1. An Economic History of Europe by Justin Kisieliauskas

2. Economy and politics at the close of the nineteenth century Era of the minimal state Role of the government – setting rules of the game (law, industry, trade etc) Role of the central bank – money supply Macroeconomic policy was absent Why? “Economy is self regulating system. Wages and prices absorb economic shocks. Equilibrium was automatic. Intervention should be minimal”

3. I WW changed it all Trade routes disrupted Gold standrad suspended Price levels diverged dramatically Parliamentary democracy was introduced Trade unions and social-democratic parties gained power

4. Situation in Europe Nominal exchange rates differed greatly from pre war period Inflation was uncontrolled High wages High unemployment and trade unions unwilling to cut wages Low competitiveness compared to USA International reserves flow to USA Great depression appeared in 1929

5. Great depressiondepression First international growth disaster Originated in USA (policy errors and absence of policy response) Negative shock to consumption and investment following stock-market excesses (bubble burst in 1929) Lowered business confidence, reduced wealth, consumption, investment. Banking system went into deep decline Industrial production fell down Food and primary goods prices fell dramatically. USA started protectionist trade policy USA stopped borrowing money to Europe World trade fell down by third

6. Situation in close Why Depression: Lowered prices Nominal wages left at the same level Real wages increased This meant low profit and possibility to survive for companies What to do? Gold standard was linking exchange rate to gold Countries could’t use monetary policy and devaluate currency (force inflation) Britain, Scandinavian countries stopped using gold standard and started inflationary policy.

7. France and Germany France fare well because of high international reserves to cover loss in falling export. France was last to leave gold standard. Germany – humiliated by military defeat Reparations Depression and falling exports Hyperinflation High unemployment (25perc) 1933 Nazis got 40 percent of votes Economy of Hitler

8. Macroeconomic management in the second half of the twentieth century Keynes (The General Theory of Employment, Interest and Money) economics Fiscal policy: Increased Government spending and stimulating economy; Decreased Government spending and reducing speed of economy.

9. Consequences Countries were fighting depression by increased spending (demand managing); Most European countries increased debts from 2 to 5 times; Full employment policy in Germany by cutting taxes ; Nations like France and the UK also failed to raise productivity sufficiently, and expansionary policies therefore quickly encountered balance-of-payments problems; Scandinavia, Austria and Germany established tradition of co-operation between unions, the state and employers; When and where Keynesian-inspired demand management was applied skilfully, economic fluctuations were dampened. Countries entered golden age in 1950-1975 This period had and other sources: high profits and investments, technology transfer, increased openness to trade and, as a consequence, high total factor productivity.

10. Welfare state Tax-financed unemployment is automatic stabilizer Welfare states are high-tax economies, and an increase in unemployment will immediately reduce government revenue and increase government outlay, which will have a stabilizing effect. Likewise, in an economic upturn high taxes and lower spending on unemployment programmes will slow down the expansion. Government does not need timing. Labour market does the timing.

11. Inflation targeting and the Phillips curve Inflation targeting means that an independent central bank is given the task of pursuing a monetary policy which aims at a given yearly inflation target, say 2 per cent.

12. Karl Marx’s trap: the rise and fall of the socialist economies in EuropeMarx’s Karl Marx and Friedrich Engels of The Communist Manifesto (1848) developed a theory of history with a surprising lesson for the socialist economies, an economic experiment that ultimately failed. Marx argued that social systems thrive and expand only if they can develop technologies and sustain an increase in material welfare. It failed because it did not deliver technological progress and material improvements on a scale comparable with the market economies of Europe. Socialist economies represented an almost total dominance of politics over the economy, a maximum state.

13. Soviet Soviet planning an abolition of private ownership of resources and the means of production; very high investment ratios; strong bias towards investment in capital goods industries; neglect of consumer goods production. No efficiency No market prices No demand Invisible hand of Smith was replaced by visible hand of Soviets

14. Consequence of planningplanning Karl Marx predicted, economic systems that do not raise the material welfare will not survive.

15. Welfare State 20 cent: Government spending – 10 percent (law and order, infrastructure investment and defence) In 1930 pension costs did not exceed 1 per cent of GDP in Germany or Sweden. The modern Welfare State, with extensive coverage including subsidized or free healthcare, education, housing, childcare and old-age pensions was born after the Second World War. Since the 1970s, welfare spending has been between 25 and 35 per cent of GDP in most European nations, of which about half is transfers and half is public consumption in health and education.

16. The uses of local and central government spending in Europe in 2005. Percentage of total

17. Why so spending? nature of the Welfare State egalitarianism and redistribution inter-temporal transfer of resources over the life cycle of households and individuals Redistribution, meaning transfers between classes which made it possible for the majority of low and middle-income earners to tax the rich Progressive tax Net welfare state balance is the difference between (1) the household’s contribution to the funding of Welfare State expenses from taxes and other contributions and (2) the mon- etary value of the household’s use or extraction of Welfare State transfers and services. We look on the Welfare State as a provider of transfers and services which helps households to smoothe consumption possibilities over their life cycle.

19. Pros and cons of WSWS