IN THE last three months of 1950 a new chapter has been opening in the story of American economic policy towards free Europe and Great Britain. Not, be it noted, a new story--in spite of Korea, rearmament, the imminent end of Marshall aid and the Gray Report[i]--but a new chapter in the story that has been running since Secretary Marshall's Harvard speech of 1947. In a very real sense Marshall aid and the European Recovery Program were functions of a foreign policy that set out to build up convalescent Europe to the point where it could master the Communist virus with its own strength. The United States saw in rising productivity, higher and better-spread prosperity, social improvement and confidence in the future precious allies against the Cominform's cold war. But between the Atlantic Pact meetings of September and the appearance of the Gray Report in the middle of November the emphasis in America's plans for aiding her allies has been moving from economic strength for its own sake to economic strength for the sake of rearmament. To use the crude formula of the Nazis and Communists, the old problem of butter versus guns has forced itself to the front of statesmen's minds; and the decision has reluctantly been made that the desire for butter has now to give way to the need for guns.

Before the execution of that decision is planned in detail and carried out with the zeal and thoroughness that the military situation demands, the allies of the United States on the European side of the Atlantic have to estimate two things: the amount of aid that will be coming from the United States for this rearmament effort, whether in dollars and raw materials or in equipment and weapons; and the type of plan and organization within which the 12 Atlantic Pact governments will be expected to work. Are the habits and methods of three years' work on the European Recovery Plan to be continued, revised or scrapped? Will the United States wish to deal directly--that is to say bilaterally--with each ally, if only to see that the best possible use is made of whatever aid is given? Or will it deal with all at once, as one of a headquarters for strategic and economic planning--making over-all estimates of needs, allocating aid according to an over-all plan of mutual aid? In short, will American policy, within the Atlantic Pact, insist on an integrated approach in which the United States will be a fully involved partner--or won't it? The Gray Report says it should, but the Allies cannot be certain that it will.

That, put very briefly, is the chief question which worries planners and statesmen in London and Paris at the moment these lines are written. But any British observer who has tried from time to time to get outside the urgent preoccupations and special views of his own country--and of Western Europe--will suspect that many Americans are asking quite different questions. And he may suspect that they will want answers to them before they will decide on just what terms the joint rearmament effort is to be set going. What are these questions likely to be and what is the situation that provokes them?

To many Americans the integration of Europe has from the first been the real objective of their policy: a political integration which would stop intra-European feuds, such as that between France and Germany, and an economic integration which would enable industrial Europe, manufacturing for one great internal market, to stand on its own feet and buy and sell freely the world over. Washington's emphasis has been on the latter aim, probably because American policy was better able to exert overt influence on economic than on political policies; whereas in Europe itself the emphasis has been far more on the former, perhaps because the politician finds it easier and more popular to busy himself in talking and thinking about political than about economic integration. From economic integration the Americans expected something like the following result: that by 1952, when Marshall aid was due to cease, Western Europe and Britain would have become capable of earning through multilateral world trade all--or most of--the dollars which they needed. In fact, it was the Americans' expectation that they would be in a position to balance their earnings and their expenditure abroad. Economic integration was to be the road to solvency. If political integration was necessary to achieve the economic result--as British critics persistently suggested--then so much the better for Europe.

It is clear, in spite of the remarkable recovery made by the Western countries (notably Britain), and in spite of the tremendous extra outflow of dollars from the United States stimulated by the Korean war and the new rearmament policy, that the job is not yet done. The countries of Western Europe, even Britain, are not yet ready to stand on their own feet; and it is unlikely that they would have been even if the European Recovery Program had gone smoothly on towards its appointed end in 1952, unflurried by rearmament or inflation or the the fear of imminent war. Now they have to shoulder the burden of increased expenditure on defense, at an average rate of 10 percent of their national incomes. And this necessity comes at a time when most of them are relying far more on cuts in their dollar purchases than on increased exports to cut down their trading deficits. They have to face the necessity of buying more things that cost dollars, and of making demands on their own resources that will certainly raise the price of everything that goes into the production of their principal exportable goods--the prices of raw materials, labor, transport, power. In short, they are being forced to face two years earlier than they expected, and, what is more, in an inflationary situation, the sort of challenge that the European Recovery Plan was supposed to have prepared them to deal with.

It is in this situation that the American asks certain questions. Will the Western partners concert their efforts to meet this challenge, or will there be a helter-skelter dash for safety to the cover of tariff walls, quotas and currency controls--a sauve-qui-peut? Will the tender shoots of liberalized trade, coördinated planning, exchange of information, limited convertibility of currencies, which have been coaxed into growth with such patient and hard work, shrivel up and die? In short, is European economic integration in danger of a deadly setback? And, if so, what should the United States do to protect the beginnings that have already been made?

In order to judge what governments are likely to do in the future we must first examine what they have done so far in the past, under known pressures of party politics and internal situations. British policy towards European integration, for instance, can be understood only in the light of the British Government's passionate attachment to its full employment policy, and its deep distrust of alternative policies pursued by many European governments--for instance, France, Belgium and Germany. Likewise the unashamed protectionism of French policy--so strikingly in contrast with the sincere desire of Frenchmen for European federation--cannot be understood without taking into account the precarious balance among the bourgeois parties in the governments that have been ruling France. Mr. Hoffman, when he gave his famous warning against economic nationalism and his exhortation to Europe to build a "dynamic, expanding economy," was perhaps not fully aware of such limiting factors. What was probably foremost in his mind was the knowledge that one of the long-term aims of Congress in passing the Economic Cooperation Act was--quite legitimately--to ensure an expanding overseas market for American goods and capital, and that "integration" in Europe would be an essential step in a return to multilateral and expanding world-wide exchanges.

With the passage of time this fundamental conception has been lost sight of--even by American officials--in the setting up and working of European economic institutions such as the O.E.E.C. These bodies have tended to become ends in themselves, and the will to use and develop their authority has tended to become--certainly in the continental mind--the test of sincere attachment to the cause of European integration. In other words, many continental ministers and some British and American officials saw in the working of the European Recovery Program the opportunity to build up the authority of the institutions which they believed to be essential to the unification of Europe--which is not what Mr. Hoffman meant by integration. On the other hand, the British Government (and here is the source of much misunderstanding and recrimination) remained conscious of the world-wide problem and the American objective, and they resisted--for this and other more parochial reasons--all concentration on exclusively intra-European bodies and authorities. If one remembers, too, that the main continental countries have never felt directly responsible for paying their way in trade with the world outside Europe--before the war this object was achieved for them by the sterling area's investments and raw materials--the confusion of aims in their counsels becomes understandable.

As a result, the 12 months that have passed since Mr. Hoffman made his appeal for integration have produced, by American standards, a poor record of achievements. There have been, it is true, some important measures of integration: the gradual removal of quantitative restrictions on intra-European private trade; the starting of a limited system of multilateral payments and settlements through the European Payments Union; some chequered progress with the Benelux Union; and the progress in negotiating the Schuman Plan. But the European economies have remained both in principle and practice highly protectionist and separatist. (The conference on tariffs at Torquay in Britain has revealed this.) Whereas in Britain the resistance to integration takes the form chiefly of comprehensive quantitative restrictions and government bulk buying, in continental countries tariff walls are as high or higher than before and there is a strong reluctance to take the further measures of liberalization discussed in O.E.E.C last month. Moreover, the first quarterly settlements of the new European Payments Union show how great is the gulf between setting up a limited system of multilateral settlements and its successful operation. Indeed, on present evidence it is difficult to see how the gulf can be bridged.

This, then, is the record to date of an effort towards economic integration that has been painfully achieved, under very favorable conditions and with American help. It can and is said that greater risks should have been taken, that the long-term result of restoring a single market--which Europe actually had in the days of the gold standard--would be increased prosperity all round. But it must not be forgotten that some of the risks involved precisely those effects which Marshall aid was designed to avert: unemployment resulting in political and social discontent, hardship to employers and employed unable to adapt themselves to competition, and direct attacks on such vested interests as high-cost agriculture and protected industries of strategic importance. Two outstanding examples leap to mind. The first is the massive opposition of French peasants and wine-growers to the project of customs union with Italy, an opposition which many Frenchmen found quite compatible with a fervent belief in European federation. The second is the resistance of the British Government--supported by the trade unions--to the Schuman Plan for integrating the coal and steel industries of the West. In each case a threat was seen to a crucial political, social and economic interest which was deemed by most people far more important than any long-term benefits that liberalization or integration might bring. It is perhaps fair to say that in each case the arguments used and the emotions aroused were not unlike those used by the American manufacturer in favor of high tariffs.

Two things, then, seem clear. First, the past record of progress towards economic integration in Europe raises only feeble hopes for the future. Second, American opinion has either misjudged--or been misled about--the possibilities of moving more rapidly in that direction. The mistake is pardonable; indeed, it was probably inevitable. For in most people's minds there has been from the first a confusion between economic integration as clearly defined by Mr. Hoffman at the end of 1949 (which meant little more than a relation to free competition and efficiency); economic integration as more boldly and vaguely envisaged in 1947; and political integration as discussed in the Council of Europe in 1950. The blame for that confusion must be shared between America and Europe. In Europe, statesmen, politicians and leaders of public opinion have persisted in advocating political integration--or federation--without considering what its economic effects would be on the individual voter, let alone troubling to explain to him that they might be disagreeable. (It would be interesting to see, for example, how the Belgian coal miner would take the shutting down of high cost mines under the Schuman Plan.) And it has been tempting for Americans to conclude that men who are so zealous at Strasbourg for political unity must--to be consistent--show the same zeal for economic integration at Torquay in the tariff negotiations. It may, perhaps, be pointed out in passing that the British have persistently criticized the existence and implications of this confusion, and have been more than once accused, not always with justice, of "dragging their feet" in the march towards integration.

Two other causes of past confusion should be mentioned in any attempt to assess the future prospects of the integration movement. The first is the fact that for the industrial countries of Europe it has been until recently only too easy to sell their goods. With so many of the world's needs unsatisfied, with German and Japanese competition still not formidable, businessmen as well as governments have found it unnecessary to keep in mind either the salutary effects of competition or the future need for bigger markets and cheaper exports. These delusive conditions were disappearing until last spring but have now reappeared under the stress of the rearmament prospects.

Second is the fact that America's own efforts towards liberalization of trade, as distinct from the Administration's policy of subsidizing dollar purchases by America's allies, have not given that promise of a return to free, multilateral trading conditions under Washington's leadership for which European governments had hoped. That is to say, the benefits to be expected in the long run from greater freedom and increased competition have appeared distant and unreal, despite the generosity of American aid. This fact, too, may change if the conclusions of the Gray Report recommend themselves to American opinion. Indeed, there is a growing tendency on the Continent--and even more in Britain--to say that Europe will go into integration just as fast as the Americans will themselves. The statement is vague and elusive, not to be taken too seriously; but there is a kernel of meaning in it which should not be disregarded.

On present evidence, therefore, it is likely that the strain of rearmament and the approach of the end of the European Recovery Plan will set back the general cause of economic integration in the sense that Mr. Hoffman urged it. On the other hand, the Schuman Plan, if it can be operated efficiently and swiftly, will certainly revive faith in the possibility of limited moves in similar directions. It should provide specific evidence of just what effects on enterprises and individuals such experiments can have, evidence that may work both for and against integration in other industries. But it would be unduly pessimistic--even rash--to assume that the cause of integration is lost or safe until more is known of what is intended in the planning now going on in the various committees of NATO--the North Atlantic Treaty Organization. It is clear, for instance, that ministers and their advisers are keeping steadily before them the need to see that rearmament does not undo the economic progress of the last three years. It is clear, too, that the relationship between the United States and the industrial countries of Europe (barring of course neutral Switzerland and Sweden) which is likely to result from the work of NATO will be closer than anything that has existed between E.C.A and O.E.E.C. The daily discussion of defense problems, touching as they do every aspect of each country's economic and political life and leading to full exchange of information, is bound to develop new habits of coöperation. Perhaps it is not too much to believe that it may even develop new institutions.

It may be useful first to discuss these possibilities briefly and on the broadest basis, indeed to speculate boldly. No one knows yet whether the United States sees in NATO a defense association of a new and special kind, or the making of a new international institution. For the British in particular there is a world of difference between these two ways of looking at it. If it is to be the former, then no far-seeing British statesman can dismiss the possibility that it will last only as long as the Soviet menace that brought it into being lasts. He can accept it as an ad hoc instrument of foreign and military policy, but not as the permanent basis of political and economic coöperation with the United States and other countries which he would like. If it is to be the latter--the permanent international institution or Atlantic community, of which Mr. Acheson has spoken more than once--then it is capable of fulfilling the aims of the British foreign and economic policy. For it might provide the basis on which Britain could plan her policies not as a European but as a World Power, and pursue common policies with Western Europe without weakening the special forms of integration which exist within the British Commonwealth of Nations.

One can, perhaps, go so far as to say that the whole future of British foreign policy--perhaps of Europe--depends on the answer to be given to this question by the United States. If there is eventually to be an integrated Atlantic community in the sense that Mr. Hoffman visualized an integrated Europe, then Britain and the Commonwealth can concentrate on that prospect, and in the long run take Western Europe with them. If there is no hope whatever of such a consummation, then there is the possibility that Britain--so far as Commonwealth ties and interests allow--will turn with more interest towards Europe. At the moment the choice is not, and cannot be, made. It is obvious to everyone, however, in which direction the British bias lies. If the choice had to be made in favor of Europe, then Americans would have to face the possibility that European integration under British leadership would mean the organization of its economic defenses, and those of some Dominions, against American competition.

These, it is repeated, are long-term, airy speculations. Nevertheless, they are not entirely absent from the thoughts of British and European ministers and officials when they find time to look more than a year or two ahead. What is perhaps more important for the present argument is to examine what could or should be done within NATO to prevent a return to economic nationalism in Europe.

There seems to be one point, and one point only, at which there is a hope of breaking the vicious circle referred to in the Gray Report, when it insists that the Western nations, if they are to find the resources and industrial capacity needed for successful and continuing rearmament, will have to increase their efficiency, expose themselves to competition and all the risks of adjustment and reorganization it would impose. The first is that the NATO governments, in assessing and distributing mutual aid for defense, should work out a new basis for giving and receiving aid, in which the emphasis will be more on the internal relations within the European and American economies and less, as at present, on their external balance of payments positions. To understand how important this is it is necessary to grasp the British official attitude to European integration.

Setting aside for a moment the merely insular attitude of many Englishmen, the limitations of Labor Party economic doctrine and the rigidity of its present planned economy, there are more permanent and substantial reasons why the British, under any government, would prefer to coöperate in an Atlantic than in a purely European partnership. First there is the fear that a European connection would force them towards a political federation, the obligations of which would cut across their ties with the Commonwealth and their psychological affinity with the Americans. More and more the Continent is beginning to understand this attitude. There is, second, their conviction that the only basis for a secure and prosperous Western world is to get the Americans well and truly committed in Europe, with men and money, and that concentration on European integration might well confuse the issue. In support of this view they can point to the persistent tendencies on the Continent to think of an integrated Europe as a "third force" standing between the United States and Russia--a conception that strikes the British statesman as unreal and dangerous. If Americans were to return, as Mr. Gray recommends, to the concept of partnership in Europe, and if the coöperative effort could be channelled through the Atlantic Pact, the British would certainly put more effort into cooperation. As it is, Mr. Bevin is obliged to ride dangerously and uncomfortably on two horses at once.

The ad hoc methods by which short-term defense aid is now being distributed do not augur well for such a development. In view of the urgency of getting something done, that perhaps is inevitable. But there are other and encouraging signs which the British would like to see growing. An attempt is clearly being made to decide the allocation of arms production on the principle of placing the job where it can be done most efficiently and where there exists productive capacity that is not being fully used. This might be an important step towards real integration not only of the European but of the Atlantic economies. If it succeeds--and much depends on the attitude of the American staff officer--the old idea of America providing money for Europeans to buy American goods will give way to the idea of producing goods where they can be got most cheaply and quickly, and where they can be most easily paid for by all NATO members. The fact that the Gray Report has taken up and recommended just such ideas as the proper basis for future aid is extremely encouraging. Thus it says:

To facilitate the required expansion of Western European defenses in accordance with joint plans, the United States should be prepared to continue supplying aid, apart from military equipment, for another 3 or 4 years beyond the present time. The needed amount of aid depends upon the rearmament effect actually undertaken by individual countries, and its total impact on their economies, these factors being worked out primarily through the economic and production planning agencies of the North Atlantic Treaty Organization. . . . Such aid should be administered on a basis that will contribute to the fullest possible use of European resources, encourage intra-European trade, and help to integrate the European economic effort.

To sum up. The last twelve months, which have been exceptionally favorable for European recovery, have seen some limited progress towards, but considerable confusion about the objectives of, European economic integration. It was to have been the first step in the renaissance of a multilateral world with an expanding, dynamic economy. Largely because of the confusion, progress has not been as fast or as real as Americans had hoped or had been led to believe was feasible. On top of this, the renewed strain on European economies, in anticipation of which Mr. Hoffman first asked Europe to start integrating, has been abruptly advanced from 1952 to the present time by the shock of Korea. This has caught the Europeans short, without any real integration of their economies and with no natural resistance to the sauve-qui-peut protective instincts of economic nationalism. Inflation, shortages of raw materials and new threats to foreign exchange resources are already making their appearance.

If this process continues, Europe will be in danger of committing undignified suicide. Whether it continues depends very largely on the evolution of American policy through the Atlantic Pact. If, in approaching the problems of rearmament, the Americans intend to develop a close Atlantic-European community through joint institutions and joint planning, they will provide the spine which the unconnected vertebrae of British policy at present lack so badly. It is in their power to resolve Mr. Bevin's dilemma. If they do, then the Americans and the British between them may at last be able to "go places" with the rest of Western Europe. In short, the key to integration lies in the methods by which the defense of the West is organized.

[i] "Report to the President on Foreign Economic Policies," by Gordon Gray. Washington: U. S. Government Printing Office, November 10, 1950.

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