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Volume XXXIII No. 2 (April-June 1998)
Lessons of the Marshall Plan for Eastern Europe
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By John L. Harper
When, on 16 July 1997, European Commission President Jacques Santer presented Agenda 2000, the Commission’s 1,300 page strategy for strengthening the European Union and preparing for enlargement early in the next century, his statement came close to the 50th anniversary of George C. Marshall’s Harvard speech on 5 June 1947, announcing the intention to launch a major new US aid programme for Europe.
The EU Commission recommended that formal accession negotiations begin in early 1998 with half of the Central and Eastern European (CEE) applicants. The five—Poland, Hungary, the Czech Republic, Slovenia and Estonia—were judged closest to fulfilling the membership requirements set by the European Council at Copenhagen in June 1993. A Commission official later commented that there was “clear blue water” between the fortunate five and the rest. 1
Santer’s presentation referred to the “substantial extra costs for the existing 15 members” (ECU 75 billion) contemplated by the Commission strategy as “a veritable Marshall Plan for the countries of Central and Eastern Europe”. 2 But Santer’s reference to the Marshall Plan, like countless others since the collapse of communism, raised as many questions as it answered. This article will address three such questions: What did the Marshall Plan actually accomplish? What were the keys to the Plan’s success as compared to Group of 24 (G-24) efforts to date in CEE? Is it too late to learn anything from the Marshall Plan to help to prepare CEE countries, in particular those of the first wave, for accession to the EU?
What did the Marshall Plan Accomplish?
The Marshall Plan or European Recovery Program (ERP) was conceived to deal with the crisis of European, and especially Western German, economic recovery that became apparent in late 1946 and early 1947. After talks with Stalin in March-April 1947, Marshall was convinced that the Soviet Union was eager to exploit economic and political discontent in order to extend its influence over all of Germany, and that local communist parties would do the same in Italy and France.
Communist control of Western Europe’s resources was thought to be a serious geopolitical threat to the US, while it was hoped that a more prosperous and tightly-knit Western Europe would be able to maintain its independence with a minimum of outside help. A flourishing capitalist Europe was also seen as an indispensable component of the multilateral trade regime—inspired in part by the pre-1914 example—that the US State Department had long pursued, and of the reconstructed monetary system based on fixed exchange rates and currency convertibility foreseen by Bretton Woods.
The ERP came in the wake of a series of short-term, stopgap, and poorly coordinated efforts: Government Aid and Relief in Occupied Areas to combat “disease and unrest” ($840 million for Germany and a similar programme for Italy); US Export-Import Bank loans to France in 1946 ($600 million) and Italy in 1945 ($25 million) and 1947 ($100 million) for raw materials; the 1946 British loan ($3.75 billion) requiring the convertibility of the pound; the 1947 Greek-Turkish package ($400 million); the 1947 International Bank for Reconstruction and Development loan to France ($250 million); 1947 “Aid of the United States of America” for Italy and Austria; 1948 “Interim Aid” ($522 million) for France, Italy and Austria. Last but not least, the UN Relief and Rehabilitation Administration (UNRRA) ($9 billion) provided mainly food, medicine and housing in Italy, Austria, Eastern European (including the USSR), and China, 1943-47.
The lack of US political control over UNRRA prompted Undersecretary of State William Clayton to say of the future Marshall Plan: “The United States must run this show!” 3 US private capital, meanwhile, having lost heavily in Europe before the war and facing serious political risks, was absent from the scene.
The elements of the ERP
The Economic Cooperation Act of 1948 authorising the ERP called for a viable, “healthy [West European] economy independent of extraordinary outside assistance”. US bilateral agreements with 15 participating governments set four basic tasks:
The underlying purpose was to stop communism and restore Western Europe’s faith in the future.
Between mid-1948 and the end of the programme on 31 December 1951, the ERP provided $12.5 billion, mostly in aid-in-kind. For each dollar’s worth of merchandise granted, the recipient governments were required to deposit the equivalent in a local currency “counterpart fund” to be spent for purposes approved by the Economic Cooperation Administration (ECA), the US agency overseeing the plan. During the plan’s official life the ECA approved the release of $7.6 billion of such funds for investment and debt retirement. 4
Evaluating the experiment
Few policy makers who invoke the plan today have a very clear idea of what it accomplished. Indeed, academic experts continue to argue the point. It can safely be said that the plan’s results did not correspond to the expectations raised by its own propaganda or to mythical accounts according to which US aid resuscitated a moribund European economy. 5 The plan was, nonetheless, a considerable success.
It helped, first of all, to create new political and psychological conditions. It was a signal of sustained US interest in the problem of Western Europe. Marshall’s warning on the eve of the April 1948 Italian elections that communist-dominated governments would not receive aid contributed to the centre-right victory. Large-scale US aid made it easier for France to abandon its punitive line toward Germany in favour of co-operation. The plan brought hope to policy makers, investors, and ordinary people. It greatly enhanced the prestige and popularity of the donor country.
The ERP did not, however, solve the “communist problem”: The removal of communist parties who were in a position to block economic stabilisation from the French and Italian cabinets occurred in May 1947, before Marshall’s announcement. Communist influence remained strong during and after the plan. US officials blamed this in part on the failure of European governments to adopt necessary reforms (for example, a serious land reform in Italy). Insistence half way through the plan on rearmament lost the US much good will. Europe was still dependent on US aid after 1951.
Marshall aid was distributed unevenly and its results varied considerably from country to country and at different levels. In general, it contributed to the continuation of recovery begun in 1945, but which had slowed or stopped in the first quarter of 1947 due to harsh weather and the shortage of dollars to buy food and raw materials.
Providing a safety net
Serious students have argued that the plan was not strictly necessary. Industrial production was once more on the upswing before ERP aid arrived. Local resources accounted for 80-90 percent of capital formation in the major economies in 1948-49. 6 But it was the prospect of sustained US support (among other factors) that encouraged businessmen and farmers to release stocks and to make investment decisions, thereby helping to solve the so-called “marketing problem”.
The Marshall Plan provided a cushion of aid, amounting overall to 2.5 percent of recipient GNP, that allowed countries (in particular France and the Netherlands) to avoid politically explosive austerity measures. During the ERP, Western Europe’s aggregate GNP increased by over 32 percent, industrial production by 40 percent, and agricultural production by 11 percent over pre-war levels. The average European per capita GNP, having fallen from 62.6 percent of US per capita GNP in 1938 to 38.3 percent in 1947, was back to 44.7 percent of the US level in 1951. 7
To take a key example, in West Germany, the “breakthrough to steadily rising rates of production” in October 1947 was indeed achieved with local resources, before the Marshall Plan. (By the end of 1948 only $22 million in non-food raw materials—mostly cotton—had arrived.) There is no direct connection between the plan and Erhard’s 1948 currency reform. Counterpart funds accounted for only 5.5 percent of gross industrial investment in Germany in 1949-52. At the same time, US plan-era policies gave Germany back greater control of its own resources—helping it to help itself—while imported supplies broke production bottlenecks in the textile, electric power, transport, and coal mining sectors. Similarly, Einaudi’s famous 1947 credit squeeze in Italy occurred in the absence of US aid, but ERP funds covered, on average, more than 28 percent of Italy’s annual imports, 1948-51. 8
World War II had considerably widened the technical and productivity gap between US and European industry. The ERP made an important, if immeasurable, contribution to technological modernisation and increases in worker productivity. For example, counterpart funds helped to finance the Monnet Plan with its ambitious production targets for steel, coal, transport, electric power, and agricultural equipment, and the modernisation of Italy’s electric power, complete-cycle steel, oil refining, and automotive sectors.
The ECA by no means promoted an anti-statist, “neo-liberal” approach to microeconomic reform. Many of its officials were New Deal or Keynesian-oriented and sympathetic to economic planning. Following the American experience, however, the ECA did place great emphasis on productivity as the key to raising living standards and ending the distributional struggle. It sponsored technical assistance projects, management seminars, pilot plants, and national “productivity councils”. The Anglo-American Council on Productivity (financed by the British Treasury and ECA Technical Assistance Funds) sent 138 British “productivity teams” of managers, technicians and workers (900 people in all) to US factories to study production methods and industrial relations. Two hundred French teams (2,600 people) and groups from other continental countries followed suit. 9
Output per worker in Europe’s mining and manufacturing industries increased by an annual average of 6.2 percent (1948-53), though it is an open question how much of this can be attributed to the ECA’s Technical Assistance Program ($34 million authorised, $18 million spent by the end of the plan). ECA and US labour activists had limited success in converting European unions (with the possible exception of the Italian CISL) to the apolitical US model. Workers’ living standards—French real wages were 36 percent below 1936 levels in 1952—made a mockery of plan propaganda. In the longer run, however, at least for managers, “the cumulative influence of a plethora of Marshall Plan-inspired productivity institutes, business schools, training centres, academic research and the conventional wisdom that they developed was pervasive throughout Europe”. 10
Growth over financial stability
The ERP was not a striking success in the area of fiscal responsibility and monetary stability. 11 The basic tension between financial stability and higher investment and growth was generally resolved in favour of the latter objective. An exception is France. There the ECA tried to tie the release of counterpart funds to reforms guaranteeing higher tax revenues and a lower ceiling on central bank advances to the treasury. This tactic was only partially successful and created friction with the French government. In Britain the ECA exercised little control over the fund. It was used entirely for debt retirement while the Labour government carried out an ambitious investment programme not to American tastes. To little avail the ECA criticised the Italians for pursuing deflationary policies and failing to make plans to invest the lira fund.
From EPU to ECSC: the birth of European co-operation and liberalisation
The ERP strongly encouraged intra-European co-operation and trade and payments liberalisation, beginning with the 1947 Conference on European Economic Co-operation (CEEC). At US behest the Conference became the permanent Organisation for European Economic Co-operation (OEEC) 12 with responsibility for screening annual national aid requests and recommending an allotment of ERP funds to the ECA.
An effective device for trade and payments liberalisation was the European Payments Union (in operation from June 1950 to Dec.1958). The Europeans had committed themselves to liberal policies by adhering to Bretton Woods and ERP bilateral agreements, but their currencies remained inconvertible and trade was conducted on the basis of some 200 bilateral agreements. Under the EPU, governments accepted the currency of any other member government in payment for exports, unsnarling the bilateral agreements.
The Bank for International Settlements consolidated balances monthly, leaving each country with a surplus or deficit with the union as a whole. Deficit countries received credits (to a point) as an alternative to restricting imports for lack of hard currency. The ECA helped to design the EPU and provided it with working capital of $350 million. The Americans insisted that EPU members adhere to an OEEC Code of Liberalisation (September 1950) by which they locked themselves into a schedule for the progressive dismantling of quantitative barriers to intra-bloc trade. Intra-European trade expanded from $10 billion in 1950 to $23 billion in 1959. 13
It has been argued that the prerequisites of convertibility into the dollar for current transactions—realistic exchange rates, sufficient reserves, elimination of excess purchasing power ( “monetary overhangs”), adequate wage discipline—were within reach of most ERP countries in 1950. Be that as it may (total OEEC gold and dollar reserves were less than $10 billion that year), quick convertibility was unthinkable for Britain after the 1947 fiasco, and elsewhere would have required further devaluation (that is, beyond the levels of 1949), consequent terms of trade losses, and tight fiscal and monetary policies to offset imported inflation. Nor was foreign capital waiting to reward “virtuous” macroeconomic behaviour. The EPU provided a prolonged transition from bilateralism to convertibility. In so doing it helped to avoid further drops in living standards while contributing to the reconstruction of intra-European trade.
During this period the US tolerated systematic discrimination against its exports, as the EPU members removed quotas with each other more rapidly than they did with the dollar area. Tariffs—seen by the Americans as a less egregious form of protection—were the purview of the US-inspired GATT, adopted in 1947. GATT permitted the creation of new tariff preferences as a stage in the creation of a free trade area or customs union—the route eventually taken by the continental six.[Eichengreen, Ibid., chaps. 3, 5; Diebold, chap. 12.]
Efforts to promote European co-operation fit the general ERP pattern: results were significant but fell short of original expectations. ECA hopes to turn the OEEC into the supranational embryo of a European federation were vastly overblown—as usual the British led the opposition. Trade liberalisation did not lead to Paul Hoffman’s dream of a single integrated market allowing European firms to achieve the economies of scale of their US counterparts. The historian Michael Hogan calls this the “central failure” of the Marshall Plan. 15
The plan had nothing directly to do with the European Coal and Steel Community (ECSC). Monnet tended to dismiss the OEEC. He acted in response to the prospect of a Germany freed from effective control by the Americans in order to contribute to the Western military-industrial build-up decided upon in early 1950. The ECSC was essentially a home-grown idea which the Americans were wise enough to embrace and lend vital support to. Thanks to US backing, for example, the ECSC obtained a waiver from GATT rules prohibiting a preferential area in a limited range of goods. 16
The Keys to the Marshall Plan’s Success Compared to Post-1989 Efforts
The post-Berlin Wall predicament of Central and Eastern Europe seems at first glance to have many features in common with the post-1945 situation of Western Europe: the collapse of long-standing trade relationships, contributing to a sharp fall in output; a shortage of hard currencies to pay for essential imports; monetary overhangs giving rise to inflation; the problems of dismantling state controls and restructuring obsolete heavy industry. In short, the Central and Eastern European countries (CEEC) and Western Europe appear to have faced similar tasks of stabilisation, liberalisation, and structural reform. 17
Though we have seen that it did not perform miracles, the ERP appears to have been much more successful than Western aid programmes to Central and Eastern Europe in tackling these problems and raising living standards. Certainly there are striking contrasts between the economic performance of Western Europe, 1947-51, and that of CEE, 1989-96. On average, GDP in the ten CEE countries grew during that period by -20.6 percent, consumer prices (1990-95) increased by 6,057 percent, and average CEE per capita GDP as a percentage of the EU average fell from roughly 50 to 33.6 percent. During the ERP, member-country GNP grew on average by 30 percent, wholesale prices on average by 46 percent, and (as noted earlier) average per capita GNP as a percentage of the US level rose from 38.3 to 44.7 percent.
Francesco Papadia of the Bank of Italy recently remarked that Western Europe “should be ashamed of itself” when comparing its efforts to those of the US after World War II. 18
Why was the Marshall Plan more successful? The reason would not at first appear to be a large disparity in sheer aid flows. It has been estimated that public international assistance to post-communist Central and Eastern Europe had amounted by 1996 to 2.7 percent of recipient country GDP compared to 2.5 percent for the Marshall Plan. 19 Marshall Plan aid equalled about $80 billion in 1997 dollars, and covered an area with a population of 283,000,000. Official aid flows to the 10 CEE candidate countries for the period 1990-96 amounted to almost $100 billion, and covered an area with a population of only 103,000,000. According to EU sources, a total of ECU 86.5 billion was provided to 15 CEE countries (the 10 candidates plus the 5 Balkan countries) in 1990-95. It is frequently noted that while there was practically no outside private investment during the Marshall Plan, there were large private flows into Central and Eastern Europe, an estimated $53.7 billion for 1991-95, of which $23.1 was foreign direct investment. 20 What comparisons of this kind sometimes fail to take into account, however, is that over 90 percent of ERP aid was in the form of grants, compared to around 30 percent of G-24 aid to Central and Eastern Europe.
Too many cooks in the kitchen
Another difference lies in the organisation of the two aid efforts. One problem with CEE aid efforts has been that of “too many cooks in the kitchen”, in other words, a lack of clear leadership. The ECA’s leverage over local authorities in France, Italy and Britain via the counterpart funds was far from perfect, but the Marshall Plan was the only game in town. Recipient governments had little choice but to follow US advice to keep politically undesirable forces out of power, accept the return of Germany to the Western fold, and co-ordinate their efforts in the OEEC and EPU. Aid to CEE after the Cold War has been subject to no such central authority and clear political guidelines.
Individual G-24 country programmes naturally tended to vary according to national interests and ideological predilections, rather than a thought-out division of labour. French aid consisted mainly of export credits to Romania. British aid was mainly debt relief for Poland. The top US priority was macro financial assistance, with Poland the biggest beneficiary. Facing severe budget deficits, the US pressured the Western Europeans to pay the lion’s share, while trying to retain maximum political leverage in CEE. Germany, by far the largest donor, has provided export credits, balance of payments credits, and debt relief, with Poland and Hungary the most important CEE recipients.
Efforts sponsored by international organisations have not been more coherent. In accordance with its traditional, controversial approach, the IMF has extended mainly short-term credits conditional upon macroeconomic stabilisation and liberalisation. World Bank loans have focused on stabilisation and infrastructure (energy, transport, telecommunications, housing) development. The European Bank for Reconstruction and Development (EBRD) has concentrated on merchant banking projects on a commercial basis in the emerging CEE private sector, as required by its 1990 founding agreement. The EU’s European Investment Bank (EIB) provides loans (co-financing only) for telecommunications, energy, and transport infrastructure projects. The EU’s Phare programme (begun 1989) initially provided technical assistance grants for economic restructuring, and after the 1994 Essen summit, more accession-oriented projects in the area of infrastructure. The EU has operated its own loan programme for macroeconomic stabilisation through the European Union’s Directorate General.
Mismanagement and bad advice?
Not surprisingly, these various efforts have overlapped and sometimes conflicted. The EU’s DG II, for example, has not always seen eye to eye with the IMF. As official co-ordinator of G-24 efforts, the EU has acted more as a clearinghouse for information than the source of an overall strategy. Private investors, consulting firms, and foundations have added their own advice. Vaclav Klaus called it “soft advice for hard currency”. It may be fairer to say that some of it was simply bad advice. If it is true that the stunning post-1989 contraction of the CEE economies “represented a bungle of economic policy on an unprecedented scale”, it is possible that better advice might have limited the damage. 21
“Shock therapy”, in any event, can be criticised for its “neglect of institution building, efficient corporate governance, the development and implementation of the laws necessary for a market economy, the creation of a modern and effective public administration, the development of appropriate social policies, and other tasks which inevitably take time”. The Marshall planners, by contrast, were strongly aware of the importance of institutions and suspicious of pure laissez faire. 22
The EU and its member states are open to serious criticism for their handling of the CEE countries after 1989. The EU launched its association or “Europe Agreements” in 1990, and encouraged the emerging Central European Free Trade Area (CEFTA)—in force as of March 1993—but negotiation and ratification of the agreements were delayed because of problems surrounding “sensitive goods”. 23 According to a recent analysis, “EU-imposed anti-dumping duties and price-fixing arrangements, meant to avoid such duties, greatly restrict CEEC exports in those areas in which they could expand sales most rapidly—iron and steel in particular. The EU also continues to impose quotas on other so-called sensitive industrial goods, such as textiles, clothing and footwear. CEEC exports of non-industrial goods—especially agricultural goods—have been liberalised only slightly by the EU.” 24
A recent evaluation of Phare praises its transfer of skills and know-how for economic restructuring activities and human resource development, and favourably compares amounts spent with the Marshall Plan technical assistance programme. At the same time, the evaluation argues that Phare has been too fragmented, “demand driven”, and responsive to local “shopping lists”, rather than “policy driven” from above, and serving a clear EU political strategy. 25
A definite EU accession strategy, endowed with political leverage, emerged from the Copenhagen (1993), Essen (1994), and Cannes (1995) EU summits. But only in mid-1997 did the Commission announce its comprehensive strategy (including further reform of the Common Agricultural Policy and structural spending programmes) and set a date for the beginning of negotiations with candidate countries. The institutional reforms adopted at Amsterdam in 1997 were embarrassingly meagre and further “deepening” will be necessary if the EU is to function with an additional five to ten member states. An earlier, unambiguous EU commitment to eastern enlargement might have had some of the favourable political and psychological effects produced by the announcement of the Marshall Plan. 26
Comparing apples and oranges?
To be fair, however, this lack of clear Western leadership is related to basic and to a considerable degree unavoidable differences in circumstances between Western Europe after World War II and the CEE countries after 1989. In 1947, unlike 1989, there was only one available donor; the problem at hand had the donor’s virtually undivided attention; life and death national interests were or were seen to be at stake. The Soviet Union and its satellites did not take part in the Marshall Plan; thus they were not a major competitor for US aid—as Russia and the other Newly Independent States (NIS) are vis-à-vis CEE today.
The US in 1947 was not distracted by the dubious task of trying to prepare Mexico for immediate statehood—a rough analogy with Germany’s DDR problem after 1989. 27 There is no comparison between the inherent strategic and economic importance of Germany, France, Italy and Britain to the United States in 1947 with that of Poland, Hungary, Slovenia and Czechoslovakia to the West in 1989. Nor is there any comparison between the seriousness of the threat, namely the risk of losing physical control to a hostile power. One need only compare the USSR of Joseph Stalin to the Russia of today.
The gravity of the threat to vital national interests explains the greater degree of US generosity (that is, grants rather than loans) and sustained, high-level political attention devoted to the problem of Western Europe. While an estimated 83 percent of European purchases using ERP dollars were made in the United States, there was no formal requirement to do so, and few strings were attached to benefit US business. In the first fifteen months of the plan (April 1948—30 June 1949), Marshall aid equalled 2.3 percent of US GNP; for the entire period, about 1.2 percent. (In 1996, total US official direct aid equalled 0.10 percent of GNP; the OECD country average was 0.35 percent.) Marshall aid accounted for 7.5 percent of total US government spending, 1948-51. 28
Postwar Western Europe, moreover, was in a much better starting position to achieve success, especially in the area of structural reform. Britain, France, Belgium, Sweden, and especially Germany in 1947 were not relatively poor, peripheral, centrally-planned economies like those of Central and Eastern Europe in 1989. They were richly-endowed, developed capitalist economies and did not suffer from serious cases of “management shock”. 29 Conditions varied from country to country, but in general they had appropriate legal systems in place and abundant human capital: skilled workers, entrepreneurial talent, academic expertise, lawyers, bankers, accountants, engineers, and—with a few exceptions—efficient bureaucracies. Western Europe in 1947 was not a tabula rasa on which the Americans mapped out their ambitious designs. It possessed vital institutions and experienced, energetic interlocutors in the private and public sectors with ideas and ambitions of their own.
To take relatively backward Italy: the state-controlled mechanical engineering sector required a painful restructuring, but Italy had not ceased to be a market economy under fascism. FIAT and Pirelli were major private companies. IRI 30 firms were partially government-owned and had been obliged to follow war-economy directives, but they were not state-owned enterprises in the communist sense, and were not reprivatised after 1945. (Indeed, the state sector expanded in Italy, France and Britain.) IRI-bred managers like Oscar Sinigaglia (head of FINSIDER) needed US technology but not re-education to operate successfully in post-war conditions.
Compared to Central and Eastern Europe, the Italian and German experiences with heavy-handed state intervention had been brief and mild. It should also be remembered that while distribution networks and trade relationships had been shattered, damage to physical plant was light. Italy lost a mere 14.5 percent of its productive capital stock between 1942 and 1945. According to Werner Abelshauser, Germany “entered the post-war period with a remarkably large and modern capital stock”. 31
Not only was Western Europe richer and more advanced to start with in 1947 than the CEE countries in 1989, the prevailing criteria of liberalisation were much less demanding than those required of Central and Eastern Europe today. In a sense, the goalposts have been moved back. Adhering to the GATT of the 1950s and the Bretton Woods rules (the European countries returned to convertibility in their own good time and many kept currency controls until the late 1970s) was not the same thing as joining a customs union including some of the world’s most competitive economies, implementing the body of legislation and case law (over 100,000 pages and constantly growing) that constitutes the acquis communautaire (did anybody care about environmental standards or elevators for the handicapped in the fifties?), not to mention preparing for the EMU. Had the task of the Marshall Plan been to bring Western Europe into the American single market and federal regulatory framework, it would have taken several decades and many billion dollars more. 32
Given these basic differences in conditions and objectives, comparing the Marshall Plan to post-1989 aid programmes sooner or later becomes an exercise in “comparing apples and oranges”. To be sure, there was a tension in US policy between the aim of integrating Europe into a multilateral world economy and that of promoting European autonomy and self-reliance, essentially for political reasons. After the Rome Treaty the Americans became increasingly worried about the prospect of a closed bloc—hence the launching of the Dillon and Kennedy rounds. But during the period of Europe’s recovery, Washington considered European strength and cohesion more important than fully reciprocal access to European markets. John Foster Dulles (American Secretary of State under Eisenhower) could accept a more protectionist and independent Europe because, in his words, “the resultant increased unity would bring in its wake greater responsibility and devotion to the common welfare of Western Europe”. President Eisenhower spoke of “the desirability of developing in Western Europe a third great power bloc”. 33 With the West German powerhouse an essential supplier and growing market for the Benelux, France and Italy, the ECSC “six” had virtually unlimited scope for the growth of trade among themselves.
What if other strategies had been used after 1989?
Much ink has been spilled over the question of whether Central and Eastern Europe might, with Western encouragement, have pursued an analogous strategy of regional integration, powered by a CEE or CEE-NIS payments union, modelled on the EPU. This might have allowed for more gradual, less painful internal adjustment, and cushioned the sharp fall of national income resulting from the precipitous end of the CMEA in 1991. 34 Unlike intra-EPU trade, however, intra-CMEA trade was trade among “high-cost/low-quality producers”—not a state of affairs to be perpetuated, and many CMEA countries quickly diverted their trade to the West. 35 It would have been difficult to persuade the CEE countries to enter any arrangement with the states of the former Soviet Union that appeared to perpetuate unwanted ties. A CEE-only payments union did not make much sense since trade within Central and Eastern Europe was only 15-20 percent of total CMEA trade, and there was limited scope for it to increase among a group of small economies. Once Poland, Hungary, and the Czech Republic had introduced a considerable degree of currency convertibility, a payments union became an academic question. 36
It is clear, finally, that the leaders of the Visegrad countries (Poland, Czechoslovakia, Hungary) did not share a common vision of CEE regional integration analogous to that of Schuman, Adenauer, and De Gasperi—and it would have been counterproductive to try to force them to adopt one. In the absence of a clear timetable and criteria for EU membership, moreover, CEE leaders tended to believe that Western encouragement of regionalism masked a desire to relegate them to a second division Europe. With the arrival of the opportunistic Klaus in power in June 1992, and the break-up of Czechoslovakia (leading inter alia to Slovak-Hungarian tensions), the Visegrad group’s political co-operation came to an abrupt end. 37
If the regional-integration/payments union formula—one of the keys to the Marshall Plan’s success—was not economically or politically feasible in post-1989 circumstances, a kind of functional equivalent might have been more rapid and genuine asymmetrical trade liberalisation by the EU. The asymmetry provisions contained in the Europe Agreements have been “less generous than they may appear”. 38 Greater access to EU markets would have been a boon to the CEE, while the overall impact on the EU would arguably have been slight. CEE exports to the EU today are 50-60 percent of total CEE exports, while EU imports from Central and Eastern Europe are only about 4 percent of total EU imports. The EU has run an overall trade surplus and even an agricultural trade surplus with CEE since the early 1990s. 39
As we have seen, this has not happened because of the power of vested interests to slow market access in agriculture and other “sensitive” areas, and of a general lack of enthusiasm in EU countries about making sacrifices for CEE. In late 1996, only 57 percent of Germans, 55 percent of Britons and 51 percent of Austrians thought EU enlargement was a good idea. 40 Western leaders could have explained more forcefully the economic and political advantages of helping CEE, but it is understandable why some countries (Germany) saw a more obvious interest in enlargement than others (France). And it is very doubtful, in the absence of a compelling geopolitical emergency à la 1947, whether such appeals would have had much effect.
Timing makes a difference
A final key to the success of the Marshall Plan was the continuation of generally favourable economic and political conditions that allowed Western Europe to consolidate the gains of the plan after it ended in 1951. The Korean war, despite its initially negative impact, increased orders for German industry and led to sustained growth. Trade liberalisation continued, culminating in the Rome Treaty. Supplies of labour were abundant in Italy and Germany. The rate of growth of productivity generally exceeded that of real wages and profits were ploughed back into plant and equipment. Oil and other raw material prices were low and access to them was guaranteed by the US political military-umbrella.
The collapse of communism, however, did not coincide with the beginning of a long cycle of economic growth in Western Europe. It came instead at a time of painful restructuring in response to technological and demographic change, and of fiscal and monetary stringency—resulting in anaemic growth and low demand for CEE exports—to meet the requirements of European Monetary Union. The political-ideological climate of the early postwar period had been conducive to the idea of social solidarity and the constructive role of the state. The 1980s and 1990s offered a stark contrast in this regard. Once again, the basic circumstances were different in ways that were both not easily correctable and unpropitious for Central and Eastern Europe.
50 Years On: Is it Too Late to Learn from the Marshall Plan?
There could not have been a Marshall Plan for Central and Eastern Europe after 1989, and there will be none today. The interests at stake for the Western donors were simply not as compelling as they were for the United States fifty years ago, and the tasks to be performed are difficult to compare. Nonetheless, it may not be stretching things to say that the position of Central and Eastern Europe after nine years of transition, especially of the most important frontrunner states (Czech Republic, Poland, Hungary, Slovenia, Estonia), is closer to that of Western Europe at the beginning of the Marshall Plan than it was in 1989-90, when appeals for a new plan were first heard.
Parallels to the early postwar situation
There are rough parallels, first of all, between the piecemeal and unsystematic aid efforts mounted under US and UN auspices in 1945-48 and the loosely coordinated G-24 efforts of 1989-97. Several CEE countries, having passed through an initial, “heroic” phase of liberalisation, and having resumed growth after severe contractions, have now experienced rising current account deficits as a percentage of GNP, potential political instability, and popular opposition to completing the process of industrial and financial reform. Capital inflows presently finance the deficits. Such inflows are not an unmixed blessing even while they last, and the experience of the so-called Asian tigers suggests that they may not last forever. 41
This set of problems is roughly comparable to the problems of 1947-48. After an initial period of liberalisation and recovery, Western European economies encountered balance of payments and competitiveness problems (including a large and growing trade deficit with the US) that put their continued integration into the world economy at risk. Interestingly, the gap in per capita GNP between the five front-runners and the EU in 1997, is close to that between the Marshall Plan countries and the United States in 1947. 42
In these circumstances, according to a recent analysis, “rapid [EU] enlargement poses enormous, unique, economic and political challenges to the applicants. If these challenges are not effectively met, and enlargement precipitates severe economic disruption or even impoverishment, then no amount of political goodwill can make it succeed”. Helmut Schmidt put it more bluntly: “If I were a Polish entrepreneur, I would be very alarmed. Within six months of joining the EU Poland will be wiped out, because in the fields of marketing, productivity and so on it is far from being able to compete.” According to a Hungarian observer, “Balancing growth and integration is what the negotiations are all about.” Balancing those objectives was also—roughly speaking—what the Marshall Plan was all about. 43
Drawing Conclusions
If 1947 and 1997 bear a rough resemblance, is there anything to be learned now from the experience of the Marshall Plan? It should be clear from the previous discussion that the plan provides no magic formula for Central and Eastern Europe—far from it. Nonetheless several simple, inter-related points come to mind.
First, when like the US in 1947 and the EU in 1997, you are running a large and growing trade surplus with poorer neighbours, follow Burke’s advice: “generosity in politics is not seldom the truest wisdom”. 44 Generosity would mean not only increasing the size of Santer’s proposed programme (ECU 75 billion for the financing period 2000-06), but fulfilling the promise of the original Europe Agreements, for example, by unconditionally removing all EU restrictions on agricultural and other sensitive imports and allowing free immigration from Central and Eastern Europe to boot. Another example of enlightened generosity would be to use excess money in the hands of the future European Central Bank (left from the pooling of national reserves) to liquidate part of the foreign currency debt of Central and Eastern Europe.
Second, the notion of “Accession Partnership”, functioning according to strict “accession conditionality”, is taking a leaf from the Marshall Plan book (for example, the bilateral agreements), but EU supervisors, like their ECA predecessors, will have to be patient, flexible and prepared to defer to local realities. That the Commission understands this is suggested by the following contradictory statement in Agenda 2000 :
A basic principle for the accession of new members to the European Union is that they will have to adopt the totality of the Community acquis, and that thus all Community policies will be applied to the enlarged Union, subject to such adaptations or transitional arrangements as may be agreed in the accession negotiations. On the other hand, availability of necessary resources for the adoption of the acquis is a major bottleneck. Also, costly adaptation of candidate countries in some areas could be delayed by considerations of competitive advantages and protection of domestic industries . It is nevertheless imperative that full adaptation to the EU acquis by candidate countries be realised the soonest possible. (emphasis added) 45
In reality the “imperative” of “full adaptation” will probably have to give way to the necessity of long-term “transitional derogations” which will create a de facto “Europe à la carte ” as far as Central and Eastern Europe is concerned.
Third, Marshall Plan experience suggests that when there is a trade-off, growth should be favoured over integration, and creating robust, competitive economies (second Copenhagen requirement) should have priority over adoption of the acquis (criterion three). For example, before and after accession the CEE countries should be exempted from the EMU Stability Pact and be given wide autonomy as far as exchange rate policy is concerned. If the EU could live with the devaluation of the pound and the lira after 1992, it could live with the managed depreciation of the crown and florin for a long time to come. The kind of “job-destroying wage rate policies” practised in the former DDR must be shunned. 46 The upward harmonisation of social and environmental policy must proceed at a pace that will not destroy one of the few competitive advantages possessed by Central and Eastern Europe: low labour costs.
Finally—and to sum up the lessons of the Marshall Plan—the Western Europeans, like the Americans after World War II, must keep their eyes on the political ball. There will be times when the political ends of the member states will have to override the technical criteria of the Commission, just as the State Department sometimes intervened to rein in the ECA. 47 The American technocrats were obliged to accept that liberalisation is a process in which states move at different speeds, according to their national interests, in the context of a dynamic, risk-filled world. The early postwar period saw the collapse of the International Trade Organisation project, the opt-out of Britain and Scandinavia from the European customs union, and the delay of European convertibility for many years.
Each of these developments was probably just as well. Nor would it be the end of the world if Poland opted out of certain parts of the acquis, or even if the Polish people (in defiance of their elites) changed their minds and decided to settle for the status of Norway, Switzerland or Turkey with respect to the EU. EU membership for Central and Eastern Europe is not an end in itself, it is a way to stabilise a potentially dangerous part of the world. There are ways of accomplishing this purpose other than full membership, and in some cases full membership may undermine the very stability it aims to bring about. If, moreover, a particular country promises to be more trouble than it is worth inside the EU, it should be left out. There will be times, to quote another piece of 18th century wisdom, when the best advice will be Talleyrand’s “surtout pas trop de zèle ”.
John L. Harper is Professor of US Foreign Policy and European Studies at the Johns Hopkins University Bologna Center.
Endnotes
*: This article is based on the specially prepared background paper to the conference “Lessons of the Marshall Plan for Eastern Europe”, held at Palazzo de Carolis, Rome, 29 January 1998. The author would like to thank Krista Schwarz for her help. Back.
Note 1: The Copenhagen criteria are: a) “stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities”; b) “a functioning market economy, as well as the capacity to cope with competitive pressure and market forces within the EU”; c) “the ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union”. Commission Press Release IP/97/660, DOC 97/9, Strasbourg/Brussels, 16 July 1997. See also G. Burghardt and F. Cameron, “The Next Enlargement of the European Union ”, European Foreign Affairs Review, Spring 1997, pp. 12-13, and Fraser Cameron’s comments at Castelgandolfo conference on NATO and EU enlargements, 4 October 1997. Back.
Note 2: Commission document Agenda 2000: For a Stronger and Wider Union. “An historic opportunity”. The 75 billion figure refers to the financing period 2000-06, and is to be composed of 21 billion in pre-accession aid to the ten candidates, and the rest in aid to the new members. Back.
Note 3: In May 1947. See Foreign Relations of the United States, 1947, vol. 3. Back.
Note 4: I. Wexler, The Marshall Plan Revisited (Westport, Conn: Greenwood, 1983) p. 108. Back.
Note 5: Marshall, in a radio address on Germany on 29 April 1947, said that “the patient is sinking while the doctors deliberate”. Dean Acheson described the 1947 situation as follows: “The life of Europe as an organised industrial community had come well-nigh to a halt, and with it, so had production and distribution of goods of every sort.” ( Present at the Creation (New York: Norton, 1969), p. 213). In fact, industrial production was on the upswing in most European countries by mid-1947, before the arrival of Marshall aid. Back.
Note 6: On capital formation see C. Maier, “The Two Postwar Eras and the Conditions for Stability in Twentieth-Century Western Europe”, American Historical Review, vol. 86, April 1981, pp. 341-2. Back.
Note 7: A. Milward, “Was the Marshall Plan Necessary?”, Diplomatic History, vol. 13, Spring 1989, pp. 231-53; H. van B. Cleveland, “If There had Been No Marshall Plan”, in S. Hoffmann and C. Maier (eds.) The Marshall Plan: A Retrospective (Boulder: Westview, 1984) pp. 59-64. See also M. Hogan, The Marshall Plan (Cambridge: Cambridge University Press, 1987) pp. 324-5, 431; C. Maier and G. Bischof (eds.) The Marshall Plan and Germany (New York: Berg, 1991) pp. 36-7. For an account stressing the “marketing problem”, see B. Eichengreen and M. Uzan, “The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR”, Economic Policy, April 1992. On per capita GNP (Europe defined as the 16 ERP countries, including Turkey), see US Dept. of State, Bureau of Public Affairs, “The Marshall Plan: Origins and Implementation”, June 1982, p. 16. Back.
Note 8: W. Abelshauser, “American Aid and West German Recovery”, in Maier and Bischof, pp. 383, 405-9 and in the same volume, K. Borchardt and C. Buchheim, “The Marshall Plan and Key Economic Sectors: A Microeconomic Perspective”, pp. 410-51. On Italian imports, see B. Bossone and F. Papadia, “Stability and Credibility in the Transition Process of the Previously Centrally Planned Economies: A Comparison with the post-War Italian Experience” (unpublished manuscript, courtesy of F. Papadia) p. 155. Back.
Note 9: A. Carew, Labour Under the Marshall Plan (Manchester: Manchester University Press, 1987) chaps. 9-10. Back.
Note 10: Carew, Labour Under the Marshall Plan, pp. 215, 223. See also Wexler, The Marshall Plan Revisited, pp. 93, 277 n. 102; P. P. D’Attore, “ERP Aid and the Politics of Productivity in Italy during the 1950s”, EUI Working Paper 85/159, 1985. The size of the ECA Technical Assistance Program prompts one to question the concentration of scholars like Maier on productivity as the centrepiece of the ERP. See also V. Zamagni, “American Influence on the Italian Economy”, in C. Duggan and C. Wagstaff (eds.) Italy in the Cold War: Politics, Culture and Society, 1948-58 (Oxford: Berg, 1995). Back.
Note 11: Recent analysts have exaggerated the degree of leverage provided by the counterpart funds in pursuing this goal. See J. B. De Long and B. Eichengreen, “The Marshall Plan: History’s Most Successful Adjustment Program”, in R. Dornbusch, W. Noelling and R. Layard (eds.) Postwar Economic Reconstruction and Lessons for the East Today (Cambridge, Mass.: MIT Press, 1993) pp. 215-7. Back.
Note 12: Later the Organisation for Economic Co-operation and Development (OECD). Back.
Note 13: B. Eichengreen, Reconstructing Europe’s Trade and Payments (Manchester: Manchester University Press, 1993) chaps. 1-2. Members reduced restrictions by a given percentage of their pre-existing level, usually one-half and increasing to 60 and 75 percent. See also W. Diebold, Trade and Payments in Western Europe (New York: Harper, 1952) pp. 97, 124, 172n. Back.
Note 14: Eichengreen, Ibid., chaps. 3, 5; Diebold, chap. 12. Back.
Note 15: Hogan, The Marshall Plan, p. 334; Hoffman was the head of the ECA until October 1950. Back.
Note 16: J. L. Harper, “In Their Own Image: The Americans and the Unity of Europe, 1943-1954”, in M. Bond, J. Smith and W. Wallace (eds.) Eminent Europeans (London: Greycoat Press, 1996). See also W. Diebold, The Schuman Plan (New York: Praeger, 1959) chap. 18. Back.
Note 17: To use the terminology of Bossone and Papadia in “Stability and Credibility in the Transition Process”, pp. 159-60. Back.
Note 18: Statement made at the Castelgandolfo, Italy, conference on NATO and EU enlargement, 4 October 1997. Back.
Note 19: IBRD, World Development Report, June 1996, cited in M. Nuti, “European Community Response to the Transition: Aid, Trade Access, Enlargement”, in S. Baldone and F. Sdogati (eds.) EU-CEECs Integration: Policies and Markets at Work (Milan: Franco Angeli, 1997) p. 4. Nuti cautions that since CEE economies were farther from purchasing power parity exchange rates than Western European countries, the figure may be closer to 1 percent than 2.7 percent. Back.
Note 20: IMF, World Economic Outlook, May 1997. Back.
Note 21: R. A. Mundell, “The Great Contractions in Transition Economies”, in M. J. Blejer and M. Skreb (eds.) Macroeconomic Stabilization in Transition Economies (Cambridge: Cambridge University Press, 1997) pp. 98-9. Back.
Note 22: J. Eatwell et al., Not “Just Another Accession” (London: Institute For Public Policy Research, 1997) p. 8. For criticisms of the lack of co-ordination, see also P. Miurin and A. Sommariva, “Financial and Technical Assistance to Central and Eastern Europe: A Critical Appraisal of the Role of International Institutions”, Washington Quarterly, Summer 1994, pp. 100-01; R. Portes, “From Central Planning to a Market Economy”, in S. Islam and M. Mandelbaum (eds.) Making Markets (New York: CFR Press, 1993) p. 38. Back.
Note 23: Negotiations with Poland, Hungary and Czechoslovakia began in December 1990 and went into force in February 1994 for Poland and Hungary; in February 1995 for the Czech Republic and Slovakia. Back.
Note 24: R. E. Baldwin, J. F. François and R. Portes, “The Costs and Benefits of Eastern Enlargement: The Impact on the EU and Central Europe”, Economic Policy, April 1997, p. 132. Back.
Note 25: “The PHARE Programme: An interim evaluation”, published by the Evaluation Unit of the European Commission, June 1997. It should also be noted that Phare has been criticised for not being “demand driven” enough and for neglecting investment. See Nuti, “European Community Response”, p. 4. Back.
Note 26: See Nuti, Ibid. p. 8 and R. E. Baldwin, “Progressive Economic Integration: Making the Magic Work Again”, Economics of Transition, October 1996. Back.
Note 27: Until 1993, Russia had probably received more financial resources than all other CEE-NIS combined. In 1994 it was still by far the biggest recipient (38 percent). OECD, “Aid and other Resource Flows to the CEEC and the NIS of the Former Soviet Union (1990-1994)”, (Paris: OECD,1996) p. 14. There were conservative Republicans who demanded equal aid for China, but the Truman administration managed to limit the damage. Back.
Note 28: Wexler, The Marshall Plan Revisited, pp. 249-50. US legislation did require that 50 percent of goods shipped be carried in US-registered ships. Back.
Note 29: That is, a lack of managers trained to operate in market conditions. M. Bruno, quoted in Bossone and Papadia, “Stability and Credibility”, p. 164. Back.
Note 30: IRI is the state holding company. Back.
Note 31: On the Italian economy, see Harper, America and the Reconstruction of Italy, 1945-1948 (Cambridge: Cambridge University Press, 1986), chaps. 1-3; Bossone and Papadia, “Stability and Credibility”, p. 147. See also Abelhauser, “American Aid and West German...” p. 377. Back.
Note 32: And of course it never would have happened because of political opposition on both sides. Back.
Note 33: Quoted in Harper, “In Their Own Image”, p. 80. Back.
Note 34: According to Mundell, “There is no doubt that the collapse of trade was a major cause of the contraction among the more industrialised and trade-dependent states.” ( “The Great Contractions”, p. 98). For one of many arguments in favour of a payments union, see, O. Havrylyshyn, “Trade and Payments Options for Central and Eastern Europe”, in T. Fleming and J.M.C. Rollo (eds.) Trade and Payments Adjustment in Central and Eastern Europe (London: RIIA, 1992). Back.
Note 35: On the EPU period, Eichengreen notes (following Robert Triffin) that for many product categories, European prices were as competitive as US prices, also that Europe possessed a number of “world class industries” ( Reconstructing Europe’s Trade and Payments, p. 115). Back.
Note 36: For the case against a payments union, see Z. Drabek, “Convertibility or a Payments Union?--Convertibility!” in Fleming and Rollo, pp. 55-73. See also, R. Portes, “From Central Planning to a Market Economy” in Islam and Mandelbaum, p. 47. Back.
Note 37: For a detailed discussion, see N. Costantini, “From Visegrad to CEFTA: the Limits of the Process of Regional Co-operation in Central Europe, 1990-1996”. MAIA Thesis, The Johns Hopkins Bologna Center, 1997. Back.
Note 38: According to Nuti, “Transitional economies having adopted an exceptionally liberal trade regime, asymmetry in tariff reduction still allows for a higher initial degree of protection for EU producers.” See “European Community Response”, p. 6. On this point, see Bossone and Papadia, “Stability and Credibility”, p. 171. Back.
Note 39: Baldwin, François, and Portes, “The Costs and Benefits of Eastern Enlargement”, p. 133. Back.
Note 40: “Together in Europe ”, EU Newsletter for Central Europe, vol. 2, no. 4, 1997. Back.
Note 41: Capital inflows “can pose risks of overheating, of excessive real exchange rate appreciation, and of macroeconomic volatility”. Executive Summary, EBRD Transition Report, Nov. 1997. On the mixed effects of capital inflows, see also Eatwell et al., Not “Just Another Accession”, pp. 49-50. Back.
Note 42: The GNP per head of the Marshall Plan countries, on average, was 38.3 percent of the US level in 1947. The GDP per head of Poland, Hungary, Czech Republic, Slovenia and Estonia, on average, equals 41 percent of the EU level today. Calculations based on Table One, p. 157. Back.
Note 43: Eatwell et al., Not “Just Another Accession”, p. 20; Schmidt, speaking in Sept. 1996, quoted in ibid., 28; Z. Becsey, Hungarian secretary of state for EU integration, quoted in Business Central Europe, Sept. 1997, p. 22. Back.
Note 44: The original version of Burke’s maxim is “Magnanimity in politics is not seldom the truest wisdom.” Burke continued, “Small minds and large empires go ill together.” Back.
Note 45: European Commission, Agenda 2000, “Impact Study”, Part I, Summary. Back.
Note 46: Eatwell et al., Not “Just Another Accession”, p. 56. Back.
Note 47: A case in point was October 1949 when the State Department got Paul Hoffman to tone down his appeal to the ERP countries on integration, and later to soften pressure on the British. Back.