ces open forum 19: imperial legacy? the eu's developmental model and the crisis of the european...

8/13/2019 CES Open Forum 19: Imperial legacy? The EU's Developmental Model and the Crisis of the European Periphery

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ces papers - open forum

2013-2014

Imperial legacy?The EUs Developmental Model andthe Crisis of the European Periphery

author: Ton Notermans


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CES-

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 Centers seminars and conferences. Any opinions expressed in the papers

are those of the authors, and not of CES.

Editors:

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Editorial Board:

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ABSTRACT

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 EUs performance compares unfavourably with

East Asian success cases as well as with Western Europes 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 EUs model is based on the principle of a level-playing eld, which

militates against such a form of economic integration. The EUs developmental model thus contrasts with the various

strategies that have enabled successful catch up of industrial latecomers. Instead the EUs 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 EUs 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 NotermansDepartment 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?.........33. 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


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Imperial legacy?The EUs Developmental Mod-el and the Crisis of the Euro-pean Periphery

1. Introduction

Te Eastern and Southern enlargements o the Euro-

pean Union (EU) gave rise to strong hopes or a rapid

convergence o the new members towards the per

capita GDP levels o the North-Western core coun-

tries. Increasingly, these hopes are being disappoint-

ed. With the onset o the Eurocrisis in 2010 conver-

gence has given way to divergence in the southern

member states as especially the countries that arereceiving EU/IMF assistance are experiencing a dra-

matic decline in their GDP. More than twenty years

afer the disintegration o the Soviet Empire many o

the Eastern member states o the EU have made lit-

tle headway despite increasing prosperity. Per capita

GDP measured as a percentage o 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 ar over a century to complete it.

Te EU thus compares unavourably to the trajecto-

ries o the Asian success cases such as 19th and 20th

century Japan and post WW2 South Korea, Singa-

pore, Hong Kong and aiwan. Indeed the current

trajectory also compares unavourably to Western

Europes own rapid catch-up to the USA afer 1945.

Given Europes disappointing perormance, there is

a need to rethink the European model o develop-

ment. Historical experience seems to indicate thatsuccessul catch-up requires an activist developmen-

tal state which helps create comparative advantage

and to that extent temporarily discriminates against

oreign competitors in avour o nascent domestic

firms. Put differently, successul catch up requires

that less-developed economies to some extent are

allowed to ree-ride on an open international eco-

nomic order.

A necessary but by no means sufficient condi-

tion or successul catch-up within the ramework

o the EU would thus be that European integration

incorporates such possibilities or ree-riding by less

developed members in its developmental model. In-

stead, the EUs model is based on the principle o a

level-playing field in which discrimination is consid-ered an unair practice. Although already included

in the Rome reaties, it was only with the Single Eu-

ropean Act (SEA) o 1986, the deregulation o cross-

border capital flows since 1998, the agreement on

Economic and Monetary Union (EMU) ollowed by

the creation o the single market in financial services

and the strengthening o competition policy since the

1980s that the notion o level-playing field came to

dominate the EUs developmental model. Accord-

ingly, that model increasingly contrasts with the vari-

ous strategies that have enabled successul catch up

o industrial latecomers. Instead the EUs approach,

both in terms o mechanism and outcomes is more

and more reminiscent o the relations between the

pre-1945 European empires and their dependent ter-

ritories.

One reason or this unortunate historical continuity

is that the EU appears to have become entangled inits own myths. Te official view sees integration as a

peace project designed to overcome three centuries

o almost continuous war in the Westphalian system

o sovereign (nation) states. As the sovereign state is

identified as the root cause o all evil, any project to

curtail its room o manoeuvre must ultimately seem

to the benefit o the common good. Yet, the existence

o a Westphalian system o nation states is a myth.

Empires and not states were the dominant actors in

the international system or at least the last three cen-

turies. As its imperial legacy has disappeared rom

view, so has the act that, European empires ailed

dismally in their sel-proclaimed task o propelling

their dependent territories to prosperity. As a result

o this historical blind spot the EUs hope o becom-

ing a model power or the rest o the world seems

vain. Rather than marking the return to the inter-


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First, state boundaries were precisely defined replac

ing the medieval system o requently overlapping

territories. Secondly, within these borders states en

joyed absolute sovereignty. Tirdly, the principle o

Westphalian sovereignty implied acceptance o the

principle o non-intervention in the domestic affairs

o other states.

Historical research has not been kind to the hypoth

esis o a Westphalian system. One line o criticism o

cuses on the account o the treaties that has entered

most International Relations texts. Te treaties a

such in no way were the watershed they are depicted

to have been. Some eatures o the Westphalian sys

tem existed prior to it and others came into being only

later. (Durchhardt 1999:308). Te principle o cuius

regio, eius religio was abolished instead o established

by the treaties (Osiander 2002: 272). Nor did the trea

ties enshrine the principle o inviolable Westphalian

sovereignty as the non-German signatories, France

and Sweden, reserved the right to intervene on the

territory o the Holy Roman Empire o German Na

tion (Winckler 2009: 125-6).

More relevant or the current purpose, is the ac

that violation o Westphalian sovereignty was and

remained the norm rather than the exception (Krasner 1999). Te main reason or this was that powe

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

difficulty o orming autonomous states on an eth

nic basis, against the gravitational pull o cultural or

economic attraction (as well as disparities o military

orce), has been so great that empire (where differ

ent ethnic communities all under a common ruler

has been the deault mode o political organization

throughout most o history. Imperial power has usu

ally been the rule o the world. (See also Osterham

mel 2009 Ch. 8; illy 1997: 2).

Empires, in contrast to nation states do not derive

legitimacy rom a common national identity bu

are multi-ethnic constructs with a more or less pro

national prestige it enjoyed during the 19th century,

Europes new empire may rather mark the last phase

o its international decline.

Te remainder o this paper is structured as ollows:

Section two argues that i there ever was an age o the

nation state in Western Europe it coincided with its

alleged demise afer 1945. Section three reviews theobstacles to convergence in the age o empires. Sec-

tion 4 argues that whereas the successul catch-up o

West European economies afer 1945 was predicated

on a heavily interventionist state, the developmental

model the EU applies to its periphery is very much

the opposite. Section five concludes by arguing that,

at least in the short to medium term, the prospects

or solving the EUs 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 successul catch-up by the periphery

will almost inevitably be interpreted as a threat by the

core states.

2.When was the Westphalian System o Sovereign

States?

European integration is commonly interpreted as abreath-taking new departure, coming as it did afer

the three-century-long reign o the Westphalian sys-

tem in which states jealously guarded the absolute

sovereignty they enjoyed within their clearly defined

borders while trying to increase their power by means

o warare. Te beginning o 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 uture other

than that a ailure to encroach on the prerogatives

o the members states in avour o supranationalism

will doom Europe.

Te Westphalian system takes its name rom the

Peace reaty o 1648 that ended the thirty years war.

Te international system it is said to have ushered

in differed in three respects rom what went beore.


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nounced hierarchical order between the various ter-

ritories that constitute it. Empires do not have pre-

cisely defined borders, because, as was ofen the case

with European colonial empires, on their rontiers

they met grey zones o uncertain political belonging.

Finally empires generally lay claim to authority be-

yond their borders, through such constructs as inor-

mal empire and zones o influence.

European empire building had started with Vasco Da

Gamas rounding o 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 o the Atlantic powers were by no means the

only ones. Afer 1480 the Muscovite Rus commenced

an unrelenting expansion that eventually resulted in

an empire spanning almost all the length o Eurasia.

Te conquest o Constantinople in May o 1453 lay

the oundations o the Ottoman Empire, which con-

trolled the Balkans, Anatolia, the modern Middle East

and most o North Arica at the height o its power.

o the north-west o the Ottoman Empire, substan-

tial areas rom modern-day Ukraine and Poland,

the northern Balkans, Bohemia and Northern Italy

ormed part o the Austro- Hungarian empire. Fur-

ther to the North lay Prussia, no doubt the least o theEuropean empires until well into the 19th century. Its

rise dated rom the conquest o Silesia in 1740, one

o Austro-Hungarys richest provinces. Almost an-

nihilated by Napoleon, it emerged rom the peace o

1815 with substantially expanded possessions in the

Rhineland. Apart rom Scandinavia, where Sweden

largely had to abandon its imperial ambition on the

continent by the 18th century, paradoxically only the

non-Prussian parts o the misnamed Holy Roman

Empire o German Nation, Switzerland and parts o

Northern Italy were governed by political units that

were both too small and internally too homogeneous

to be classified as empires.

Nor would it seem correct to locate the start o the

age o the nation-state in the 19th century. Also in

this case historical research has not been able to un-

earth much evidence or the hypothesis that in 19th

century Europe organic national communities united

by a strong common identity successully managed

to overcome imperial rule. Instead 19th century na

tionalism appears primarily an elite driven-strategy

with only limited success (Bayly 2004: 205; Gellne

1981, Hobsbawm 1992, illy 1994). For local elites

nationalism held out the lucrative prospect o gainingcontrol o the monopoly to tax, but it was tempered

by the improbability o survival as an independen

state in a world o empires.

19th century Europe witnessed the rise o only eigh

new states. Five o them had previously been part o

the Ottoman Empire (Greece 1832, Romania 1856

Montenegro 1860, Serbia and Bulgaria 1878). Te

remaining three states were Belgium, Germany and

Italy. Belgium was created in 1830 afer having been

part o the Netherlands or 15 years. Italy was united

in stages between May 1859 and September 1870

Germany was unified under Prussian leadership afe

the war o 1870-71 against France.

Whether and when new states did emerge had little

to do with the strength o nationalist movements bu

much more with great power politics (Davies 1997

815). Te Balkan states including Greece owed theiexistence 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 ormal incor

poration into an empire or membership in the inor-

mal empires o France and Britain.

Prussia very likely would not have succeeded in uni

ying Germany against the wishes o Austria i 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 II

and allowed the Italian government to seize the pa

pal states (Winckler 2009: 812). Te Belgian revol

against the Netherlands would hardly have succeeded

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without the support o French troops and British dip-

lomats, as well as the reusal o Prussia and Austria to

side with Czar Nicolas I who was eager to intervene

on the side o 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 defined their anomalous

position as states without dependent territories. Bel-gium overcame this anomaly when its king managed

to convince the participants o the 1885 Berlin Con-

gress to grant him the lions share o the Congo basin.

German oreign policy increasingly came to ocus

on acquiring imperial possessions, especially afer

Chancellor Bismarcks resignation in 1890. Italy was

soon to direct its attention towards northern Arica.

Having lost its overseas territories at the end o 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 deend its

independence in a world o empires became one o

the main causes leading to World War 2; particularly

afer the Great Depression when many European na-

tions were tempted to withdraw behind the protective

walls o their empires.

Te disintegration o the Ottoman and Habsburg

Empires and President Wilsons insistence on thenationality principle or redrawing borders did cre-

ate a host o new nation states, while simultaneously

extending the French and British (inormal) empires

in the middle east. Yet, or Eastern and Southern Eu-

ropean nations independence was short-lived as they

were gradually drawn into Germanys inormal em-

pire ollowed by inclusion in its ormal empire, again

to be exchanged or a somewhat longer lasting inclu-

sion in the Soviet Empire.

At best, one could argue that the nation state became

the prevalent orm o political organisation in West-

ern Europe only afer 1945. Decolonisation reduced

Belgium, the United Kingdom, the Netherlands and

Italy rom empires to nation states. Te deeated

Germany had lost its Eastern Empire and a signifi-

cant chunk o its own territory to the Soviet Union.

Moreover, as a result o the combined effects o the

Great Depression and War, international economic

relations remained ar more regulated than they had

been beore 1914 and national governments thus ex-

erted a much strengthened authority over their own

territory. Accordingly, the age o the nation-state co-

incided with its alleged demise at the hands o Euro-

pean Integration.

Moreover, since its inception in 1958 the EU (EEC)

gradually acquired all the salient attributes o an Em-

pire (Zielonka 2006; Anderson 2007:19). It does not

derive legitimacy rom a common national identity

but is a multi-ethnic conglomerate held together

by transnational organizational and cultural ties, to

use Deepak Lals (2003: 29) definition o empire. Like

an empire, the EU has uzzy borders and multiple

power centres. Not being a governance structure or

a clearly delineated and easily recognisable national-

ity, the question o where the natural borders o the

EU lie can only have more or less arbitrary answers

Like empires, the EU reaches beyond its borders. Te

inormal empire o the 19th century finds its corol-

lary in the EUs various neighbourhood programmes

which seriously compromise the sovereignty o these

states (Zielonka 2008).

O course, the mechanism and orms o this new su-

pranational construct were novel; but then again, this

equally applied to the succession o different empires

that had populated the globe in earlier times. With

some exceptions, smaller entities were ofen orce-

ully incorporated into Europes pre-1945 empires

Post-1945 enlargement o the EU unctioned accord-

ing to a undamentally different principle, especially

since the 1993 EU Copenhagen summit when strict

eligibility criteria were set or new entrants. Yet, this

different mechanism o enlargement does not suffice

to make the EU an entity sui generis. Te pre-1945

empires could not have survived or as long as they

did without being able to count on the cooperation

o local elites that perceived clear benefits rom the

arrangement (Hobsbawm 2008: 79-80). Essentially

what held those empires together was that they pro-

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vided both political and economic security to the

core and held out the promise o 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 centriugal orces o

nationalism.

Afer 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 or West Germany

which had seen its traditional trade relations with the

East cut off. In addition, o course, integration with

its European neighbours was a necessary condition

or Germany to regain its sovereignty. Britains initial

reusal to join the Common Market had much to do

with a mistaken belie in the continuing strength o

its empire.

For France, much o the attractiveness o European

integration derived rom the possibility to undo at

least some o the radical drop in status it had experi-

enced as a result o the Second World War. With Ger-

many unable to lead, integration held out the promise

o increasing Frances standing in the world by plac-

ing it at the head o a European block. Moreover, inte-gration also helped France to hold on to what was lef

o 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 or its steel

industry certainly helped France continue its colo-

nial wars. In addition, part o the concessions France

obtained or its agreement to the Common Market

consisted in EEC financial support or the cost o the

remaining French empire.

For the countries that joined the EU in the 2004 and

2007 enlargements, prosperity and security rom a

possible reawakening o Russian appetites provided

the crucial motives or relinquishing part o their

sovereignty almost the moment they had regained it.

Similarly or what is now the southern periphery o

the Eurozone, probably the most decisive argument

in avour o EU membership was economic moderni-

sation.

Hence, the emergence o European integration, in a

sense, may be considered business as usual as it con-

firmed that Westphalian states rarely are viable enti-

ties in the international system. When Jean Monnetwas voicing his conviction that the resources o the

nation states no longer sufficed (Bache & George

2006:95), he was not so much expressing a radically

new view but a rather widespread conviction that em-

pire was necessary or prosperity.

Blotting out Europes imperial past in avour o an

imaginary Westphalian system, however, serves to

seriously constrain the understanding o European

integration. First, as Jan Zielonka (2006), and others

(Beck & Grande 2010, Colomer 2007) have pointed

out, awareness o the historical role o empires helps

to discern alternative uture trajectories beyond the

unhelpul dichotomy o a United States o Europe

versus the dominance o the nation state. Secondly

by postulating that the dominance o (nation) states

is coterminous with warare, successul integration

becomes coterminous with more supranationalism

and a-priori excludes the possibility that (certainorms o) suprantionalism may in act be inimical to

successul integration. Tird, seeing the Westphalian

state as the historical standard, European integration

becomes a construct sui generis, which means that

Europes past cannot hold many useul lessons.

In contrast, the realisation that supranational em-

pires have traditionally been the dominant actors in

international relations, almost inevitably invites com-

parison o the EU to its imperial predecessors. How

does the EU differ rom these previous supranational

constructs? What where the strengths and weakness-

es o such Empires and how can the ormer be ampli-

fied and the latter avoided in contemporary Europe?

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3. Economic Convergence in the Age o European

Empires

Te main weakness o the European empires, no

doubt, was the ailure to develop their peripheral ar-

eas. Although generally justified in terms o 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 o the 16th century, but at that point,according to the estimates o Angus Maddison, Asian

per capita GDP still stood at roughly 74% o the West

European level. By 1950 it had allen to about 14%

(able 1).

Te official justification underlying 19th century

European attitudes towards development o the pe-

riphery, as well as much o current thinking, was that

ree trade, ree capital movements and gold standard

membership would suffice to bring about conver-

gence. European industrialisation did indeed cre-

ate buoyant markets or the producers o primary

goods in the periphery and a stream o oreign in-

vestment (mainly British) that helped to create the

necessary inrastructure or this trade. Especially

rom the 1870s to 1914 solid export growth allowed

many primary producers to record rates o GDP

growth comparable to those in the core countries

(Findlay & ORourke 2007: 414-15). But specialisa-

tion in primary products did not lay the oundations

or sustained convergence as spectacularly demon-

strated by, or example Argentina whose per capita

GDP in 1913 was on a par with that o the indus-

trialised countries (della Paolera & aylor 2001: 7)

What was needed or sustained convergence was di-

versification and especially a domestic manuactur-

ing base (Williamson 2006: 147), and this in turn

required high levels o investment, i.e. strong invest-ment demand had to be matched by an ample sup-

ply o investment unds. As argued in early work by

Alexander Gerschenkron (1962), and subsequently

confirmed by more recent research (Amsden 2004

Chang 2003; Lin & Chang 2009; Reinert 2007; Ro-

drik 2007), late development o manuacturing de-

pended critically on active state involvement. Partly

due to economies o scale, underdeveloped systems

o investment finance, long learning curves in manu-

acturing, coordination problems due the imperecttradeability o intermediate goods and the absence

o a domestic entrepreneurial class, less-developed

economies could not hope to catch-up by relying en-

tirely on the market mechanisms.

As first argued by Alexander Hamilton (1791) and

later popularised and diffused 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



List (1885), one upshot o this view was that nascent

industries required tariff protection. Although such

inant industry tariffs came to be widely employed in

the periphery, especially since the interwar period,

the strong ocus on tariffs was misplaced. ariffs were

one and not even a necessary element in a broader

strategy o late industrialisation. Te use o tariffs

alone would suffice only i a nascent industry was al-ready present or could be assumed to spring up auto-

matically in response to changed price signals. Lack

o industrial experience and the many coordination

problems involved in creating a diversified manu-

acturing base rom scratch implied that such was

not necessarily the case. Late industrialisation thus

required a broader strategy o what (Chang 2003)

has called Industrial, echnology and rade policies

(I). I strategies in general comprise a mix o

horizontal and vertical state aid, such as upgrading

o the education system and the transport inrastruc-

ture, promotion o research & development, model

actories, state owned companies, subsidies to prior-

ity sectors as well as selective credit allocation, preer-

ential access to oreign exchange, dual exchange rates

or undervalued currencies.

At first sight, intererence with open capital markets

and the rejection o fixed exchange rates, the otherpillars o classic European liberalism, might not seem

to be in the interest o convergence. Foreign invest-

ment, o course would allow the periphery to accu-

mulate capital at a much aster rate than by relying on

domestic savings alone. Moreover, there is substantial

evidence that adherence to the Gold Standard low-

ered borrowing costs (Obsteld & aylor 2003) and

promoted trade (Flandreau & Maurel 2005). Yet, fi-

nancial and monetary integration ofen turned out to

be a two-edged sword. Exchange rate manipulation

could effectively complement or substitute tariffs in

promoting domestic manuacturing. Indeed, India

was placed on the Gold Standard by the British ad-

ministration in 1892 mainly because its depreciating

silver standard was seen to coner an unair advantage

on its exports. Te advantages o lower borrowing

costs could be easily offset by the destabilising effects

o a speculative overexpansion o credit ollowed by a

sudden drying up o oreign unds. Te costs would

multiply i deault and devaluation were eschewed in

such a credit crisis in avour o austerity and deence

o the gold parity (McLean 2006). Indeed, many ana

lysts o the pre 19-14 Gold Standard concluded that it

served to destabilise peripheral members (Galarott

1995:37-41; Notermans 2012). Finally, adherence tothe Gold Standard in times o relative gold scarcity

would inhibit the ability o monetary policy to pro

mote an ample supply o domestic investment unds

necessary or sustained growth.

As state-led development strategies proved necessary

or catch-up, the relation o peripheral countries to

the metropolitan areas was o crucial importance

Colonies were most restrained in this respect as they

were not permitted significant deviations rom the

ree trade doctrine and colonial administration did

not count industrial development amongst their pri

orities. As Josiah Child (Child 1751), director o the

British East India Company, had already set out in

1751, European nations should assign their colonie

to the role o suppliers o raw materials and consum

ers o European goods and investment while prevent

ing them rom turning into competitors or Euro

pean manuactures. As a result none o the coloniesmanaged to catch up under European rule and India

which clearly was technologically more advanced

than Britain in the crucial area o textiles as late as the

beginning o the 19th century, experienced substan

tial de-industrialisation under British rule (Ferguson

2004: 369).

Partly as a reaction to the revolt o the American colo

nies in the late 18th century, the British dominions o

Canada, Australia and New Zealand, enjoyed much

more autonomy. Home Rule, was granted to all o

them early on, and this included the right to set their

own tariffs; a right which they used liberally in an e

ort to promote their own industrialisation (Findlay

& ORourke 2007: 395). Moreover, the Dominion

benefitted rom a continuous inflow o British and

Irish immigrants which brought with them the skills

19



and entrepreneurial experience most colonies were

lacking, while Australia, in addition received large

amounts o British subsidies in the first decades afer

the ounding o a British penal colony there in 1788

(Boot 1998). As a result the British dominions, along-

side the breakaway colony o the USA were the only

countries to successully close the development gap

with Europe beore Japan embarked on its ascent in1868.

Although they were less constrained than the colo-

nies, the techniques o inormal imperialism meant

that even ormally 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 hal o the

19th century European colonial powers employed

such techniques to open markets, secure supplies o

raw materials and protect its investors rom sovereign

deault. Japan, China, the Ottoman Empire and a host

o other countries signed so-called unequal treaties

that seriously circumscribed their sovereignty; espe-

cially with respect to tariffs, market access and trade.

(Findlay & ORourke 2007: 400-402). Ottoman tar-

iff autonomy, or example had already been largely

lost in 1838 in exchange or British support against

Egypts Mehmed Ali Pasha, and was never recovered.Sovereign deault repeatedly served as another route

through which European powers constrained the

economic policy options o independent territories

(Fishlow 1985: 403-4). Te 1832 treaty recognising

Greek independence, or example, limited its fiscal au-

tonomy in the interest o debt service. Not unlike the

proposals floated by Merkel and Sarkozy in February

o 2012, western creditors placed fiscal policies under

the control o the International Finance Commission

(IFC) when the country proved unable to service its

debt afer deeat in the war with the Ottoman Em-

pire in 1897. Te IFC controlled a large part o public

revenues and had a veto on the issuing o new debt.

(Andreopoulos 1988; Lazaretou 2004). In response to

the Ottoman deault o 1875, Britain and France es-

tablished the Public Debt Council which effectively

placed the management o Ottoman public finances

into their hands (Anderson 1964, Pamuk 1987). Sim

ilar devices were used in the Balkans (ooze & Ivanov

2011). In Egypt, where Anglo-French control o pub

lic revenues afer the sovereign deault o 1875 pro

voked a nationalist backlash, the British instead saw

it necessary in 1882 to proceed rom inormal empire

to occupation.

But a considerable degree o autonomy rom the Eu

ropean empires was a necessary but not a sufficien

condition or successul development because auton

omy neither implied a willingness to pursue such pol

icies nor the presence o a state apparatus that could

prevent such a strategy rom degenerating into pure

rent-seeking. In 19th century agricultural exporters

such as Argentina and Brazil as well as the coned

erate US states, policies o orced industrialisation

could not necessarily command political support

particularly in times o improving terms o trade. Te

production o export crops by means o a latiundia

system created a strong interest o the political elites

in ree trade, exchanging agricultural exports or

manuactured imports. When many Latin American

countries did embark on an inward looking develop

ment policy since the Great Depression serious prob

lems o crony capitalism developed. Te constellation

was much the opposite in the Northern states o theUSA, which became the most successul early case o

catch-up afer they had broken away rom the Brit

ish Empire in the late 18th century and embarked on

highly protectionist trade policies.

In the end, outside o the European offshoots the con

ditions or successul convergence beore 1945 were

only met in Japan. Te threat o colonisation and

the absence o concentrated primary good export

ers ensured the political primacy or a programme

o orced industrialisation afer 1868. Japan did no

enjoy tariff autonomy between 1858 and 1911 bu

this handicap was compensated or by extensive use

o horizontal and vertical state aids. An exceptionally

centralised and efficient state apparatus insured tha

such strategies could be implemented efficiently. Te

central governments ability to raise substantial tax

19



revenues made this strategy invulnerable to exces-

sive oreign indebtedness. Indeed, the example o the

British occupation o Egypt in 1882 provided a strong

incentive in the first decades o the Meiji era to avoid

significant oreign public indebtedness (Jansen 2000:

373), and or similar reasons private oreign direct in-

vestment was discouraged. Finally, Japan joined the

Gold Standard only in 1897, a time when silver-basedcurrencies were appreciating (Mitchener, Shizume &

Weidenmier 2010: 29).

4.Te Crisis o the European Periphery

Te post-1945 history o Western Europe itsel con-

firms that catch-up required an interventionist state

and the active management o international econom-

ic relations. Afer two world wars and one Great De-

pression, Western Europes lead over the rest o the

world by 1945 had been lost. In 1950 French, Ger-

man and Italian per capita GDP stood at 55%, 41%

and 37%, respectively, o the US level (Maddison

2001: 264). Economic catch-up then became the most

pressing priority o West European governments.

Te initial American plans or the post-war order

might have hindered convergence as they envisaged

ree trade, fixed exchange rates, current account con-vertibility and the end o European imperial preer-

ences; a combination which would have allowed the

US to exploit its economic superiority to the ull.

With the emergence o the cold war, that programme

was unceremoniously scrapped in avour o the Mar-

shall plan, a massive devaluation o almost all West

European currencies against the Dollar in 1949, and

support or closer economic cooperation which al-

lowed Europe to discriminate against US trade.

Hence it was with US support that Western Europe

tackled the task o catch-up on the basis o a urther

substantial increase in the role o public authorities

in economic management. In Britain, the Labour

government o Clement Attlee, elected in late 1945,

embarked on a programme o nationalisation o stra-

tegic industries. Te French government, and to a

lesser extent the Dutch one, instituted an ambitious

programme o indicative planning in what was to

become a highly successul policy o orced indus-

trialisation. ax 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 unds to priority sectors and keep in-flationary pressures arising rom the monetary over-

hang at bay. Public involvement in wage-bargaining

increased significantly with a view to keeping infla-

tion down and promoting the competitiveness o

manuacturing, the extreme case being the Nether-

lands where wages were de acto set by the govern-

ment until well into the 1960s.

Highly cautious liberalisation o external economic

relations was part and parcel o 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 re-

quently used aferwards to correct external imbalanc-

es. Convertibility or capital account transactions was

introduced in all EU member states only afer Coun-

cil Directive 361 o 1988. rade liberalisation made

little headway until the mid-1950s when the post-warboom was well under way, and even then, introduc-

tion o a customs union or goods with a common

external tariff between only six members meant that

competition rom 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 o a

widening gap within the EU as a result o the Mediter-

ranean (1981, 1986) and Eastern enlargements (2004

2007, 2013). In 2012 the per capita GDP o the richest

member, Luxembourg was more than 15 times that o

Bulgaria, the poorest members, while the per capita

GDP o Denmark, the second richest country - still

exceeded the Bulgarian one by more than 8 times.

Te convergence perormance o the EUs own pe-

riphery is disappointing compared both to western

Europes own perormance afer 1945 as well as Ja-

19



pan and the so-called our Asian tigers. Post-1945

Japan managed to catch up in a little over three de-

cades, Western Europe took roughly our decades,

and South-Korea, which started rom a much more

unavourable position in 1955 than the new member

states, did so in about five decades.

able 2 shows per capita GDP as a percentage o theGerman level o the GIIPS countries in 2011 and

the year o 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. Te only exception

to this pattern is Ireland whose speed in catching up

is reminiscent o Japan and South- Korea.

With the exception o 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 o 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 EUs strategy or pro-

moting economic convergence did not build on the

lessons o empire and post-1945 success. Te disap-

pointing perormance o the core countries itsel

provides the main explanation. Despite the Com-

missions belie that the various step towards urther

integration, rom the SEA to EMU and enlargementwould boost growth, and notwithstanding the Lisbon

Strategys high-flying 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 acto embracing a theory o absolute

advantage. In Ricardos classic ocus on static com-

parative advantage the lower cost structures o pe-

ripheral countries are not a threat to more developed

economies as they reflect the overall lower productiv-

ity levels o these countries. Te heterodox ocus on

dynamic comparative advantage, in addition, derives

a need or an activist developmental state. Instead, in

the EUs ocus on competitiveness, both eatures are

Table 2: GIIPS GDP Per Capita as aPercentage of the German Level

Per Capita GDP(%)

Year of

Accession

Year of

Accession 2011

Greece 1981 58.82 47.73

Ireland 1973 61.44 105.76Italy 19701 79.88 72.26

Portugal 1986 39.60 44.08

Spain 1986 54.36 58.87Notes: 1, earliest year of data availability.Source:Calculated on the basis of GDP/Capita inconstant 2000 US$, World Bank, World DevelopmentIndicators Database.

19

Table 3: CEE GDP Per Capita as % ofGerman Level

1991 2004 2011

Czech Republic 23.40 28.17 30.25Estonia1 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 2000US$, World Bank, World Development Indicators Database.



considered a potential threat to the more developed

economies. Competition rom low-wage countries is

seen to threaten a race to the bottom in labour and

social standards and many eatures o a developmen-

tal state are said to coner an unair competitive ad-

vantage.

On the global level, these perceived threats inormedthe EUs strategy o 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, saety and environmental

standards, many EU officials and some scholars in-

terpret harmonisation as a mutually beneficent social

democratic alternative to the Anglo-Saxon strategy o

liberalisation tout court (Abdelal & Meunier). Te re-

jection o this strategy at the 2003 Cancun ministerial

meeting o the WO showed that emerging econo-

mies instead tend to interpret it as an attempt to kick

away the ladder.

Te enlargement strategy is inormed by much the

same desire to maximise the EU core countries op-

portunities in the new member states and minimise

the threats rom them by means o a mix o liberalis-

ing and regulatory measures.

Te most damaging blow to the economic prospects

o the periphery would seem to be the combination o

a single currency, the abolition o capital controls and

the creation o a single market in financial services.

Since the late 1990s, when the Euro was introduced

and it became clear that the CEE countries, who gen-

erally fixed their exchange rates to the EU by such

means as ERM2 membership and currency boards,

would join the EU shortly, interest rate differentials

virtually disappeared and substantial capital inflows

financed large current account deficits. As a result

GDP growth rates in Europe were higher in the East-

ern periphery and in Spain and Greece until 2007.

Tat decade thus seemed to confirm the EUs con-

viction that economic liberalisation plus the Acquis

equals convergence.

All this changed since 2008, when the financial sys-

tems o the metropolitan countries came under stress

thus conronting the periphery with a sudden drying-

up o capital inflows, 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 o oreign direct investment(FDI) had been employed in manuacturing enjoyed

some protection rom sudden stops, whereas in the

Baltics, Spain and Ireland, where capital inflows u-

elled real estate booms, the collapse in GDP afer

2008 was on a scale not seen since the Great Depres-

sion. In Greece, instead, the bulk o capital inflows

had financed the public deficit.

Te original aim o introducing the common cur-

rency or fixed exchange rates was to promote struc-

tural reorms by orcing employers and trade unions

to internalise the effects o wage and price setting

decisions. But the mere impossibility o devaluation

proved insufficient to eradicate deeply rooted differ-

ences in industrial relations systems such that fixed

exchange rates commonly implied real appreciation

Tis effect was greatly strengthened by massive capi-

tal inflows with the result that what was lef o po-

tentially competitive export industries was urtherweakened.

While uelling a speculative boom, adherence to the

common currency in turn deepened the recession

Te experience o the pre-1914 gold standard would

seem to indicate that devaluation and deault would

minimise the costs in terms o GDP or peripheral

countries conronted with a sudden stop. (McLean

2006) Adherence to the common currency instead

dictated a policy o 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 o I policies (Scharp 2002: 648). Te

abolition o capital controls and the harmonisation

19



o financial markets within the Union made it diffi-

cult or the new Eastern members states to prevent

western companies rom acquiring what might have

become serious competitors over time (Jacoby 2010:

418-19). Extensive oreign ownership in manuactur-

ing, in turn, promoted an enclave economy with only

limited technological and managerial spill overs (El-

lison 2008; Jacoby 2010: 425). Moreover, competitionbetween oreign banks in the newly opened up areas

o Eastern Europe did much to spark consumption

and real-estate bubbles (Reinert & Kattel 2013: 21).

Competition policy, although included in the Rome

reaties, remained a dead letter as long as creat-

ing national champions ormed part o the catch-up

strategy o countries such as Italy and France. But as

competition policy was tightened in the wake o the

SEA such strategies now are no longer permissible,

including the use o public utilities and public pro-

curement or industrial policy ends. Equally since

the 1980s, state aid, has come under the province o

competition policy. Although here the EU can wield

less power than in the other fields o competition

policy, crucial elements o financial repression such

as preerential interest rates and avourable loan

terms are now considered inadmissible (Rutkiewicz

2011: 45). Te same applies or most o the instru-

ments that were initially employed, especially in theVisegrad countries, to attract oreign investment. In-

dustrial processing zones, or example were outlawed

by the EU in Hungary. emporary monopoly conces-

sions in order to increase the incentives or large scale

FDI were equally ruled incompatible with EU rules

whereas significant limits were placed on the use o

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 unction o preventing the poorer

members rom deriving an advantage rom a light-

er regulatory structure. As John OBrennan (2006:

133) argued: Te enlargement process would ensure

that CEE producers would gradually become sub-

sumed into EU regulatory structures, thus ensuring

that CEE advantages in respect o the costs o inputs

would dissolve over time.

Against this array o harmonising measures stands the

structural policies, which are specifically designed to

promote the convergence o less developed regions

Although being the second largest expenditure item

support generally amounts to no more than 2.5%

o GDP in the new member states and the policy iswidely criticised or its inefficient management (Bor-

gloh et al 2012). Indeed the EUs conclusion that the

major recipients, Spain, Portugal and Greece, suffer

rom serious structural problems testifies to the ine-

ficiency o these policies. Moreover, the reorientation

o regional policies increasingly comes into conflict

with classic developmental state strategies. Te shif

to horizontal, as opposed to vertical aid reduces the

ability to channel support to priority sectors, while

the concentration o spending on the poorest regions

makes little sense in the presence o industry cluster-

ing due to external economies o scale.

5. Conclusion

What made the classic liberal view o 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-efits. As Smith (2007: 381) had already pointed out

in the Wealth o Nations a, country could only ben-

efit rom having rich instead o poor neighbours. It is

paradoxical then that the revival o core parts o the

liberal economic policy orthodoxy since the 1980s

should have again enthroned a zero-sum view o 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 manuactur-

ing, most avourable tax system or the lowest cost

structure are expected to thrive whereas the others

will all by the wayside.

19



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 or com-

petitiveness, but unlike a company they could not

simply be dismantled and the valuable pieces sold off.

Te EUs short term solution was massive financial

assistance combined with fiscal austerity while the

long-term solution is expected to arrive rom improv-ing competitiveness, i.e. radical cost cutting in the

crisis economies. Tus the EU becomes increasingly

entangled in a web o contradictions. Afer all, the al-

leged purpose o insisting on the wholesale export o

the Acquis to new members, as well as the Managed

Globalisation strategy, was exactly to prevent a down-

ward race o cost cutting. Moreover, i competitive-

ness decides the economic ate o the periphery its

recovery must necessarily come at the expenses o the

core countries. It may be increasingly difficult to con-

vince the electorates o the latter to guarantee billions

o financial assistance while simultaneously accepting

that the competitiveness o their economies needs to

decrease.

In order to exit rom this zero-sum trap o low over-

all growth and increasing regional disparities the EU

will need to a development model that combines a

rejection o export led-growth in avour o domesticsources with the recognition that the lower develop-

ment levels o the periphery justiy exemptions rom

the principle o reciprocity.

Yet, Europes undamental problem may lie much

deeper than an embrace o dysunctional economic

ideas. Te 1980s switch towards a neo-liberal mac-

roeconomic strategy that lies at the root o the EUs

low growth was not driven by the inherent attractive-

ness o what essentially were pre-Great Depression

convictions but by the difficulty o controlling distri-

butional struggles in a policy regime where the state

accepted its macroeconomic responsibility or assur-

ing adequate growth and low unemployment. But a

policy regime that excluded macroeconomic growth

strategies or reasons related to the process o interest

intermediation had no other option but to interpret

economic success in microeconomic terms o com-

petitiveness. Similarly, as pointed out e.g. by Dani Ro-

drik (1995) East Asian types o developmental strat-

egies require a substantial degree o state autonomy

relative to societal interest groups in order to prevent

developmentalism rom degenerating into crony

capitalism. It is doubtul that the current systems o

interest intermediation in many peripheral memberstates would be able to successully implement such

an approach.

19


17/21

ces papers - open forum #

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

worlds population lived in empires. Despite the intervening age of nation-state building, notmuch 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 generisonly means that we are not using a sufficiently broad analytical concept, capable o includingthis case among those with common relevant characteristics. Te appropriate concept could bethat o empire.

4. Source: AMECO, Gross domestic product at current market prices per head o population.

19


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