.'rply certain

scarce and urgently needed items only if the other party

agrees to import a substantial volume of non-essential gOOdSOli

See A Survey of the Economic Situation and Frosuects of Eurone (Economic Oowaission for Europe), p. 96:

lilt ""as officially estimated in Denmark that during the first half of 1947 the value of such unwanted imports had amounted to 100 million Kroner G':ut of a total of 1,400 million Kroner; these 'ltlere additional to the amounts previously allocated to meet such bar­gaining requirements and necessitated a recasting of the entire import program, including a reduction in the amounts available for more essential goodso"

Even the United Kingdom, "hich 1s euforcing strict austerity in its import program, has had to submit to this exchB,nge of non-essentials. The Economic Commission for Europe quotes the Eritish Chancellor of the Exchequer descd bing the pod tion as follo'll!s:

ItOur task ",ould be greatly eased if ,,,e could merely draw up a program of the impor·ts ll1hicb "re required and then proceed to buy them from the countries ,-,here ,.,e could get them on the best terms. It ",ould th~n be 12Q.§sible to eliminate man.y of the unne~essar;t foreign goods which now auneared on the domestic market end "Thich ~~J!1e "Oeo;')le i.'TcLAer ",hether there really \'las a balance of "OB.x::, menta crisiso Eut ue ~1are often forcad to ta.l{;e su!'plies \'Jhieh ",e did ngt particularly want as a condition of obtaining the food and ra'\'}' materials '"Thich 'IIlare essential to us. Thi s a.lso operated in the other direction and .,re, tOOt put a cendi tion in our agreements 1.then 1'1e could that the other country should take a proper proportion of our lless a ssential' goods. If

The EconOmic Commission also points out that "the "realter the bar­gaining position of one of the countries ... that is, the smaller the amount of essential. scarce goods it can offer - the greater tends to be the amount of non-essentials it must acceut in orde~ to get the prrducts it ~eally needs.!! -

- 33 -

(d) During the last three years the European countries have e~

tended to each other commercial credits of several million

dollars ,,,hieh have hel~)ed to finance this large volume of

exchanges "ri thin the group~

(e) Several of the countries in the groupJ such as g"litzerlando

S'\veden, Portugal and Belgium had accumulated l'eserves during

ths ",ar and ,jere able to follo.,r a liberal import policy

intended to counteract inflatior~ry pressures and mAst un-

satisfied consumer needs o These countries have been among

the most important markets for the ~ro~ucts of Britaint

France, Italy and the Netherlands during the last throe

years 0

(f) i'{ith large American credits available to pay fo!' essential

imp@rts, the ur gency of directing eXJ?ol~ts to O"9'e:rseas

regions, \'There these imports "rere o"bta:!.nedo 'Nas grea'lily

reduced and Governments \'Tere under no ::oro~su:r'e to take

measures that Nould have increased the att:.:-activeness :~O

expvrters of non~European markets o

As credits an~ reserves are being exhausted and aCCUillU-

lated needs me'ii, this exceptional EIlrupean demand for

relatively non-essential goods is subsiding end is tending

to reduce the volume of exchanges Nithln the group ..

]e"t\"een 1947 and the first half of 1948 there ~eems to ha"le

been a decline in volume of some 10 to 15 per cento!! The

decline was probably greater for non-essentials than this

~~--------------------------------------------,------------.---------11 This calculation is based on the assumption that prices inc~eased by 15 to 20 per cent during the period.

I"

- 33a -

average suggests since trade in essentials (coal. steel~ food) a~~ears

to have increased during the period.

5. Nature and Sig;n1fic~'-"lce of Post-'!Ilar Develo'Oments in Intre.-Eu!Ql2.~.n. Trade

vfuat is the significance of these developments in intra-European

trade in relation to the general problem of European recovery?

It is clear that to refer to the over-all volume of intra-Eurol)ean

trade and merely say that it 1s bela", pre-Hal' and should be stimulated

is hardly illuminating" It is only ':Then intra-European exchanges are

broken do,m into their main component S ttl8.t it is possible to assess the

real significance of what bas happened and reach valid conclusions on

\\That should be done.. ThuSt 11h1le it is true that total int1'a-Suropean

trade in 1947 ''las probably no more than half its p1'eo-\1ar volume? an

analysis of that trade ShO't1S that the decline "'as "jholly dne to (a) the

virtual elimination of Ge~many as an important trading par~nerp (b) the

reduction of British imports from the European Continent and (c) the

reduction of trade ,,,i th the countries of Eastern Europe.

All these developments are the product of fu~damental economic and

pol! tical changes in Euro!)e and cannot 9 thereforet be deaJ.t ,·Ii th through

financial or commercial measures aloneo Only a full economic revival

in Germany, the recovery by Britain of her former finanGial strength and

a return to the pre-war pattern of trade relations "lith Eastern Europe

34 -

could restore the European trade of these countries to their pre-war

levels. This is not likely to happen, and consequently the participation

of these countries in intra-European trade is certain to remain smaller

than before the wa.r for a considerable number of years.. An incre~,se from

present levels may be confidently e~ected as the economy of Germany

revi ves, British austerity is relaxed and exchanges ,·,1 th Eastern Europe

expand. but such an increase can tru~e place only ~fter production in

these countries has increased; it cannot be brought,about through

financial schemes or commercial arrangements. Thus. tr..at }Jart of intra­

European trade v,hich accounts for the ",hole of the decline that has

taken place since the ,,,ar is not susceptible of ea.rly and easy expan­

Sion, and it certainly requires more than credits or trade arrangeoents

in order to expand from its ~resent levelso

The remaining part, namely exchanges among l'lestern Continental

countries, has been rold can be stimulated through financial devices

because exchanges among those countries involve many less essential,goods

for \"hich ample productive capacity exists. The advantage, h01'Tever, of

maintailung trade among these countries on a high level is, to say the

least, doubtful, as far as European recovery is concerned.. If this is

so, ,·,hy bas so much emphasis been placed on schemes to expand European

trade and ,,,hy has it been found a.dvisable to use scarce dollars to s'U...i.~ort

that trade?

It has already been pointed out that the main factors 'ltrhich contri­

buted to maintain exchange$ "dthin i'lestern Euro:;e at a high level during

the last three years have been (a) the "dll1ngness of European countries

to extend credits to each other and to use gold and dollars for the

- 3S -

settler',ent of balances, (b) the holding by European countries of large

sterling balances accumulated during the "ar, (c) the e:(ceptional derr,and

for.'econstruction and cons1L1'Jlption goods and (d) tho availabili t,( of

large American credits anc; the ,dllin;;:ness to deplete reSK~ves in order

to ~,:ay for imports from overseas without having to make a c:rastic

readjustment in the direction of exports.

Most of these factors were of a temporary natu~-:,e anc. so "('.'as the

pattern of intra-European trade which helped to ,create anc~ '"hieh

could be maintained only so long as exceptional :,1ean8 of ::i.nancing were

availa;-)le to support it.Hth the exhaustion of credits, the reduction

of Gold and dollar reserves and the satisfaction of accum'~llated needs,

payrnents difficulties among European countries ber,;an to appem' and to

cause 5erio;18 concern. That concern v'faS of two t:7pes (a) export surplus

countries which thought they had solved their export problem because

their ,'soods were sellinr~ 'o':ell in Europe were being confro'1ted w"i th a

markets for their less essenti 21. goods and the shrinkage of forei

chotct> of eit.her further credits or th':; v()lune of their

exports reduced, (b) import SurpL1S cOUlTGries which l:ad been a ,Ie to use

credi ts or foreifm exchan.'~e to raJ for their fro;" En.rope

were finding themselves f~iced with the necessity to curtail these inrorts,

among which lmre many essential supplies needee:. b\r their c

Before proceeding to discuss trade balances aJnong Eucopean Gountries

and determine the extent to wr.ich intra-European trade durim~ the last

three yea:08 has depended on exceptional means of financing, it necessary

to point out that Europea...'1 trade statistics are far from reliable and that

there are great discrepancies !Jetween the data of the various countries

referri!1g to the sallle cornmercial tral1saction8. This especi true

- 36 -

of French statistics "which consistently under-estimate imports. Si:m:Uarly~

Belgian statistics are generally considered as unsatisfactory and the Swiss

officially admit that their trade figures reflect what exporters and ifnti

porters find advantageous to report rather than independent and objective

estimates of the quantities and values involved. At the same time it. seems

that a substantial part of what is knorm as intra-European trade consists

in fact of re-exports of overseas co~~odities paid for in hard currencies

by the c01mtryvlfhich is re-exporting them. This of course is no genuine

intra-European trade since it represents a mere resale of non-European

goods.

It is therefore necessary to exercise great caution in interpreting

European trade figures, especially when discussing trade balances, where

a small error in the opposite direction (for instance, overvaluation of

exports - undervaluation of imports) may make all T,he difference to the

picture that wi.ll be obtained. A country, for instance, Mayan the basis

of its trade statistics, appear to be an export sU:.~plus couatry when in

fact it is an j.mport surplus country.

Keeping these qualifications in :nind one may conclude from al1

examination of 1947 trade returns that, on a total trade among tl-:;':)

principal ERP countries of :;;4,300 million, about ::w700 million vvere gross

credi tor and debtor bal 811ces representing 16 percent of the toti.:.l. Of

these about iJl250 or 6 percent could have been compensated :nultilaterally

and the remaining 19 percent or 4?450 1;11ould in an~ case have required

credits or settlement in gold or dollars. In fact, multilateral compen­

sation was much smaller than this and practically the whole of the

surplus-debi t total, to the extent that it was not met through receipts

from invisibles, was settled through the use of balances, credits or gold.

- 37 -

The main creditors and debtors in the group were as follows:

1947

rrJ.llion Dollars !/

Net Creditors Credit Debit Net Credit

Belgium 115 51 t 121

France 120.2 0.5 t 119.1

U.K. 169 63 t 106

Italy 97 24 t 7J

Denmark 39 17 t 22

600.2 158.5 t 441. 7

Net Debtors Credit Debit Net Debit -Netherlands 11.8 Ih2.5 - 130.7

St'lli tzerland 22 116 - 154

Norway 2 140 - 138

Sweden 48 67 - 19

83.8 525.5 .,. 441. 7

The most striking characteristic of trade balances in 1947 which

this table reveals is the position of France as a major creditor country

on trade account. ?!hatever the value of the data on which the calculation

of trade balances is based, there can be little doubt that France had a

genuine export surplus with the rest of Europe in 1947. One should keep

this fact in mind when~~ the sharp deterioration in the French

position in 1948 which accounts for a large part of the recent disequi-

1ibrium in intra-European trade.

1/ The ff gures sho'wn in the text are based on export data ' at partners. ~hen the export and import data of each country are used to calculate trade balances there results a discrepancy of .1300 million representing in part freight and other incidental costs and in part a real crepancy between statistics of the various countries. The method of computation on which the figures shown above are based is the only one that can ensure consistency in the data used.

- )8 -

Another feature of 1947 trade balances is that, ,vi th the exception

of the Netherlands, the group of debtor countries consisted of the

economically stronger countries of Europe which had sufficient foreign

reserves and invisibles to finance their import surpluses. This means

that v;hile the pattern of 1947 intra-European exchanges depended on

e::cceptional financing, there was only one country, namely the IJetherlanis,

for ',hich serious payments difficulties existed in financing her trade

deficit with other European countries, ma~.nly Belgium.

Why then did the problem of financing intra-European trade beGin

to attract so much attention and cause so ElUch concern since the middle

of 1947? The anS'Ner is that the payments difficul ties i~hich European

countries have been facing in their dealings V'd. th each other s-ince the

middle of 1947 are due overwhelmingl~r not to trade itself but to non­

cormnercial transactions as well as to factors which have nothin6 to do

~ith intra-European trade.

Non-commercial transactions are of considerable impo::~tance in

European pa;Ylllents. Tourist travel, wor-kers' remittances, shipp:Lng

services, transit and investment income are the most importaDt of these

transactions. Very little statisticcl information is, however, availaole

on these items. In 1947 British tourist eJq:enC'itures, mostly to ':I:urope,

amounted to some ,..>230 million and represented corresponclin~': rece:tpts for

such countries as France, Svl'i tzerland and Italy. On the other hand I3ri tain

provided shipping and miscellaneous financial services to many continental

countries and received investment income payments from them. Cn balance,

therefore, Britain may have earned as much from non-corr~ercial trans­

actions as she spent on them in her dealings in til the contine!1t. Simi­

larly France, i/hich had to spend some ~55 million (net) for remitta'1ces

- 39-

of :Belgian and Italian ;.rorkers, earned at least as much from tourist

trade and on balance should not have been in a debit position on non­

commercial items. Italy, ,<,1th her .. !orkers' remittances and tourist

recei~ts, must have been in a net creditor position on invisibles and

the same applied to SW'i tzerland ",hich had large tourist receilJ"ts and

investment income.

It is clear that the extent to which a country 'oJaS in a net

creditor or deb'lior position on invisible items modified the infiu8::J:C:le

of its trade balance on its over-all payments position" A country uith a

given surplus on its European trade but a. larger deficit on its EUropean

invisibles 'oJas no longer a su~}lus country as far as European payments

"'ere concernedo And inversely, a country l;ri th a deficit Oll trade and a

surplus on invisibles was not a deficit country in its over-all payments"

A second factor "Thieh began to assume eonsideraole proportions in

1948 is the repayment of eo~mercial credits and other short-term loar.s

granted oy the European countries to each other during the first three

post~var years. Thus, during the third qttarter of 1948 scheduled repay­

ments by Frarlce of earlier Belgian and Swiss credits required $22 million.

representing an anm~al rate of repayment of $88 mlllion~ These payments

accounted for the bulk of France t s ovel··-all defiei t ,-rith these counGTies.

Finally, the picture of European trade relations and in'i;ra-European

payments is decisivelY affected by the fact that one major European

COuntry1 namely the U.K., centralizes the foreign exchange tra-~sactions

of the ,,,hole :British Oommom'lea1th and Empire. Thus, the :British trans­

actions Hith Europe refer to the transactions of the '.1hole sterling area

and not of the Un! ted Kingdom alone, and to that extant the payments

problems that arise from them are not the result of intra-European trans­

actions alone but also of Europe's transactions ,ri th a great number of

- 40 -

overseas countries whose onl~T link v.Q. th Elli~ope is throu~h their close

association with the United Kin,-;dom. Thus, while Britain, by cutting

dOYrrl her imrorts from Switzerland and expanding her exports~ had a

substantial export surplus with that country in 1947 the trade deficits

of the sterling area, and especially of South Africa, ni th Sm tzerland,

tOiSether with British tourist expenditures, resulted in a British deficit

with Switzerland which was settled in crold and dollars. And inversely,

in 1947, France had an export surplus 1id.th the United Kin,?dom and c~lso

probably a surplus on invisibles but <1n import surplus I'dth the sterling

area which produced a not deficit in her payments ·with the United Jiingdom.

The following table which compares the trade position of the main

European countries in 1947 with their payments position shows how de-

cisively non-commercial transactions affect the overall picture of intra-

European exchanr;es and how greatly they contributed to increase the d1s-

equilibrium in the European payments position in 191~7.

1947

Kno1'l1l Implied Balances Trade Payments on non-commercial

Balances Balances transactions -Belgiurll ~121 ~ 374 ~ 253 France /- 120 - 66 - 186 Netherlands - 131 - 37 ~ 94 Sweden - 19 - 30 - 11 S'V\ritzerland --154 ~ 8 ~ 162 Norway - 139 80 ~ 59 Italy f 73 ~ 6 - 67

Denmark f 22 29 51 U.K. ~ 106 .. 139 - 245

This table shows that non-commercial transactions and the transactions

of associated overseas territories turned the surplus on trade of France

and Britain into a large overall deficit, ',:rhile reducing half the trade

- 41 -

deficits of Norway and the Netherlands and more than offsetting the large

trade deficit of Svdtzerland. It also shO"l''VS that in 1947 the only im ...

portant surplus country as far as payments were concerned was Belgium

while the main debtors were France and the U.K. which were among the most

important ereci tors on trade account.

It must be pointed out that these calculations, which are based on

official data, ignore an important factor in the overall European pa:lments

difficulties, namely the extent to which capital flight absorl)s financial

resources which would otherwise have been available to pay for current

transactions. Such flight of capital usually takes the form of QDder-

valuation of exports, non-repatriation of export proceeds and diversion of

other foreign exchange resources to the blacl( market. There is strong

evidence that French exporters, for instance, are able to leave a sub-

stantial part of the proceeds from exports abroad, especially in Belgium

and Swizterland. Similarly, a considerable proportion of receipts from

tourist expenditures in France and Italy find their way to the black market.

According to the Economist (December 25, 1948, p. 1053) the flight of

French capital is unofficially estimated at >~500 rn:illion, i. e. half the

total American aid received during 1948 !/. Since, however, no author-

1/ See also Problemes Econonuques (Secretariat General du Gouvernement) 'November 9, 1949, p. 4-6 giving a summary of an article by Mr. Pierre Uri. "Part of the external deficit is undoubtedly only apparent,. So long as the rise in prices destroys confidence in the national currency, exporters will try to build up holdings in stable currency and the simplest way to do this is to under-value exports in their declarations to the authorities and leave the balance abroad. It noteworthy that the avera~e unit value of exports in 1947 was steadily falling while the index of wholesale prices vms con­tinuing to rise. And it is quite obvious that the foreign exchange brought in by tourists serves primarily to feed black mm'ket without providing the means to pay for the mes t essential imports. In both cases we have a form of foreign investment which might one day provide the resources to finance future deficits but which today is an improducti ve investrnent and is an investment that reduces the deflationary effect which the import surplus might have exercised on the countryls economy •••• It may be preswaed that clandestine French holdings of foreign assets have increased considerably more than kno"A'l1 French holdin"'s of such assets have declined. If

- 42 -

i tati ve calculation of the ma~ni tude of these illegal transactions can

be made, they cannot be taken into account in discussing Europe's payments

problems.

Available information, which is far from complete, suggests that tte

settlement of balances in 1947 required the utilizat,j.on of more than ;p200

million of gold and dollars and the extension of some ~80 million of

special credits "}./, in addition to the credits granted through payments

agreements.

}/ Total gold aDd dollar settlements and special credits were as follows, by main Coul'ltries (partial data):

France with Belgium Norway Netherlands Italy

Netherlands ~~th • Belgium

France Norway Sweden U.K.

Italy itd.th -Belgium

France

Norway ~~th . Belgium

Netherlands 3wi t zer land U.K. France

U.K. with Belgium Norway Netherlands Denmark

Bel gi urn with France Italy Netherlands Norway Switzerland U.K. :enmark

Credit

9.5 2.5

12 1.7

30 21.3 4

55.3 23.8 16.7 28.1 3.1

64.4

(I~llion Dollars) Debit

55.3 1.7

77.3 9.5 1.7

10.5 21.3

25.8 2.5

28 1.7 1.9

30

64.4 12.0

12.0

l'Jet

- 55.3 1.7

f 9.5 .;. 2.5 - 45.0

- 77.3 9.5 1.7

- 10.5 - 21.3 - 120.3

- 2.5.8 2.5

- 28.3

- 23

1.9 - 18.0 .;. 1. 7 - 47.9

... 64.4 .;. 18

~ 2t· 3

- 21.1

f. 55.3 .;. 23.8 .;. 76.7 .;. 28.1

9.1 .;. 6h.4

3.9 2

It was clear that Europea.c"1 countries could not afford to continue

utilizing scarce dollars and extendin~ credits to each other in order

to settle these balances and since many of the non-commercial trans­

actions are the ones that can be least affected by government policy,

it was obvious that in trying to balance more closely their accounts,

European cOlmtries would have to restrict the exchange of goods among

themselves. For some countries, like the Netherlands, the reduction

of certain imports from other European countries would have represented

a definite setback to their recovery.

6. The Intra-European Pa;yments AlSreement

It was '>''ith these difficulties in mind that the Committee on

European Economic Cooperation which met in Paris in September, 1947

drew attention to the problem of intra-European trade and payments and

set up a special Technical Committee to study the problem anc. make

recommendations. The Report of the main Committee itself does not

discuss the problem of intra-European payments but a suggestion is

contained in paragraphs 74 and 75 to the effect that a dollar fund of

;~3, 000 million should be made available to raise reserves and restore

confidence in national currencies. This suggestion, while vague, was

vddely interpreted as having some connection with the request for a

dollar fund to finance intra-European excharF:'es which was heard at that

time in Europe.

The Technical Committee on Payments Agreements, however, basing its

recommendations on the Report of the Financial CommHtee of the Paris

Conference, took a more conservative view of the matter and stated as

follovring the case for using EHP dollars to finance intra-European

exchanges:

- 44 -

liThe primary purpose of American aid is to enable the parti-cipating countries to obtain from the knerican Continent what is needed for their production programmes. But a number of the Governments repre­sented on the Committee desire that American aid should serve a double purpose and also be used to reduce payments difficulties as bet'Neen the participating countries and restrictions on the interchange of goods and services between these countries so far as these restrictions arise from payments difficulties. Accordingly, these governments desh~e that some part of AHlerican aid should take the form of dollars vihich can be used, first in making payments for goods supplied by one of the parti­cipating countries (including ~);estern Germany) to another, and subse­quently by the country which receives such payments to cover su~)plies from the American Continent. It is, for example, clear that if one of the participating countries has coal or steel which it is able and ready to sell to another participating country, the latter should not be compelled by paJ~ents difficultues to refrain from buying steel or coal from a participating country and be forced to continue to buy them from the United States. This would be inconsistent with the programmes formulated by the Technical Committees of the Paris Gonference, which assumed that no payments clifficul ties would prevent participatinG countries from supplying key cOIll.11locities to each other. To achieve the desired result, it not suggested that additional Americ~'1 d should be granted, but that American aid should be so arra.r:l?;ed that it will serve both purposes instead of one purpose only.1I

The idea that free dollars should be made available to EurOl)e in

addition to aid in specific commodities found little sYlupathy in the

United States. The American Government and Congress felt that the object

of the aid was to help European countries obtain key connnodi t~_es in the

Western Hemisphere for which they were not as yet able to pay and not

to provide &'1 easy solution to all the problems and difficulties :aced

by Europe.

Thus the idea of using EItP dollars to settle intra .... European balances

was dropped during the first part of 1948. Meanwhile, European countries,

impressed by the disadvantages of strictly bilateral arrangements had

agreed on a scheme of liITited multilateral compensation of balances and

entrusted the Bank of International Settlements 'with the carrying out of

monthly offsets of such balances. Much had been hoped from this scheme

vmich was expected to remove a major obstacle to the exchange of goods

- 45 -

within Europe, but the results were disappointing. During the first six

months of the operation of the scheme IIfirst category" compensa.tions vera

only $12 million and 'tsecond category" -':;'14 million.

The reason why the multilaterization of payments did not come up

to expectations is twofold. First, the extent to which lack of trans­

ferabiE ty of European currencies was a factor in the ex.i.sttng pa:rments

difficulties had been exaggerated. On a total exchange of goods of

some~p4,300 million in 1947, 84 percent were transactions of a naturally

bilateral character, another 10 percent consisted of transactions ,;hieh

required o11tside financial resources in order to be settled and only

6 percent were transactions that could have been settled multilaterally.

Thus from the beginning the scope of multilaterization was limited.

The second reason for the smallness of the results achieved was that

the scheme introduced in 1948 provided for automatic transferabiE ty

only in the case of I1first category" offsets, i.e. of offsetts that

would help to reduce the total size of the balances. Offsets whose

result would have been to transfer claims and debts from one cOlmtry

to another were possible only with the consent of the interested coun­

tries and this consent was seldom given because few countries were

v'Jilling to allow a change in the currency composition of their claims

or debts which would often have meant surrendering strong against weak

currencies, or exchanging a debt in a weak currency against a debt in

a strong currency_ The United Kini2dom, in particular, objected to any

system that would result in aD undue concentration of claims against it.

Thus, the scheme had to be confined principally to the small range of

"first category" offsets a!td its contribution to the solution of European

payments problems proved negligible.

- 46 -

Meanwhile the disequilibrium in intra-European exchanges was in-

creasing rather than decreasing and was calling from some kind of

solution.

During the first six months of 1948 the net export surpluses of

Belgium, U.K. and Italy increased considerably while France which until

1947 had been a major creditor on trade account developed a large import

surplus:

IiIillion Dollars

Net Creditors 1947 1948 (Annual rate)

Belgium 121 194

Italy 73 104

U.K. 106 148 Denmark 22 128 France 120

442 574

Net Debtors

Netherlands 131 148

Switzerland 154 194

NOri"l'ay 139 86

Sweden 19 56

France 98

443 582

On overall payments the situation had l:Jecorne critical in the

fo11o,ving cases:

(A) FraDce - United Kin~dom

With only ~p89 million of sterling holdings left and these heavily

committed France found herself confronted,i th increasing pa;;lments

difficulties towards the sterling area, with which a deficit of .'J1)200

- 47 -

to ~300 million was anticipated for 1948. A short-term British credit

of $40 million and various private credits were expected to see France

through until September 1948 but afterwards the situation would have

become critical if new aid were not extended.

(3) France - Belgilli~

Since tlle middle of 1947 Fra.'1ce has been encountering difficulties

in her payments position with Belgium in spite of a surplus on trade

account and on tourist receipts. In the second half of 1947 gold pay­

ments to Belgilli~ amo~'1ted to ~30 million and by February 1948 the French

credit margin with Belgium had been exceed by ,~34 million in spite of a

sharp reduction of imports from Belgium.

: The repayment of that credit, scheduled to take place in 1948 in

six installments, aggravated the French pa;pnents position v{i th Belgium

and threatened a breakdo)vu in trade between the two countries.

(c) France - Italy

The French position towards Italy was strong in 1947 but deteriorated

in 1948 as a result of a decline of French exports to and an increase in

French imports from Italy. During the second quarter of 1948 Fra~ce had

a deficit with Italy of ;;pIS million representing an annual rate of ';ii60

million and since no credit rr~gins in favor of France existed the settle­

ment of such a deficit was expected to require payment in dollars.

(d) Netherlands - Belgium

A Dutch deficit with Belgium has been a normal feature of Dutch­

Belgian relations and in the past could be financed through Dutch earnings

of third currencies. In the post-war period Belgian credits at first

helped to meet the deficit but Sin8€ the widdle of 1947 it has been fi­

nanced by gold and dollar transfers and by Belgian francs purchased from

- 48 -

the International Monetary Fund. A deficit of '.;p20 million ,vas anUci­

pated for the third quarter of 1948 (annual rate :..>80 million) and called

for further depletion of Dutch reserves.

(e) Norway - Belgium

Large imports from Belgium with no corresponding increase in

exports, together with repair and construction of ships by BeleilliTI on

Norwegian account, brought the ~Jorwegian payments position towards

Belgiu;'n into a critical staR:e in the last part of 1947. Imports from

Belgium were reduced from 243 million kroner in 1947 to 90 million in

the first months of 1948 (annual rate) a'1d diffic'~ ties were still

expected because of credit repayments by Norway.

It thus became clear during the Slli~er of 1948 that unless outside

financing were forthcoming intra-European exohc.nges and/or European

reserves were due for a sharp contraction in the following months.

Felced with this situation ECA decided that a limited amount of dollars

out of its total appropriation should be made available to European

countries to settle balances among themselves and prevent a breakdown

in necessary exchanges of goods. Informed of this ECA decision, European

countries proceeded to negotiate a Payments Agreement among themselves

providing for the settlement of balances lid. th ECA dollars.

The Agreement was signed on October 16th and in substance is intended

to maintain the trade and payments pattern which existed in Europe in the

first part of 1948.

- 49 -

The Agreement contemplates that ',~565 million of ERP dollars will be

used for the settlement of intra-European balances during the period ending

June 30, 1949. Belgium and the U.K. are expected to be the main recipients

of these dollars in return for corresponding surpluses in Europe, princi­

pally with France, Netherlands, Austria and Greece. 1/

-----------------------------------------------------------------11 As follows:

with U.K. Belgium France Netherlands Norway Bizon~a

Italy Greece Austria Other

Total Net

with U.K. Belgium Italy Bizonia Other

Total net

- 30 r!200

.;. 46 .. 5

.;. 25.0 r! 10 .j. 25 .j. 505

.j.282.0

Franc:::

-200 - 40 - ill - 63

9.3

Main Net Creditors

Billions Dollars

.j. 30

.L 40 ~.;.I 72 .. 5 i 23.0

17 .. 0 - 11,,0 f 13 0 0 f 4.5 t...~e5

.j. 207.5

- 25 .;. 11 .j. 11

.j. 0.5

.;. 10.1

.j. 7 2

.j. 7.7

.;. 20.3

Netherlang~ Austria

----- 71.7

- 25,0 - 4 .. 5 .;. 2.0 - 32.0 - 4,,0

- 63.5

- 46.5 - 17 f 63 .;. 8.5 - 8

- 10.1 f 4.3 .;. 32 - 16

.;. 10.2

Greece

- 10 - 13 - 7 - 4.3 - 32.5

- 66.8

- 50 -

1.rThat is the significance of these arrangements for the creditor countries,

the debtor countries and European recovery as a whole?

The answer to this question depends greatly on the extent to which

these arrangements have affected the distribution of American dollar aid

among European countries. If, as is contended in Britain, the distribution

of direct dollar aid among these countries would have been the sa.'lle whether

the Payments Scheme had been adopted or not, then the British view is

correct that the credits granted under the scheme represent a net burden

on the economies of the creditor countries and additional aid to the debtor

countries. In other words, if the U.K. would have received ... ,1,260 million

of direct dollar aid, irrespective of any contributions to Europe, then the

~282 million of British grants under the Payments Scheme are a burden on

the British economy imposed by that S;cheme. And inversely if France Hould

not have obtained more than the)989 million of direct dollar aid that it is

now getting under the Scheme then the 1;323.3 million of European grants

represent additional aid obtained under the Scheme.

If, on the other hand, the distribution of direct dollar aid would

have been different without the Payments Scheme, the U.K., for instance,

getting less direct dollar aid and France getting more, then the credits

granted under the Payments Scheme represent in essence ECA offshore pur­

chases in the creditor countries and not independent credits granted to their

European partners by the creditors. Not only this, but to the extent that

the Payments Scheme has resulted in substituting European goods for dollar

goods the debtor countries may be worse off under the Payments Scheme than

they would have been without it since it is probable that dollar goods would

have been more desirable than Suropean goods. And inversely the Payments

Scheme in that case is a form of assistance to the creditor countries

- 51 -

enabling them to dispose of eA~ort surpluses against dollars, without the

need to redirect their trade towards the dollar area.

It is not easy to decide which of the two interpretations is the

more correot. Preliminary American estL~ates of European dollar require-

ments seem to support the British view. On the other hand it is well

known that some, at least, of the allocations of direct dollar aid, have

been affected by the Payments Scheme. The Greek dollar allocation, for .,

instance, against which Greece protested vehemently, 1;!ould probably have

had to be larger if no credits had been granted to Greece under the Payments

Scheme. And inversely, Turkish dollar aid ,,!Culd probably have been smaller

if no contributions had been made by Turkey under the Payments Scheme. At

the same tL~e it is a fact that the dollar shortage of countries like

Belgium and to some extent the U.K. was due, not t9 lack of export capacity

as such but to the failure to sell an adequate volume of goods to the

dollar area. This fact was bound to be increasingly noticed on this side of

the Atlantic and to raise questions as to whether dollar aid of the size

requested by these countries was justified. Jelg~~, for instance, has had

to curtail production in some of its export industries because of shrinkage

of' foreign markets 1/ at a time when its exports to the 1Jestern Hemisphere

are below their prewar volume. It seems doubtful that a country whose

11 According to a statement by the association of Belgian textile manufac­turers, the Belgian It!Col-spinning factories have recently had to reduce their output by one-third on an averace. This has been follotored by similar developments in the linen-spinning industry, whose production has fallen to 5,000 tons a month, as compared with a high record of 7,847 tons in January, 1948. Hhile in many textile factories the working time has been reduced, the cotton mills have decided to close for a certain period as has already been the case in 1936 and 1933, this method having proved more rational. The cr~sis is attributed, for the most part, to the decline in exports (see BIS Press Review No. 19, 1948 - quoting the N. Zurcher Zeitung of Nov. 18, 1948).

- 52 -

productive capacity was adequate to provide the exports needed to pay

for its imports could expect to continue receiving large dollar aid si'11ply

because it was not making the effort to sell those goods outside lJurope.

Horeover, even if the contributions under the Payments Scheme have not

affected the distribution of direct dollar aid they have undoubtedly

affected the foro under which that aid had been granted. It seems for

instance, certain that without the contribution under the Payments Scheme

a much larger part of the Belgian dollar allocation would have been in the

form of loans than it is at present and this is also probably true of the

British allocation. There can be no doubt that the advantage of not having

to incur a dollar debt offsets a considerable part of the burden undertaken

under the Payments Scheme. II Finally, it is probable that the creditors

under the Payments Scheme would in any case have extended some credits to

their European partners, if for no other reason than in order to prevent a

sharp decline in their exports.

Taking all these considerations into account, one may conclude that the

l,gymen-cs Scheme has not affected the allocation of direct dollar aid to the

full extent of the contributions made by the creditor countries th~der the

Soheme, but it has affected it to some extent and has improved the conditions

under which the creditor countries have received American aid (more grants

instead of loans) besides strengthening their case for such aid in the face

of adequate export capacity. If this is so the overall burden imposed by

the Payments Scheme on these countries is much smaller than the amount of

the contributions indicates and inversely the benefit of the Scheme to the

debtors is not as large as is indicated by the contributions.

11 See Banker, October, 1948, P4 8

- 53-

Thus~ from the point of view of distribution of burdens and benefits,

the Payments Scheme is less unfair than British comments have suggested.

From the point of vie,,, of European recovery, hovTever, the Scheme falls

far short of the claims made on its behalf.

On both sides of the Atlantic~ the signing of the payments agreement

has been officially hailed as an important contribution to European

recovery that will ensure a higher exchange of goods 1 a more effectiV'e

utilization of European resources and greater cooperation among European

countries:) \Vhat are the facts?

Let us take the case of France and Gl'eece ,·,mch are receiving tH(,,'-

thirds of the aid under the Payments Scheme"

In 1947 France e~oTted $636 million to the other major EeA countTies

and imported $.516 million from themo In the first six mOil'~h~ of 1948 French

e~orts "'lere only $5.50 million (annual rate) ,.,hile imnol'i:;s "Jere $648 million

(annual rate)" Thus~ the F:.L"'ench position deterio:..'ated ins~ead of 1.mj?roving

and this ill spite of a 20 :per cent increase in indusJ~rial prcducUcn e.nd

continued American aid" The hench trade defiei t 'V,Hh the s'~er11ng area

increased from $120 million in 1947 to $400 million in Apri1-~une 19~8

(annual rate)" Fl't:mch expol'(;s to Belgium declined from $217 million l.n 1947

to $146 million in 1948. Exports to Italy fell from $18 million in 1947 to

$14 million in 1948 and imports rose from $18 c 6 m:i.llion to $.52 millionQ

French exnorts to Denmark deClined from $14¢6 to $10 million and impor~s .. -rose from $120.5 to $30 million., Similarly~ the French position to\'Jard

- 54-

Switzerland which was favorable until 1947 bec~~e unfavorable in 19481(

The main cause of this deterioration is the relaxation of controls

over foreign trade and the attempt to return to a IIfree lf economy under

conditions of monetary instability and social unrest. The policies inaug-

urated in 1948 have proved disastrous for the French balance of pa;;rments:

they have diverted to the home market goods previously exported, they have

made possible the importation of many less essential goods previously

excluded from the French import program, they have encouraged the wholesale

evasion of control regulations by exporters and have been responsible for

the loss of large amounts of foreign exchange to the country. It is these

policies rather than inflation itself which account for most of this deteri-

oration since the situation was probably less inflationary during the first

six months of 1948 than during 1947 and exchange rates were unquestionably

more realistic in 1948 than in 1947.

----------------------------------------------------------------------1/ A report published in the N. Zurcher Zeitung of November 11, 19~.8 and

quoted in the BIS Press Review of November 24, 1948 describes the French­Swiss position as follo,,!s: "In the first half of this year Swiss exports to France, at SF 181.5 million, were 20 per cent above the pre-war volume and represented a post-war record as rsgards value. The French e::;cport surplus thus declined from SF 12.7 million in August 1947 to SE' 7.2 million in November and in the following four months to Harch even gave way to a Swiss export surplus, which, however, decreased :fro:} SF $.9 million in December 19[. .. 7 to SF 0.8 million in Harch, 1948; thereafter trade showed again a French export sur~lus ranging from SF 5.1 million in April this year to SF 9.5 million in September, but this improvement for France "Jas mainly due to a decline in Swiss exports, ,!ihereas French deliveries to Switzerl§gd decreased contin~ously from Ap~il to Septembe~. The balance of payments position betvJeen the t"l0 countries in the first eight months of this year, for which official figures are now available, developed much more unfavorably than could be expected after the results of the years 1945 to 1947 •••••• strikes and their repercussions on production have •••• impaired France's export capacity for those goods in which Switzerland is most interested (coal, steel and iron), not to mention the fact that French prices are too high for almost all goods."

- 55 -

Under these conditions it is difficult not to feel that the allocation

of :'~323 million to France ,.]ill primarily serve the purpose of filling ga:)s

resulting from the inadequacy of French policy rather than genuine French

needs. This can hardly be considered as a means of promoting European

self-help and recovery and as stimulating European cooperation. The bitter

comments in the British press show how much resentment the inadequate

effort made by France is causing in those countries \-1hic11 are exerting

themselves to the utmost to become independent of American aid)/

Greece is a second example of inadequate effort sanctioned and encouraged

by the Payments Scheme. '\tlhatever her needs for overall outside assistance,

and they are real and great, her deficit of :',67 million in intra-l'..uropean

exchanges is wholly unjustified. In 1947 her deficit with otherSCA coun-

tries was only (~30 million. Greece does not lack export capacity; she has

substantial surpluses of such commodities as tobacco, dried fruit and olive

oil and is complaining about the marketing difficulties she is meeting in

disposing of them. It is the high Greek prices and the desire to obtain

compensation for inadequate direct dollar aid which account for the ~;67

million credit to Greece under the Payments Scheme rather than any genuine

payments difficulties in intra-European trade.

]/ See Es®..omist September 18, 1948 p. 466 "The figures ••• speak for themselve. They Show the real order of precedence among the recipients of aid and they !ndicate, more clearly than any dialectics could achieve, which countries of Europe are pulling their weight and making the fullest con-tributions to the cause of European cooperation and recovery.1t Also, Ihe Banker, October 1948, p.g "The scheme ... <imposes the minL'1lUIn of sanc­tions on the chronic debtor countries. For the time being they can wallow in their deficits supported not only by the United states but by the rest of the European communityll. The bitterness aroused is acknowledge in France. See f!:2.QJ:em~conomiqu~.§ Nov. 23,1948 p.4, "France is the prinCipal beneficiary of the new system which allows her to meet her deficits in sterling, Belgian francs, and Swiss francs. This advantage has not been vdthout drawbacks: our country has been violently attacked, especially in the British press, as being a people of beggars, the more impudent because of their excessive consu.mption."

- 56 -

Thus, far from helping to correct intra-European disequilibria and

encourage intra-European exchanges, the system devised in Paris tends to

perpetuate these disequilibria and postpone necessary adjustments.

As pointed out in the Banker (op.cit.p.8) "just as the Scheme gives

the minimum incentive to potential creditors to put ther essentials at the

disposal of the rest of Europe, conversely it imposes the minLmum of

sanctions on the chronic debtor cQuntries." The ]£onomist (Sept. 11, 1948

p. 424) describes the implications of the system for intra-European trade

as follows: "Instead of maximizing the incentive to export to European countries, as would have happened if dollars had been forthcoming to match the credits arising from trade within Europe, it does the reverse; it maximizes the tendency to Lmport from otl~r European countries because deficits will now be covered by gifts from the creditor countries. Only a few months ago, certain countries in the ERP group, hoping to be designated as markets from which off-shore purchases against dollars might be made, were loudly advertising the unsaleable surpluses they held - tobacco in Turkey, dried fruit in Greece, steel and grapes in Belgium, fruit in Italy. These were surpluses under which the economy of these countries was apparently groaning and which could readily be put at the disposal of the rest of Europe if dollars were paid for them. But today these apparent surpluses have dis­appeared as if by magic. Under the new scheme, if these surpluses entered into European circulation they would l't.a.ve to be given avlay. Consequently they no longer appear on the list of what is availahle. The gap between what the countries want to export under this new Payments Scheme and what they would like to import was lUdicrously revealed when the first estimates of intra-European balances of payments for the coming year were tabled in Paris. Enormous divergences appeared betvleen the two sides of the export and import accounts. ~very country naturally tried to keep its exports to other European countries to a minimuln and to inflate its imports froln European countries as f'ar as deGency would allow - and sometimes beyond. 1I

Not only was the Scheme worked out on the basis of such far from edifying

considerations but it also promises to lead to further distortions and frus-

trations in its practical application. Cases of dissatisfaction with creditor

countries have already been reported because these countries are apparently

trying to discharge their obligations under the agreement with less

- 57 -

essential goods and reserve their more valuable products for sale against

payment. 11 The Payments Agreement has tried to provide against such tendencies by

recommending principles of commercial policy to its members, one of which

entreats creditor countries to "facilitate the use of the new resources

under the Intre-European Payments Scheme for the purchase of goods necessary

for recovery." ~I In practice, however, there are no means of enforcement

against countries not complying with this recommendation and, as the Banker

points out, lithe workings of the basic instincts of economic mann can be

relied upon to frustrate the application of these principles since there

will be no "really tangible motive force I! other than the "vague desire to

help European recoveryll to operate in the direction of an expansion of trade

in essentials.

There are some genuine cases where payments difficulties would have

hindered the procurement in Europe of essential supplies by countries unable

to pay for them in European currencies. Such is the case of the Netherlands

in its trade with Belgium and of France in its coal imports fron Germany.

But these cases would probably have involved no more than ',20D million as

compared with the $565 million of the Pa;y'ments Scheme. Off-shore purci18ses

by the ECA on behalf of these countries would have represented a much

11 See lL~J0rk TL"':le~ December 6, 1948 "Negotiations are in progress between France and Belgium •••• ')::he negotiations are expected to be difficult~ The Belgians, it is believed, l..rill ask the French to use some funds for pur­chase~of non-essential products in Belgium. The French would rather acquire only raw materials or metals of first necessity. This may hamper the usefulness of the system of payments." See also N~ork Ti'l1~ Dec.20, 1948 in which cases of evasion of the obligation to provide essentials to European partners are !~por.tedo

Y The recommendation adds that "in particular, net creditor and other partic­ipating countries should try to increase their exports to participating countries of products whose procurement within the group of participating countries may be regarded by the countries concerned, or by the Organiza­

tion, to be necessary as a result of decisions taken by the Organization with respect to the distribution of aid. tI

- 58 -

simpler and straightforward method of meeting these difficulties. They

"ould have provided an incentive for the creditors to malee their essential

commodities available to their European partners and at the same time

they would have served to warn both ~ed1to~s and £abtops ~tthey oust

have eliminated their payments difficulties by the time American aid to

Europe ceases; to the creditors this would have brought the realization

that exports to Europe cannot be sold against dollars except as an emer­

gency arrangement, and it would have reminded the debtors that they must

seek a more permanent solution to their difficulties than the use of foreign

aid.

As it is, the Payments Scheme is likely to prove more of a sedative

than a stimulant and will only serve to postpone the drastic adjustments

in the structure of European production and trade that are essential for

the restoration of economic independence in Europe. It will maintain the

British and ~elgian export surpluses to Europe which should have been

diverted to the regions with which these countries have yawning payments

gaps; it will enable Europeans to postpone measures such as currency

devaluation and reduction of costs which are essential for expanded exports

to the l--Jestern Hemisphere; it will relieve the laggards from the need of

making a more adequate effort to solve their difficulties.

American support for the scheme was primarily motivated by the con­

sideration that payments difficulties should not be allowed to interfere

with exchanges of essentials t.Jithin Europe and thereby increase European

needs of Americ2"n goods. vlhat this approach to the problem overlooks is

that a large part of the Dresent payments difficulties in J-mrope, as the

case of France strikingly demonstrates, are only a s~nptom of inadequate

effort and inappropriate policies and can be corrected only by vigorous

- 59 -

and determined aotion on the part o£ the countries experiencing these

difficulties. The provision of aid either in dollars or in other cu~-

rencies only serves to weaken the incentive to take corrective actlo:l.

It is a safe guess that little 1..ri11 be done <.luring the life of the Agree-

ment to reduce the disequilibrium in intra-European payments and that in

June 1949, 1lhen the Agreement expires, Europe and EGA will hav3 to face

and solve exactly t:le same problem that baffled them in 1948, only har­

dened by time and by the illusion that an answer had been found in the

Payments Scheme. 1/

]/ See 1~9onomist Sept. 11, 1948 p .. 425 liThe new facilities may tend to give permanence to an artificial distribution of trade but only on the basis of the decidedly impermanent prop of ~lP dollars. As Marshall aid falls off, or is cut off, the whole edifice of the system of European payments will be left suspended in ;nid-air,,11

- 60-

c. CON C L U S ION £

1<) ~he_:tjeed For Early Indeuendence From AmeI'~~

Eu."t'ope faces today serious economic and social problems "Thich ba,ve

been created or aggl'avated by the ,>Far.. She must model'nize her methods

of production and increase her efficiency in order to be able to ~ro-

vide the standaj:d of living insisted upon by her PO:pul8.tiO:..'lQ Ohe must

adjust her production to the changes in demand that have taken place

both in the outside wm.'ld l7nd ,vi thin the region.. She nrus'~ find the

means to meet the formidable competition of the Uni ted S'cates in Horld

markets.:. She must resolve the serious tensiorJ,s \-,hich "treake:.t h8T , ,

society and threaten its very exis·tence.. In our v'iei.", hvWe'78r" the

most urgent need of the present European si'tuation is t116 early achieve-

ment of independence from American aid.. This is a 'V'ital I!L .... rCpGrn interest

much more than it is an American interest.

The Uni ted Sta~es ,<!ill ahlays be fl'ee to d.ecide uhehher to contin'!.!e

or terminate the aid in accordance uith ",hat at any momen';; \,,:;'11 be

deemed to be the Ameriean interest in this mattero EuroJ?e~~s haVd no

such free choice~ unless they "Jork hard and un:tem:1. ttingly tOi'!a:ccts the

goal of ind.epeno.ence that goal \-Jill continue 'i;o elude them a!ld '~h'3 rL;;k

of collapse tvi th any cessation of Am6rican assis'cance 'l{Jill con'i;::.!1ua 'to

threaten them at the end of the four-year period as it threa'i;enl'2e. the:n.

at the beginning9

For the United States the material cos'j; of s'U,~~or'i;ing Europe beyor.d

the four-year period 'ltlould not be great; it ""Quld involve an annual bur-

den of $2 tv $3 billion a't most.. Today aid to Europe is a drain on the

American economy and reJ;resents a real sacrifice of the American people.

The 7iei'1~ shared by many Europe!;l.ns, that the ECA program helps Americans

- 61-

to dispose of surpluses is palpably untrue. :But "That is untrue today f!!8::r

become true by 1953. At that time aid to Europe 1nvolv1':lg, as it ,'1111,

many commodities.in which surpluses would have developed, may contribute

to maintain economic activity in the U.S.A •.. and relieve the farmers of

their surplusese :By that time Aoericans may find that ,·,hat they give

out as tax-payers for the financing of European aid is more than offset

by "That they get back as producers and ",age earners. The e:x;perience of

the 1930's has demonstrated ho\-, decisively the addition or "Tithdra"Tal

of relativelY small amounts of purchasing power can affect the level

of economic activity in a country as large and self-con~ained as the

United states. Thus, as far as Americans are concerned, a failure of

Europe to become self-su:Pporting ,'11 thin the next four years '-TOuld be a

disappointment but hardly more.

For the Europeans, however, continued dependence on American aid

is not a prospect that can be contemplated ,.rUh equanimity. It would

mean continued uncertainty, inability to look ahead of the next

Congressional session, and, above all, losa of dignity, self-confidence

and self~respect.

The United States has proclaimed its determination to support a

four-year program of European r.ecovery.. For tlw.t })eriod, Europeans

have something solid and concrete to .build on. :Beyond that, all is

speculation. Americans may find that continued help to Europe is justi­

ned and .'1orth",hile but theY' may not. They l1lay find (as some Europeans

seem to hope they '\I!il1) that having invested so much in European

recovery they could not refuse a fe~" more billions to keep the thing

going, They may find that continued help to Europe has its advantages

beeause. as already suggested, it ",ould relieve them ot surpluses while

- 62-

keeping their friends and allies happy and contented" ~ney may be so

heavily committed militarily that they "rould not i,Fish to see a critical

economic and social situation develop in an area of military importence

to them. :But it is also possible that none of these things ,.n.ll hap:Jen"

Europeans have a tendency to underestimate the interest arollsed in the

United States by the European Recovery Program and they do not seenl to

realize hot'1 seriously the objectives set for 1952 are taken on this

side of the Atlantic. They also forget that Americans react violently

to failure~ If the present expectations are disappointed Americans

may suddenly dedde to give the \'1hole thing U"'p as a bad job Q No:t should

it be ignored that a3 Europe recovers and Euxopean gOJc'i.s reappear in wI th the meaIlc:l to cO:1pete

quantity on foreign markets supplying onels competito:cs/may become

too strong a dose of enlightened statesmansh:::'p for '0he a':;o:..~age Americ?n

to accepto Finally~ there can be no certainty about the kind of busi-

ness conditions that "lill exist in the United S'~ates in the 19.50 9 So

The AJnerican economy may develep surpluses and go into a recession or

even a ~e}?ression. But it lI'.ay not~ Fublic spendillg en such things as

housing, river control, soil conservation~ high'\<IaYs, is i:nmensely

popular Hith a :n::l.jority of Americansc A program of that tY.J;B? if i~

is large enough~ ma:y easily take up all the slack that may develop in

the American economyo Nor is it unreasonable to su:o}Jese tl1at A::Jericans

may in the end tire of helping others and decide to help themselveso

The UnHed States is a young nation \1h8re change is a national tra-

d1 tion~ and \1here new solutions to new problems do not take long to be

"forked out" There is no justification for assuming that the Anerican

attitudes and conceptions of 1953 ~dll be the same as those cf 19JOc

One thing is certain: it is impossible to foresee today l:hat Americans

.... 63-

will feel and think in 1953. Elementary "'Iisdom should caution

Europeans not to rely on continued American assistance beyond 19520

:But even if such assistance "IIlere assured, is it really :i.n :]uro)Je!s

interest to become a pensioner of the United States? Is even the

present relationship of temporary dependence a really hap,y one? l'l;

\1ould be idle to pretend that it is.

1'1:1. th Americans naturally feeling that they must supe:l."Vi se the use

of their money and Europeans naturally resenting the resulting American

interference in their affairs, a psycholog-.r of dependenee combined i'lith

hidden resentment is being created in E'l,l.rope ,·,hio.."11 does not bid fail'

for the futureo Thr,?ugh its aid r the United S'i;a'ces is .1ielding enor­

mous pm'ler in Europei far greater than is sefe for a!lY coun':;ry to

exercise over others for a prolonged period of tlme" O:"11y in::j.ni·~e

wisdomp \l1hieh is not a human attributa~ could pre'vent s1;;.c..h :p0\';,e1' froID

being misused. o ~he present relationship between Americans ane.

Europeans is justified only as an emergen.cy arrang6me:£lt c :rhe mol'e it

is prolonged the more it "\1ill eat into a tra·::li·tional fricnish:i.p an(;.

produce mu.tual recriminations and antagonisms::> Hor should it be rOT­

gotten that the COmffivn bond which today keeps many of ~ae antagvnioms

beneath the surface~ namely fear of Russ;i.an agg:i.~essior.v may onQ day

vleaken or even disappear" Russian Erlira'~eg9' mey cha!"l..ge in the coming

years 9 it may aim at allaying the fear that Russian actions inspire arLd

may even offer profitable Jcrade deals tJ .Europe:a:ns., Unlass the

Western association is built on something more constructive and mor~

permanent than fear of Russia it may not be able to "Ti thstand all these

c~ming tests. It is? therefore~ in the interest of both parties, but

especially of the Europeans, that the American role be shifted e.s sOO:''l.

-64-

as possible from that of a provider and admonisher to that of an equal

partner in a community of like-minded nationso

Such considerations IIl8.y not weigh heavily >,Ii th leaders a.n~ states-

men struggling ui th the day to day problem of making ends meet,; but in

the end it is these considerations, and not \1hether the sugar ration is

too high or too 101;1, that \<lill shape Europe f s future.

2. The Problem Of Intra-European Trade As Part Of The General Problem Of European Economic Independence. ,

If our vie,." is correct, tr;.at independence from American aid must

be the paramount consideration of European policYt it follows that all

other issues must be submitted to the practical test of ,·,hether they

would assist or hinder the early restoration of European self-sufficiency.

In this interpretatlon of the European situation the problem o~ stimulat­

ing intra-European trade is not a separate and unrelated issue, but is

part of the more general problem of economic independence for Europe.

A higher volume of intr~European exchanges is desirable if it decreases

Europe's dependence on outside aid, and it is clearly undesirable if it

increases that dependence.

The measures taken to date to stimulate intra-3uropean trade do not

meet this test. When qecretary of State Marshall a:?Jlealed for cooJ?era-

tion and self-help in Europe he was referring to the cooperation and

self-help needed to minimize the drain on American resources and enable

Europe to regain its independence from American aid. There uas nO

suggestion in his speech that European cooperation as such '1as an American

concern, even less than the United States was preyarad to spend dollars

in order to ensure such cooperation. Similarly. \~'hen Congressional

leaders called for increased exchanges of goods ,d thin Europe, they had.

in mind those exchanges that \1ould reduce the demand for American

- 65 -

supplies. Unfortunately, these simple and straight-fo~,ard objectives

have been lost sight of and the conception has been gaining grou~d that

increased exchanges within Europe are a good thing in themselves, that

they are in fact the most tangible form of European cooperation, and as

such are "Torth encouraging, irrespective of. their effect on Europe 1s

dollar requirements. Recently the argument has been running as folloHs:

Amer!ca.'1S w"ish to see a close cooperation established among European,

countries~ Increased cooperation means larger and freer trade, ~list

however, requires dollars. Therefore, the Americans should be lJre-,ared

to provide the dollars in order to ensure that the objective of coopera-

tion is achieved. There have recently been re~eated references in the

press that the Benelux Union, conceived during the ,.,ar as a means of

bringing. the economies of Belgium, the Netherlands a,nd Luxembourg closer

together. \',ill not be a practical !,lroposi tion "1i thout the prop of some

$350 million aid per annum from the United States as late as 1952. It

is suggested that Americans who have asked for economic cooperation uith­

in Europe should be prepared to pay the bill(OlI

The dollar-sup!>orted Payments Scheme, vl11ich vIas discussed in the

previous section of this I\femorandum, is largely the product. admittedly

a modest one, of these conceptions.

JJ See The lil'e,·, York Times, lTovember 8, 1948:

liThe latest analyses of the eoonomic posi tion of the N'ebherlar.ds and Belgium have convinced top financial authorities in both countries that realization of the Benelux Economic Union by 19.50 ",111 be im­possible unless the project is undenTritten by the United States/) ••• A seemingly insurmountable obstacle has taken shave in the dim but not very distant future. This is the apparent inevitability of a dollar deficit for the combined countries of around $350 million as late as 19.520 000 The Belgian reaction to the prospects t~nds to be based on faith that the United. States ,,,ould not want to see the Benelux unity effort fail. It is the only real attemot in Euro~Je permanently to destroy economic barriers and establish free trade over a ,dde area."

- 66-

It seems that some clear thinking is urgent~ needed on this matter~

~le restoration of European self-sufficiency depends overwhelm1~

lyon a reduction of imports from the l'lestern Hemisr>here and an increase

in exports to that region. The reduction in i~orts can be achieved

through increased European production of such essentials as coal,

cereals, timber, an increase in the supplies obtainable from other

regions, es:?ecially Eastern EnrOlle and the Far East, and, the grad1:lal

reduction in the need for reconstruction goods. It must, hO"1fever, be

recognized that requirements of essentials will be larger in Europe in

the 1950 t ~ than they ,.,ere in the 19301 s, because production levels "lill

be higher, the population ,·rill be larger and the demand ,dll be more

heavily concentrated on food and basic eo~uodities than before the "~r.

At the same time alternative sources of supply will not be as easy to

develop a.s is sometimes assumed. The Far $st ,·rill be in turmoil for

many years to come. Eastern Europe is making drastic changes to the

structure of its economy. Oolonial development is much slower and much

more costly than is commor~y imagined. ThUSt it is a safe gu~ss that

European dependence on the sU!,:?lies of the ivestern Hemisphere9 although

reduced as co~ared with present levels, .dll be greater than before

the ,,,aT. HOi" ,.Jill Euro"Je be able to pay for these su!'plies i:!hen American

aid ceases? Before the '''aT, European countries met one-third of their

expenditure ~n overseas imports through investment income~ ship!,ing and

foreign travel and earned some $400 million indirectly tr~ough the

export surpluses of their colonies \':i th the U. S.A. In the 1950t e these

financial resources will be much reduced and large payments "Till be due

to the United States for the servicin€: of post-l'lar loans. At the same

time the exceptionally favorable terms of trade of the 1930's which were

due to the "Forld depression cannot be expected to return. Thi s means

- 67-

that in order to obtain a given volume of imports Europea:"1s ,·!ill have

to provide a larger volume of exports than before the \1ar.. Thus» even

if imports from the '''estern Hemisphere "'ere reduced to their pre-l'lar

level, Europeans \'1ill be able to pay for them only if they expand their

exports considerablY abov'e the pre-'t':7ar level" And since imports from

the Western Hemisphere will probably have to be higher than before the

war, only a tremendous expansion in exports to the lfestern Hemisphere

can restore equilibrium in the European balance of payments by 1952 or

19530 The expansion needed may be roughly estimated at 100 per cent of

pre-war, ,.,hich means that Europeans ,'1'111 have to more than double their

exports to the \jestern Hemisphere betvleen no\" and 1953 if they are to

become ina.ependent of ~nerican aid~ SU0n is ~he ~~'nitude of t~e task

faCing them" v[ould a high volume of intra-]Jur0pean trade assi st or hinder

this task? It is on the anst>J'er to this question that the desirability

of stimulating intra ... Eu.rcpean exchanges depends ..

Larger intra-European exchanges "JQuld assist the task of restoring

equilibrium in European payments onI:" if they ,-IOuld reduce the need for

overseas sUI'!;lies o~ increase the export capacity of ~Qropean countries~

Exports \'li thin Europe that do not meet this tes'l; must neuessarily be at

the expense of exports to OVerseas countries because they reduce

corresponuingly the resources and productive capacity available for over­

seas expo:. .. ts.,

An exaDtlnation of the prospects of 1noreased intra-E~xo~ean

exchanges in the light of these consideration(ii leads to the fol101:ring

conclusions:

ao Intra-Europ6~n Trade In Essentials

At present intra-European trade in essentials is considerably

below pre-wara Coali oreBi metals, timber are exchanged in smaller

68 -

quantities than before the ,,,ar not only because production is in many

cases Imver than before the vJar but also because a larger proportion of

~utput is retained for home use. (British production of coal, for

instance, was only 10 per cent bela,., pre-war during the first half of

1948 but exports were 80 per cent belo'\11' pre-'Ilrar.) European countries

are clamoring for each other's essential Frcducts but are offering each

other mostly non-essentials~ It is clear that larger exchanges of essen­

tials within Europe depend on increased production and not on financial

arrangement s. Only \'Then the internal diffieul ti e;; inrpeding larger prO­

duction, such as manpower shortages and inflation, are overcome can a

larger trade in these essentials be achieved. There are few cases where

payments difficulties are hindering the flow of essenti~~ supplies in

Europe. The case of Dutch imports from Belgium and Frenc~ imports, of

coal from Germany has already been mentioned. III general, hm"ever, the

volume of essential sU:9J?lies that is available for export is still short

of the existing demand and places the countries ,·,hich have essentials for

export in an extremely strong bargaining position, vis-a-vis the countries

needing these exports. The case of Belgian steel "1hich Europeans need

but cannot pay for has often been cited as an example of essential trade

handicapped by payments difficulties. An examination of the facts tells,

however, a different story. Belgium. taking advantage of the existing

shortage of stee;L, charges prices S;lX times higher than before the, "Jar

and far in excess of production costs. 'When it comes to purche.ses, hov~

ever, Belgium prefers to obtain her supplies in the lower-priced dollar

markets and, not content t<Tith charging high prices to her European

partners, she asks them to pay these prices in dollars. Having thus

discovered an easy mea..'1S of getting dollars ,dthout the need to sell her

- 69-

expensive exports in the competitive markets of the Ivester'n !fEttllf~herew

Eelgium feels that she has solved her problem and that it is her

partners 1 job to make their currencies convertible in dollars~ The fact

that her o,vn eJq?orts to the United States are only half of theil' pre-'ivar

volume seems haxdly relevant to her in this matter. This Belgian atti­

tude ignores the fact that no .Eu:ropean country \vill ever be able to pe;y

in dollars for its European imports because no European country cen h~2e

to achieve a surplus Hith the dollar area.. If :Belgium W'all':~s to sell in

Europe she must buy in Europe, otheI"l'Tise she must div'er'l; her exports to

the Vlestern Hemisphere and earn directly the dollars ,-;1 th ",hleh to pe,y

for her imports. ifuat technicians call "payments difficu):liies" are in

fact difficulties arising from inadequate European cooperation and lack

of coordinated policies ..

An increase of intra-European trade in basic cOll"1nodiUes above

present levels is essen'tial to European recovery b~1i deperlJ.s on

increased production and greatel" cooperationo Can. ho\ve7er, the Europeans

hope to substitute European goods for goods traditionally obtained ove~

seas and thereby reduce theil" dependence on the su:nplies of the t'lestern

Hemisphere? A glance at the list of goods imported from overseas is

sufficient to sho\-T that the scope for such substitution is very limited.

indeed. From the technical :point of viei-!, of course~ Euro::::>e could grow

more food. produce more ',,001, refine more petroleum than she has been

doing in the lJasto From the economic point of vim'! this \,;ould in most

cases be a costly prOposition entailing a less efficient utilization of

resources and consequently a 1m'ler standard of living. It .liould .also

mean mass discrimination against overseas products and the strangulation

of ,,,orld trade" Nor is it likely tha'b the interests of all the. countries

in the group ,,,ould coinCide :1:0. thi s matter. There is no reason, for

- 70-

instance, why Bri tain should be ... dlling to divert her purchases of uheat

to the more expensive French product and provide in return coal and

machinery \1hile she could obtain much larger quanti ties of "IIlheat in

Argentina and Australia against the same volume of exports.

Increases in the production of foodstuffs above pre-i'Jar levels are

possible in Europe through more scientific farm~ng but these could, at

test, only offset the increased demand for food, they could not be such traditional

as to reduce the/dependence on overseas supplies~

Our conclusion is t\1J'o-fold: (i) increased intra-Euro!>ean trade in

essentials de?ends on inoreased produotion and not on financial schemes;

(ii) increased production and exchange of essentials oannot reduce sub-

stantially Europe's dependenoe on overseas supplies.

b. Intra-European Trade In Luxuries Ar.d Less Essential Gooc.s.

In the first section of this ~femorandum it '."laS shoiJn that before

the '"lar a considerable part of intra-Eu:r01Jean exchanges consisted of

an exchange of lUXUries and less essential goods_ During the last three

years, trade in these goods, unlike trade in essentials, r~s been on a

high level due to inflationary demand and profitable ma.rkets in Europe

and to the lack of urgency to eJrport to the dollar area.

Imports of non-essentials from one European country to another

affect the prospects of achieving independence from Ar,lerican aid in

more than one way: (1) they reduce the sUJT:?lies of such goods that are

available for export to the dollar area; (ii) they raise prices and ~:e

these goods non-competitive in dollar markets; (iii) they absorb scarce

resources of manpower. fuel and rat;, materials '\Ilhich should be diverted

to produce essentials.

The familiar argument in favor of such exchanges is tl~t the

resources that go to make these less essentipjl goods are so specialized

-71-

that they cannot be shifted 'dithout great economic loss. Vineyards, it

is said, cannot be changed into ,,,heat fields. nor lace ;,·rorkers into

minersl> Since this is so, the argument runs, better produce and e::cl::ange

the less essential goods than leave the resources unutilized. It is not

difficult to refute this argument Q In the first placet there can be no

justification for encouraging exchanges of non-essential goods ~,ri thin

Eurol:le so long as e:lq)orts of such goods to overseas rer;ions reooin lo'u and

no real effort is made to render sales in these regions more profitable

to exporters than sales in European markets. In the second place, it is

not true that resources cannot be shifted and l'lorkers retndned for

more essenticl job s. During the ':Jar :Britain retrab.ed and transferred

thousands of 1.1orkers from cotten mills to engineering.

The present emergency is almost as great for Europe as war itself

and cannot be overcome by relying on automatic processes alone. It is

an emergency ~'Thich calls for determined policies and deliberate action.

The problem of trade in less essential goods raises difficult and

complex issues because it is part of the 't,ho1e problem of adjustme:i.1t

in the Euro,ean economic structureo Exports of luxuries and non­

essentials have for decades been a mainstay of European exports" H01:rever,

Horld demand for these goods has been steadily and irrevocablY decliningo

The problem for Europeans is to determine hot"~ much demand for these

goods remains and adjust their prcduction accordingly. Forcing these

goods on ull1."illing buyers is no endUring solution.

There can be little doubt that exchanges of non-essentials uith1n

Euro'Je ,,,111 have to be considerably smaller than before the ,-rar if Euro!Je

is to become independent of American aid and tolerable living standards

for the European masses are to be ensured. The United Kingdom, ",h1eh

before the "lar was one of the largest markets for Euroye I s non-essentials,

- 72-

has already given notice that it does not contemplate returning to its

pre-war pattern of imports. Germany ~,1ill be in a similar position. It

is pure \'l'ishfuJ. thinking to expect Uat European demand for non-essential s

can be restored to its pre-~~ levels.

It is true that there can be no rigid definition of what is essen~

ti81 and l1ha.t is non-essential. Commodities, such as fruits, vegetables,

wine!'). Hbich today are labelled as non-essentials in many import progral:lS,

will again become essentials as the foreign exchange position improves.

To the enent that the falling off in demand is of a temporary chart'.cter

is it reasonable, it "rill be asked, to shift resources and subject the

economy to the resulting dislocations? Ivould not such a course involve

oonsiderable ~laste and l[Quld it not be preferable to malee some interim

arrangement for the marketing of the goods?

Similarly, in the case of countries "Thich haJ)J?en to depend heavily

on exports of non-essentials, would not some concessions by their former

customers be justified? 1'lould it not be in the common :3u.ropean interest

that concessions be made vhen these vlOuld prevent e%.treme hardship in the

exporting countries Hi thout imposing too heavy a burden on the importing

countries?

These questions cannot be answered before Europeans really get to­

gether, compare their re~pective positions and find out where they are

and \'That they can do for each other. Financial mechanisms and (lollar­

supported Payments Scheme cannot do this job for them. The shock ;."hich

the British four-year :plan has produced in Europe shmV's how little aw'are

of each other's position and policies Europeans really are, The British

intention to keep imports fl"om Europe dOi,m could not have cona as a sur­

prise to anyone who has foll~led British internal end external develop­

ments during the last three years.

- 73-

:Bilateralism Or Oon~rertibility? )

It is argued that bilateralism, ",hich today dominates intra-

European trade, is (lne of the obstacles to increased exchanges "ri thin

Europe and to the elimination of present payments difficultieso Trs,!'!s­

farabili ty of European currencies, ','hich in fact means free convertibi-

lity ,dthin Europei ,"as proposed by the Finandal Oonn! ttee of the

Faris Oonference and has since been urged by many Europeac"1s as tl1e

ans,,,er to the defects of bilateral tradingo The recent Pa~rments Sche21e

represents a limited application of these conceptions~

There can be no doubt tl~t strict bilateralism is not an efficient

method of trading. It restricts the freedom of buying the goods most

"laTlted uhere they can be obtained mOfa'\; advantageously and of selling in

the most profitable markets~ It yrevents countries from offsetting defi­against

ci ts ,'lith one partner I sur:pluses ,d th anothero It strengthens

monopolistic tendencies and enables countries in a strong be.rgRining

position to tal~e undue advf4"1tage of their less fortunate partnerso Ee-

fore the "Tar bilateralism "ras sometimes resorted to as a means of stimu­

lating exports and thus relieving unenIlJloyment"lI !;!ore oft~n, ho ... ·rever,

it i-ras the refuge of cou.n.tri es '\11 th 'I:leak or over'",aluecL currencies 1111ich

could not compete in ':1Orld markets ~md could not let their currencies

be freely transferred from country to country:> Thus, bilateralism "\vas

a sYID:!?tom and. not a cause of the '"leaknesses and disequilibria Hl!ich

existed in the pre-war economy.

During the first post-war years the bilateral trade a,greements

signed in Europe did not require strict balancing of accountso Substantinl

'iJ The Trade Agreements signed by' the United Kir.gdcm in the 1930' s vi th countries heavily depending on the British market for their exports ,,,ere of thi s type"

... 74-

credit margins were pro~ided as well as settlement in gold or d~llars.

With net creditor and debtor :positions developing, these resources "lere

soon exhausted and European countries \1ere forced to aim at a closer

balancing of accounts \"i th each of their partners. The experience of

the last three years has demonstrated that so long as European currencies

possess varying degrees of "hardness" and "softness" the countries 1'Ii th

t~e relatively" softer" c'JXrencies \'Till tend to develop defic! ts to'llJards

the rest of Europe. This is acknmvledged by those '''ho urge greater

transferabili ty of currencies 1:ri thin Euro:)e as a means of stimulating

intra .... European exchanges. They recognize that such transferability is

feasible only if dollars are provided to sU1)port the system. In other

"lords, it is asked that American resources be made available to promote

a large but unbalanced excha."lga of goods '1i thin Europe.. Such a dema.:nd

lilOU.l.d have had some justification in the immediate post-Har years \1hen

inadequate production in some European countries and rapid recovery in

others meant that some countries needed but could not afford to buy the

products of other countries.

TodaYIl '1hen European production is at or even above pre-"ro,r levels,

payments difficulties ,'.1. thin Eurc!)e are due overwhelIll1ngly to the unstable

monetary situation and inadequate effort of the deficit countries, and

it is clear that under such conditions the provision of dollars ",ould

merely be an encouragement to inefficiency and lack of self-help.

Nor is it true that convertibility of currencies ~dthin Europe

'IIlould have a beneficial effect on trade. As pointed out in the Survex

of the Economic Situation and Prosn~cts of Euroue (p. 106), under con­

ditions of free interconvert1bility Itthe 'deficit' cOll..Tltries Hould each

tend to restrict imports from the others in order to obtain funds for

- 75-

expendi ture in the hard-currency or r surplus I countries of Europe o These

effort s ,,,auld necessarily be conflicting and tra~e Hould st1.?gnate rather

than flourish8 Freedom of convertibility cannot. thereforev successfully

operate among currencies some of ,.,hich are chronically scarce or ~h.:'1Xd I

and others chronically redundant or tsoft'."

Full convertibility of European currencies, such as the one

at tempted last year by the United Kingdom, ''lould have still more di stort­

ing consequences for European trade: to quote again from the ~~

(p. 106), "if European countries "Jere under the obligation to provide

dollars in settlement of adverse trade be~~J~es with their neighbours,

each country uould seek to alleviate its O'\.·/ll overri9-ing hard-currency

problem by res'tricting its im:9orts and~ if possibles by e:x;panding its

exportso They ,,,ould thus nullify their mutually inco:asis·tent efforts

and stifle trade among themselves .... Jith little or no benefit to anyone

country" A different result '\'TOuld ensue only uncter the remote contin­

gency that dollars should cease to be the currency most sought after,

or if appropriate safeguards could be erected to ~revent a ruinous com­

petition for dollars.. It seems clear that destructive forces of the

nature indicated - specifically, restrictions against imports from the

United Kingdom in the face of expandir~ British imports from the

Continent of Europe - ",ere among the factors contributing to su.s:Jensj.on

of dollar convertibility by the United Kingdom in August 19470 Even

under :present conditions, uhere only extremely limited J?~vvision is

made for gold or dollar settlement of bilateral balances, COIDlJetition

to obtain such funds may tend to th''lart the development of trade amor.g

European countrieso Yet the propulsion touards such conflicting !'oli­

cies is strong uhen Virtually all European countries are faced vith

seriously inadequate resources to finance their oversea requirements .. "

- 7'6-

Oonvertibili ty is the form ,vhieh economic health and strength

takes in the field of foreign transactions. An essential prerequisite

for the restoration of convertibility in Europe is the establishmellt of

eCluilibrium in the European economy 8nd finances. Present bilateral

arrangement s reflect this lack of eCluilibrium; they ,,,ill be necessary

until the factors making for diseCluilibrium are eliminated.

d. Conditions For The Restoration Of Eguilibrittm In Intra­Eyropean Exchanges.

The main object of the preceding investigation was to demonstrate

that there are no short-euts and easy solutions to the present payments

difficulties. These merely reflect the more general economic and social

dif;f'iculties facing post-,var Europe. Dollar-su!:'l)Orted schemes and

similar financial arrangements are expedients ,vhich only serve to post-

pone necessary adjustments.

The problem of intra-European trade can be solved only if the

underlying causes of disequilibrium are removed. This requires an attack

on many fronts:

(i) So long as the currencies of deficit count~ies remains '-Teak

and are rejected even by their 0'I.,,'Il ~~ a major factor

in the present payments difficulties Hill continue to

operate. Only by letting these countries face the conse-

Cluences of their inadeCluate poliCies can there be any hope

that they will take the measures necessary to restore finan-

cial stability. Coming to their rescue i-71th European

credits and grants is an encouragement to inaction.

(ii) A second factor of diseCluilibrium in the European economic

si tuation ",hieb must be removed is the inappropriateness

of many European exchange rates both in relation to each

- 77-

other and in relation to the dollar. In the Memorar~dum of

l'fovember 11, 1948 on the llProspects of European Recoveryll it

,"as argued that a simultaneous devaluation of EurO'pean cur­

rencies to'hrards the dollar '1Iras an essential condition for tb.e

restoration of equilibrium in Eu.rop~an accou..."lts '1l!ith the

dollar area. Such a devaluation \\Tould prove beneficial to

intra--European payments themselveso It ,.Tould help redirec't;

e:x;ports of many non-essential commodities tOiTards the dolll?.r'

area and thus reduce the need for pre~sing these goods on

un'tlilling European partnerso It v!ould make dollar goods mor~

expensive in relation to European goods end uould~ therefore,

help divert European purchases from the dollar area to

European sources of supylyo Thtts1 it 1'Iould erlcoU:;:age trade

in essentials v'li thin Europe and discourage trade in non­

essentialsG A readjustment of excha.nge rates '1,Ti thin Euro:!Je

1'1ould have similar resul teo It ,,,ould reduce the discre!)al'lcy

at present existing bet'Neen the value of the various 3luropean

currencies~ and by stimulating exports from deficit cow1tries

and discouraging exports from surplus countries it \,:ou1d

contribute to restore equilibrium in European payments.. The

usual objection to SUcll suggestions for devaluation is that

so long as mOlJatary instability ~ersists dev~~uation is

ineffective in correcting external disequilibrium. This is

true and that is ,,,hy the first condition for restoring equi­

librium in European external accounts is the rest~ration o~

interr...al financial s)ability. This does not :mean, hot·rever,

that deficits due t~ lack of such stability should continue

to be financed "lith outside aid. Nor does it mean that no

- 78-

problems of ina~propriate exchange rates other than those aris­

ing from financial instabilit~ exist in Europe. A grea~

number of European currencies, such as the British Pound,

the Belgian Franc, the NO~legian Kroner r~ve achieved as

much stability as could be expected under ~revailing con­

ditions. They are, hO'tV'ever, unquestionably overvalued to'l.'Tards

the dollar and are probably over- or undervalued in relation

tG each other and to the remaining European currencieso To­

day, dollar aid to Europe makes the adjustment of European

exchange rates both towards the dollar and among themselves

aP:Jear less urgent than it really iao lf~ hO\1ever, the ad­

justment is postponed until the termination of American aid

there is a real da.'Ilger that it 'Hill be made in an uncoordi­

nated manner and may lead to dest~~ctive competition gnd to

a return to the rivalries of the 1930 l so

(iii) It was sho\m in the :preceding section that repayment of

credits granted during the first post...,.t"ar years absorbs

substantial current earnings and accounts for some of the

payments difficulties between European countries. It is

clear that too rapid a rate of repayment affects the flow

of" trade \"i thin Europe and intensifies the exis't1ng dis­

equilibria. A consolidation of these debts and the spread­

ing of their re:payment over a longer 2Jeriod ,,,ould be in the

interests of both creditors and debtors because it "lould free

resources for current exchanges of goods. Countries lThich

are themselves receiving aid from the United States under

generous terms have the obligation to. treat their Oim

debtors generously. At the same time, hOi1Tever. it is clear

- 79-

that the granting of short-term credits to meet deficits of

chronic debtors is a palliative ~tllich does not contribute to

solve the difficulties of these countries and shou.ld g therefo:::e.

as far as possible, be avoided.

(iv) Action alor..g the lines suggested in the preceding :!,a!'agra!:"lhs

is essential but is not sufficient to restore equilibrium in

intra-]luropean exchangeso Europe I s changed circumstal1.ees re­

quire concerted action to determine "That are the com::lodi ties

each country needs from the other! where ean these commodities

be produced to the best advantage;;i' ,,,hat are the goods that are

not wanted and hO'l:1 best Can the interests and potentialities of

the various countries be reconciled. So long as European coun­

tries insist on thinking in terms of over-'all volume of trade

and of defiei t or su:r:Jlus balances the solution of their d.iffi­

culties ,dll continue to elude them. It is only ,-rhen the

problem of intra-European trad.e, like that of overseaR trade~

is tackled on the co~modity level tl~t reRI progress can be

made.

The dual:1 ty of approach \1hich characterizes· present

European ;;olicy is based on the theury that o'Verseas irrrports

are J)aid for in scarce currencies and must? therefore, be

carefully screened ",hile trade vi thin Euro)Je involves soft

currencies and consequently requires no similar scrutinYQ This

thecry disregards the fact that goods traded in Euro~e use up

scarce resources of manp01"er and ra'l;1 materials in order to be

produced and reduce correspondingly vThat is available for

export to overseas regions. (Textile nanufactures, for instance.

\'lhich are exchanged 1:1ithin Europe embody l'a"; materials paid for

- 80 -

in hard currencies and could earn hard currencies if exported to

overseas markets.)

European resources are and ",ill for some time continue to, be

inadequate to satisfy all European needs and must. therefore, be

utilized \-[1 th the utmost care and effectiveness if the region

is to be able to meet its essential needs '\,rithout outside aid.

This means that the ~resent duality of approach to the problem

of Euro~ean trade is not justified. Only when the problem of

intra-European exchanges is taCkled on a commodity level can

the adjustments in the European economy be made that "Till increase

the production of those goods vhich are ,-,anted and reduce or

divert to overseas markets the production of those goods '-lhlch

Europeans can no longer afford to consume or exchange among them­

selves.

No countr, can solve this problem by itself or by bilateral

neeotiations , .. tith its :r.:artners. Still less can the problem be

solved by driving hard bargains "lith ""eaker :uartners. Only if

all European countries get together ,,\rill each of them be able to

see ,,,hat it can eXlject from the others and ~-rhat it must do for

the others as a 'ltlhole" Only vhen concessions are made simul­

taneously \'.'il1 it be possible to ensure that gains and sacrifices

\1i11 offset each other and that no country ,·,ill be called u2/0:o.

to bear an undue share of the burden of adjustment. Such a

degree of cool')eration has not been achieved yet but, in our vie,'],

nothing less ''1'111 provide an enduring solution. This is not a

question of coordinating long-term plans and looking years ahead.

It is a question of planning this yearts and next year's trade

1Irithin Eurone &n a commedity bas:i.s in the same "·ray t11at imports

- 81-

from the dollar area are :planned on a commodity ba,sis.

It is :precisely because this ayproach involves a considerable

degree of :planning in foreign trade that it does no·t a:Dpeal to

many European countries \1hich are becoming increasingly impatient

of controls and restrictions and are looking fo~roxd to a freer

economy and freer trade.. ~hese countries resent even the degree

of :planning and control involved in the :muroysan Recovery 1'ro:,;ra.'11

and accuse the Americans of inconsistency in l-"':Jr-dJ..~.J€ the gospel

of free enterprise ~~ at the same time insisting on providing

aid in the form of ~)ecifie commodities rather than free dollars

and exercising close su?ervision over the use of the supplies

made available.

What these coun"cries forget is that free en~el"prise can func­

tion effectively only t'ihen certain conditions are fulfilleo.o

These conditions are high productivity or 10\'1 1iv:'.ng standarcls

for the masses and stable currency_ Free enterprise is success­

ful in the United States of today because the 11i.;h productivity

of tJ::a American economy ensures good living stl?Jldards to all

sections of the po:pulation ru1d keeps the masses han~ and con­

ten"ed. Jh'ee enterprise ,"as suc:cessful in 19th century Euro}.')e

because the exploited and unproteded masses had to be satisfied

with a life of bare subsistence 'IIThile huge p:""'ivate fortunes ,·rere

being accumula"teda Neither of these conditions obtains in present­

day Europeo European productivity is not high enough to provide

an abundance of goods for all and the Euroye,m lIl8.sses are no

longer satisfied merely to subsist. Under ~resent ~v:?ean con­

ditions of scarcity and class antagonism free ente~rise means

free explQitation, social unrest and inflation and is certainly

- 82-

not the type of free enterprise extolled in the United States.

The United Stat as itself, "Then faced 11i th shortages and infla­

tionary pressures, did not hesitate to institute government con­

trols over the use of scarce resources as the only means of

ensuring economic stability and social peace. American '11.rar-time

controls were as comprehensive and as well-administered as thos~

of any other country and there can be little doubt, in our vieu,

that the United states "rould have retained such controls even

in peace-time if it had been faced ' .. lith conlii tions similar to

those obtaining in Europe. As regards the third condition for

the functioning of a free economy, namely monetary stability,

it is clear that the degree of monetary sta.bili ty required for

free enterprise does not yet obtain in ~resent-day Europe.

Similarly, freer :European trade '1.:'1111 be possible only after

the disequilibria in European production and trade ''I'hich make

present restrictions and controls necessary have been eliminated.

The concerted adjustment in the production and exchange of goods

,dthin Euro!le ",;hioh has been suggested here ",auld help to eli­

minate a grea.t yart of these disequilibria. An adjustment of

thi s kind would ensure the optimum volume of trade i',ri thin Europe~

Iffiether that volume ,"lOuld be higher or lower than before the l'l'8r

is immaterial. It ,,!ould prcbably be Im'rer because trade in non­

essentials '>7h1eh before the war represented a substantial ]lart of

intra-European exehangesW\'lJ1have been substantially reduced and

trade in essentials i'lould not have been corresyondingly increased.

:But, ,,,hat ever its volume, trade along these lines ,"Tould be

balanced and would not depend on strict bilateralism and severe

restrictions in order to be kept in equilibrium. Without such an

- 83 -

adjustment freer trade in Europe ,·rill continue to mean more

Amerioan dollars and larger overseas defioitsa

3. ~ Possibility Of European Economio Integratio~~

In discussing the problem of intra-European trade 'Are have assu.rncd

throughout that the next four years will see no sJ?ectacular re(Jrganization

of the European eoonomy in the direotion of greater syec:'l.alization amc,ng

European countries. It is olear that to the extent that European prcduc­

tion oould be reorganized in larger units along Amerioan lines a higher

volume of exchanges ,·ri thin Europe ,·!ould result because each country

,,,auld conoentrate its efforts on the produotion of those goods in ,\>,11ioh

it vTould possess the greatest advantages and ",ould depend on the other

countries for the marketing of its products and the satisfaction of its

over-all needs ..

Fe," ideas ha:ve appealed more to the American imag:;'nation during

recent years than this vision of a reorganized European ecoI!t)my reproduc­

ing the pattern ~'lhich has given the United States its unequalled 11ealth

and economic strength. It is because of this 'vision of an econcmically

unified Europe that >gO m::.;,e:i{' importaJ1Ce is attached to a large volune

of intra-European exchanges, the hope being that larger trade 'ltrill s(\me­

how bring about greater economic integrationo The desire to see this

achieved is so strong that it has affected the traditional American atti­

tude against discrimination in foreign tradeo Today, 3uropean countries

are urged to adopt meaMUres, such as the establishment of a customs

union, that would in fact mean increased discrimination against A~erican

products"

In the Memorandum of last February it "TaS argued that these

American expectations were unrealistic and were bound to be disap~ointed.

J;t "'as suggested there that no s~Qectacular changes in the structure of

- 84-

the European economy vlere likely to take place in the next fev' years,

first, because they 'IIlere not "lanted by Europeans and, second, because

they ,,,ere not economically possible.

Developments during the last year have confirmed this assessment

of the prospects of greater economic integration in Europe. ~ne econo­

mically stronger countries in Eur~pe, such as the United Kingdom, the

Scandinavian countries and Switzerland, have clearly demonstrated their

reluctance to 1'Jork for a closer European economic association ;.,bleh in

practice ,,!ould mean a weakening elld not a strengthening of their economies.

The eagerness of the weaker countries, such as Fr~ce and Italy, for such

an association has reinforced the conviction of the first group that

getting closer together "muld mean shouldering new burdens and responsi­

bilities. The determination not to get involved in such experiments is so

strong that, in our vie\.,~ these countries ",ould probably bave :preferred to

do \'Ii thout American aid if a merging of their economies I,d th those of

other European countries had been made a condition of such aid. In fact,

EeA has sho,m great realism in this matter and has asked for no more tr..an

the minimum degree of coo:peration among European countries. In some cases.

:meA has even been content to accept the out,.,ard forms of cooperation for

its substance rather than press Europeans too hard along a road ",hich

they do not uish to travel. The satisfaction otficially e~)ressed at such

doubtful forms of c~operation as the sharing of American dollars and the

agreement over the Payments Scheme ahol'!s how modest EOA aims are in this

matter of European econcmic integration.

lie are nO'tV' entering the fcu...-th post-ltlar year Hi th the European

situation sufficiently crystalized to enable Americans to realize "That

can be done and ,,,hat cannot be done in Euro:pe. Nothing hurts 31uropeans

more than to be told by enthusiastic Americans tllat their insistence on

- 8.5 -

being separate nations is a c ••• ~ ~~Gh~9nism and should be given up~

Nor does tbe American persistence in ignoring the huge economic, political,

social and cultural c.ifferences 't'ihich separate European coull'tries increo,se

European confidence in American understanding of European rea.l1 tieso

The group of ECA countries is more an accident of politics and of

Russian actions than a separate economic unito It is not neeessary to

point ("uti ho;., much closer, are the ties of the major country in the gr01:rp,

namely the United Kingdc,ID» , .. Ii th the, :Bri ti sh Commonveal th and Empire.

But even :British economic ties 1iTith~ saY, Argentina or Uruguay a.xe, closer

than those "Tith countries like Turkey and Greeceo And in any caso, hm1

can there be ar:y question of reoI'ganizing European indu6try along IDore

rational lines so long as the future of Germany is undecide.l? And hO'l.1

can economic factors alone determine the location of Eu:rupean industry

when the threat of ne,,, Germa...'l aggression looms so la:!"ge in Euro:pe?

Americans rightly insist on the need for a cooperative effort by

Europeans i'lhich "rill maxim:'loze the effeeti'veness of American help and

reduce overlapping and rivalries in European recovery programsQ ]Ut they

are going too far uhen they ask for a <?omplete merger of the European

economy. The free movement of capital';) labor and commodities \'Thich is

said to be the answer to Europe~s economic difficulties is not only impossi-

ble but 1:10UJ.d, if it were attempted) lead to much greater dislocation

than exists at present and greater and longer dependenoe on American aido

The often repeated statement that Euro?e cannot bec~me independent of

American aid unless it integrates its econcmy is simply not true o Those

countries '\I'Thich arB making the necessary effort '\!Jil;:t be independent of

American aid in four yearsl time. vlhether they '1I'ill l".a.ve achieved a satis-

factory degree of recovery and restored their standards of living by the

end of the period is a different matteT9 but it is a matter for the~ to

.... 86-

decide and solve. The countries 1I!mch are lagging behind "trill recover only

if they make a more adequate effort and this only the fear of 1ITi thdrawal

of American aid seems at present likely to produce.

In discussing the possibility and desirability of European econo­

mic integration it is necessary to keep in mind that economic integration

under present-day conditions is not possible ,vithout political int~gration.

Such integration must either be \vanted by the countries themselves, as

was the Case ,·Ii th the American States, or it must be imposed by force or

conquest. There is no example in history of integration having been

achieved against the 1I,ill of the participants merely by exhortation from

outside.