01_development_and_concepts

MANAGEMENT

Two Non-Overlapping Circles (2)

•It is instructive to follow the behaviour of the few OEEC members that joined neither the EEC nor EFTA.

–In 1961 Finland essentially joined EFTA by signing an Association Agreement.

–Iceland applied for EFTA membership in 1968, acceding in 1970.

–Thus by the end of the 1970s, all West European nations have forsaken bilateralism except Spain and Greece (who were under dictatorships) and Ireland (which was neutral and did most of its trade with the UK).

–Greece and Turkey both applied for associate EEC membership almost as soon as the Treaty of Rome was signed.

MANAGEMENT

Two Non-Overlapping Circles (3)

•Spain signed a preferential trade agreement with the EEC in 1970 and one with EFTA in 1979.

•The 1960s saw the trade liberalisation promised by the Treaty of Rome and the Stockholm Convention (EFTA's founding document) come to fruition.

•By the late 1960s trade arrangements in West Europe could be described as two nonoverlapping circles.

MANAGEMENT

Evolution to Two Concentric Circles (1)

•In the early 1960s, EFTA-based and EEC-based firms had roughly equal access to each other's markets (the preferential liberalisation had only just begun).

•However, as the barriers began to fall within the EEC and within EFTA (but not between the groups), discriminatory effects appeared. This discrimination meant lost profit opportunities for exporters in both groups.

•Accordingly, the progressive reduction of within-group barriers generated new political economy forces for lowering between-group barriers.

MANAGEMENT

Evolution to Two Concentric Circles (2)

•In 1961, Great Britain applied for EC membership.

•While this move was unilateral, Ireland, Denmark and Norway quickly followed suit.

•The other EFTAns did not apply for political reasons such as neutrality (Austria, Finland, Sweden and Switzerland) or because they were not heavily dependent on the EEC market (Portugal and Iceland).

•After much discussion, France vetoed this first enlargement attempt in 1963, but the same four EFTAns reapplied in 1967.

•After many delays, membership for the four was granted in 1973. Norway's population (which is profoundly jealous of sovereignty that they won only in 1905) refused EEC membership in a referendum.

MANAGEMENT

Evolution to Two Concentric Circles (3)

•The upshot of all this was that by the mid-1970s trade arrangements in West Europe had evolved from non-overlapping circles into two concentric circles.

•The outer circle, which encompassed both EFTA and EEC nations, represents a unified free trade area for industrial products.

•The inner circle was the EEC. These countries were much more thoroughly integrated, even in the mid-1970s.

•Again a parallel with the 1990s appears. The EFTAns that chose not to apply for EEC membership - A, SF, ISL, S, CH and P - were again faced with the prospect of increased discrimination. Just as the CEECs did in the 1990s, the EFTAns of the 1970s reacted by signing bilateral FTAs with the EEC.

MANAGEMENT

Euro-pessimism

•For the first time since WW II, the US began to run an irresponsible monetary policy in the late 1960s, essentially printing money to pay for the Vietnam War.

•Since all major currencies were linked to the dollar at the time (via the Bretton Woods exchange rate system), US inflation was more or less automatically translated into rising inflation in Europe and elsewhere.

•The political pressures arising from this irresponsible US action lead to the gradual break down, between 1971 and 1973, of the global fixed exchange rate system.

MANAGEMENT

Failure of Monetary Integration (1)

•Exchange rate stability was widely viewed as a critical factor supporting the rapid post-war growth trade and international investment and the rising prosperity these brought.

•Consequently, the EEC searched for ways of restoring exchange rate stability among members.

•The first step was the creation of the so-called “snake in the

tunnel” in 1972. This limited exchange rate movements of EEC member currencies to a band of 2.25% (i.e. the snake).

•The name came from the fact that this band was narrower than the 4.5% band (i.e. the tunnel) permitted under the weakened Bretton Woods arrangement.

MANAGEMENT

Failure of Monetary Integration (2)

•The economic environment for this new European monetary arrangement could not have been worse. Months after it was launched, the Yom Kippur war in the Middle East triggered an Arab oil boycott of Western powers.

•Most European nations adopted expansionary monetary and fiscal policies to compensate for the economic downturn and these further fuelled inflation. The resulting falling income levels and rising inflation rates came to be known as ‘stagflation’.

MANAGEMENT

Failure of Monetary Integration (3)

•Between 1972 and 1978, the UK, Ireland, Denmark, Italy and France were all forced from the snake.

•In the end, this brave attempt to integrate EEC members more deeply end up as a symbol of European’s inability to co-operate.

•At the heart of this failure were the deep set differences over how to manage economic shocks.

•Germany and like minded nations such as the Netherlands, Belgium and Luxembourg refrained from softening economic downturns by printing money. These nations, which came to be known as the DEM bloc, did manage to limit exchange rate fluctuations among themselves.

MANAGEMENT

Failure of Deeper Trade Integration (1)

•At the same time, European nations began to erect new trade barriers among themselves.

•These new barriers consisted of detailed technical regulations and standards, called technical barriers to trade (TBTs), which had the effect of fragmenting the European markets.

•While these policies undoubtedly inhibited intra European trade, their announced goal was to protect consumers.