Europe used to have a fabulous economy. So did Japan. In the 1950s and 1960s, and even a chunk of the 1970s, the growth rates in West Germany, France, Italy, and Japan were huge, 6 percent per annum and higher. Jobs were everywhere, the opportunities for entrepreneurial success and fortune legion. The times were so great that they inspired nicknames. These were the “thirty glorious years” in France. It was the Wirtschaftswunder (economic miracle) in the federal republic of Germany. The “Golden Sixties” watched over prosperous Japan.
People talk about the Marshall Plan and the heyday of Keynesianism as the backbone of the postwar prosperity, but that omits one major point. Europe succeeded in all its resplendence two generations ago under a regime of fixed exchange rates. From 1944 to 1973, per common agreement, each major European currency (along with the yen) traded at a fixed rate of exchange to the U.S. dollar, and hence to each other.
It is one of the most scarcely appreciated facts of contemporary economic history. The most cherished era of modern prosperity occurred under the auspices of fixed, not floating exchange rates.
This reminder is, unfortunately, apt now in early 2015 as the European Central Bank seeks to imitate its American counterpart the Federal Reserve. The ECB is embarking on a program of “quantitative easing” such that it will flood the banking system with some 1 trillion euros in excess of what the market was already requiring. The major effect has been on exchange rates. The euro has sunk well beneath its ten-year trading range against the dollar. The Swiss have had to drop their fixity to the euro and let the franc appreciate by a whopping 20 percent.
The hope professed on the part of European central bankers is that the QE will at last solve the region’s gaping unemployment and no-growth problem. It is odd that the example of the last time Europe really was prosperous is not inspiring contemporary lessons.
In the 1950s and the 1960s, the idea of a big money binge as a solution to a growth problem met its end, in the academic literature, care of a peripatetic young Canadian economist by the name of Robert Mundell who was doing stints at institutions in Bologna and London and soon to settle for much of his life in Italy.
Mundell was the one who nailed down the now obvious point (it would win him the 1999 Nobel Prize in economics) that given fixed exchange rates, along with any substantial mobility of capital, a country cannot have an independent monetary policy. Therefore (in the 1950s and 1960s), countries should not try to, and instead seek to boost their economies by reforming and lessening tax and regulatory structures.
It sure did work. Non-independent monetary policy accompanied the greatest growth Europe had ever seen, during these thirty glorious years.