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Economy: Europe Midterm Notes
- Grado
- Institución
Lectures notes 1-6 all together
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(Ch.1 Aldocroft): Structures of the European Economy1. Why did the postwar peace settlement lead to the Balkanization of Europe?
2. How significant was the death toll and the physical damage caused by WW1?
3. Why were the financial legacies of war so severe?
4. Did failure of the postwar relief programme retard europe’s economic recovery?
5. What were the main political and social consequences for Europe of WW1?
LECTURE 1 NOTES
When should you raise IR and cut purchases? Depends ↓ Interest rates ↑
on the business cycle → FLYNN’S IDENTITY (The Table)
- BOP ↓ Money Supply ↑
↓ GDP ↑
HOW DID COUNTRIES KEEP THEIR ECONOMIES
STABLE? ↑ Deficit ↓
BEFORE: Keeping currencies stable + barely any intervention ↑ Unemployment ↓
After WW2: no more colonialism wars > economic change
↓ Inflation ↑
COMMON MISCONCEPTIONS: WHY EUROPE IS RICH LOW Growth QUICK
No. 1: Europeans are an undifferentiated mass of rich people
● Most Europeans are ‘middle class’ → Even in the ↑ Exchange rate ↓
wealthiest countries they were poor before the 1950s → ↑ Value of Money ↓
‘victims’ of an exploitative economic system
● Most people in Europe (esp. Eastern and Southern Europe), spent most of
c19th+20th being poor, uneducated
No. 2: Europe is ‘rich’ because of colonialism (or slavery):
● Colonialism grew European GDP by up to 10%
● Rich parts of Europe = same as China and Islamic world
● Colonialism only lasted from 1870-1950. By 1940 the net drain on the empire
was far worse than the gains – Europe was actually going broke
● Most of Europe did not participate in colonialism → victims of expanding empires
WHY IS EUROPE RICH?
● Institutions which created wealth, over many centuries.
● Competition amongst European states ensured that countries with the most
efficient wealth-creating institutions got the riches > larger armies > won more
● Mercantilist mentalities created by colonialism > hindered growth for the
colonizers and the colonized > fosters monopolies and autarky
● Banking > global economic growth
● Europe was the epicenter of the Industrial Revolution > main reason to Europe
breaking free of traditional limits on wealth > BUT did not automatically make
every European ‘rich’ > depressed living conditions for the majority of Europeans
, ○ Even if their wages were technically higher than they had been working on a
farm, cost of living went up and security and rural safety nets disappeared
● Reformers believed factory system was to blame → early Socialism + variant
Marxism
● 20th CE: best way to create the most prosperity for the industrializing world >
Capitalism, Communism, Fascism, or Socialism
○ Economic focus > competing for the most economic growth
○ Who won? The contest against Fascism was decided by WW2
○ Challenge of Communism took longer to defeat politically;
○ 1980s: everyone realized that the tremendous success of hybrid socialist
capitalism → SOLUTION → No such thing as a free market, someone or
something to keep people in line
● 1950: success of hybrid Socialist-Capitalism → West focused on narrower
debate
● Welfare State flipped the lower and middle classes in Europe → everyone ‘rich’
by historical standards
○ fall of Communism + implementation of Western Style hybrid economies →
living standards in Eastern Europe also rose dramatically
CHANGE IN SOCIAL CLASS COMPOSITION
European Society in 1910 European Society in 1990
● Upper class 5% (don’t have to work) ● Upper class 5% (don’t have to work)
● Middle class 15% (little hardship) ● Middle class 75% (little hardship)
● Lower class 80% (real hardship) ● Lower class 20% (real hardship)
Who should be allowed to participate in European wealth? Immigrants?
- Left: does this from compassion
- Right secretly does this:
- Lowers wages → good for the rich, dilutes benefits for middle + lower class
- Creates larger consumer base (more essentials are sold- good for the rich)
COMPONENTS OF CAPITALISM
Evolution of Capitalism
● Where was the epicenter of modern Capitalism?
○ Republican Italy (Venice, Florence, Genoa)
○ Republican Holland (first “national” republic)
○ Republican UK (after 1688 a constitutional monarchy)
○ Protestant countries in General (democratic)
● Historically, absolute monarchies + dictatorships = worse for business
○ stifle innovation, decrease trust → increase risk → higher interest rates →
increased corruption + increase transaction costs → less ambitious and
informed people, and suppress education
,Varieties of Capitalism
● Modern ‘Socialist-Capitalism’ can have different flavours
● 20th CE: British and German capitalism have taken different paths → Both
embrace welfare state after WW2
○ Corporate (GER): businesses with social interests of the gov, banks + unions
○ Private (UK): businesses run more as the property of individuals
Major components of Capitalism (Formal and informal)
● Government (Parliament): Guarantee good-faith contracts and stability
● Financial System: public debt + central bank (fiscal + banking system, stocks)
● Production: run via joint stock companies → allocate capital + reward innovation
● Social Milieu: People support a “Protestant work ethic” which sees individuals
“getting ahead,” via skills building and work, seeking meritocratic rewards;
increasing human rights tends to increase labor productivity
Components of European Economic Systems
● Support for business + entrepreneurialism
● Education (helps having bigger wages)
● Fostering scientific mentality (led to indu revolution)
● Limitation of dogma → Separation of church/state
● Limits on the powers of the rich
● Low-interest rates on public debt
Components of European Wealth Creation
Political institutions, from c17-18
● Democracy ● Public law
● Meritocracy ● Corruption reduction
● Humanism ● Separation of public/private
Financial institutions (financial capital productivity)
● Central banks (can regulate money supply and guarantee value of currency)
● Government loans
● Beginnings of Business Cycle
○ Investors control the fate of industries/projects (E.g. canals/, railroads)
○ Investors attract/remove specie from a country
● Invention of Joint Stock Company > more investors = more money >
improvement in applied technology > Raise capital > Value of company increase
EXAMPLE(S) of Evolution of Financial Institutions
British Public Debt System
● 1692: Bank of England was set up > sold shares in the debt
● People could buy ‘shares’ and would receive guaranteed interest + money back
○ British government could quickly raise large sums from the public
, ● Rich people were happier to buy shares of debt than paying additional taxes
○ This acted like a credit card for the government
● Governments with successful debt systems → more revenue per capita
● Kings cancel their debts on a whim → people distrustful → interest rates high
○ Today, the most trusted public debts are the best-run democracies
British Central Banking System
● 1781: lender of last resort for other private banks
● 1844: Bank Charter act → bank issues banknotes tied to the gold standard
Functions of a central bank
● Monetary Policy: control money supply, interest rates, and credit conditions in
an economy → achieve objectives (price stability, economic growth,employment)
● Currency Issuance: sole issuer of a country's currency; ensure adequate
supply of currency is in circulation and maintain the integrity of the currency.
● Banker to the Government: managing government’s accounts, facilitating
government transactions, and underwriting government debt.
● Lender of Last Resort: provide emergency liquidity to financial institutions
● Regulation and Supervision: over commercial banks and financial institutions
● Foreign Exchange Management: intervening in foreign exchange markets to
stabilise exchange rates or address balance of payments issues.
Features and Functions of the Reserve system
CB hold foreign exchange reserves → assets denominated in foreign currencies
● Currency Stabilization: stabilise domestic currency's exchange rate
● External Debt Servicing: used to pay off external debt obligations, ensuring the
country can meet its international financial commitments.
● Import Cover: allows a country to import essential goods and services even
during times of economic stress or external shocks.
● Investment: Central banks may invest foreign exchange reserves → income.
How did the banking system in Europe evolve?
● Medieval and Early Modern Banking: merchants and goldsmiths provided basic
banking services > banks emerged and played roles similar to central banks
● Napoleonic and Industrial Era: development modern banking > rise of joint-stock,
commercial, and savings banks > spread of central banking institutions
● World Wars and Post-War Era: countries established CB to stabilize economies.
● European Monetary Integration: establishment of ECB > European monetary
integration; introduction of the euro > transformed European banking
● Financial Crisis and Regulation: financial crisis of 2008 > increased regulation
and oversight of the banking sector in Europe (establishment of the European
Banking Authority (EBA) and the Single Supervisory Mechanism (SSM))
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