Collapse and Recovery of the Global Economy: The 1970s and 80s Section 24.121.

Collapse and Recovery of the

Global Economy: The 1970s and 80s

Section 24.121

Introduction

• Global economy makes each country vulnerable to events in far off places

• Oil embargo that arose out of Arab-Israeli war in autumn of ’73 precipitated roaring post war economy to drop (1974)

OPEC• Oil replaced coal as major energy

source• Vast reserves of Middle East were

easily and cheaply transported under US companies’ control

• 1960 14 oil exporting nations formed the Organization of Petroleum Exporting Countries (OPEC)

• Wanted to control prices• Arab states used oil as a political

weapon against any nation that supported Israel

• Embargoed oil from these nations, cut back production, and quadrupled prices

• Entire global industrial complex now vulnerable

Dependence on Oil• Periodic wars in ’79, 80s interrupted

flow of oil

• But OPEC proved less powerful than originally thought

• GB and Norway became oil exporters with the discovery of oil in the North Sea

• France turned to nuclear energy

• Others turned to natural gas

• Oil prices fell (T HIS BOOK IS NOW DATED) but continues to play critical role in international affairs

The Recession: Stagnation and Inflation• Began in 1974 and most severe since Great Depression• Strangely accompanied by inflation• Rose as high as 27% in GB ’75• Economic growth slowed or stopped• 32 million people were out of work in free market

nations• 10.2% in US (1982)• Unemployment benefits cushioned the blow for Western

nations• Structural Unemployment

– Some industries automated or became less important ‘smoke stack industries’

– Coal mining, shipbuilding– IE. Jobs would not return

Stagflation• Combo of stagnation and inflation shook

governments• Keynesian economic theory called for

government deficit spending to finance slow times

• Inflation made this questionable– IE inflation is usually combated with a

tight money (high interest rate) policy– Unemployment is usually combated

with a loose money (low interest rate) policy to encourage business to expand, hire, produce

• Most nations decided to combat inflation with tight policies– Unemployment remained high

Back to the future?

Faith in Keynes Shaken

• Keynesian precepts were openly challenged

• Margaret Thatcher

– GB prime minister (1979) campaigned against the welfare state

– “Costly, wasteful, paternalistic, bureaucratic, and squashed individual initiative”

Supply Side Economics• New conservative governments (Reagan,

Thatcher) continued to spend on military but curbed spending of social programs

• Offered tax reductions, deregulation, restraints on unions

• Supply side economic emphasized increased production rather than increased consumer demand for economic growth

• “trickle down” effect would help the rich first and then middle and lower classes

• Conservative economic theories of free market began to overtake idea of planned economies

Economic and Political Change in Western Europe

• GB suffered highest rate of inflation, high unemployment, a devalue of the pound

• Propped itself up with foreign loans• Strikes in coal and transportation

weakened the nation (despite pleas from the Labour party not to strike)

• Radical Labours pushed for nonalignment in Cold War and nationalization of industries

• Nation was exasperated with Labour and voted Conservative in 1979

Margaret Thatcher• First female prime minister of any

Western nation

• Cut government spending, reduced imports, resisted union demands

• Shifted focus on investment, productivity, economic growth

• Inflation decreased, unemployment rose

• 1982 economic woes were put aside for Falklands (Islas Malvinas) War with Argentina

•War ensured Conservative victory in elections•New term saw union power curbed, 33% of nationalized industries privatized, easy credit for business and home buyers•Economy grew rapidly (especially in South) but unemployment remained high (Wales, Scotland)UK became leading creditor nation •Thatcher served eleven years, longer than any postwar statesperson in the English-speaking world, and had a great working relationship with Reagan

“New” Labour• 1990s economic growth slowed• Thatcher’s new fiscal measures

led to her fall• John Major challenged with

weakening pound, unemployment, and recession

• Moderate “New Labour” party said that Thatcher era favored the rich and caused greater economic disparity

• Tony Blair and Labour part own in 1997

Mitterand and “Changer la vie”• France turned Left politically in the

1980s as public viewed De Gaulle’s conservative successors as unfeeling

• Francois Mitterand and the Socialist party came to power in 1981

• Had a checkered past including associating with right wing causes in the early 30s and service to the Vichy before joining the Resistance

• A moderate socialist and got party to drop class struggle rhetoric

• Said he would “change life for everyone” in his campaign slogan as he and the socialists gained a majority in the National Assembly

Mitterrand’s Reforms• Labor reforms included:

– Reducing workweek from 40 to 39 hours– Adding 5th week of paid vacation– Nationalization of large banks and

industries– Held to Keynesian theory that reform

would increase purchasing power and offset welfare programs

– But results were:• Trade deficits, loss of investment, loss

of competitiveness, inflation, unemployment, weakening franc

• Mitt Abruptly changed course– Cut off subsidies to decaying industries

and shifted govt. support to technology– But unemployment remained high

“Cohabitation”• Socialist lost parliamentary majority in 1986

and Mitterrand had to govern with a Conservative prime minister

• Cohabitation of a popularly elected president of one party working with prime minister of other party

• Showed resilience of 5th Republic• Gaullist tradition of president dealing with

foreign affairs and defense continued• Unemployment, scandal led to return of

conservative majority in 1993 under conservative Gaullist Jacques Chirac

• Became president in 1995• Socialist prime minister Lionel Jospin reduced

workweek from 39 to 35 hours to create new jobs

• Strongly resisted by employers

West European Socialists• Now championed modernization,

market economies• Moderate and pragmatic• Helmut Schmidt, Social Democratic

chancellor of W. Germany (1974-1982)• Controlled inflation via fiscal

conservatism but unemployment rose to 8%

• Stopped open door policy for guest workers

• W. Germany remained strongest economy in Europe but was burdened by high labor costs from high wages and generous social benefits

The Financial World• NYSE is world largest stock exchange and financial

market• Deregulation of 80s resulted in mergers• New ways to trade attracted smaller investors and

speculation (as opposed to investment) returned• 10/1987 Market crashed• Lost 25% of its value• Felt around the world• But soon recovered and soared• Group of Seven (US, GB, France, W. Germany, Italy,

Canada, Japan) largest economies realized that their economies depended on each other and began to meet periodically

• OECD (Organization for Economic Cooperation and Development)

• Organization of 24 leading industrial nations of world meet to watch economy

The Enlarged European Community: Problems and Opportunities

• In ’73 GB, Denmark, Ireland were admitted into the EC

• Greece, Spain, Portugal were admitted in the 80s

• Austria, Finland, Sweden came in the 90s

• Enlargement brought new problems

• GB (a food importer) objected to the “common agricultural policy” of ’68

• Large nations like France and Italy got subsidies for their farmers to keep prices higher

• GB said it paid more than it got out of EC

• New less industrialized nations brought regional differences

• Free trade still not complete

• France kept Italian wine out

• Idea of a United States of Europe have dimmed

Toward a “Single Europe”: The European Union

• World entered Third Industrial Revolution in the 1970s

• Automation, computers, advanced technology and the things that make them became new mark of progress rather than coal or steel

• 1977 1st personal computer was produced to public

• Service sector grew rapidly

• Global economy began to erode boundaries of the nation state

• Corporations could set up shop anywhere

• The World is Flat

The Single European Act (1987)• 12 members of the EC agreed to

establish common production standards, removed barriers of capital flow, seek uniform tax rates, recognize each others licensing, honor labor rights

• Called a “Europe without borders”• Hoped for uniform currency in future

(Euro) and common foreign policy and defense

• Treaty of European Union signed at Maastricht in the Netherlands (1991) was ratified in ’92

• EU • A domestic market of 345 million people

and largest trading bloc• Accounts for 40% of international trade