European Economy Flashcards
What is a primary economic sector?
One that involves the direct productionof raw materials.
E.g. Argriculture, mining, etc.
What is a secondary economic sector?
One that involves the production of goods using raw materials.
E.g. Manufactering, textiles, etc.
What is a tertiary economic sector?
One that involves the production of services.
E.g. Finance, healthcare, etc.
How does an increase in savings lead to growth?
It allows people to invest in capital (K).
Why did high public debt help Britain industrialize?
(i) Investors had a way to accumulate capital funding despite primitive/restricted banking sector; & (ii) Nobility invested in bonds instead of land (freeing it up).
Why did Germany overtake Britian in the later 1800s?
It had an advantage in things like coal, steel, and iron (which had replaced textiles).
What characterized La Belle Époque?
(a) The Europe-wide adoption of the the Gold Standard, (b) The industrialization of the peripheral countries, (c) The growth of the service sector.
What characterized the period from 1866-1891?
Economic stagnation, largely due to American comeptition in exports.
What characterized the period from 1844-1869?
(a) An economic boom, (b) the abandonment of mercantilism, (c) lots of bilateral trade agreements.
Also the invention of the most favoured nation clause.
Why did the gold standard help growth?
It fixed the double coincidence of wants in international currency markets.
What does the gold standard do to exchange rates?
It fixes them.
Why did Eastern Europe lag behind the West?
(i) Lack of protoindustrialization in agriculture; (ii) Lack of human capital; (iii) poor economic policy (esp re land); & (iv) low access to coal.
How might lagging countries catch up to industralizing ones?
A transition to manufactering should raise wages (incl for ag workers) and give the lagging country a comparative advantage, thereby increasing savings.
Why wasn’t the East able to catch up by exploiting a comparative advantage in agriculture?
(i) Lots of unproductive military spending; (ii) high govt deficits; (iii) overtaxation; & (iv) low education levels.
How did Europe escape the “Malthusian Trap”?
(i) The Agricultural Revolution; (ii) Finance (which reduced technological risk).
Interest rates drop over this time.
Is Britain still the industrial leader by 1913?
No, both Germany and the US have overtaken it.
Why didn’t governments tax their citizens to pay for WWI?
They thought the war would be short-lived and that they could make the enemy pay.
How does a government print money under the gold standard?
It collects foreign currency and gold via taxation and issues new notes worth less gold (indistinguishable from the rest)
Or just print more notes anyway lol
What was the result of war financing in WWI?
Inflation
How was WWI financed?
(i) International loans (US -> Britain); (ii) War bonds; & (iii) Money printing.
What do cash-holders do in the event of a war?
They convert to gold, provided the govt doesn’t make it illegal.
(Which they did)
What happens to consumption in a war economy?
It drops due to forced saving and crowding out due to war production.
What happens to investment in a war economy?
Private investment falls, public investment increases.
How does wartime production cause inflation?
As the means of production are reoriented to war, the supply of consumer goods goes down.
How do wartime governments address supply-side inflation?
They use war bonds to suck up money supply.
What happned to European net exports in WWI?
They went down and become heavily reliant on foreign imports, such as those from the United States.
What happned when the UK become a net importer in WWI?
It was forced to defend its currency under the gold standard by trading gold for US dollars.
50% of British war debt is currency defence.
Why doesn’t wartime production necessarily increase output?
(i) Labour and capital are still constrained; (ii) war destroys capital assets; & (iii) economic calc problem.
What did Article 231of the Treaty of Versailles specify?
That Germany was solely responisble for the damages, owing 50 billion gold marks to the Allies.
This could be payed in raw goods such as lumber, livestock, etc.
Why did inflation occur in so many countries after WWI?
They borrowed money to pay for reconstruction, as the tax based was severely reduced.
Why was Germany already prone to hyperinflation during the war?
It had borrowed a lot of money and its productive capacity was more greatly reduced compared to other countries.
What are the three main causes of German hyperinflation?
(i) war reperations; (ii) destroyed production capacity; & (iii) a refusal to return to the gold standard.
What happened to German reparations after hyperinflation?
They had to pay in real goods.
How did BOP cause German hyperinflation?
Germany exported large quantities of goods and recived no money in return to pay for its imports. Thus, needing to print it.
What causes the bust in 1921?
The US massively cuts its money supply, which forces debtor nations to defend their currencies.
What were the two economic paths a country could pursue after WWI?
Austerity, to get inflation under control, or allowing inflation to invest more in reconstruction.
Austere countries rebuilt faster.
What happened in 1925?
The economic situation had stabilized for all remaining countries and there was a Europe-wide boom.
What reforms did Tsarist Russia make to serfdom in 1861?
Serfs could pay for their freedom.
This led to 23 million being freed.
What is a syndicate?
An industrial group that had been nationalized under the USSR.
There were ones for sugar, coal, etc.
What is war communism?
An extreme form of communization that occured during the civil war.
What did initial Soviet land policies entail?
Workers could only own what they could cultivate themselves and were barred from hiring labour.
What happened to banks in the USSR?
They were merged into the People’s Bank of the Russian Republic.
Ceasation of foreign debt payments meant no more foreign trade/capital.
What is the VSNKh?
The planning/nationalization body.
How does nationalization occur in the USSR?
The People’s Bank denies loans to industry until they do.
Later through expropriation (post-war).
What happen if peasants produced more than their quotas in the USSR?
The surplus was confiscated.
Why did the USSR go from encouraging worker autonomy to disallowing strikes?
Food shortages and inflation by 1920s.
What did govt grain quotas cause?
A black market to emerge, prompted by peasants recieving insufficent rations.
Those who were caught were killed.
What are the characteristics of war communism?
(a) Attempt to ban private manufactering; (b) ban on private trade; (c) partial elimination of money (rations); & (d) confiscation of peasant surplus.
Why did peasants reduce their output?
They recived extremely low, fixed prices from the state in a period of high inflation.
Also a famine from 1921-22.
What is the New Economic Policy?
A policy that replaced (unpopular and ineffective) war communism.
What does the New Economic Policy entail?
It attempts to finance capital accumulation and transition the economy to manufactering.
Exports and profitable state enterprises are a goal.
What does the NEP say about agricultural surplus?
That it may be sold in private markets.
How did the USSR finally achieve a stable currency?
Balanced budgets and the gold standard.
1923, Chevronet
What happens to unemployment and output under the NEP?
Output increases, but unemployment spikes due to lay offs (state firms are now profit-maximizers).
Lots of welfare programs implemented to deal with this.
What does the USSR do with all the unemployed peasants (who still refuse to collectivize)?
It implements big national insfrastruture projects and, eventually, its first five-year plan.
What is material balance planning?
Recording the quantity of economic inputs and then setting output targets based on that.
No prices.
What happened to peasants who didn’t produce their quotas?
They were deported.
~ 1.5 million kulaks
What is true of output and unemployment under central planning?
They are fixed.
How did the US stock market crash effect Europe?
It reduced household wealth and thus European imports.
How did European governments initially respond to the Depression?
By running balanced budget and sticking to the gold standard.
What was true of European gold reserve after WWI?
They were low from buying US imports (who in turn had massive gold reserves).
Under fractional reserve banking, what happens when a bank fails?
The money supply falls drastically, as it includes both desposits and loans.
What happens when money supply falls?
(i) loans are hard to find; (ii) deflation occurs (and unemplyment due to downwardly rigid wages); & (iii) debt burdens rise, causing more defaults.
What happens when a bank has move liabilities than assets?
It goes insolvent and can’t repay its depositors.
How did Austria deal with the banking crisis?
The government issues loans to the banks by reducing its own spending.
When Hitler showed up, the govt already owned everything.
What constraints did Germany face prior to the Depression?
Savings was still ravaged from hyper-inflation, they couldn’t monetize their debt, and fiscal discipline was strong.
Also political fear of inflation + con’t reparations
How did argriculture influence the Depression?
The US continued to subsidize it as prices fell and European banks were heavily invested.
How did Reichsbank respond to the Depression?
(think defending currency)
It secretly blew past its 40% reserve-to-notes circulation limit.
They limited desposit withdrawals to hide inflationary impact.
What is the Sterling Crisis of 1931?
When the UK was forced off the gold standard due to a halt to gold conversion.
This was done to pay for deficit in crisis.
What was the Gold Block?
A collection of countries that had large reserved and stayed on gold.
E.g. France, Belgium, etc.
pseudogold block – limited transfer of it
What was the Sterling Block?
A collection of countries that pegged to the pound.
E.g. Canada, UK, New Zealand, Egypt, Sweden, etc.
What happened to trade policy during the Depression?
Protectionism was pursued.
Esp UK
What is Dirigisme?
Fascist economic policy, the state directs the economy.
Related to corporatism
What are the characteristics of Dirigisme?
(i) Veneration of the war economy; (ii) self-sufficiency; & (iii) large economic decress (e.g. public works projects).
What happens to labour under Dirigisme?
It is forcefully syndicated, meaning strikes and independent unions are banned.
What happens to business under Dirigisme?
It is forcefully syndicated, meaning prices, quotas, and imports are fixed.
How do fascists gain support for their economic policies?
Implement lots of social welfare programs.
What was the economic situation after WWII?
Capital, insfrastructure, and labour force was vapourized. Further, Europe has no money to pay for any imports.
Was there lots of unemployment after WWII?
No, reconstruction required lots of workers.
What was slow to recover after WWII?
Housing stock and agriculture
What was lend-lease?
The US lent Europe matertial goods rather than money that wouldn’t be repayed.
In exchange, the US leased land for military bases.
What was Bretton-Woods?
An agreement of all countries to peg to the USD (in a band), which was in turn pegged to gold. This made sense as the US held 80% of the world’s gold reserves.
Why was the IMF created?
To alow countries to devalue their currencies in the event of a chronic BOP deficit.
What is GATT?
A massive, workld-spanning trade agreement from 1948.
How is the economic situation after WWII different from WWI?
War debts are smaller (due to lend-lease) and infaltion is lower (due to more balanced budgets).
Why did the Marshall plan allow countries to purchuse goods in their own currency?
Because it was easier for them and reduced their excess money supply.
How did Europe afford US goods under the Marshall plan?
US banks, underwrote by teh US government, granted them credit to do so.
Only about 10% of aid involved any interest.
How did the Marshall plan asses which countries required more aid?
By using their trade deficits.
What were the “strings” of the Marshall plan?
Recipients had to: (i) get off price controls; (ii) stabilize exchange rates; & (iii) balance their budgets.
What is a problem is post-WWII Germany?
Price controls are still present, leading to shortages.
Fear that removing will lead to inflation ala WWI.
Beyond regular Marshall aid, what other economic reforms happen in Germany?
The creation of a new central bank and banknotes. Also income taxes.
What were the two solutions to the problem of incovertable currencies after the war?
(i) multilateral clearing arrangements; & (ii) devaluation of overvalued currencies
Why did reconstruction take longer in the East compared to the West?
(a) More severe devastation; (b) Raparations for the former Axis; (c) socialism
Why was an liberated country required to provide Allied soliders with local currency?
Because the new exchange rate was heavily in their favour.
Why was growth so high in the 50s?
Investment increased drastically (25%).
How does the fall of the Berlin wall help Western German growth?
The inflow of cheap labour surpresses wages.
What are the determinants of growth in the 50s?
(i) starting position (proxmity to US imports, wartime distruptions, indsutrial development thus far); (ii) social cooperation in country; & (iii) availability of raw materials.
What caused Germany to grow so quickly?
(i) Supply line is present and operating (wartime self-sufficency); (ii) low wages; (iii) politics boring and economically sound (balanced budgets); & (iv) tax breaks to desperate sectors.
Investment skyrockets.
Why do the Netherlands and Austria also grow quickly?
Wages are surpressed.
Why is France slow to grow?
(i) Inflation from govt spending; (ii) protectionism; (iii) Franc is overvalued (needs IMF intervention); & (iv) high wages.
What did the Monnet plan do?
(i) reduce inflation; (ii) reduce protectionism; (iii) have newly-nationalized banks provide loans to needy sectors; & (iv) use Marshall aid to productive sectors like steel.
Why did the Italian Miracle occur?
(i) Unions are fragmented; (ii) Inflation is stabilized; (iii) Korean war means demand for Italian goods (e.g. textiles and cereals; & (iv) land reform
Why doesn’t Ireland grow?
The Catholic Church pushes for more development of agriculture over other sectors.
Why doesn’t the UK grow?
(i) high wages; (ii) labour force resistent to traditional work: & (iii) poor timing of stimulus and policy.
How did the Soviets believe growth would be obtained?
Through heavy industry.
Agricultural is starved of any investment, huting eastern periphery.
Why is high Soviet output in the 50s/60s questionable?
Because state producers tried to meet their quotas by only producing cheaper/low-quality goods.
Growth “cracks” in the 60s.
What was Russia’s alternative to the Marshall plan?
CMEA, which creates an Eastern trading block.
US eventually forces Marshall recipients to cut off trade.
What was the European Coal and Steel Community?
A 1951 treaty to integrate the coal and steel industries of Europe via fixed prices and quotas.
What was the Treaty of Rome?
A 1957 treaty which created the European Economic Community and the European Atomic Energy Community.
What did the EEC do?
Eliminate tariffs between member countries and fix them for external ones.
How did Europe get dollars (for central bank reserve) post-Marshall?
By exporting to the US, which is helped by the 1949 devaluation.
Thereby closing the dollar gap.
When are all tariffs removed?
In 1960 under the European Community.
Countries needed to specialize and couldn’t rely on cartels.
Why did CAP implement price floors for agriculture?
Because of the boom and bust cycle in that industry.
What would happen if food prices fell below their CAP floors and there was a shortage?
The EC would buy the surplus.
How did agriculture spur monetary integration?
If a country was devaluing it currency against another, farmers would take advantage and dump their goods and drive down prices.
This eventually account for 60% of CAP’s budget.
What was the European Monetary Agreement of 1955?
It expanded the exchange band to +/- 3% and engaged in surveillance of national policies that might end up violating this.
Monetary Committee of central banks
What was the Hague Summit?
A 1969 conference to discuss the issue of monetary unification.
What was the European Monetary System?
It studied how to reduce inflation across EC members and tried to peg currencies within a 2.25% band (later upped to 6% due to stagflation).
What are the specifications for a country to adopt the Euro under the Maastricht Treaty?
(i) Price stability; (ii) Exchange stability; (iii) Interest rate atability; (iv) Sound public finances; & (v) Good debt-to-GDP ratio
What happened in preperation for a single currency?
Capital control were eliminated and interest differentials were reduced. ERM members would then peg all their currencies together before being supplanted by the Euro.
What supplanted the GATT?
The WTO
What drove European growth in the 1960s?
Trade and surpressed wages
Aided by immigration to Western Europe
How did France achieve growth in the 1960s?
(i) Cartels and price controls were removed; (ii) Public wages are frozen (limiting G); (iii) Investment-to-GDP increases; & (iv) Currency Devaluation in 1958.
What happens when wages (and thus consumption) are held constant but Y increases?
Exports rise.
Investment also necessarily goes up as C is fixed.
Why do wages rise in the late 60s?
(i) full employment is hit; (ii) strikes occur in some countries; & (iii) Bretton-Woods weakens and money supply is no longer fixed.
What was the Regional Development Fund?
A policy aimed at developing underdevelopment regions, defined as a GDP/person under 75% of the EC average.
What is a Bundeskammer?
A Austrian board with representation of the state, businesses, and workers.
This is how you get wage-price agreements.
What happens to taxes during the 60s?
They are made progressive and raised considerably to fund social welfare programs.
Where did high levels of investment go?
(i) Nuclear R&D; (ii) electronics; & (iii) the growing service sector.
What happened when wages finally started to increase?
People started buying goods other than those needed to stay alive (i.e. food).
What happens to eastern countries in 1969?
They are allowed to take American loans to buy American goods. They cannot pay it back and are forced to reduce investment.
What happens as a result of the Soviet-Afghan War?
The Russians ask their periphery to help pay for it.
What happens to eastern countries in the 1980s?
Growth drops substantially.
Govt raises wages to appease public, but only causes inflation.
Why is the transition to market economies difficult in general?
No one obvious to give the means of production to.
Why was the transition to market economies difficult for the East?
(i) High public debt and no credit; (ii) high inflation (to pay for deficits); & (iii) the new tax system has yet to be fully implemented.
What was a major setback for East German development post-reuinification?
West German trade unions set the wages for East German workers, which was allowed due to fear of out-migration.
What happens in 1991?
There is a recession, partially the result of austerity needed to converged monetary policies. Germany raises rates to deal with inflation and exposes everyone else to speculative attacks.
Germany is forced to reverse course, but not before damage occurs.
