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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–

2009

Oxford Handbooks Online


A Restructured Economy: From the Oil Crisis to the
Financial Crisis, 1973–2009  
Ivan T. Berend
The Oxford Handbook of Postwar European History
Edited by Dan Stone

Print Publication Date: May 2012


Subject: History, European History, Contemporary History (post 1945)
Online Publication Date: Sep 2012 DOI: 10.1093/oxfordhb/9780199560981.013.0020

Abstract and Keywords

During the quarter of a century that followed World War II, Western Europe enjoyed the
most spectacular prosperity in history. While the population of Western Europe increased
by less than 20 per cent, the gross domestic product rose by 286 per cent. Economists
explained that depression and economic crisis were things of the past. In mid-October
1973, however, a dramatic event ended European prosperity. The Arab oil-exporting
countries made a political decision against the West by introducing an oil embargo,
increasing prices. Six years later, a second oil crisis followed, and, between 1973 and
1980, led altogether to a tenfold increase in oil prices. It soon turned out that the
politically ignited oil crisis simply made the crisis manifest. Most paradoxically, the
postwar prosperity in Europe undermined itself, and paved the way for a deep economic
crisis. This article examines the ideological consequences of the dual economic and
political crises of the 1960s and 1970s, focusing on neoliberal revolution, de-statisation,
and deregulation. It also discusses the financial crisis and the economic restructuring in
Europe.

Keywords: economic restructuring, Europe, oil crisis, economic crisis, financial crisis, de-statisation, deregulation,
oil prices

Creeping Economic Crisis and its Explosion:


The Late 1960s and 1970s

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
2009
WORLD WAR II was a watershed in European history. The devastated and decimated
continent was divided into two isolated eastern and western halves, hostile and living
under the threat of nuclear war. However, during the quarter of a century that followed
the war, Western Europe enjoyed the most spectacular prosperity in history. While the
population of Western Europe increased by less than 20 per cent, the Gross Domestic
Product rose by 286 per cent. As an average, roughly two and a half times more goods
and services were available for every citizen. A prosperous consumer society emerged
with a majority of people having comfortable housing, mechanized households, cars, and
long vacations abroad.

The twelve countries of the region increased the value of their exports nearly six and a
half times, from $115,087 million to $730,235 million (at constant prices). In 1950, a west
European worker, as an average, produced $5.82 value per hour; by 1973, this was
$16.37 value, thus labour productivity increased 2.8-fold. The western half of the old
continent, already relatively rich before World War I, had never experienced such
affluence. Economists explained that depression and economic crisis were things of the
past. (p. 407) Economic cycles supposedly no longer existed. In mid-October 1973,
however, a dramatic event ended European prosperity.

The Arab oil-exporting countries made a political decision against the West by introducing
an oil embargo, increasing prices. The cost of a barrel of oil jumped from $2.70 in 1973 to
$9.76 by 1974, and then to $12, and generated a sharp worldwide price increase. Six
years later a second oil crisis followed and, between 1973 and 1980, led altogether to a
tenfold increase in oil prices. Inflation reached a two-digit rate in the West and was
combined with an increasing trade deficit, since the price of imported goods, mostly raw
materials, increased 20 per cent more than export prices did.2 Fast economic growth
stopped from one day to the next. The twelve advanced European countries (later the
EU-12) saw annual growth decline from 4.8 per cent between 1960 and 1973, to 0.5 per
cent during the first half of the 1980s.3 Unemployment increased tenfold in West
Germany and then remained high during the entire 1980s, at between 5 and 12 per cent.
In some countries, such as Spain, it reached 20 per cent.4 Countries lost control of
inflation, which reached an average of nearly 10 per cent per year in Western Europe and
nearly 20 per cent in Mediterranean Europe.

The feelings associated with the forgotten Great Depression and cyclical economic
development, all of a sudden replaced growth-cum-consumption euphoria. However, both
oil crises had extra-economic origins. Both were the consequences of local or regional
political crises. The first exploded as the consequence of the Arab-Israeli War (the so-
called Yom Kippur War), when Syria and Egypt attacked Israel, followed by the political
punishment of the Israel-friendly West by the oil embargo, while the second oil crisis was
a consequence of the Iranian Islamic Revolution.

However, it soon turned out that the roots of the crisis were much deeper, and that the
politically ignited oil crisis simply made the crisis manifest. Most paradoxically, the
postwar prosperity in Europe undermined itself, and paved the way for a deep economic

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
2009
crisis. Virtually full employment, the lack of a labour reserve that entered and left the
labour market, as well as a shortage of labour, which initiated the employment of guest
workers and immigration, made labour's position strong. Workers’ attitudes changed. The
unions launched mass strikes for higher wages. The postwar social partnership between
employees and employers ended, and class confrontation reappeared. Collective self-
restraint that helped to overcome postwar decline disappeared. A race between wages
and prices initiated a wage-price spiral in West Germany, France, Italy, and several other
countries from the late 1960s.5

Prices also soared and required the introduction of rigorous fiscal measures to
(p. 408)

regain control in June 1972.6 In West Germany, the rate of wage increases doubled during
the 1970s. Inflation gradually emerged during the period of high prosperity and full
employment, and became significant between 1968 and 1973. As Andrea Boltho explains,
‘the success of the 1950s and 1960s had laid the preconditions for at least some of the
failures of the 1970s.’7 High prosperity paved the way for its end in the form of over-
investment and over-production. The gross capital stock per employee in France, West
Germany, the Netherlands, and Britain increased nearly threefold between 1950 and
1973. As one chronicler noted:

Tremendous over-investment [took place] in the traditional industrial sectors of


the modern consumption economy during the 1960s, causing massive
overcapacity … the enormous investment in the secondary and tertiary sectors,
held out the prospect of a shortage of foodstuff, raw materials and energy. The
turning of the terms of trade in favour of primary producers from the beginning of
the 1970s came as a result of this growing imbalance.8

The economy became overheated: industrial output in the advanced West increased by 10
per cent, and the price of energy and raw materials increased by as much as 63 per cent
in 1972–1973. The rate of inflation in West Germany reached 7 per cent that year, i.e.
before the oil crisis. Excessive growth and skyrocketing consumption led to the saturation
of consumer goods markets. As part of this trend, exports also became more difficult, and
their growth slowed. Mass production, a key factor for prosperity, became less and less
sustainable. Between 1965 and 1973, the aggregate manufacturing profitability of the
seven wealthiest countries of the world declined by 25 per cent.9

In the middle of this changing economic trend, the postwar Bretton Woods agreement,
which created economic stability by fixing exchange rates for the West, collapsed in
1971.10 Because of its accumulating deficit, the United States first devalued the dollar,
which was the de facto international currency, and then abolished its exchange rate for
gold. Fixed exchange rates and control of the financial markets were eliminated. Stability,
the basis of mass production, dramatically weakened. Keynesian stimulation of demand
did not stop recession, but rather provoked wage compensation and increased inflation.11
Creeping economic crisis was joined with an unexpected political crisis in Western
Europe. In (p. 409) March 1968, riots began at French universities. Events culminated in
May with general university strikes, occupations, and mass demonstrations by 1 million

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
2009
people. Street battles rattled the Latin Quarter, and special military headquarters were
established for operations. Workers occupied factories, and 2 million of them went on
strike and achieved substantial wage increases. The Paris events ignited massive echoes
in several other countries, most of all in Italy and West Germany. The Rote Armee
Fraktion (an urban guerilla force) and the bloody actions of the Baader-Meinhof group in
Germany, as well as the activities of the Italian Brigate Rosso in Italy (such as the
occupation of the Fiat factory in Milan, bombing of landmark monuments, attacks against
banks, and the Piazza Fontana bombing that killed sixteen people and wounded ninety)
signalled the end of an era. Bombing, kidnapping, and the executions of kidnapped
politicians and business leaders scarred Italy and West Germany between 1968 and the
1970s.

Nothing worked as normal any longer. Economic growth stopped, prices and
unemployment sharply increased, and Keynesian demand-side economics—which held
that economic crisis could be coped with by increasing demand and strengthening the
purchasing power of the population through job creation and state investments—was not
able to cure stagnation and to prevent decline. In fact, it generated even higher inflation.
The Philips curve, the classic ‘law’ of economics, describing the inverse relationship
between inflation and unemployment, such that increasing inflation decreases
unemployment and vice versa, stopped working, as inflation and unemployment rose
together. Between 1950–73 and 1973–83, consumer prices in the leading western
economies more than doubled from an annual average increase of 4.2 to 9.4 per cent. In
the Mediterranean region, they more than quadrupled from 4.0 to 18.4 per cent. World
price levels had also more than doubled. Unemployment, averaging 2 to 4 per cent in
Western and Mediterranean Europe between 1950 and 1973, jumped to 12 per cent and
hit more than 7 million people.12 What followed was a sudden slowing down and then a
decline in economic growth, accompanied by high inflation and unemployment. The
Belgian mining industry declined by half, construction by one-third. In ten west European
countries, employment in the three ailing industrial sectors dramatically decreased
between 1974 and 1985: in the iron and steel industry to 58 per cent, in textiles to 62 per
cent, and in shipbuilding to 28 per cent.13

The coal output of Belgium, Britain and France combined decreased by 40 per cent. By
the early 1980s, the combined textile production of Belgium, West Germany, France, Italy,
the Netherlands, and Britain dropped to less than half of the production levels of the
1960s.14 At its lowest point, industrial output had declined by 13 per cent. The
International Monetary Fund was unable to maintain the liquidity of the international
(p. 410) banking system. Severe austerity measures became unavoidable and closed the

circle. This odd pairing of stagnation and inflation led to the introduction of a new
economic term: stagflation.

It soon turned out that besides the deeper roots that went back to the 1960s, the real
causes of the decline were also much deeper than the transitory oil crisis. What happened
was a phenomenon typical of the market economy, best described and analysed by the

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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Austrian-born Harvard economist, Joseph Schumpeter, who called it ‘structural crisis’. He
explained:

Industrial revolutions periodically reshape the existing structure of industry by


introducing new methods of production … new forms of organization … new trade
routes and markets to sell in. While these things are being initiated we have brisk
expenditure and “prosperity” predominates … and while those things are being
completed … we have the elimination of antiquated elements of the industrial
structure and “depression” predominates. Thus there are prolonged periods of
rising and falling prices, interest rates, employment and so on, which phenomena
constitute parts of the mechanism of this process of recurrent rejuvenation of the
productive apparatus.15

In this interpretation, the ‘whole set of technological changes’ or industrial revolutions


are what generates pressure for adjustment. Those firms and industrial branches that
represent the old technologies and methods, and are unable to change, will in time
disappear. Readjustment is difficult and requires a relatively longer period, especially
because countries and companies are unable immediately to satisfy the demands for
investments, credits, and new skills. This causes a period of economic turmoil and
depression. The significant slowdown and destruction are, nevertheless, ‘creative’, as the
way is cleared for new technologies and methods. New leading sectors emerge, based on
new technologies and organizational principles, and the whole process brings about a
restructuring of the economy. When most sectors of the economy have completed the
transformation, a new wave of prosperity follows. This entire process is thus inherent in
the market system and in free market competition. However, extra-economic factors, such
as wars and political upheavals, also contribute to this process as happened in the late
1960s.

The recession of the 1970s, which lasted until the early 1980s, clearly exhibited the signs
of a structural crisis. The old postwar leading sectors literally collapsed: in eight west
European countries, employment in the iron and steel, textile, and shipbuilding industries
dropped to 59, 61, and 37 per cent of their pre-recession levels, respectively.16 The share
of traditional industries—i.e., construction and building materials, iron and steel,
traditional engineering, wood, paper, textile, and clothing—in the gross value added of
total industry declined by 40 per cent in West Germany between 1970 and 1980. During
the decade after 1973, exports slowed to roughly one-third and one-half of the (p. 411)
growth rates of the decade before 1973.17 The stagflation from the mid-1970s was thus
not accidental, but a characteristic long-term cyclical phenomenon.

A new technological revolution gradually transformed the economy. What happened is


comparable to the British Industrial Revolution in importance. As two hundred years
before, technological revolution also had a history several decades long. Its beginning
went back to World War II, when the first mainframe computer started decoding German
military communications at the end of 1943. The other most visible invention of the time

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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was the atomic bomb, or the ground-breaking use of nuclear energy. The revolution in
electronics had advanced after World War II with the invention of the transistor, and then
the first silicon integrated circuit in 1958.

Mass production of chips with thousands of transistor circuits reduced the price
drastically … Since the mid-1960s the chip has become increasingly an internal
part of the 20th century civilization … The chip made possible reliable computers,
personal computers, lap computers, and calculators. It also made possible digital
watches, increased efficiency in automobiles, control robots, and …
communications. The chip has made possible cellular telephones, satellite
communications … electronic mail … home banking and many other new
technologies.’18

The transistor and the chip created the real foundation of the computer revolution that
gradually gained ground and opened a new age of communication and in everyday life by
the appearance of the personal computer in 1974,19 and by the World Wide Web in 1991.
The electronics revolution gained an ever-greater momentum in the last third of the
century. Most important was the new age of telephony, crowned by the digital cellular
revolution of the 1980s that itself generated an unending series of inventions.

Europe was hit especially hard by the structural crisis, because its rapid postwar
development was based, as Barry Eichengreen underlined, on an extensive development
model, i.e. on increased capital and labour input and imported existing technology. The
labour force increased by an average of 1 per cent per annum, partly by using ‘imported’
Turks, Portuguese, Italian, North African, and Yugoslav temporary ‘guest workers’. The
extensive development model would not have been possible without the importation of
the existing stock of technological knowledge, transferred from the friendly United States
during the Cold War decades.

The sources of extensive development and its institutional framework, however, dried up
and became inappropriate by the early mid-1970s. ‘The same institutions of coordinated
capitalism that had worked to Europe's advantage in the age of extensive growth now
posed obstacles to successful economic performance.’20 Western Europe, already facing
strong challenges, arrived at a turning point.

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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The Ideological Consequences: Neoliberal


(p. 412)

Revolution, De-statization and Deregulation


The dual economic and political crises of the 1960s and 1970s, together with rising
globalization, when employment became uncertain as jobs were outsourced, and
investments shifted to low-wage countries,21 generated a major change in the cultural-
ideological environment of the western world. The sudden change generated doubts, and
harsh critiques about the unintended negative side effects of postwar policies and
institutions. A significant group of liberal, left-wing intellectuals became deeply
disappointed and turned against their former ideas with neophyte vehemence. Genuine
traditional conservatives, pushed aside after the war, re-emerged and became influential
again. In a situation of global competition, slowdown, and declining income, they
challenged redistributive welfare systems and the achievement of social harmony by neo-
corporatist intervention as ‘unaffordable’. Dominant Keynesian economics with its strong
belief in state intervention and regulation was declared to be the problem, not the
solution. These ideologies found a social base in a post-industrial society where the
growing majority of white-collar employees and the middle class replaced the old class
structure.

The entire concept of rationalism and the Enlightenment, which dominated social
thinking and actions since the eighteenth century, was vehemently questioned. Belief in
historical progress and the power of human actions to influence and push it ahead—the
basic idea of Enlightenment and a popular concept of postwar Europe—lost ground and
was replaced by scepticism about the possibility of understanding the world and
historical truth. Disappointment generated relativism and nihilism. Left-leaning parties—
communists, socialists, and left-liberals—lost their self-confidence and the belief in a
politics they had previously regarded as successful. Their identity crisis undermined their
organizations. The Left became fragmented and disorganized, and their mass parties lost
the masses. This environment became the hotbed of a rising new political culture and
ideology, a new zeitgeist from the 1970s and 1980s on. From that time, neoliberalism
emerged, triumphantly rejecting Keynes and negating the role of state. It merged with
the rising neoconservatism or the new Right, and a whole set of post-modern culture and
ideology. The cultural–ideological arena became the main battlefield.

Neoliberal economics became the most powerful new ideological trend. The return to a
simplified classical liberal school in an extreme way not only dethroned Keynesian
economics, but also offered a new comprehensive ideological political base, which was
later often called market fundamentalism. The prophets of this new zeitgeist were Ludwig
von Mises and Friedrich (p. 413) Hayek of the Vienna School of Economics, and Milton
Friedman, and other members of the neoliberal Chicago School of Economics. An
ideological war erupted and led to the victory of deregulation, privatization, and
unrestricted free markets as the only solutions in a free society in the grips of cut-throat
global competition. Both Hayek and Friedman connected laissez-faire policy with social
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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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and political principles. Undisturbed, they claim, self-regulating markets guarantee social
and individual freedom and prosperity. Freedom of the individual and freedom of the
market, they argue, are inseparable prerequisites of each other. State intervention, on the
other hand, is The Road to Serfdom, as the title of one of Hayek's books proclaims.

For Friedman, state intervention was the real cause of economic trouble because, he
claims, it disturbs market automatism and undermines freedom. A self-regulated market
has a strong corrective automatism. He advocates the privatization of various
governmental functions to increase efficiency. Moreover, he argues, a self-regulated
market is able to provide healthcare, pensions, and various kinds of insurance. Welfare
institutions represent brutal intrusions upon personal freedom; it is like ‘sending a
policeman to take the money from somebody's pocket’. He recommended making radical
tax cuts and introducing a flat tax rate of around 16 per cent for everybody, reducing
government expenditures drastically by privatizing nearly everything, as well as making
families and individuals responsible for their own schooling, health care, and pension
schemes. He argued for ‘a free, competitive, private-market educational system’ and ‘a
high natural rate of unemployment’ as a prerequisite of a dynamic and progressive
economy.22

As they returned to old ideas, neoliberalism's new twin ideology, neoconservatism, arose.
Neoconservatives maintained that the postwar ‘values of modernity are irreparably
corrupt’, even ‘hostile’, and offered a ‘total critique’ of them.23 In their view, the system
had become ‘ungovernable’; the postwar decades had resulted in the ‘inflation of
expectations’ about what could be expected from the state. The ideas of liberal
intellectuals had undermined the basic principles and moral basis of capitalism; and
postwar profane political culture had to be replaced by religion to re-establish social
cohesion, and the culture of obedience, service, duty, and faith.

The neoconservatives also reinterpreted social justice. Egalitarian ideas became


‘destructive and counterproductive’ in their interpretation. Rather, ‘inequality is the
inevitable (and beneficial) outcome of individual freedom and initiative.’ ‘Human nature’
explains inequality and serves as its legitimization. The balance between equality and
freedom in the social state was broken, they claimed: it had been distorted towards an
equality that undermined the self-assurance of private ownership and replaced it with the
fear of ownership. In short, liberal democracy (p. 414) commits suicide.24 These victorious
ideas strongly dominated the last decades of the twentieth century and paved the way for
the conservative political revolution of Ronald Reagan and Margaret Thatcher. Domestic
political party formations were partly rearranged along these lines.

During the 1980s, the burgeoning neoliberal ideology seriously questioned both of the
two peculiar postwar institutions that distinguished the European model: the mixed
economy and the welfare system. The mixed economy, established by major wartime and
postwar nationalizations, created a 20 to 25 per cent state-owned sector in the Western
European economies. The state sector, which worked in a market environment and acted
accordingly, played a strategic role in modernization and economic growth during the

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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postwar decades. However, neoliberals attacked the state-owned sector as a parasite and
inappropriate in the new global environment. Privatization became a universal agenda.
The first steps were taken by Thatcher: several services covered by the Ministry of
Defence and the National Health Service (in its 2000 hospitals) were contracted out to
private companies in Britain. By 1985, the government had privatized nearly a dozen
major state companies: among them, the North Sea Oil licenses and part of the stock of
British Petroleum, followed by major assets of British Aerospace, Associated British Ports,
British Gas, and British Telecom. Altogether, they transferred more than ₤5 billion and
400,000 jobs from state to private ownership.

In Mitterand's France, 53 per cent of the assets of French companies were in public
hands after the unique nationalization wave of the early 1980s. But the July and August
1986 privatization bills placed thirteen major companies in private hands in nine months.
Another nine months and all the nationalized companies were re-privatized. In post-
Franco Spain, where a huge part of the economy was state-owned, a privatization wave
began in 1984, and 350 industrial firms and ninety-two banks, and then the Instituto
Nacional de Industria, the huge holding company with 700 industrial and banking
interests, were taken over by private firms in two years. Italy also privatized a dozen
major firms of the traditional state sector, including Alitalia, Autostrada, Banco di Roma,
and Elsag.25 Europe eliminated one of the main characteristics of its postwar economic
model: the mixed economy. Although the welfare system was attacked and curbed, and
the pension system radically reorganized, it was saved and the European social model
was preserved, albeit in altered form.

Besides eliminating the state sector, Europe adjusted to the new situation by abolishing a
large number of economic regulations, including the control of the financial market, and
several forms of state interference that had dominated the entire postwar period of
prosperity. It turned instead towards the neoliberal, American-type laissez-faire system.
The main economic trend, the transformation from a regulated to an unregulated (p. 415)
market system, was an interrelated ‘western’ phenomenon that actually emerged first in
the United States, followed closely by Britain and then the Western European countries.
The deregulation process began in 1971 with the collapse of the Bretton Woods system,
the fixed international exchange rate policy, and of control of international money
movements. The advanced countries entered into vast international financial
transactions. Their foreign assets and liabilities increased by fivefold during the 1990s,
and they doubled in the single decade between 1998 and 2008.

The United States, followed by Britain and gradually the western half of the continent
deregulated their banking system.26 The Economist, looking back from 2008, evaluated
these steps in the most positive way: because of ‘financial deregulation … freer markets
produced a superior outcome. Unencumbered capital would flow to its most productive
use, boosting economic growth …’27 Indeed, deregulation increased flexibility for
relocating resources from crisis-ridden areas to emerging sectors of the economy.
America's envied growing advantage in coping with the crisis of the 1970s and early

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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1980s lay not simply in its technology, but in its flexible financial system that provided
incentives and helped employ new technology.

The entire banking and financing industry changed radically. The separation of
commercial and investment banking, a regulation introduced during the Great
Depression, was abolished. Banks increased their liabilities (loans) far beyond their assets
(deposits). Their capital was far from sufficient to repay deposits if some financial panic
pushed people or institutions to withdraw their deposits. Insurance companies also
performed banking activities, and the most flexible financial institutions, the hedge funds,
began playing a crucially important role in investment. Their activities clearly illustrate
the deregulated financial markets. Among the big hedge funds, the ‘billion dollar
members’ of the ‘club’, 120 had their headquarters in New York, 65 in London. In 2007,
370 new hedge funds were established in Europe. In the summer of 2008, the hedge fund
business, worth more than $2.68 trillion, had financed most of the start up companies and
technological development that had occurred since 1980. They attracted huge amounts of
capital by offering spectacular profits. Hedge funds performed lucrative investments for
their investors for a 20 per cent to 40 per cent performance fee, deducted from the
capital gain. However, if the investment failed, the fund did not share the loss, but the
investors bore the cost. This rule transformed the hedge funds’ investment activities into
reckless gambling. The fund managers were strongly interested in the gain, but did not
suffer from the losses, a system which encouraged wild speculations. When the German
government initiated regulation of the hedge funds before the financial crisis, the British
government and the American administration blocked any regulatory measures. In the
five years before 2008, hedge funds gained 47 per cent profit from investing in Central
and Eastern Europe.

Bond markets that were national became international: countries issued bonds
(p. 416)

and sold them to other countries to manipulate interest rates. One of the flexible financial
innovations allowed by an unregulated market was the securitization of credits, which
entirely transformed commercial lending. Creditors (mortgage loans, credit card loans,
student loans, corporate loans, car loans, etc.) performed this transaction by pooling their
assets, issuing securities, and selling their existing loans to an investor in this form. The
borrowers gradually paid back the fully amortized securities in the specified term. Selling
these assets became legal in the mortgage business in the 1970s United States, but from
1985–86 they were used broadly and became part of the victorious Anglo-Saxon
deregulated financial system.

Securitizing credits increased money circulation; the company that issued the loan did
not have to wait until the borrowers repaid it, sometimes in 3 to 30 years, but sold it,
received cash, increased its liquidity, and could issue new credits and gain new profits.
Besides, they could report the transaction as new earnings that attracted investors and
opened the door for easier access to credit. The lending companies transferred the risk to
other companies. By 2005, the amount of securitized credits in the United States
amounted to $8.06 trillion. Household debt, which accounted for 80 per cent of the
disposable income of borrowers in 1986, reached 140 per cent by 2007. However, the

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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indebtedness of British households was even greater. Deregulated financial markets
offered the advantage of more flexible and risky financial activities, which mostly earned
higher profits and resulted in cheap credit for the economy.

One of the most innovative new characteristics of the financial market was the derivatives
business. Traders—first of all commercial and investment banks and insurance companies
—bought and sold future contracts, future commodity trade, and future options on shares,
bonds, currencies, and interest rates. These transactions aimed to avoid risk by selling or
buying at an assumed (forecasted) price, to eliminate future changes in exchange or
interest rates or commodity prices. In Germany, the leading banks established a Derivate
Forum in 2004 to provide risk ratings. Because of this trading practice, banks ended their
traditional practice of assessing the creditworthiness of their clients. The derivatives
business thus served risk management, but it was itself at the same time a major risk,
involving speculation about future prices, exchange rates, and interest rate movements.
In other words, this business became a form of gambling, based on assumed future price
movements. It might offer huge profits as well as huge losses, according to real price and
rate formations. According to the Bank for International Settlements, the world's
derivates trade increased from $75 trillion in 1997 to $600 trillion in 2007. To evaluate
these astronomical figures, it is noteworthy that the 1997 figure was already equal to two
and a half times the world's global GDP. It thus became impossible for any single
company, or even a single nation, to handle the potentially huge losses.

Deregulation and the flexible financial market worked and helped to cope with the crisis
of the early 1980s. Neoliberal ideologues and economists, as well as governments under
their influence, celebrated the success. They did not worry about possible negative
consequences, since they blindly believed in the self-correcting mechanism of the
(p. 417) market. The warning they often made was just the opposite: not to interfere, not

to destroy the market mechanism that would, if necessary, correct itself and solve all the
emerging problems.

The blind neoliberal belief in self-regulating markets and the withdrawal of state
regulations helped prosperity in the short-run, and gave a huge spurt to globalization.
Internationalization has had a long history in Europe. However, the transition from the
1970s to the 1980s was the real watershed for its breakthrough. Globalization emerged
as a new policy that replaced colonialism for the leading economic powers, but it had an
objective economic base in the new technological and corporative-managerial revolution.
The end of the Cold War division of Europe in 1990 created a new, and even more
favourable political environment for further globalization, opening large new markets and
resources in the significantly enlarged laissez-faire system. During the 1980s and 1990s,
Western Europe therefore entered a radically transformed era of economic globalization.
Europe—besides North America and Asia—emerged as the strong third pillar of the
global system. International trade increased three and a half times from $1.7 trillion in
1973 to $5.8 trillion by the end of the century. In 1970, nearly 9 per cent of the world's
gross products were exported, but, by 2001, this was already more than 16 per cent.
Daily financial transactions amounted to $15 billion in 1973 but increased to $1.3 trillion

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by 1995. This amount was fifty times higher than the value of world trade.28 This was the
time when advanced countries, exploiting the achievements of the communication
revolution, established subsidiaries all over the world and supported a policy of
eliminating trade barriers, strengthening competitiveness by outsourcing workplaces,
and establishing a new division of labour. Multinational companies became dominant in
the world economy by monopolizing most of the industrialized innovations, as well as 75
per cent of the world trade in manufactured goods. The stock of Foreign Direct
Investments (FDI) abroad increased to $2.5 trillion by 2004, and advanced countries
began investing into each other. Outsourcing production allowed the advanced countries
to concentrate on service and high-tech industries, as well as on research and
development. Adjustment to globalization provided the exit from the economic crisis of
the 1970s and early 1980s and opened a new paradigm of economic development for the
West.

By 2004, Europe had become the most globalized region, and Belgium the most
globalized country, of the world. According to the Swiss KOF globalization index, which
assesses the economic, social and political aspects of 122 countries, the first 16 of the
most globalized countries are European, with a score of between 80 and 92 out of 100.
Among the first twenty countries, only four—including the United States and Canada—are
non-European.

Inspired by the transformation of the world system, thirty years after the Treaty of Rome,
the European Community introduced its first major revision with the Single European
Act, implemented in the summer of 1987. Instead of a united Western Europe as a
defence against (p. 418) war, the Act declared that the Community protects the common
interests of its member countries by creating a common market with the free movement
of goods, people, services, and capital. The realization of these ambitious goals was
assisted by 282 detailed measures. ‘As regards research and technical development’,
Article 130F of the agreement set out the objective ‘to strengthen the scientific and
technological basis of European industry and to encourage it to become more competitive
at international level.’ Jacques Delors summed up as follows: ‘History is accelerating and
we should make it with her.’29

The integration process shifted into high gear: in December 1991, the Maastricht Treaty
led to the establishment of the European Union, which was served by a common currency
and a central bank within a decade. Development of a common foreign policy, citizenship,
and a European constitution sped the integration process during the 1990s towards the
goal of an ‘ever closer union’. In this environment, even before the total collapse of the
Soviet Bloc, Jacques Delors, the President of the Commission of the Community, launched
a further major process in a speech in Bruges in October 1989:

The Twelve [member countries] cannot control history but they are now in a
position to influence it once again. They did not want Europe to be cut in two at
Yalta and made a hostage in the Cold War. They did not, nor do they close the door
to other European countries. … The present upheavals in Eastern Europe are

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changing the nature of our problems. It is now merely a matter of when and how
all the countries of Europe will benefit from … the advantages of a single
market.30

In this international environment, a window of opportunity opened for the former Soviet
Bloc countries to join the new world system that helped the countries’ democratic
transformation and stabilization, as well as their introduction of functioning market
economies. Meanwhile it also offered the opportunity for Western Europe to give a better
answer to the challenge of globalization. The European Union countries gained an
unprecedented chance to establish their economic backyard in Central and Eastern
Europe. They outsourced a great part of their expanding car industry to the former
communist countries, they owned more than 80 per cent of their banking assets, and
gained a huge share of their 100 million people market.

Restructuring the Economy


Adjusting to the new requirements of the world economy was difficult. How to
counterbalance the sharp decline of the old sectors? Replacing them with new industries
representing the latest word in technological development was not a simple task. The
Western (p. 419) European core, as an OECD analysis found in 1987, was suffering from
structural rigidities, and could not keep up with modern technology. Because of slow
adjustment, Europe's position in intensive research and development branches
significantly worsened after 1973.31 The slow structural-technological adjustment was
clearly expressed by Europe's losing ground to international competition in technology-
intensive products. Around the mid-1980s, European companies had only a 9 per cent
world market share in computer and data processing products, 10 per cent in software,
13 per cent in satellites and launchers, and 29 per cent in data transmission services.32

After the stagflation of the troubled 1970s and early 1980s, however, Western Europe
made great progress in adjusting to the requirements of the new technological regime
and the globalized world economy. They had to turn towards their own innovation base
and establish competitive modern high-tech sectors. Investment in information and
communication technology (ICT) doubled between 1980 and 2005, and in some countries,
it nearly quadrupled. Sweden, Finland, and Britain exhibited especially impressive
performance in this area. During the 1980s, the United States had a huge advantage,
which increased their total investment in ICT to 24 per cent by 1992, compared to the
European Union-15 countries’ average of only 13 per cent in cutting edge technology,
hardly more than half of the American investment share. By 2003, the average European
investment increased to 17 per cent, but Sweden and Finland (each nearly 27 per cent)
and Britain (22 per cent) approached the 27–29 per cent American share.33

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Accordingly, modern high-tech sectors emerged only gradually in Europe. Their share of
manufacturing output increased in Finland from 3.6 to 5 per cent and in France from 12
to 13 per cent, as well as increasing somewhat in Belgium and Germany. More successful
was the adjustment in technological modernization and the renewal of traditionally strong
medium–high-tech industries. The country leading this trend was Germany. The output of
medium–high-tech branches—motor vehicles, engineering, and chemicals—increased
from 32 to 41 per cent of total industrial output in Germany, and to about one-third of the
industrial output in several other west European countries.34 Through renewed
technology, product differentiation, and specialization, they were able to lower the cost of
production and conquering markets that were less saturated and less competitive. These
medium-level R&D-intensive sectors significantly increased their exports.35

As a clear sign of structural adjustment, the output of the ICT sector made good
(p. 420)

progress in Europe. The income share of this sector tripled between 1980 and 1996. In
1980, it stood at only one-third of the U.S. level, but by 1996 it had reached one-half of it,
signalling that capital stock in the most modern technology branches was accumulating
in Europe. This had an important impact on output growth: during the first half of the
1990s, ICT contributed less than a third to growth, but during the second half of the
decade, it contributed one-half. At the turn of the century, Europe lagged only about five
years behind the United States in the diffusion of modern technology. The output of the
ICT sector in Western Europe reached more than 4 per cent of GDP. Only Ireland, at
nearly 8 per cent, and Sweden and Finland, at nearly 6 per cent each, were around the
American level of almost 7 per cent of GDP. In another clear sign of modern structural
changes, even though job creation was weak and slow during the 1990s, 75 per cent of
net job creation during the second half of the decade occurred in high-tech sectors whose
work force was at least 40 per cent comprised of individuals with tertiary education.

By 2004, high-tech exports from the European Union-15 nearly matched the Japanese
level: 23 per cent of total exports, compared to 24 per cent for the Japanese. This
remained behind the United States, for whom high-tech exports comprised 33 per cent of
the total. Regarding medium–high-tech exports, Europe's share increased to 47 per cent,
while only 44 per cent of total exports from the United States were in this category.
Although somewhat later than the United States, Europe closely followed modern
technological and structural changes around the turn of the century.36

Western Europe was consequently able to counterbalance the decline of the old sectors
with a rapid increase in the modern sectors, that is, it was able to cope with the
structural crisis. For example, consumer price inflation, which reached roughly 10 to 14
per cent in Western Europe, dropped to 3–5 per cent in the second half of the 1980s and
thereafter. The Western European economy was consolidated. Private consumption also
almost recovered and increased by 3–4 per cent annually. After a series of years of
negative figures, fixed capital formation regained the pre-Oil Shock dynamism of 6–8 per
cent increases annually. In the late 1980s, industrial production in Germany increased by

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4–6 per cent per annum, and it increased in Western Europe as a whole by 2–4 per cent.
The increase in GDP also returned to a solid 2.5 to 3.5 per cent annual growth rate.37

Technological transfiguration was also closely connected with a major structural change,
often called the service revolution. Occupational structure clearly expressed the dramatic
decline of the agricultural population, the decrease in industrial employment, and the
enormous increase in service employment. At the end of 2006, twelve western member
countries of the European Union employed, on average, slightly more than 4 (p. 421) per
cent of their active population in agriculture, and almost 29 per cent in industry. All of
these countries experienced a service revolution: this sector employed roughly one-third
of the active population after the war, half of them in the early–mid 1970s, and roughly 70
per cent by 2005. This share reached three-quarters of the active population in quite a
few countries, including Belgium, Denmark, France, Norway, Sweden, Switzerland, and
Britain. The service sector produced roughly half of the total value added in the 1970s,
but it became the leading sector of the western economies around the turn of the twenty-
first century, producing nearly three-quarters of total value added.38

The structural changes in occupation, and the considerably increased contribution of


services to the GDP, also reflected increased productivity in agriculture and industry,
which produced more value with far fewer employees and thus freed a greater part of the
labour force to work in other sectors of the economy. On the other hand, these changes
also clearly placed the service revolution, brought on by a more sophisticated division of
labour, at centre stage. During the last decades of the twentieth century, several
functions were separated from manufacturing: research, design, accounting,
transportation, and various other activities were taken over by specialized service
companies serving several firms with increased efficiency. In Silicon Valley-type industrial
agglomerations, several service companies settled to serve dozens of high-tech
companies. Several functions that were parts of agricultural or industrial production
before became independent services, provided by specialized service companies.
Technological-structural transformation strongly contributed to a further advance of
labour productivity, which increased in Western Europe by more than fivefold. Ireland,
one of the formerly backward European countries, increased productivity by more than
sevenfold after the 1980s.39

Around the turn of the century, however, growth slowed down again; a new oil crisis
temporarily skyrocketed prices to $150/barrel in the summer of 2008. The new oil crisis,
however, was not the real cause of gathering economic clouds. Mid-2008 became the
scene of a major international financial crisis that started in the United States and spread
throughout the world. It was mostly the backlash of deregulation and reckless financial
gambling. As noted before, flexible, deregulated financial markets had a major and
positive role in coping with the crisis of the 1970s-80s. In reality, however, the question
was not whether, but when the negative effects would become dominant. Since the 1980s,
local crises have actually accompanied the transformation of international financing in
Mexico, Asia, and Russia, as well as in the bursting of stock market and housing market
bubbles. George Soros, one of the main winners in, and experts on, the unregulated

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financial markets, actually warned of the danger in 1998: ‘market fundamentalism … put
financial capital into the driver's seat. … Market forces, if they are given complete
(p. 422) authority … produce chaos and could ultimately lead to the downfall of the global

capitalist system.’40 Indeed, global crisis and the collapse of financial systems, on a scale
unheard of since the Great Depression, arrived in 2007–08 in the United States, and
spread to Europe and throughout the world in 2008–09. Hedge funds that gained a
fortune from investments lost 57 per cent of their invested money in 2008. As Keynesian
economics and practice failed after the 1970s crisis, neoliberal economics and policy
failed in 2008–09. The circle was closed, and a new orientation and adjustment began.

Further Reading
Berend, Ivan T., An Economic History of Nineteenth Century Europe (Cambridge:
Cambridge University Press, 2006).

Berend, Ivan T., Europe Since 1980 (Cambridge: Cambridge University Press, 2010).

Boltho, Andrea, The European Economy: Growth and Crisis (Oxford: Oxford University
Press, 1982).

Brenner, Robert, The Boom and the Bubble: The US in the World Economy (London:
Verso, 2002).

Krugman, Paul, The Return of Depression Economics and the Crisis of 2008 (London:
Penguin, 2008).

OECD, Measuring Globalization: The Role of Multinationals in OECD Economies (Paris:


OECD, 1999).

Rhode, Paul W. and Gianni Toniolo (eds), The Global Economy in the 1990s: A Long-Run
Perspective (Cambridge: Cambridge University Press, 2006).

Soros, George, The Crisis of Global Capitalism: Open Society Endangered (New York:
Public Affairs, 1998).

Stiglitz, Joseph E., Globalization and Its Discontents (New York, NY: W.W. Norton, 2002).

Williamson, John, ‘The Washington Consensus Revisited’, in Louis Emmerij (ed.),


Economic and Social Development into the XXI Century (Washington, DC: Inter-American
Development Bank, 1997).

Notes:

(1) This study is based on my book, Europe Since 1980 (Cambridge: Cambridge University
Press, 2010).

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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(2) Angus Maddison, Two Crises: Latin America and Asia 1929–38 and 1973–83 (Paris:
OECD, 1985), 13.

(3) Instead of nearly 5 per cent annual growth in Germany before 1973, growth rates
dropped to 1.6 per cent between 1974 and 1983. In the Netherlands growth declined
from 5 to 1.4 per cent per annum in the same period.

(4) Unemployment rate was nearly 14 and 13 per cent in the Netherlands and Britain.

(5) A contract in 1969 stipulated a 19 per cent wage increase in Italian industry. In
France, wages rose more quickly than GDP every year between 1968 and 1973. Social
expenditures steeply increased in postwar Europe: by 14 times in Italy, 7 times in France,
6 times in Sweden, and 4 times in Western Europe as a whole. Public spending grew from
30 to 50 per cent of GDP in Italy. The western countries spent 40 to 50 per cent of GDP
on welfare expenditures.

(6) OECD, Structural Adjustment and Economic Performance (Paris: OECD, 1987), 129.

(7) Andrea Boltho, The European Economy: Growth and Crisis (Oxford: Oxford University
Press, 1982), 28.

(8) Herman Van der Wee, Prosperity and Upheaval: the World Economy 1945–1980
(Berkeley, CA: University of California Press, 1986), 90.

(9) Robert Brenner, ‘Uneven Development and the Long Downturn: Advanced Capitalist
Economies from Boom to Stagnation, 1950–1988,’ New Left Review, Special Issue, (May-
June, 1998), 138.

(10) In August 1971, the Nixon administration practically ended dollar convertibility. This
shocked the international monetary system and led to uncertainty.

(11) Barry Eichengreen, ‘Institutions and Economic Growth: Europe after World War II’,
in Nicholas Crafts and Gianni Toniolo (eds), Economic Growth in Europe since 1945
(Cambridge: Cambridge University Press, 1994), 61.

(12) Angus Maddison, Monitoring the World Economy 1820–1992 (Paris: OECD, 1995), 84.

(13) Based on OECD, Structural Adjustment, 236 (unweighted average of Austria, the
three Benelux countries, Britain, France, Germany, Italy, Norway, and Sweden).

(14) Wolfram Fischer, Jan A. van Houtte, Herman Kellenbenz, Handbuch der Europäische
Wirtschafts- und Sozialgeschichte vom Ersten Weltkrieg bis zum Gegenwart (Stuttgart:
Franz Steiner, 1987), vol. 6, 117, 135.

(15) Joseph Schumpeter, Capitalism, Socialism and Democracy (London: Allen & Unwin,
1976), 67–8.

(16) OECD, Structural Adjustment, 236.

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A Restructured Economy: From the Oil Crisis to the Financial Crisis, 1973–
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(17) Angus Maddison, The World Economy in the 20th Century (Paris: OECD, 1989).

(18) Edward N. Singer, 20th Century Revolution in Technology (Commack, NY: Nova
Science Publisher, 1998), 76, 77.

(19) Ibid., 93–106.

(20) Barry Eichengreen, The European Economy since 1945: Coordinated Capitalism and
Beyond (Princeton, NJ: Princeton University Press, 2007), 6–7.

(21) Terence Ball and Richard Bellamy (eds), The Cambridge History of Twentieth-
Century Political Thought (Cambridge: Cambridge University Press, 2003), 365.

(22) Milton Friedman, The Program for Monetary Stability (New York, NY: Fordham
University Press, 1959); Friedman, Inflation: Causes and Consequences (New York, NY:
Asia Publishing House, 1963); Friedman, The Optimum Quantity of Money and Other
Essays (Chicago, IL: Aldine Publishing Co., 1969); Friedman, The Tax Limitation, Inflation
and the Role of Governments (Dallas, TX: Fisher Institute, 1978).

(23) Richard Wolin, ‘Introduction’, in Jürgen Habermas, The New Conservatism: Cultural
Criticism and the Historians’ Debate (Cambridge, MA: MIT Press, 1989), xxiii.

(24) Walter Leisner, ‘Demokratie, Selbstzerstörung einer Staatsform’, cited in Iring


Fetscher (ed.), Neokonservative und ‘Neue Rechte’. Der Angriff gegen Sozialstaat und
liberale Demokratie in den Vereinigten Staaten, Westeuropa und der Bundesrepublik
(Munich: C.H. Beck, 1979), 108.

(25) J-J. Santini (ed.), Les privatisations à l’étranger: Royaume-Uni, RFA, Italie, Espagne,
Japon (Paris: La Documentation française, 1986).

(26) Paul Krugman, The Return of Depression Economics and the Crisis of 2008 (London:
Penguin Books, 2008).

(27) The Economist (11 October 2008), 10. I used this study in discussing the
transformation of the international financial markets in the next pages as well.

(28) Maddison, World Economy, 127, 362; OECD, Structural Adjustment, 273.

(29) Activities of the European Union: Summaries of Legislation (www.europa.eu/


scadplus/treaties/singleact_eu.htm-31K-).

(30) Jacques Delors, ‘Address by Mr Jacques Delors, Bruges, 17 October 1989’, in Brent F.
Nelsen and Alexander Stubb (eds), The European Union: Readings on the Theory and
Practice of European Integration (Boulder, CO: Lynne Rienner, 1998), 59.

(31) OECD, Structural Adjustment, 203.

(32) Ibid., 213.

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(33) OECD, Factbook: Economic, Environmental and Social Statistics (Paris: OECD, 2007),
155. Investment rates in general recovered from a severe decline—from a 5.6 per cent
annual increase before 1973, to an annual decrease of 0.6 per cent between 1973 and
1980—and again reached a 5.7 per cent increase per year in the second half of the 1980s.

(34) OECD, Structural Adjustment, 254. During the 1980s, the share of medium–high-tech
industries increased from 29 to 34 per cent in France, from 29 to 32 per cent in Italy,
from 20 to 25 per cent in Holland, and from 30 to 37 per cent in Belgium.

(35) Ibid., 215.

(36) Commission of the European Communities, European Economy (Brussels: European


Commission, 2000), 37, 108–9, 115, 117.

(37) United Nations Economic Survey of Europe (New York, NY: UN, 1991).

(38) Based on OECD, Science, Technology and Industry Outlook (Paris: OECD, 2000), 63;
World in Figures (London: The Economist, 2008).

(39) Maddison, World Economy, 351.

(40) George Soros, The Crisis of Global Capitalism (New York, NY: Public Affairs, 1998),
xx, xxvii.

Ivan T. Berend

Ivan T. Berend is a Distinguished Professor at the Department of History, University


of California, Los Angeles. Previously, he was professor of economic history at the
Budapest University of Economics (1953-1985); President of the Hungarian Academy
of Sciences (1985-90); and President of the International Committee of Historical
Sciences (1995-2000). He is a Member of the British Academy and five other
European academies of sciences. His most recent book is Europe since 1980 (2010).
Among his earlier works, he published a tetralogy on nineteenth- and twentieth-
century Central and Eastern Europe, The European Periphery and Industrialization,
1780-1914 (1984), and An Economic History of 20th Century Europe (2006). He is
currently working on an economic history of nineteenth-century Europe.

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