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ces papers - open forum
2013-2014
CENTER FOR EUROPEAN STUDIES
THE MINDA DE GUNZBURG
AT HARVARD UNIVERSITY
CENTER FOR EUROPEAN STUDIES
THE MINDA DE GUNZBURG
AT HARVARD UNIVERSITY
Imperial legacy?
The EU´s Developmental Model and
the Crisis of the European Periphery
author: Ton Notermans
C
E
S
-
ces papers - open forum # 19
Open Forum CES Paper Series
The Series is designed to present work in progress by current and former Center afliates and
papers presented at Center’s seminars and conferences. Any opinions expressed in the papers
are those of the authors, and not of CES.
Editors:
Grzegorz Ekiert and Andrew Martin
Editorial Board:
Philippe Aghion
Peter Hall
Roberto Foa
Alison Frank
Torben Iverson
Maya Jasanoff
Jytte Klausen
Michele Lamont
Mary Lewis
Michael Rosen
Vivien Schmidt
Kathleen Thelen
Daniel Ziblatt
Kathrin Zippel
ABSTRACT
1
ces papers - open forum # 19
The high hopes for rapid convergence of Eastern and Southern EU member states are increasingly being disappointed.
With the onset of the Eurocrisis convergence has given way to divergence in the southern members, and many Eastern
members have made little headway in closing the development gap. The EU´s performance compares unfavourably with
East Asian success cases as well as with Western Europe´s own rapid catch-up to the USA after 1945. Historical experi-
ence indicates that successful catch up requires that less-developed economies to some extent are allowed to free-ride on
an open international economic order. However, the EU´s model is based on the principle of a level-playing eld, which
militates against such a form of economic integration. The EU´s developmental model thus contrasts with the various
strategies that have enabled successful catch up of industrial latecomers. Instead the EU´s current approach is more and
more reminiscent of the relations between the pre-1945 European empires and their dependent territories. One reason for
this unfortunate historical continuity is that the EU appears to have become entangled in its own myths. In the EU´s own
interpretation, European integration is a peace project designed to overcome the almost continuous warfare that character-
ised the Westphalian system. As the sovereign state is identied as the root cause of all evil, any project to curtail its room
of manoeuvre must ultimately benet the common good. Yet, the existence of a Westphalian system of nation states is a
myth. Empires and not states were the dominant actors in the international system for at least the last three centuries. If
anything, the dawn of the age of the sovereign state in Western Europe occurred after 1945 with the disintegration of the
colonial empires and thus historically coincided with the birth of European integration.
Ton Notermans
Department of International Relations
Tallinn School of Economics and Business Administration
Tallinn University of Technology
Akadeemia Tee 3
12618 Tallinn, Estonia
table of contents
1. Introduction.......................................................................................................2
2. When was the Westphalian System of Sovereign States?.........3
3. Economic Convergence in the Age of European Empires........7
4. The Crisis of the European Periphery..................................................10
5. Conclusion..........................................................................................................13
6. endnotes................................................................................................................15
7. References.............................................................................................................16
2
ces papers - open forum # 19
Imperial legacy?
The EU´s Developmental Mod-
el and the Crisis of the Euro-
pean Periphery
1. Introduction
e Eastern and Southern enlargements of the Euro-
pean Union (EU) gave rise to strong hopes for a rapid
convergence of the new members towards the per
capita GDP levels of the North-Western core coun-
tries. Increasingly, these hopes are being disappoint-
ed. With the onset of the Eurocrisis in 2010 conver-
gence has given way to divergence in the southern
member states as especially the countries that are
receiving EU/IMF assistance are experiencing a dra-
matic decline in their GDP. More than twenty years
aer the disintegration of the Soviet Empire many of
the Eastern member states of the EU have made lit-
tle headway despite increasing prosperity. Per capita
GDP measured as a percentage of the German level
in Hungary, Latvia and Lithuania has barely made
any progress at all since 1991. In Poland and Estonia
instead, convergence takes place at such a slow speed
that it would take far over a century to complete it.
e EU thus compares unfavourably to the trajecto-
ries of the Asian success cases such as 19th and 20th
century Japan and post WW2 South Korea, Singa-
pore, Hong Kong and Taiwan. Indeed the current
trajectory also compares unfavourably to Western
Europe´s own rapid catch-up to the USA aer 1945.
Given Europe´s disappointing performance, there is
a need to rethink the European model of develop-
ment. Historical experience seems to indicate that
successful catch-up requires an activist developmen-
tal state which helps create comparative advantage
and to that extent temporarily discriminates against
foreign competitors in favour of nascent domestic
rms. Put dierently, successful catch up requires
that less-developed economies to some extent are
allowed to free-ride on an open international eco-
nomic order.
A necessary – but by no means sucient – condi-
tion for successful catch-up within the framework
of the EU would thus be that European integration
incorporates such possibilities for free-riding by less
developed members in its developmental model. In-
stead, the EU´s model is based on the principle of a
level-playing eld in which discrimination is consid-
ered an unfair practice. Although already included
in the Rome Treaties, it was only with the Single Eu-
ropean Act (SEA) of 1986, the deregulation of cross-
border capital ows since 1998, the agreement on
Economic and Monetary Union (EMU) followed by
the creation of the single market in nancial services
and the strengthening of competition policy since the
1980s that the notion of “level-playing eld” came to
dominate the EU´s developmental model. Accord-
ingly, that model increasingly contrasts with the vari-
ous strategies that have enabled successful catch up
of industrial latecomers. Instead the EU´s approach,
both in terms of mechanism and outcomes is more
and more reminiscent of the relations between the
pre-1945 European empires and their dependent ter-
ritories.
One reason for this unfortunate historical continuity
is that the EU appears to have become entangled in
its own myths. e ocial view sees integration as a
peace project designed to overcome three centuries
of almost continuous war in the Westphalian system
of sovereign (nation) states. As the sovereign state is
identied as the root cause of all evil, any project to
curtail its room of manoeuvre must ultimately seem
to the benet of the common good. Yet, the existence
of a Westphalian system of nation states is a myth.
Empires and not states were the dominant actors in
the international system for at least the last three cen-
turies. As its imperial legacy has disappeared from
view, so has the fact that, European empires failed
dismally in their self-proclaimed task of propelling
their dependent territories to prosperity. As a result
of this historical blind spot the EU´s hope of becom-
ing a “model power” for the rest of the world seems
vain. Rather than marking the return to the inter-
3
ces papers - open forum # 19
First, state boundaries were precisely dened replac-
ing the medieval system of frequently overlapping
territories. Secondly, within these borders states en-
joyed absolute sovereignty. irdly, the principle of
Westphalian sovereignty implied acceptance of the
principle of non-intervention in the domestic aairs
of other states.
Historical research has not been kind to the hypoth-
esis of a Westphalian system. One line of criticism fo-
cuses on the account of the treaties that has entered
most International Relations texts. e treaties as
such in no way were the watershed they are depicted
to have been. Some features of the Westphalian sys-
tem existed prior to it and others came into being only
later. (Durchhardt 1999:308). e principle of cuius
regio, eius religio was abolished instead of established
by the treaties (Osiander 2002: 272). Nor did the trea-
ties enshrine the principle of inviolable Westphalian
sovereignty as the non-German signatories, France
and Sweden, reserved the right to intervene on the
territory of the Holy Roman Empire of German Na-
tion (Winckler 2009: 125-6).
More relevant for the current purpose, is the fact
that violation of Westphalian sovereignty was and
remained the norm rather than the exception (Kras-
ner 1999). e main reason for this was that power
disparities between political units made empires and
not states the dominant political actors. As John Dar-
win (2007: 23) has expressed it elegantly: “Indeed, the
diculty of forming autonomous states on an eth-
nic basis, against the gravitational pull of cultural or
economic attraction (as well as disparities of military
force), has been so great that empire (where dier-
ent ethnic communities fall under a common ruler)
has been the default mode of political organization
throughout most of history. Imperial power has usu-
ally been the rule of the world.” (See also Osterham-
mel 2009 Ch. 8; Tilly 1997: 2).
Empires, in contrast to nation states do not derive
legitimacy from a common national identity but
are multi-ethnic constructs with a more or less pro-
national prestige it enjoyed during the 19th century,
Europe´s new empire may rather mark the last phase
of its international decline.
e remainder of this paper is structured as follows:
Section two argues that if there ever was an age of the
nation state in Western Europe it coincided with its
alleged demise aer 1945. Section three reviews the
obstacles to convergence in the age of empires. Sec-
tion 4 argues that whereas the successful catch-up of
West European economies aer 1945 was predicated
on a heavily interventionist state, the developmental
model the EU applies to its periphery is very much
the opposite. Section ve concludes by arguing that,
at least in the short to medium term, the prospects
for solving the EU´s crisis are dim. Because competi-
tiveness has replaced comparative advantage as the
alleged key to success in the global economy, the EU
has turned economic development into a zero-sum
game such that successful catch-up by the periphery
will almost inevitably be interpreted as a threat by the
core states.
2.When was the Westphalian System of Sovereign
States?
European integration is commonly interpreted as a
breath-taking new departure, coming as it did aer
the three-century-long reign of the Westphalian sys-
tem in which states jealously guarded the absolute
sovereignty they enjoyed within their clearly dened
borders while trying to increase their power by means
of warfare. e beginning of European integration
hence appears as a Stunde Null; an entry unto new
and uncharted territory with the implication that the
past can provide little guidance to the future other
than that a failure to encroach on the prerogatives
of the members states in favour of supranationalism
will doom Europe.
e Westphalian system takes its name from the
Peace Treaty of 1648 that ended the thirty years war.
e international system it is said to have ushered
in diered in three respects from what went before.
ces papers - open forum # 4
nounced hierarchical order between the various ter-
ritories that constitute it. Empires do not have pre-
cisely dened borders, because, as was oen the case
with European colonial empires, on their frontiers
they met grey zones of uncertain political belonging.
Finally empires generally lay claim to authority be-
yond their borders, through such constructs as infor-
mal empire and zones of inuence.
European empire building had started with Vasco Da
Gama’s rounding of the Cape in 1498 and Columbus’
voyages to the Americas, which would result in Por-
tugal, Spain, France, England, and the Netherlands
each acquiring vast overseas possessions. But the
empires of the Atlantic powers were by no means the
only ones. Aer 1480 the Muscovite Rus commenced
an unrelenting expansion that eventually resulted in
an empire spanning almost all the length of Eurasia.
e conquest of Constantinople in May of 1453 lay
the foundations of the Ottoman Empire, which con-
trolled the Balkans, Anatolia, the modern Middle East
and most of North Africa at the height of its power.
To the north-west of the Ottoman Empire, substan-
tial areas from modern-day Ukraine and Poland,
the northern Balkans, Bohemia and Northern Italy
formed part of the Austro- Hungarian empire. Fur-
ther to the North lay Prussia, no doubt the least of the
European empires until well into the 19th century. Its
rise dated from the conquest of Silesia in 1740, one
of Austro-Hungary’s richest provinces. Almost an-
nihilated by Napoleon, it emerged from the peace of
1815 with substantially expanded possessions in the
Rhineland. Apart from Scandinavia, where Sweden
largely had to abandon its imperial ambition on the
continent by the 18th century, paradoxically only the
non-Prussian parts of the misnamed Holy Roman
Empire of German Nation, Switzerland and parts of
Northern Italy were governed by political units that
were both too small and internally too homogeneous
to be classied as empires.
Nor would it seem correct to locate the start of the
age of the nation-state in the 19th century. Also in
this case historical research has not been able to un-
earth much evidence for the hypothesis that in 19th
century Europe organic national communities united
by a strong common identity successfully managed
to overcome imperial rule. Instead 19th century na-
tionalism appears primarily an elite driven-strategy
with only limited success (Bayly 2004: 205; Gellner
1981, Hobsbawm 1992, Tilly 1994). For local elites,
nationalism held out the lucrative prospect of gaining
control of the monopoly to tax, but it was tempered
by the improbability of survival as an independent
state in a world of empires.
19th century Europe witnessed the rise of only eight
new states. Five of them had previously been part of
the Ottoman Empire (Greece 1832, Romania 1856,
Montenegro 1860, Serbia and Bulgaria 1878). e
remaining three states were Belgium, Germany and
Italy. Belgium was created in 1830 aer having been
part of the Netherlands for 15 years. Italy was united
in stages between May 1859 and September 1870.
Germany was unied under Prussian leadership aer
the war of 1870-71 against France.
Whether and when new states did emerge had little
to do with the strength of nationalist movements but
much more with great power politics (Davies 1997:
815). e Balkan states including Greece owed their
existence to a common British, French and Russian
interest in weakening the Ottoman Empire. Not sur-
prisingly, these new states did not enjoy Westphalian
sovereignty but essentially exchanged formal incor-
poration into an empire for membership in the infor-
mal empires of France and Britain.
Prussia very likely would not have succeeded in uni-
fying Germany against the wishes of Austria if the
Crimean war had not broken up the Austro Rus-
sian alliance. Likewise Italian independence would
have been impossible without French support aimed
at weakening the Austrian Empire and without the
Prussian-French war that toppled Napoleon III
and allowed the Italian government to seize the pa-
pal states (Winckler 2009: 812). e Belgian revolt
against the Netherlands would hardly have succeeded
19
ces papers - open forum # 5
without the support of French troops and British dip-
lomats, as well as the refusal of Prussia and Austria to
side with Czar Nicolas I who was eager to intervene
on the side of the Dutch king (Winckler 2009: 516-7).
Unlike the Balkan states, Belgium, Germany and
Italy could mount a stronger claim to Westphalian
sovereignty, but this exactly dened their anomalous
position as states without dependent territories. Bel-
gium overcame this anomaly when its king managed
to convince the participants of the 1885 Berlin Con-
gress to grant him the lion’s share of the Congo basin.
German foreign policy increasingly came to focus
on acquiring imperial possessions, especially aer
Chancellor Bismarck´s resignation in 1890. Italy was
soon to direct its attention towards northern Africa.
Having lost its overseas territories at the end of World
War 1, the German conviction, shared equally in Ja-
pan, that a densely populated nation-state heavily de-
pendent on trade would hardly be able to defend its
independence in a world of empires became one of
the main causes leading to World War 2; particularly
aer the Great Depression when many European na-
tions were tempted to withdraw behind the protective
walls of their empires.
e disintegration of the Ottoman and Habsburg
Empires and President Wilson’s insistence on the
nationality principle for redrawing borders did cre-
ate a host of new nation states, while simultaneously
extending the French and British (informal) empires
in the middle east. Yet, for Eastern and Southern Eu-
ropean nations independence was short-lived as they
were gradually drawn into Germany’s informal em-
pire followed by inclusion in its formal empire, again
to be exchanged for a somewhat longer lasting inclu-
sion in the Soviet Empire.
At best, one could argue that the nation state became
the prevalent form of political organisation in West-
ern Europe only aer 1945. Decolonisation reduced
Belgium, the United Kingdom, the Netherlands and
Italy from empires to nation states. e defeated
Germany had lost its Eastern Empire and a signi-
cant chunk of its own territory to the Soviet Union.
Moreover, as a result of the combined eects of the
Great Depression and War, international economic
relations remained far more regulated than they had
been before 1914 and national governments thus ex-
erted a much strengthened authority over their own
territory. Accordingly, the age of the nation-state co-
incided with its alleged demise at the hands of Euro-
pean Integration.
Moreover, since its inception in 1958 the EU (EEC)
gradually acquired all the salient attributes of an Em-
pire (Zielonka 2006; Anderson 2007:19). It does not
derive legitimacy from a common national identity,
but is a “multi-ethnic conglomerate held together
by transnational organizational and cultural ties,” to
use Deepak Lal’s (2003: 29) denition of empire. Like
an empire, the EU has fuzzy borders and multiple
power centres. Not being a governance structure for
a clearly delineated and easily recognisable national-
ity, the question of where the natural borders of the
EU lie can only have more or less arbitrary answers.
Like empires, the EU reaches beyond its borders. e
informal empire of the 19th century nds its corol-
lary in the EU’s various neighbourhood programmes,
which seriously compromise the sovereignty of these
states (Zielonka 2008).
Of course, the mechanism and forms of this new su-
pranational construct were novel; but then again, this
equally applied to the succession of dierent empires
that had populated the globe in earlier times. With
some exceptions, smaller entities were oen force-
fully incorporated into Europe´s pre-1945 empires.
Post-1945 enlargement of the EU functioned accord-
ing to a fundamentally dierent principle, especially
since the 1993 EU Copenhagen summit when strict
eligibility criteria were set for new entrants. Yet, this
dierent mechanism of enlargement does not suce
to make the EU an entity sui generis. e pre-1945
empires could not have survived for as long as they
did without being able to count on the cooperation
of local elites that perceived clear benets from the
arrangement (Hobsbawm 2008: 79-80). Essentially,
what held those empires together was that they pro-
19
ces papers - open forum # 6
vided both political and economic security to the
core and held out the promise of political and eco-
nomic modernization to the periphery. In important
respect, the motives that drove European integration
were thus similar to the gravitational pull that al-
lowed empires to overcome the centrifugal forces of
nationalism.
Aer having lost its Indonesian colony, the Dutch
government expected economic catastrophe and ea-
gerly looked to gain better access to European mar-
kets. Much the same held true for West Germany
which had seen its traditional trade relations with the
East cut o. In addition, of course, integration with
its European neighbours was a necessary condition
for Germany to regain its sovereignty. Britain’s initial
refusal to join the Common Market had much to do
with a mistaken belief in the continuing strength of
its empire.
For France, much of the attractiveness of European
integration derived from the possibility to undo at
least some of the radical drop in status it had experi-
enced as a result of the Second World War. With Ger-
many unable to lead, integration held out the promise
of increasing France´s standing in the world by plac-
ing it at the head of a European block. Moreover, inte-
gration also helped France to hold on to what was le
of its empire. Robert Schuman may have presented
the ECSC (European Coal and Steel Community) as
a means to make war between Germany and France
impossible, but securing German coal for its steel
industry certainly helped France continue its colo-
nial wars. In addition, part of the concessions France
obtained for its agreement to the Common Market
consisted in EEC nancial support for the cost of the
remaining French empire.
For the countries that joined the EU in the 2004 and
2007 enlargements, prosperity and security from a
possible reawakening of Russian appetites provided
the crucial motives for relinquishing part of their
sovereignty almost the moment they had regained it.
Similarly for what is now the southern periphery of
the Eurozone, probably the most decisive argument
in favour of EU membership was economic moderni-
sation.
Hence, the emergence of European integration, in a
sense, may be considered business as usual as it con-
rmed that Westphalian states rarely are viable enti-
ties in the international system. When Jean Monnet
was voicing his conviction that the resources of the
nation states no longer suced (Bache & George
2006:95), he was not so much expressing a radically
new view but a rather widespread conviction that em-
pire was necessary for prosperity.
Blotting out Europe´s imperial past in favour of an
imaginary Westphalian system, however, serves to
seriously constrain the understanding of European
integration. First, as Jan Zielonka (2006), and others.
(Beck & Grande 2010, Colomer 2007) have pointed
out, awareness of the historical role of empires helps
to discern alternative future trajectories beyond the
unhelpful dichotomy of a United States of Europe
versus the dominance of the nation state. Secondly,
by postulating that the dominance of (nation) states
is coterminous with warfare, successful integration
becomes coterminous with more supranationalism
and a-priori excludes the possibility that (certain
forms of) suprantionalism may in fact be inimical to
successful integration. ird, seeing the Westphalian
state as the historical standard, European integration
becomes a construct sui generis, which means that
Europe’s past cannot hold many useful lessons.
In contrast, the realisation that “supranational” em-
pires have traditionally been the dominant actors in
international relations, almost inevitably invites com-
parison of the EU to its imperial predecessors. How
does the EU dier from these previous supranational
constructs? What where the strengths and weakness-
es of such Empires and how can the former be ampli-
ed and the latter avoided in contemporary Europe?
19
ces papers - open forum # 7
3. Economic Convergence in the Age of European
Empires
e main weakness of the European empires, no
doubt, was the failure to develop their peripheral ar-
eas. Although generally justied in terms of a mis-
sion to bring civilisation and prosperity to its colo-
nies, European overseas imperialism coincided with
a “Great Divergence” in per capita GDP levels in the
world economy. Europe did already have a head-start
at the beginning of the 16th century, but at that point,
according to the estimates of Angus Maddison, Asian
per capita GDP still stood at roughly 74% of the West
European level. By 1950 it had fallen to about 14%
(Table 1).
e ocial justication underlying 19th century
European attitudes towards development of the pe-
riphery, as well as much of current thinking, was that
free trade, free capital movements and gold standard
membership would suce to bring about conver-
gence. European industrialisation did indeed cre-
ate buoyant markets for the producers of primary
goods in the periphery and a stream of foreign in-
vestment (mainly British) that helped to create the
necessary infrastructure for this trade. Especially
from the 1870s to 1914 solid export growth allowed
many primary producers to record rates of GDP
growth comparable to those in the core countries
(Findlay & O´Rourke 2007: 414-15). But specialisa-
tion in primary products did not lay the foundations
for sustained convergence as spectacularly demon-
strated by, for example Argentina whose per capita
GDP in 1913 was on a par with that of the indus-
trialised countries (della Paolera & Taylor 2001: 7).
What was needed for sustained convergence was di-
versication and especially a domestic manufactur-
ing base (Williamson 2006: 147), and this in turn
required high levels of investment, i.e. strong invest-
ment demand had to be matched by an ample sup-
ply of investment funds. As argued in early work by
Alexander Gerschenkron (1962), and subsequently
conrmed by more recent research (Amsden 2004;
Chang 2003; Lin & Chang 2009; Reinert 2007; Ro-
drik 2007), late development of manufacturing de-
pended critically on active state involvement. Partly
due to economies of scale, underdeveloped systems
of investment nance, long learning curves in manu-
facturing, coordination problems due the imperfect
tradeability of intermediate goods and the absence
of a domestic entrepreneurial class, less-developed
economies could not hope to catch-up by relying en-
tirely on the market mechanisms.
As rst argued by Alexander Hamilton (1791) and
later popularised and diused in Europe by Friedrich
1500 1600 1700 1820 1870 1913 1950
Total Western Europe 774 894 1024 1232 1974 3473 4594
Total Western Offshoots 400 400 473 1201 2431 5257 9288
Total Latin America 416 437 529 665 698 1511 2554
Japan 500 520 570 669 737 1387 1926
Total Asia (excluding Japan) 572 575 571 575 543 640 635
Africa 400 400 400 418 444 585 852
Table 1: World GDP per Capita since 1500 AD
(1990 international $)
Source. Maddison 2001: 264
19
ces papers - open forum # 8
List (1885), one upshot of this view was that nascent
industries required tari protection. Although such
infant industry taris came to be widely employed in
the periphery, especially since the interwar period,
the strong focus on taris was misplaced. Taris were
one and not even a necessary element in a broader
strategy of late industrialisation. e use of taris
alone would suce only if a nascent industry was al-
ready present or could be assumed to spring up auto-
matically in response to changed price signals. Lack
of industrial experience and the many coordination
problems involved in creating a diversied manu-
facturing base from scratch implied that such was
not necessarily the case. Late industrialisation thus
required a broader strategy of what (Chang 2003)
has called Industrial, Technology and Trade policies
(ITT). ITT strategies in general comprise a mix of
horizontal and vertical state aid, such as upgrading
of the education system and the transport infrastruc-
ture, promotion of research & development, model
factories, state owned companies, subsidies to prior-
ity sectors as well as selective credit allocation, prefer-
ential access to foreign exchange, dual exchange rates
or undervalued currencies.
At rst sight, interference with open capital markets
and the rejection of xed exchange rates, the other
pillars of classic European liberalism, might not seem
to be in the interest of convergence. Foreign invest-
ment, of course would allow the periphery to accu-
mulate capital at a much faster rate than by relying on
domestic savings alone. Moreover, there is substantial
evidence that adherence to the Gold Standard low-
ered borrowing costs (Obstfeld & Taylor 2003) and
promoted trade (Flandreau & Maurel 2005). Yet, -
nancial and monetary integration oen turned out to
be a two-edged sword. Exchange rate manipulation
could eectively complement or substitute taris in
promoting domestic manufacturing. Indeed, India
was placed on the Gold Standard by the British ad-
ministration in 1892 mainly because its depreciating
silver standard was seen to confer an unfair advantage
on its exports. e advantages of lower borrowing
costs could be easily oset by the destabilising eects
of a speculative overexpansion of credit followed by a
sudden drying up of foreign funds. e costs would
multiply if default and devaluation were eschewed in
such a credit crisis in favour of austerity and defence
of the gold parity (McLean 2006). Indeed, many ana-
lysts of the pre 19-14 Gold Standard concluded that it
served to destabilise peripheral members (Galarotti
1995:37-41; Notermans 2012). Finally, adherence to
the Gold Standard in times of relative gold scarcity
would inhibit the ability of monetary policy to pro-
mote an ample supply of domestic investment funds
necessary for sustained growth.
As state-led development strategies proved necessary
for catch-up, the relation of peripheral countries to
the metropolitan areas was of crucial importance.
Colonies were most restrained in this respect as they
were not permitted signicant deviations from the
free trade doctrine and colonial administration did
not count industrial development amongst their pri-
orities. As Josiah Child (Child 1751), director of the
British East India Company, had already set out in
1751, European nations should assign their colonies
to the role of suppliers of raw materials and consum-
ers of European goods and investment while prevent-
ing them from turning into competitors for Euro-
pean manufactures. As a result none of the colonies
managed to catch up under European rule and India,
which clearly was technologically more advanced
than Britain in the crucial area of textiles as late as the
beginning of the 19th century, experienced substan-
tial de-industrialisation under British rule (Ferguson
2004: 369).
Partly as a reaction to the revolt of the American colo-
nies in the late 18th century, the British dominions of
Canada, Australia and New Zealand, enjoyed much
more autonomy. Home Rule, was granted to all of
them early on, and this included the right to set their
own taris; a right which they used liberally in an ef-
fort to promote their own industrialisation (Findlay
& O´Rourke 2007: 395). Moreover, the Dominions
benetted from a continuous inow of British and
Irish immigrants which brought with them the skills
19
ces papers - open forum # 9
and entrepreneurial experience most colonies were
lacking, while Australia, in addition received large
amounts of British subsidies in the rst decades aer
the founding of a British penal colony there in 1788
(Boot 1998). As a result the British dominions, along-
side the breakaway colony of the USA were the only
countries to successfully close the development gap
with Europe before Japan embarked on its ascent in
1868.
Although they were less constrained than the colo-
nies, the techniques of informal imperialism meant
that even formally independent states might enjoy
less autonomy in some crucial policy areas than the
dominions in the British system (Gallagher & Rob-
inson 1953). Especially since the second half of the
19th century European colonial powers employed
such techniques to open markets, secure supplies of
raw materials and protect its investors from sovereign
default. Japan, China, the Ottoman Empire and a host
of other countries signed so-called unequal treaties
that seriously circumscribed their sovereignty; espe-
cially with respect to taris, market access and trade.
(Findlay & O’Rourke 2007: 400-402). Ottoman tar-
i autonomy, for example had already been largely
lost in 1838 in exchange for British support against
Egypt’s Mehmed Ali Pasha, and was never recovered.
Sovereign default repeatedly served as another route
through which European powers constrained the
economic policy options of independent territories
(Fishlow 1985: 403-4). e 1832 treaty recognising
Greek independence, for example, limited its scal au-
tonomy in the interest of debt service. Not unlike the
proposals oated by Merkel and Sarkozy in February
of 2012, western creditors placed scal policies under
the control of the International Finance Commission
(IFC) when the country proved unable to service its
debt aer defeat in the war with the Ottoman Em-
pire in 1897. e IFC controlled a large part of public
revenues and had a veto on the issuing of new debt.
(Andreopoulos 1988; Lazaretou 2004). In response to
the Ottoman default of 1875, Britain and France es-
tablished the Public Debt Council which eectively
placed the management of Ottoman public nances
into their hands (Anderson 1964, Pamuk 1987). Sim-
ilar devices were used in the Balkans (Tooze & Ivanov
2011). In Egypt, where Anglo-French control of pub-
lic revenues aer the sovereign default of 1875 pro-
voked a nationalist backlash, the British instead saw
it necessary in 1882 to proceed from informal empire
to occupation.
But a considerable degree of autonomy from the Eu-
ropean empires was a necessary but not a sucient
condition for successful development because auton-
omy neither implied a willingness to pursue such pol-
icies nor the presence of a state apparatus that could
prevent such a strategy from degenerating into pure
rent-seeking. In 19th century agricultural exporters
such as Argentina and Brazil as well as the confed-
erate US states, policies of forced industrialisation
could not necessarily command political support,
particularly in times of improving terms of trade. e
production of export crops by means of a latifundia
system created a strong interest of the political elites
in free trade, exchanging agricultural exports for
manufactured imports. When many Latin American
countries did embark on an inward looking develop-
ment policy since the Great Depression serious prob-
lems of crony capitalism developed. e constellation
was much the opposite in the Northern states of the
USA, which became the most successful early case of
catch-up aer they had broken away from the Brit-
ish Empire in the late 18th century and embarked on
highly protectionist trade policies.
In the end, outside of the European oshoots the con-
ditions for successful convergence before 1945 were
only met in Japan. e threat of colonisation and
the absence of concentrated primary good export-
ers ensured the political primacy for a programme
of forced industrialisation aer 1868. Japan did not
enjoy tari autonomy between 1858 and 1911 but
this handicap was compensated for by extensive use
of horizontal and vertical state aids. An exceptionally
centralised and ecient state apparatus insured that
such strategies could be implemented eciently. e
central government´s ability to raise substantial tax
19
ces papers - open forum # 10
revenues made this strategy invulnerable to exces-
sive foreign indebtedness. Indeed, the example of the
British occupation of Egypt in 1882 provided a strong
incentive in the rst decades of the Meiji era to avoid
signicant foreign public indebtedness (Jansen 2000:
373), and for similar reasons private foreign direct in-
vestment was discouraged. Finally, Japan joined the
Gold Standard only in 1897, a time when silver-based
currencies were appreciating (Mitchener, Shizume &
Weidenmier 2010: 29).
4.e Crisis of the European Periphery
e post-1945 history of Western Europe itself con-
rms that catch-up required an interventionist state
and the active management of international econom-
ic relations. Aer two world wars and one Great De-
pression, Western Europe´s lead over the rest of the
world by 1945 had been lost. In 1950 French, Ger-
man and Italian per capita GDP stood at 55%, 41%
and 37%, respectively, of the US level (Maddison
2001: 264). Economic catch-up then became the most
pressing priority of West European governments.
e initial American plans for the post-war order
might have hindered convergence as they envisaged
free trade, xed exchange rates, current account con-
vertibility and the end of European imperial prefer-
ences; a combination which would have allowed the
US to exploit its economic superiority to the full.
With the emergence of the cold war, that programme
was unceremoniously scrapped in favour of the Mar-
shall plan, a massive devaluation of almost all West
European currencies against the Dollar in 1949, and
support for closer economic cooperation which al-
lowed Europe to discriminate against US trade.
Hence it was with US support that Western Europe
tackled the task of catch-up on the basis of a further
substantial increase in the role of public authorities
in economic management. In Britain, the Labour
government of Clement Attlee, elected in late 1945,
embarked on a programme of nationalisation of stra-
tegic industries. e French government, and to a
lesser extent the Dutch one, instituted an ambitious
programme of indicative planning in what was to
become a highly successful policy of forced indus-
trialisation. Tax policy in virtually all countries was
designed to promote industrial investment. Similarly,
almost all governments kept interest rates low while
employing selective credit rationing in order to chan-
nel investment funds to priority sectors and keep in-
ationary pressures arising from the monetary over-
hang at bay. Public involvement in wage-bargaining
increased signicantly with a view to keeping ina-
tion down and promoting the competitiveness of
manufacturing, the extreme case being the Nether-
lands where wages were de facto set by the govern-
ment until well into the 1960s.
Highly cautious liberalisation of external economic
relations was part and parcel of this strategy. No at-
tempt was made to resurrect the Gold Standard. Con-
trary to what had been envisaged at Bretton Woods
in 1944, currencies remained inconvertible until
late December 1958 and parity adjustment were fre-
quently used aerwards to correct external imbalanc-
es. Convertibility for capital account transactions was
introduced in all EU member states only aer Coun-
cil Directive 361 of 1988. Trade liberalisation made
little headway until the mid-1950s when the post-war
boom was well under way, and even then, introduc-
tion of a customs union for goods with a common
external tari between only six members meant that
competition from non-members was kept at bay.
By the 1980s the gap with the USA had largely been
closed, but that same decade saw the beginnings of a
widening gap within the EU as a result of the Mediter-
ranean (1981, 1986) and Eastern enlargements (2004,
2007, 2013). In 2012 the per capita GDP of the richest
member, Luxembourg was more than 15 times that of
Bulgaria, the poorest members, while the per capita
GDP of Denmark, the second richest country - still
exceeded the Bulgarian one by more than 8 times.
e convergence performance of the EU´s own pe-
riphery is disappointing compared both to western
Europe´s own performance aer 1945 as well as Ja-
19
ces papers - open forum # 11
pan and the so-called four Asian tigers. Post-1945
Japan managed to catch up in a little over three de-
cades, Western Europe took roughly four decades,
and South-Korea, which started from a much more
unfavourable position in 1955 than the new member
states, did so in about ve decades.
Table 2 shows per capita GDP as a percentage of the
German level of the GIIPS countries in 2011 and
the year of their accession. Greece and Italy actually
are poorer compared to Germany than they were in
1981 and 1970, respectively. In the 27 years that have
elapsed since their accession, Portugal and Spain have
only made very modest progress. e only exception
to this pattern is Ireland whose speed in catching up
is reminiscent of Japan and South- Korea.
With the exception of Poland and the Slovak Repub-
lic, the eight Central and Eastern European (CEE)
countries that joined in 2004 have made very little
progress at all. While one should not expect miracles
in a span of seven years, the picture does not improve
much when comparing the 2011 level with 1991. Es-
tonia and Poland have made notable progress, but it
still took Estonia two decades to reduce the gap to
Germany by about 10 percentage points, and at that
speed it would take more than a century to close
the gap. Hungary, Latvia and Lithuania instead have
made no progress at all.
Paradoxically, perhaps, the EU´s strategy for pro-
moting economic convergence did not build on the
lessons of empire and post-1945 success. e disap-
pointing performance of the core countries itself
provides the main explanation. Despite the Com-
mission’s belief that the various step towards further
integration, from the SEA to EMU and enlargement,
would boost growth, and notwithstanding the Lisbon
Strategy´s high-ying ambition to become “the most
competitive and dynamic knowledge-based economy
in the world” by 2010, overall GDP growth rates in
the Union have been disappointing compared to the
post-war decades while mass-unemployment has be-
come an endemic problem. Against this background
competitiveness came to be seen as the key to growth
with the EU de facto embracing a theory of absolute
advantage. In Ricardo´s classic focus on static com-
parative advantage the lower cost structures of pe-
ripheral countries are not a threat to more developed
economies as they reect the overall lower productiv-
ity levels of these countries. e heterodox focus on
dynamic comparative advantage, in addition, derives
a need for an activist developmental state. Instead, in
the EU´s focus on competitiveness, both features are
Table 2: GIIPS GDP Per Capita as a
Percentage of the German Level
Per Capita GDP
(%)
Year of
Accession
Year of
Accession 2011
Greece 1981 58.82 47.73
Ireland 1973 61.44 105.76
Italy 1970
1
79.88 72.26
Portugal 1986 39.60 44.08
Spain 1986 54.36 58.87
Notes: 1, earliest year of data availability.
Source: Calculated on the basis of GDP/Capita in
constant 2000 US$, World Bank, World Development
Indicators Database.
19
Table 3: CEE GDP Per Capita as % of
German Level
1991 2004 2011
Czech Republic 23.40 28.17 30.25
Estonia
1
13.57 23.34 24.90
Hungary 22.24 23.14 21.93
Latvia 19.96 19.40 20.34
Lithuania 21.89 19.21 22.11
Poland 15.82 21.54 26.16
Slovak Republic 27.12 27.18 33.17
Slovenia 42.66 49.12 48.42
Notes: 1, 1995
Source: Calculated on the basis of GDP/Capita in constant 2000
US$, World Bank, World Development Indicators Database.
ces papers - open forum # 12
considered a potential threat to the more developed
economies. Competition from low-wage countries is
seen to threaten a race to the bottom in labour and
social standards and many features of a developmen-
tal state are said to confer an unfair competitive ad-
vantage.
On the global level, these perceived threats informed
the EU´s strategy of “Managed Globalisation”, which
is built on the notion that the liberalisation needs to
be accompanied by regulatory harmonisation. As it
would improve e.g. labour, safety and environmental
standards, many EU ocials and some scholars in-
terpret harmonisation as a mutually benecent social
democratic alternative to the Anglo-Saxon strategy of
liberalisation tout court (Abdelal & Meunier). e re-
jection of this strategy at the 2003 Cancun ministerial
meeting of the WTO showed that emerging econo-
mies instead tend to interpret it as an attempt to “kick
away the ladder.”
e enlargement strategy is informed by much the
same desire to maximise the EU core countries’ op-
portunities in the new member states and minimise
the threats from them by means of a mix of liberalis-
ing and regulatory measures.
e most damaging blow to the economic prospects
of the periphery would seem to be the combination of
a single currency, the abolition of capital controls and
the creation of a single market in nancial services.
Since the late 1990s, when the Euro was introduced
and it became clear that the CEE countries, who gen-
erally xed their exchange rates to the EU by such
means as ERM2 membership and currency boards,
would join the EU shortly, interest rate dierentials
virtually disappeared and substantial capital inows
nanced large current account decits. As a result
GDP growth rates in Europe were higher in the East-
ern periphery and in Spain and Greece until 2007.
at decade thus seemed to conrm the EU´s con-
viction that economic liberalisation plus the Acquis
equals convergence.
All this changed since 2008, when the nancial sys-
tems of the metropolitan countries came under stress,
thus confronting the periphery with a sudden drying-
up of capital inows, not unlike the “sudden stop” cri-
ses that destabilised peripheral countries during the
classical Gold Standard (Notermans 2012). Countries
like the Czech and Slovak republics and Hungary,
where a substantial share of foreign direct investment
(FDI) had been employed in manufacturing enjoyed
some protection from sudden stops, whereas in the
Baltics, Spain and Ireland, where capital inows fu-
elled real estate booms, the collapse in GDP aer
2008 was on a scale not seen since the Great Depres-
sion. In Greece, instead, the bulk of capital inows
had nanced the public decit.
e original aim of introducing the common cur-
rency or xed exchange rates was to promote struc-
tural reforms by forcing employers and trade unions
to internalise the eects of wage and price setting
decisions. But the mere impossibility of devaluation
proved insucient to eradicate deeply rooted dier-
ences in industrial relations systems such that xed
exchange rates commonly implied real appreciation.
is eect was greatly strengthened by massive capi-
tal inows with the result that what was le of po-
tentially competitive export industries was further
weakened.
While fuelling a speculative boom, adherence to the
common currency in turn deepened the recession.
e experience of the pre-1914 gold standard would
seem to indicate that devaluation and default would
minimise the costs in terms of GDP for peripheral
countries confronted with a sudden stop. (McLean
2006) Adherence to the common currency instead
dictated a policy of austerity and internal devalua-
tion, which was not only a recipe that prolonged the
crisis - dramatically so in the Southern Eurozone –
but also one that could not succeed in the aggregate.
In addition to macroeconomic policies, European
integration also placed successively tighter limits
on the use of ITT policies (Scharpf 2002: 648). e
abolition of capital controls and the harmonisation
19
ces papers - open forum # 13
of nancial markets within the Union made it di-
cult for the new Eastern members states to prevent
western companies from acquiring what might have
become serious competitors over time (Jacoby 2010:
418-19). Extensive foreign ownership in manufactur-
ing, in turn, promoted an enclave economy with only
limited technological and managerial spill overs (El-
lison 2008; Jacoby 2010: 425). Moreover, competition
between foreign banks in the newly opened up areas
of Eastern Europe did much to spark consumption
and real-estate bubbles (Reinert & Kattel 2013: 21).
Competition policy, although included in the Rome
Treaties, remained a dead letter as long as creat-
ing national champions formed part of the catch-up
strategy of countries such as Italy and France. But as
competition policy was tightened in the wake of the
SEA such strategies now are no longer permissible,
including the use of public utilities and public pro-
curement for industrial policy ends. Equally since
the 1980s, state aid, has come under the province of
competition policy. Although here the EU can wield
less power than in the other elds of competition
policy, crucial elements of “nancial repression” such
as “preferential interest rates and favourable loan
terms” are now considered inadmissible (Rutkiewicz
2011: 45). e same applies for most of the instru-
ments that were initially employed, especially in the
Visegrad countries, to attract foreign investment. In-
dustrial processing zones, for example were outlawed
by the EU in Hungary. Temporary monopoly conces-
sions in order to increase the incentives for large scale
FDI were equally ruled incompatible with EU rules
whereas signicant limits were placed on the use of
tax breaks to attract FDI (Ellison 2008).
Finally, the non-negotiable requirement that new
members adopt the acquis communtaire in its entire-
ty also served the function of preventing the poorer
members from deriving an advantage from a “light-
er” regulatory structure. As John O’Brennan (2006:
133) argued: “e enlargement process would ensure
that CEE producers would gradually become sub-
sumed into EU regulatory structures, thus ensuring
that CEE advantages in respect of the costs of inputs
would dissolve over time.”
Against this array of harmonising measures stands the
structural policies, which are specically designed to
promote the convergence of less developed regions.
Although being the second largest expenditure item,
support generally amounts to no more than 2.5%
of GDP in the new member states and the policy is
widely criticised for its inecient management (Bor-
gloh et al 2012). Indeed the EU´s conclusion that the
major recipients, Spain, Portugal and Greece, suer
from serious structural problems testies to the inef-
ciency of these policies. Moreover, the reorientation
of regional policies increasingly comes into conict
with classic developmental state strategies. e shi
to horizontal, as opposed to vertical aid reduces the
ability to channel support to priority sectors, while
the concentration of spending on the poorest regions
makes little sense in the presence of industry cluster-
ing due to external economies of scale.
5. Conclusion
What made the classic liberal view of the world econ-
omy so much more attractive than its mercantilist ri-
val was that the latter could only see a zero-sum game
whereas Smith, Ricardo and others saw mutual ben-
ets. As Smith (2007: 381) had already pointed out
in the Wealth of Nations a, country could only ben-
et from having rich instead of poor neighbours. It is
paradoxical then that the revival of core parts of the
liberal economic policy orthodoxy since the 1980s
should have again enthroned a zero-sum view of eco-
nomic competition between nations. Since the 1980s,
Europe considers competitiveness and not compara-
tive advantage as the key to success in a global econ-
omy, which implies that economic relations necessar-
ily are cast as a zero-sum game (Krugman 1994). In
analogy to competition between private companies,
the countries with the most innovative manufactur-
ing, most favourable tax system or the lowest cost
structure are expected to thrive whereas the others
will fall by the wayside.
19
ces papers - open forum # 14
At the latest since 2010 it should be clear that coun-
tries are not companies. Greece, Spain, Portugal and
Ireland had apparently lost out in the race for com-
petitiveness, but unlike a company they could not
simply be dismantled and the valuable pieces sold o.
e EU´s short term solution was massive nancial
assistance combined with scal austerity while the
long-term solution is expected to arrive from improv-
ing competitiveness, i.e. radical cost cutting in the
crisis economies. us the EU becomes increasingly
entangled in a web of contradictions. Aer all, the al-
leged purpose of insisting on the wholesale export of
the Acquis to new members, as well as the Managed
Globalisation strategy, was exactly to prevent a down-
ward race of cost cutting. Moreover, if competitive-
ness decides the economic fate of the periphery its
recovery must necessarily come at the expenses of the
core countries. It may be increasingly dicult to con-
vince the electorates of the latter to guarantee billions
of nancial assistance while simultaneously accepting
that the competitiveness of their economies needs to
decrease.
In order to exit from this zero-sum trap of low over-
all growth and increasing regional disparities the EU
will need to a development model that combines a
rejection of export led-growth in favour of domestic
sources with the recognition that the lower develop-
ment levels of the periphery justify exemptions from
the principle of reciprocity.
Yet, Europe´s fundamental problem may lie much
deeper than an embrace of dysfunctional economic
ideas. e 1980s switch towards a neo-liberal mac-
roeconomic strategy that lies at the root of the EU´s
low growth was not driven by the inherent attractive-
ness of what essentially were pre-Great Depression
convictions but by the diculty of controlling distri-
butional struggles in a policy regime where the state
accepted its macroeconomic responsibility for assur-
ing adequate growth and low unemployment. But a
policy regime that excluded macroeconomic growth
strategies for reasons related to the process of interest
intermediation had no other option but to interpret
economic success in microeconomic terms of com-
petitiveness. Similarly, as pointed out e.g. by Dani Ro-
drik (1995) East Asian types of developmental strat-
egies require a substantial degree of state autonomy
relative to societal interest groups in order to prevent
developmentalism from degenerating into crony
capitalism. It is doubtful that the current systems of
interest intermediation in many peripheral member
states would be able to successfully implement such
an approach.
19
ces papers - open forum # 15
endnotes
1. Many thanks to Luigi Bonatti and Andrew Martin for challenging comments on an earlier
version (Notermans 2013).
2. As Hobsbawm (2008:74) pointed out, at the onset of the First World War most of the
world’s population lived in empires. Despite the intervening age of nation-state building, not
much had changed then since 1750 when, according to Bayly (2004: 27-8), around 70% of the
global population lived in empires.
3. Joseph M. Colomer (2007: 65) argues that the claim that European integration is sui generis
“only means that we are not using a suciently broad analytical concept, capable of including
this case among those with common relevant characteristics. e appropriate concept could be
that of ‘empire’.”
4. Source: AMECO, Gross domestic product at current market prices per head of population.
19
16
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