Second Thoughts on the Common Market

KENEN, PETER B.

Trade and currency strains darken prospects of economic community SECOND THOUGHTS ON THE COMMON MARKET By Peter B. Kenen IN DECEMBER 1958, a group of West European countries executed a series of...

...Germany was apparently prepared to make the mark fully convertible some months ago...
...It will be wasted, however, unless the new French Government can hold down wages and costs...
...France's quantitative import restrictions had to be removed to make effective the tariff concessions among Common Market countries...
...The Common Market, then, may not be an unmixed blessing...
...If a country encounters difficulties during the period of transition to European economic union, the pace of tariff reduction may be temporarily diminished...
...In February 1955...
...The strength of Europe's payments position also reflects a slackening in the pace of economic growth within Europe...
...The long-term prospect for growth in the Common Market countries is favorable, but the short-term prospect is less promising...
...Output and employment have leveled out in several Western European nations and the situation in Britain has deteriorated so far as to compel a relaxation of credit controls...
...because their own industries could not fill orders fast enough...
...the British Government authorized the Bank of England to intervene in "grey markets" for inconvertible sterling—to support the price of sterling in those markets near to the official rate...
...A number of countries made their currencies fully convertible for non-residents...
...If West Germany turns protectionist, evolution toward a European Common Market will be accompanied by an intensification of restrictions on imports from outside countries...
...They have understandably tried, therefore, to keep the free-trade area proposals alive...
...Sterling has therefore been convertible into dollars, albeit at a slight discount, for the last four years...
...Surplus countries received three-quarters of the sum owed to them in dollars and extended credit to EPU for the remaining quarter...
...It is reliably reported, however, that Germany demanded convertibility if the French were to devalue the franc...
...One million dollars of imports from France, however, would have cost Britain only $750,000 in gold or dollars...
...Foreigners now have the assurance that they can redeem their sterling at will...
...are relatively slender and its commitments as a banker to other countries are enormous, the United Kingdom's financial position is also secure for the time being...
...Were this to be the case, Britain might still give agricultural countries in the Commonwealth more favorable treatment than the European countries...
...But German price stability, the source of her competitive advantage in world markets, may be otherwise explained...
...The Germans, therefore, declined to make their currency convertible until other European countries were ready to go along...
...A customs union, economists believe, is most promising when the countries concerned are actually similar in the composition of their output but potentially dissimilar...
...These measures were the first in a scheduled series designed to eliminate all trade barriers among the six at the end of 15 years, the first steps toward creation of a European Common Market...
...The French were similarly disturbed because Britain would have continued to favor its own overseas possessions over those of France, and France's agricultural exports would not have benefited...
...In addition, the six countries have established a fund to help finance economic development in France's overseas possessions...
...The Rome Treaty, which established the Common Market, distinctively reflects France's sense of economic and financial inferiority...
...During the second half of 1957, American exports of machinery and industrial materials fell off sharply...
...This proposal was acceptable in principle to the members of the Common Market and to the Scandinavian countries, which were also expected to join the free-trade area...
...Concomitantly, they need no longer surrender foreign currencies earned outside of Germany...
...The German balance of payments is among the strongest in the world...
...The West German economic recovery is among the most startling and prominent events in postwar economic history...
...The Government has recently tried to encourage West German investment abroad so as to reduce the marked disparity between Germany's foreign exchange position and that of her neighbors...
...One million dollars of imports from the United States cost Britain one million in gold or dollars...
...Each month, each memPETER B. KENEN, assistant professor of economics at Columbia University, has written for various journals...
...As a consequence of these financial reforms, the European Payments Union has been put out of business...
...Other provisions in the Rome Treaty similarly reflect French fears...
...France's reserves of gold and dollars are exceedingly low, and the French are in debt to EPU and to the International Monetary Fund...
...At the beginning of this year, France...
...Britain, however, could not enter fully into the Common Market...
...The pound remains one of the world's most important currencies and is now fully convertible for nonresidents...
...recession of 1957-58...
...As a result, French goods will now be cheaper for foreigners and foreign goods more expensive for Frenchmen...
...During the next five years $581 million will be paid into that fund, $200 million by France, S200 million by Germany and the rest by Italy and the Benelux countries...
...But countries in surplus with Germany would have been able to extract all the money owed them in dollars, by selling convertible marks on the open market...
...The devaluation of the franc by 17.55 per cent reflects French concern that its industries may be injured by tariff reduction and by the elimination, in December, of quotas on all but ten per cent of France's imports from other European countries...
...Agricultural commodities, however, are the major exports of such countries as Denmark...
...A free-trade area is a group of countries which eliminate restrictions on trade within the group but which allow member-countries to maintain their own tariffs on imports from outside...
...The British insisted that agricultural commodities be excluded from the free-trade arrangements...
...Should the two countries combine in an autarchic alliance, American export interests could be substantially injured...
...The franc was devalued by 17.55 per cent, to 493 to the dollar...
...If, however, Myrdal is correct, a European customs union will not augment economic efficiency unless it is accompanied by measures to stimulate geographic mobility—unless barriers to the movement of persons are removed, as well as barriers to the movement of goods...
...But as European currencies are now convertible, the operations of EPU can be ended...
...These monetary measures have consolidated the gains European economies have made in the last several years...
...A customs union, like the Common Market, imposes a uniform tariff on outsiders...
...Britain finds itself in an extremely precarious position today...
...In effect, France will receive on behalf of its overseas possessions $311 million more than it will pay into the fund...
...Indeed, the American government has supported, at times uncritically, most proposals for European economic integration...
...The pound has been exceedingly strong for the past year, and Britain's reserves of foreign exchange have remained at near-record levels...
...Europe's strength, however, has been purchased partly at the expense of other countries, and the gains which the Common Market countries are likely to make in the years ahead will similarly be charged to countries outside Europe and to those European countries, especially Britain, which are not members of the Common Market...
...Henceforth, foreigners will be able to buy and sell European currencies without restriction...
...When that is the case—and it is the case in Western Europe—the opportunities for eliminating inefficiency and for specialization within the union are greatest...
...Germany, Italy and the Benelux countries reduced their tariffs on each other's goods by ten per cent...
...policy favors creation of the Common Market...
...To compromise between its substantial interests in Europe and its commitments to the Commonwealth, Britain proposed that a "free-trade area" be established around the six-nation customs union taking shape on the continent...
...The economic liberalism of Germany has hitherto balanced the protectionism of France...
...The Common Market arrangements necessarily discriminate against our exports...
...It also enlarges the market available to efficient industries, encourages the introduction of mass production techniques and stimulates investment...
...Much more evidence must be accumulated before a judgment can be entered on this point...
...The other nations of Europe display a nearly pathological fear of Germany...
...Gunnar Myrdal...
...Countries in deficit with Germany might have discharged their debts through EPU, paying only three-fourths of their deficits in dollars...
...Trade within Europe, then, was to be preferred to trade beyond Europe...
...The Danes, therefore, could see no advantage in joining in a free-trade area that would require them to dismantle their barriers to British manufactures without receiving concessions from Britain on farm products...
...A reduction of tariffs exposes inefficient industries to new competition, forcing a desirable reallocation of resources...
...THE SEVERAL countries of Western Europe are not likely to feel the effects of tariff reduction—or of currency convertibility—in the same way or at the same time...
...But as the next steps toward European economic union are taken, the British will find themselves at a disadvantage...
...At an acrimonious meeting in Paris in December 1958, the French view prevailed...
...Hence, when plans for the Common Market were first announced, London tried hard to expand it—to ally Britain and the Scandinavian countries with the six parties to the Rome Treaty...
...Sterling has been virtually convertible for some years...
...Were a free-trade area to surround the Common Market, and were Britain to join that free-trade area, London might admit European goods free of duty but could still give preference to Commonwealth products over goods from other non-European countries...
...They could only exchange one European currency for another...
...But Bonn was understandably reluctant to go it alone...
...The devaluation was designed to make French exports and home production more competitive with other countries' output...
...They testify to the increased strength of European currencies relative to the dollar...
...At the same time, these countries began to standardize their tariffs on goods from other countries...
...This decline in prices must adversely affect the development programs of the poorer countries and may ultimately rebound to the disadvantage of Europe...
...In addition, Britain retains a substantial standby credit at the International Monetary Fund...
...West Germany, in fact, has extended the same privileges to its own citizens...
...American tariffs might be raised all along the line, but especially upon the manufactured goods which now bulk large in European sales to the U.S...
...Consider, first, the position of Germany...
...This is the explanation of President Charles de Gaulle's "austerity" program, and it is the issue on which his regime, like so many of its Fourth Republic predecessors, may founder...
...Moreover there are signs of recrudescent protectionism in Western Europe...
...for example, has argued that workers displaced from their jobs by tariff reduction are more apt to seek similar jobs in different communities than to take different jobs in the communities which formerly employed them...
...They are designed to promote European economic growth, not merely to consolidate European solvency...
...This would be a catastrophe for the world as a whole, for American protectionists would then have a field day...
...Because unemployment has increased in Germany's coal fields, Bonn has imposed a ten per cent tariff on imports of coal...
...As a matter of fact, the Germans eliminated important restrictions on capital exports in July 1958...
...French exports should increase and imports should decline...
...This institution was established in 1950 to facilitate recovery in European trade...
...If the underdeveloped countries earn less abroad, they will have to cut back purchases from the European countries...
...Those of the Common Market countries, moreover, are likely to gain in strength as tariff barriers are dismantled and as intensified competition promotes the reallocation of resources...
...The little experience we have had with population movements in postwar Europe suggests that migrants are not readily accepted by labor unions or by governments...
...To make matters worse, Britain is an "open" economy...
...The Germans were apparently prepared to tolerate increased French competition—an inevitable result of devaluation—provided German earnings from sales to France could be freely converted into other currencies...
...Trade and currency strains darken prospects of economic community SECOND THOUGHTS ON THE COMMON MARKET By Peter B. Kenen IN DECEMBER 1958, a group of West European countries executed a series of trade and payments decisions which promise to transform the European economy during the next two decades...
...But S511 million of the fund's resources will be spent for the development of France's overseas territories...
...Signs that this is already happening are to be found in Britain's trade statistics...
...with the slowing down of production, import demand has fallen...
...British goods will be at a relative disadvantage in European markets...
...As a consequence, German wages have risen much more slowly, and German costs have been more stable, than have those of other countries...
...it depends more heavily on foreign trade than most other major countries...
...Similarly, deficit countries paid off three-quarters of their current deficit in dollars and received credits from EPU for the rest...
...But France's greatest victory in the extended negotiations of the past two years was its triumph in December over British attempts to extend the Common Market...
...German goods have penetrated world markets with a speed and to an extent few people had anticipated...
...They also permit the Germans to enter into the Common Market with great confidence...
...The European economies, it would appear, are stronger today than they have been for many years...
...This is a gross exaggeration...
...France has changed the value of its currency...
...Until now, few foreigners could turn pounds, francs, marks or lire, earned from trade or investment, into dollars...
...Furthermore, were the mark convertible and other currencies inconvertible, Germany would have found herself in an awkward financial position...
...Germany need not fear a flood of competitive imports from France, Italy and the Benelux countries as tariffs among the Common Market nations are reduced...
...This same slackening of economic activity in Europe aggravated the U.S...
...Europeans had hitherto bought goods from the U.S...
...The German recovery is sometimes attributed to the restoration of capitalism on the banks of the Rhine...
...For it would have had to admit European goods to British markets free of duty, and, therefore, on more favorable terms than goods from British Commonwealth countries...
...Lowering tariffs will not increase imports if quota restrictions remain in force...
...For the time being, then, the British position is unimpaired...
...Furthermore, it is becoming increasingly clear that the cost of European integration will have to be borne partly by the U.S...
...In fact, the German surplus of foreign currencies has embarrassed the Bonn Government...
...These countries export the goods which Europe imports, and Europe's gains of gold and dollars reflect, in part, a reduction in prices paid to the underdeveloped countries for food and raw materials...
...MANY OBSERVERS have hailed the convertibility of sterling as a great step forward for Britain and for world trade, but have warned that the return to official convertibility could place great strains upon the pound in years to come...
...Germany's comfortable foreign exchange position and the awesome efficiency of her major industries help to explain the willingness of Germany to go further in the dismantling of exchange controls than have other countries—to place the mark beside the American and Canadian dollars and the Swiss franc...
...That, at least, is the explanation West German officials export...
...Clearly, the EPU arrangements encouraged discrimination against the dollar and other hard currencies...
...France, for example, won partial admission to the customs union for its overseas possessions...
...In fact, the shoe is on the other foot...
...And now that it is fully convertible, it is likely to be stronger than it was before...
...The financial strength which has made possible a return to convertibility is the counterpart of new difficulties for the underdeveloped countries in Asia, Africa and Latin America...
...A Conservative Government could propose that Britain align itself more closely with Western Europe but could not ask Tory backbenchers to agree to loosen the economic ties between Britain and the Commonwealth...
...Recently, however, some economists have warned that a customs union, by itself, may not increase economic efficiency very much...
...Under normal circumstances, therefore, the French ought to have been reluctant to make the franc convertible for nonresidents...
...France is a case in point...
...The destruction of West German trade unions by the Nazis and the great influx of refugees from the Soviet satellites have much diminished the bargaining power of German labor...
...The Common Market countries tried to mollify the British by extending to all countries the first ten per cent reduction in European tariffs...
...A second set of decisions introduced last December represents a distinct and novel step forward...
...Germans may now purchase foreign currencies freely and may therefore buy goods or invest anywhere in the world...
...As the financial journalists are fond of putting it, the pound, franc, mark and lire can now look the dollar in the face...
...her country reported to EPU its net payments position vis-a-vis the other countries of Western Europe...
...For these reasons, U.S...
...With the progressive reduction of tariffs among France, Germany, Italy and the Benelux countries, the United Kingdom's major export markets are likely to shrink...
...But they turned back to European manufacturers once the slower pace of European activity had allowed home industry to catch up on its deliveries...
...The temptation to "dump" sterling at the first signs of weakness in Britain's balance of payments may be consequently reduced...
...Though Britain's foreign exchange reserve...
...Its exports to Western Europe will continue to receive as favored treatment as those of any other country...
...But Britain's reserves of foreign exchange and gold are relatively small...
...since pounds can be freely exchanged for dollars, a Frenchman who sells goods to Britain for sterling can easily and legally sell all his sterling for dollars, He has no cause to put the transaction through EPU...
...By unilaterally restoring convertibility, Germany would have surrendered an important lever she might have used to extract similar measures from other countries...
...But to remove barriers to the movement of persons is not easy...
...Most economists favor creation of the Common Market because they believe it will stimulate West European economic growth...
...The exports of France's colonies will ultimately enter all six Common Market countries free of duty, but exports by those countries to the same colonies will be subject to tariffs...
...But London's next proposal was not...

Vol. 42 • March 1959 • No. 9


 
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