MPIfG Working Paper
03/8, July 2003
Postwar Europe: Aligning Domestic and International Goals
Max Planck Institute for the Study of Societies
This paper looks at the historical developments that
led to the Schuman Plan in 1950, which today is seen as a starting signal for
the European integration process. It argues that this announcement by the French
foreign minister constituted a genuine change of strategy that can only be
understood in the light of the preceding historical chain of events. The first
steps of European integration were part of a search for suitable institutions
capable of dealing with Europe's economic and political problems, which also
involved the Bretton Woods institutions, Marshall Aid and the OEEC, and,
finally, the ECSC. These organizations' respective fate depended on the
strategies of key states, which in turn were driven by domestic concerns.
Aligning their interests took several steps and was only completed when all
three organizations existed in parallel. Throughout this process, all states had
to abandon their preferred course of action and learn to settle for second best.
Dieses Papier betrachtet die historischen
Ereignisse, die 1950 zur Bekanntgabe des Schuman-Plans führten, der heute als
Startschuss der europäischen Integration angesehen wird. Es argumentiert, dass
Schumans Initiative ein dramatischer Strategiewechsel zugrunde lag, der nur vor
dem Hintergrund der vorangegangenen historischen Sequenz verstanden werden kann.
Die ersten Schritte europäischer Integration waren aus dieser Sicht Teil einer
umfassenderen Suche nach institutionellen Lösungen für Europas ökonomische
und politische Probleme. An ihr waren die Bretton Woods-Institutionen, die
Marshall-Hilfe und die OEEC sowie schließlich die EGKS beteiligt. Der Erfolg
dieser Organisationen hing vom Verhalten der wichtigsten Staaten ihnen
gegenüber ab, welches wiederum durch innenpolitische Überlegungen bestimmt
war. Ihre Interessen in Einklang miteinander zu bringen, benötigte mehrere
Anläufe und war erst abgeschlossen, als alle drei Organisationen nebeneinander
bestanden. Im Verlauf dieses Prozesses mussten alle Staaten lernen, dass die von
ihnen bevorzugte Entwicklung nicht mehr länger möglich war, und aus ihrer
Sicht zweitbeste Lösungen akzeptieren.
This paper looks at the formative phase of European
integration in the immediate postwar years. It seeks to explain the historical
development leading to the Schuman Plan. With the benefit of hindsight we know
that Schuman's speech in 1950 inaugurated a long European integration process.
At that time, however, it was part of a larger effort to stabilize postwar
Europe that involved the Bretton Woods institutions, Marshall Aid and the
Organization for European Economic Cooperation (OEEC), and finally the European
Coal and Steel Community (ECSC). Their consecutive creation was closely related
and European integration resulted from the successes and, more importantly, the
failures of earlier attempts to resolve its economic and political problems.
Thus, to understand the origins of the European integration process we have to
look at the preceding historical sequence that preceded it. The "uniting of
Europe" neither started from scratch nor was its future course foreseen.
The claim is that institution-building in Europe crucially
depended on aligning the domestic and international goals of three leading
states, the United States, Great Britain, and France. Each followed its own
strategies based on domestic politics. Thus, this paper agrees with those
authors who conceive of European integration as driven by national interests.
However, although integration at first meant mainly economic integration, the
founding states did not follow commercial interests alone as the liberal
intergovernmentalist approach maintains (cf. Moravcsik 1998: 3, 18, passim). In
fact, the French initiative to pool coal and steel resources ingeniously
combined economic interest with foreign policy concerns.
Furthermore, this article stresses that neither the
institutions chosen nor the fact that European states opted for integration in
the first place can be understood without reference to anteceding developments.
Thus, it shares the recent concern of historical institutionalist writing on
sequences and temporality (cf. Lieberman 2001; Büthe 2002). Rather than
aligning national interests through a single, separate lowest-common-denominator
bargain, it was achieved sequentially by creating new institutions in response
to the (partial) failures of preexisting ones:  Marshall Aid and the OEEC were an
answer to the shortcomings of the IMF for postwar reconstruction; the OEEC was
supplemented after two years by the European Payments Union (EPU) to overcome
Europe's deadlocked economic situation and by the ECSC to reconcile German and
French reconstruction; and the stabilization of Western Europe was completed
only after the IMF, OEEC, and ECSC existed side by side. No single state had
been able to realize its preferred institutional order but all had to settle for
second or third best. Yet, in retrospect, these second best solutions led to
Aligning national interests turned out to be decisive for
the institutional order of postwar Europe. It also gave European integration a
specific form, that is, economic integration. While this kind of integration
developed dynamically, the "road not taken" (Scharpf 2002: 2-4) meant
that later attempts to move beyond market integration proved difficult. As early
steps increased the probability of further steps being taken in the same
direction, it seems worthwhile to better understand why and how the initial
steps were taken in the first place.
Outline of the Paper
This paper is organized in three sections dealing with the
Bretton Woods' blueprint for an international economic order, Marshall Aid and
the OEEC, and the run-up to the Schuman Plan respectively. Thus, in the first
section the earliest attempt to foster a viable international economic order -
the Bretton Woods agreement - will be discussed. Though this agreement sought to
devise a set of rules and organizations matching domestic and international
aims, it failed to deliver these results in practice, mainly because it lacked
sufficient means to support economic recovery. Hence, to sustain the domestic
reconstruction efforts of European governments a more comprehensive approach was
This was forthcoming with the European Recovery Program
(ERP) or Marshall Aid, which is dealt with in Section Two. American policymakers
tried to conjugate financial assistance with setting up a political framework
for cooperation. In response to their demands, the Organization for European
Economic Cooperation (OEEC) was created for distributing Marshall Aid. It was
reasoned that only a joint recovery effort could work and the OEEC was to fuse
national economies into a common market. Moreover, economic integration was
supposed to become a vehicle for political integration. During the first two
years of its existence, however, the OEEC failed to produce anything of the
sort. Distributing Marshall Aid meant intense haggling, which heightened
tensions between the states involved. In 1950, though, an important step towards
remedying Europe's economic problems was taken by establishing as part of the
OEEC the European Payments Union (EPU), which allowed for multilateral clearing.
This institution succeeded in facilitating intra-European trade. Prior to that,
dwarfed trade had been a central obstacle to Europe's economic recovery -
unresolved by the Bretton Woods institutions. Whereas the OEEC succeeded in
economic terms it never came close to being a vehicle for political integration.
Limited to intergovernmental cooperation, it also failed to ease France's
foreign policy concerns about Germany. Again, a different institutional
framework was needed.
Section Three deals with those developments leading to the
Schuman Plan for pooling France and Germany's coal and steel resources. It will
be argued that this step was not taken for the ideal of European unity but
rather because France's preferred alternatives had faltered as its allies, Great
Britain and the United States, followed a different course of action. In fact,
it was a fairly dramatic change of strategy deemed necessary to achieve two
essential goals: controlling Germany and securing access to the Ruhr's resources
vital to France's domestic reconstruction efforts.  At home, the Monnet Plan
rested on the assumption that France could make use of the Ruhr's resources to
modernize its industries in advance of Germany's recovery - as a safeguard
against the latter's potential dominance. Hence, France's security concerns were
linked inseparably to its economic objectives.
Woods: Designing Multilateralism
The most important lesson drawn from the interwar period
had been that any international order would have to take into account its
national consequences as well. As Karl Polanyi (1978: 309-311) argued, the price
for re-establishing the gold standard had been to preclude any meaningful social
policy and thus a failure to mitigate social hardship brought about by increased
market dependency. Subjugating domestic politics to a monetary order in the end
led to the collapse of democratic political institutions in many states as well as
of the international economic order since states turned towards protectionist
and nationalistic strategies instead. Hence, building the postwar order entailed
a dual task: re-establishing a fair measure of international trade while
allowing for domestic policies to ensure social welfare for the population at
large. This dual task has been called "embedded liberalism compromise"
(Ruggie 1982). However, fostering this compromise in Europe was not achieved
without difficulty and rested on a major effort by the prime architect of the
postwar order, the United States.
While the U.S. had already been in the ascendancy prior to
World War II it only attained a dominant position through the war. In terms of
military and economic capacity America was second to none after the war,
outdistancing any potential contestant by far. Traditional European powers as
well as the Soviet Union had been severely hit by the war and were partially
struggling for survival (cf. Cox 2001: 314-315). Thus, the only candidate left
to shape the postwar world was the United States. Although clearly in a dominant
position, it still needed the assent of those states that were to be included
into the new economic and political order. Hegemonic leadership does not touch
upon other states' formal sovereignty and depends on a certain degree of
legitimacy (Gilpin 2002: 165-166).  Accordingly, the question at the time was how
to accommodate the need for states to comply with the rules of the international
order without emasculating their capacity to satisfy the demands of their
domestic societies (James 1996: 30).
the Postwar Order: The Bretton Woods Agreement
Through 1943 and 1944, when it had become clear that
Walther Funk's proposals for a German dominated international financial order
would not materialize, discussions between British and American officials took
place outlining the postwar economic order.  This marked the transition of power
from the old hegemon to the new one, with the compromises struck reflecting who
was to set the tone thereafter. The leading figures at the time were John
Maynard Keynes and Harry Dexter White. Both had written proposals for a postwar
economic order and personally headed the respective delegations negotiating
Keynes and White disagreed on a number of substantial
points, probably due to differences in the situation and prospects of their home
countries (Boughton 2002). Most importantly, they had quite different ideas
about the new institution that was to be created. Whereas the British proposal
emphasized balance-of-payments assistance, the American placed the emphasis on
exchange rate stability. 
Keynes proposed an International Clearing Union (ICU),
acting much like an international central bank, inserting liquidity into the
international economy and creating an international currency
("Bancor") which should allow for multilateral clearing. The value of
Bancor was to be fixed in terms of gold; national currencies in turn were to set
their par value in terms of Bancor. According to the underlying diagnosis,
international trade was hampered by continuing bilateralism. Inconvertible
currencies meant that a country A that had surpluses with B but trade deficits
with C could not settle the latter with the former. As a consequence, the
overall volume of international trade remained far below its potential size. An
obvious cure would have been a return to the gold standard, but this was haunted
by a "deflationary bias." If a country had a persistent trade deficit
- importing rather than exporting net value - there were few alternative
mechanisms for adjustment other than to shrink its imports by deflationary
measures. Adjustment costs fell on the debtor country unmitigated by the
expansionary policies of the creditor. Bancor was conceived to enhance
multilateral settlements as well as to provide additional liquidity (cf. on
these points Triffin 1957: 93-99).
White, on the other hand, favored setting up an
international stabilization fund that buffered stable exchange rates (Bordo
1993: 33).  Accordingly, the key institution of the plan was the United Nations
Stabilization Fund equipped with five billion dollars by member states'
contributions. Currencies were to be declared in terms of "Unitas", an
international unit of account rather than an international currency, and member
countries were to be obliged to keep their par value constant except for a
fundamental disequilibrium in their balance of payments. Countries facing a
trade deficit with a particular country up to a certain limit would be able to
sell their own currency to the Fund against that of the country in question,
thus allowing for a higher level of bilateral trade. Exchange rates could be
altered by ten percent after consulting the Fund; any greater change would
depend on a three-quarter majority in favor of it within the Fund.
Thus, Keynes' and White's plan differed on two crucial
points. First, the amount of liquidity to be provided covered a range between
$5bn and $30bn respectively. Second, the former plan allowed for multilateral
clearing, while the latter did not since countries did not have to make their
currencies convertible into third currencies (Mikesell 1994: 13).  Continuing
bilateralism and a severe lack of resources for reconstruction would turn out to
be lasting problems for the European states not resolved by the Bretton Woods
institutions and eventually necessitating a new approach within different
organizations. However, by the time the Joint Statement by Experts on the
Establishment of an International Monetary Fund (Horsefield 1969b: 128-135) was
finally published in 1944, White's ideas had prevailed. The Americans feared the
inflationary consequences of Keynes' ICU, which in their eyes failed to limit
the amount of credits the U.S. would have to provide (cf. Mikesell 1994: 14-15).
Whatever the intellectual merits of the two proposals were, only the U.S.
government had the muscle to promote its ideas effectively. 
In spite of these differences a remarkable degree of
"expert consensus" (Ikenberry 1992) prevailed throughout these
negotiations, paving the way for the agreement to be finally reached. This
consensus rested on a shared Keynesian understanding of the economy, which
called for active intervention and demand management to control business cycles.
Four points in particular deserve attention (cf. Cohen 2001):
(1) Neither floating exchange rates as in the 1930s -
perceived to carry the risk of competitive devaluations as well as discouraging
investment and trade - nor too rigid an exchange rate regime as the gold
standard of the 1920s seemed acceptable any longer. The aim of reconciling a
smooth functioning of the international economy with national welfare politics
generally was supported.
(2) If exchange rates were not to float freely and thus
could not be used for national macroeconomic adjustments, a higher level of
international liquidity would have to be guaranteed, forestalling the spread of
deflation as had happened in the past. Again, any new international monetary
order would have to allow for expansionary policies at home.
(3) At the same time as national governments should retain
the right to pursue welfare policies, this freedom of action was circumscribed
by a set of rules maintaining a liberal international order. After a brief
transition period states were expected to move towards currency convertibility,
allowing for trade in goods and services, and to remove related trade barriers
(e.g. tariffs, import quotas).
(4) Lastly, after the experience of the thirties, a more
institutionalized form of dealing with international monetary matters was needed
badly. Binding governments to common rules was supposed to prevent nationalistic
Thus, the quest for building an international economic
order can be summarized as follows:
"The architects of the Bretton Woods system wanted a
set of monetary arrangements that would combine the advantage of the classical
gold standard (i.e., exchange rate stability) with the advantage of floating
rates (i.e., independence to pursue national full employment policies). They
sought to avoid the defects of floating rates (destabilizing speculation and
competitive beggar-thy-neighbor devaluations) and the defects of the fixed
exchange rate gold standard (subordination of national monetary policies to the
dictates of external balance and subjection of the economy to the international
transmission of the business cycle). As a consequence, they set up an adjustable
peg system of fixed parities that could be changed only in the event of a
fundamental disequilibrium." (Bordo 1993: 5)
The Articles of Agreement  establishing the International
Monetary Fund (IMF) formulated in July 1944 at Bretton Woods embodied these
aims, and yet, due to a misapprehension of the situation the world economy was
in and several inconsistencies within the agreement, the provisions proved
inadequate to deal with problems still to come. 
According to the Articles, each member country defined a
par value of its currency in terms of gold or any currency convertible to gold
(U.S. dollar) and committed itself to keep exchange rate fluctuations within the
range of one percent on either side of the parity. However, each state was able
to depreciate - as well as appreciate - its currency up to ten percent after
informing the Executive Board of the IMF. As under the White Plan, larger
changes were also possible to correct a "fundamental disequilibrium" -
a term never properly specified - but the changes depended on IMF consent. These
rules were intended to apply symmetrically to all countries, i.e. in principle
to the United States too. Yet, by 1950 this adjustable peg currency regime had
turned in fact into a "fixed-rate dollar standard" without symmetry
(McKinnon 1993: 14-15).
Furthermore, the Articles wanted to limit trade and
exchange restrictions. Whereas international capital movements could be
regulated to minimize currency speculation, members were not allowed to
introduce any restrictions on payments and transfers for current international
transactions (Art. VIII.2.a) and they should abstain from discriminatory and
multiple currency arrangements (Art. VIII.3). At the same time, however, the
transitional arrangements (Article XIV.2) stated that members may "…
maintain and adapt to changing circumstances […] restrictions on payments and
transfers for current international transactions." Ideally, the
transitional period was to end after five years, yet in reality it lasted until
1958, when 15 European countries finally moved to currency convertibility
(Horsefield 1969a: 466). Prior to that, only a few currencies - not a single
European one - were convertible.
Finally, the borrowing facilities of the International
Monetary Fund resembled White's ideas - and American interests - much more
closely than Keynes'. The total sum of funds available was around $ 8.8 billion
made up of member countries' quotas (Bordo 1993: 36). This system operated as
follows: a quota was assigned to each country roughly according to its economic
power, obligating it to pay into the Fund a subscription of an equal amount,
with one quarter in gold and three quarters in its own currency. From this pool,
members were allowed to "borrow" - selling their own currency against
a specific other currency needed to settle a deficit with that country - up to a
certain limit defined by the quota. These provisions failed to allow for
multilateral clearing since currencies were still purchased bilaterally. In the
absence of convertibility, deficits with one country could not be balanced by
surpluses with another, rendering it impossible to settle balances of payments
Taken together, these were not just minor issues but meant
instead that the very blueprint for an international economic order did not
address some of the most pressing problems Europe faced after the war. As one
commentator has remarked: "In retrospect, the belief that this system could
work was extraordinarily naive" (Eichengreen 1998: 98). Most importantly,
the intensity and length of the transition period were grossly underestimated by
the U.S. government. The architects of the Bretton Woods system thought that
international trade would cure Europe's immediate problems, yet not the least of
their problems was the fact that these states were not ready for international
trade - or, rather, not willing to liberalize at the expense of domestic
reconstruction efforts and welfare policies. It is quite possible that the
provisions made at Bretton Woods might have worked at a different time, but
there was little the IMF offered that was capable of transforming the dismal
state in which the European economy found itself into a functioning liberal
The next section will look at some of the problems in
Western Europe, which damaged the initial Bretton Woods system so badly that it
died of "… infant mortality, or, if a harsher view is taken, of
infanticide by its European parent" (Milward 1984: 466).
Situation after the War
With memories of the collapse of the world economy in the
thirties still vivid in their minds, the architects of the postwar order wanted
to secure an international framework that effectively prevented moves towards
economic autarchy. Mundane as this may sound, the stakes in reconstructing
European economies were high. Fostering embedded liberalism entailed
domestically the task of increasing welfare for the population at large - not
just as a desirable objective but as an imperative if capitalism was not to be
discredited permanently as an economic and social order (Maier 1987b: 161). 
Achieving rapid economic reconstruction meant that the short-term actions of
governments quite frequently contradicted the rules and aims of the Bretton
The immediate economic prospects were rather dire. By 1947
the United States had already spent some $ 9 billion on aid programs, but most
European countries still depended on substantial amounts of foreign aid.
Agricultural production in Western Europe stood at 83 percent of its 1938 value,
industrial production at 88, and exports at a low of 59 percent (Hogan 1987:
30). Three interrelated problems in particular hampered further progress:
balance-of-payments difficulties, the dollar shortage, and continuing
As a consequence of the war, Europe's production in 1947
was at a lower level than in 1938. At the same time, however, reconstruction
efforts produced a considerable demand for resources such as raw materials, in
particular coal and steel, agricultural products, and capital goods. With
damaged or obsolete industries and a shortage of both manpower and food after an
unusually severe winter, most European states desperately depended on overseas
imports since intra-European trade had virtually collapsed. The United States,
on the other hand, emerged as the prime supplier of these goods since wartime
efforts had raised productivity and industrial output enormously. Hence, Western
Europe was rapidly building up a balance-of-payments deficit with the U.S.,
peaking in 1947.
Table 1: Balance of Trade of Western Europe with the
Source: Milward 1984: 27.
Theoretically, a number of solutions to this problem
existed for the European states: to diminish imports from the U.S. by deflating
the economy, to increase intra-European trade, to earn hard currency by trading
with countries other than the U.S., or, finally, to increase exports to the U.S.
so as to achieve a more favorable balance of payments. However, each one of
these "solutions" was beset by further problems and European
governments proved unable to solve them at that time (cf. Graph 1).
Graph 1: Unresolved Problems of Trade and
Payments in Western Europe, 1947
[click on graph to enlarge]
As their balance-of-payments situation deteriorated, the
reconstruction efforts of most governments were put into question. As Tsoukalis
(1993: 14) points out, Europe's trade deficit resulted from the success of its
industrial recovery and "… the ambitious growth strategies pursued by
European governments." However, with limited international reserves
available, these states were unable to import as much as they needed to rebuild
their economies. Lower levels of production blocked the possibility of
increasing the exports which in turn could have financed further imports (cf.
Eichengreen 1993: 11).
Any measure that remotely questioned the standard of
living of the population - either deflating the economy by lowering investment
or depreciating a currency, which would have meant contracting purchasing power
for imported goods - seemed politically infeasible. Traditionally Western Europe
had financed its trade deficit with the U.S. by surpluses with other regions.
Yet, these countries, too, depended on U.S. imports and needed their limited
reserves to finance those. Moreover, overvalued currencies obviously meant a
serious obstacle to stimulating exports.
In the light of these alternatives, instigating
intra-European trade seemed attractive as an option since it would have eased a
number of problems. Greater intra-European trade would have lessened the
dependence on U.S. imports; it would have allowed production to be stimulated,
possibly with the benefit of scale economies, which in turn would have increased
competitiveness and exports. Finally, by earning more through trade, the
European economies could have gone on to finance the import of further capital
goods. Yet, trade within Europe was limited seriously by a prevailing
inconvertibility of currencies (q.v. Diebold 1952: 16-17). Most currencies -
with the exception of the Swiss franc - could not be exchanged freely for other
currencies and soft currencies could not be used to pay for imports. Thus, as
countries were reluctant to spend scarce reserves, they tried to limit imports
from other European countries as much as possible or, contrariwise from the
point of view of an exporting country, they accepted payments only if effected
in hard currency. To make matters worse, if country A exported more to B than it
imported, it was not able to use its surpluses to pay for debts with country C.
Hence, intra-European trade did not move beyond bilateral patterns that clearly
limited its overall size. In sum:
"Almost every Western European country faced a
twofold foreign exchange problem: first, it was unable to earn enough by
exporting to pay for the imports it judged necessary, and second, it often could
not use the money earned by exporting to one country for purchases in another
country." (Diebold 1952: 15)
Taken together, these problems meant that Europe was not
moving towards the kind of international economic order envisioned at Bretton
Woods. On the contrary, trade restrictions were maintained and sometimes even
new ones were added, currencies remained inconvertible and overvalued, and
government spending was kept at levels unsustainable without massive foreign
aid. The Bretton Woods remedy to these problems, removing monetary impediments
to trade and adopting convertible currencies at official rates - which basically
would have meant substantially depreciating most European currencies - was
resisted staunchly by European governments because they feared its politically
destabilizing consequences as worsening terms of trade and declining living
standards might trigger labor unrest (Eichengreen 1998: 100-101).
Arguably, Western Europe was not ready to be integrated
fully into the world economy. Domestic political priorities such as a speedy
recovery through high investment, growth and full employment fitted ill with
quick moves towards international liberalism. Consequently, Europe did not
approach a liberal capitalist order but rather fostered elaborate systems of
trade restrictions and controls, blatantly at odds with the strategic aims of
the United States. The situation in 1947 showed that the tools devised at
Bretton Woods were insufficient to root Europe in a liberal economic order. In
the words of Robert Triffin (1957: 141): "The early blueprints for
international monetary reconstruction failed utterly to cope with the real
problems confronting the postwar world." Once this point was appreciated,
the realization led to a change of strategy in 1947.
Marshall Plan: Breaking the Deadlock
As any quick transition towards integrating Europe into a
liberal economic order had become illusionary, the United States concluded that
intermediary steps would have to be taken first. Stabilizing Europe was a
primary objective even at the price of violating Bretton Woods' principles. This
objective become increasingly important because Western Europe was considered a
bulwark against the Soviet Union as the Cold War intensified. It meant that
Europe had to substitute a joint approach to its problems for conflict-prone
Recovery Program and OEEC
In a speech delivered at Harvard University on June 5,
1947, Secretary of State George C. Marshall stated that Europe was in need of
"… substantial additional help or [it would] face economic, social, and
political deterioration of a very grave character" (Marshall 1997: 258). In
the light of this analysis the U.S. government set up the European Recovery
Program (ERP), commonly known as the Marshall Plan.  Financial aid provided by
this program allowed European governments to continue their strategy of
promoting rapid recovery through high investment. It enabled Europe to keep
importing vital goods while at the same time maintaining the living standard of
the population. More specifically, there were three key economic goals of the
Marshall Plan: the restoration of multilateralism, price stability, and the
recovery of production (cf. Block 1977: 89). Hence, the ERP intended to ease the
balance-of-payments problems depicted above in Graph 1 in three ways. First, by
infusing dollars into European economies it would immediately improve their
balances-of-payments. As a second objective, ERP planners wanted to induce the
"politics of productivity" (Maier 1987a), which today appear as the
virtues of a Fordist production model. Thirdly and most importantly, U.S.
policymakers wanted to tackle directly the reasons that held intra-European
trade at such a low level, by providing incentives to move towards more
cooperative forms of economic policy, eventually resulting in multilateralism. 
To reach this third aim, the U.S. demanded that a
"permanent organization" be created that would be responsible for
jointly distributing ERP means. Already in his Harvard speech, Marshall insisted
that the United States was not going to set up a program for European recovery
unilaterally. Instead these states themselves would have to come to an agreement
on distributing Marshall Aid.  Underlying the demand for a new, genuinely
European organization was a far-reaching vision for Europe's future. This
organization should not simply facilitate economic recovery but rather pave the
way for some form of political unity that would overcome traditionally hostile
relationships on the Continent (James 1996: 74). From this time onwards, and in
spite of negative attitudes on the part of both the French and the British
governments, the U.S. pushed for steps towards European integration. Well in
line with later neo-functional arguments, economic integration was seen as a
means of achieving the ultimate goal of political integration. 
The promotion of integration emanated from a changed
attitude towards Germany's future in particular. The Morgenthau Plan had
advanced the idea of a deindustrialized, agrarian Germany. By 1947, however, it
had become clear that Europe's economic recovery depended a good deal on that of
Germany. As foremost supplier of industrial goods before the war, German exports
were difficult to replace. Since the U.S. alone was able to meet this demand,
this situation increased Europe's dependence and exacerbated its
balance-of-payments problems. Moreover, replacing damaged equipment often
required parts by those German companies that had delivered the product in the
first place (Buchheim 1990: 172-173). Thus, allowing Germany to partially play
its old role would help reduce the need for American imports as well as
accelerate European recovery. A crucial task, however, was to make sure that
economic recovery would not lead to reinvigorated German nationalism or any form
of dominance over its neighbors. From an American point of view, therefore,
creating an overarching institutional framework for Europe served economic as
well as political goals: It would speed up economic recovery and become a
mechanism to control Germany on a permanent basis.
France and Great Britain responded to America's
proposition by calling for a conference, which opened in Paris on July 12, 1947.
This conference led to the establishment of the Committee of European Economic
Cooperation (CEEC). However, French and British plans for the CEEC were
distinctively different from those of the United States. Neither one of them
wanted to confer too many competences to a supranational organization and even
less so to give birth to a future European government. Consequently, their
interests were in stark contrast to those of the U.S. at the Paris conference:
"During the conference American policy on the
objectives of Marshall Aid and the methods of its administration was elaborated
in detail. The rather vague role which the European organisation was originally
to play came to be defined in such a way that CEEC was seen in Washington as an
extremely important potential step towards West-European political integration,
indeed as a West-European government in embryo. […] The State Department
wanted that conference to give birth to a permanent European organization which
would quickly bring together the West-European countries into a close economic
association, and it wanted that association to be a stepping-stone towards some
form of political integration." (Milward 1982: 517-518)
Formally, the European states met U.S. demands. The work
of the CEEC led in April 1948 to the signing of the Convention for European
Economic Cooperation, which established the requested permanent organization,
the Organization for European Economic Cooperation (OEEC).  At the final count,
this Organization's achievements were ambivalent. In terms of promoting
multilateralism and liberalizing trade it was mainly successful through the work
of the European Payments Union. With regard to any moves towards political
integration or, at least, supranationalism, it fared very poorly. In fact, its
very failure to solve the "German problem" satisfactorily for France
eventually led to the Schuman Plan. Hence, it is either a rather warped view or
sophisticated dialectics to regard the OEEC as "… perhaps the opening
step to the Treaty of Rome" (Barbezat 1997: 35).
In particular the distribution of aid turned out to be
more of an instrument for separating the participating countries than a device
for integration. They were asked to draw up annual plans for the distribution of
aid as well as a four-year plan. These plans were supposed to be based on an
assessment of the respective needs of each country and, crucially, on a common
strategy as to how the means provided could maximize the reconstruction effort.
Rather than planning separately, OEEC member countries should view themselves as
part of a larger common market. Progress towards this aim remained
disappointing, though. The first report on the ERP acknowledged openly that all
national programs had been "… drawn up independently, without full
knowledge of the contents of the others" (OEEC 1948: 13). As a result, the
total sum requested for the next four years amounted to some $ 29 billion (Block
1977: 86). This sum was certain to upset Congress and to raise doubts about its
willingness to support the ERP.
From the start American Congress was skeptical about
providing large amounts of foreign aid and pressed for a number of safeguards.
For example, aid would not be provided for the whole period at once but instead
be authorized on an annual basis. Through the years that Marshall Aid was
provided there was a constant struggle between the Economic Cooperation
Administration (ECA), set up specifically for administering the ERP, and the
OEEC members over the latter's insufficient cooperation. Prolonged haggling went
on between the recipient countries only to increase the ECA's worries about
Congress' consent.  Thus, on a number of occasions, ECA officials stressed that
nothing but decisive moves towards economic integration would secure Congress'
approval of further aid.  Nonetheless, distributing aid never turned into
something else but a painful procedure occasioning a fair amount of misgiving.
Only substantial U.S. pressure combined with a system of arbitration procedures
(a "committee of wise men" finally drew up aid distribution) could
secure any agreement at all. Since a settlement was so difficult to reach, the
recipient countries decided after two years not to reopen the negotiations and
stuck to the percentage shares of aid for each country (Schelling 1955: 618). 
The principal reason why the OEEC did not become a
stepping-stone towards European political integration was the opposition
encountered from two crucial players, Great Britain and France. Great Britain
objected to being involved in any kind of supranational organization that
brought into question its role in world politics. It did not see itself as equal
to the countries on the Continent and rejected being treated as such (Hogan
1987: 49). For France, on the other hand, the OEEC was not an appropriate way of
achieving its main goals: access to German resources (mainly coal and steel)
and, related to this, firm political control over Germany. Nonetheless, short of
promoting integration, the OEEC after 1950 was remarkably successful in
facilitating multilateralism and trade liberalization through the work of the
European Payments Union (EPU).
Payments Union and Trade Liberalization
Under Marshall Aid, around $ 13 billion were provided over
the course of four years. This clearly facilitated reconstruction and eased
prevailing economic problems. Yet, the underlying causes still had to be
tackled. An obstacle to European exports was that most currencies were
overvalued. This problem became all too obvious when the United States ran into
a recession in 1948/49. With a diminishing U.S. demand for imports from Europe
the latter's balance-of-payments deficits rose sharply and Marshall Aid alone
did not suffice to close the widening dollar gap. The United Kingdom especially
suffered from falling export opportunities and was losing international reserves
at an intolerable rate. Hence, the pound was devalued on September 18, 1949.
Another 23 countries followed suit, which meant a notable adjustment of their
exchange rates. Although these devaluations did have a positive effect by
alleviating immediate pressures, they fell short of eliminating the dollar gap
(Eichengreen 1998: 105-106). The key to Europe's economic stabilization was to
be found in increasing intra-European trade by way of superseding bilateralism.
Bilateralism meant that the overall trade volume between
two countries was determined by government authorization. Payments were
conducted indirectly through central banks: importers paid in their national
currency the value of the goods purchased to their national central bank. In
turn, the central bank of the country being traded with paid an equal amount in
its own currency to the exporters. Any overall settlement took place between the
two banks. If the net debts of one country reached a ceiling agreed to in
advance, that country was obliged to settle the difference in gold or U.S.
dollars (Triffin 1957: 144). Since European countries were guarding their gold
and dollar reserves anxiously, trade with the country in question would come to
a halt whenever that ceiling was reached.
Already in 1947, CEEC countries had debated multilateral
clearing without, however, reaching a conclusion. Five countries - Benelux,
Italy, and France - went ahead nonetheless, signing the First Agreement on
Multilateral Monetary Compensation on November 18, 1947.  The scope of this
agreement remained very limited since it only allowed for "first category
compensations" of the following kind: if A owed B $3m, B owed C $ 5
million, and C owed A $ 4 million in turn, the "agent" (the Bank for
International Settlements, BIS) could cancel A's debt to B, reduce B's to C to
$2 million, and C's to A to $ 1 million (Diebold 1952: 24).
Unfortunately, debts rarely followed such a neat pattern,
as there were countries with either deficits or surpluses with all others.
Moreover, if any country that was theoretically part of such a chain did not
participate, no progress could be made. In fact, most conceivable compensations
depended on the voluntary consent of an "occasional member" - which,
invariably, was not forthcoming. As a result, of the total $ 762.1 million of
existing bilateral debts, the procedure merely permitted a compensation of $
39.2 million. Because of the reluctance of member countries only a tiny $ 1.7
million actually were compensated (Bean 1948: 408).  This sum could have been
expanded markedly by allowing for "second category compensations,"
which provided for an increase in bilateral balances beyond the agreed ceiling.
Yet, second category clearings depended on the agreement of all the parties
involved (cf. Oatley 2001: 956). In many cases this condition was not met,
however, as the following example shows:
"Suppose that by the terms of a payments agreement
Belgium agrees to hold sterling balances up to the equivalent of $ 5 million
while England agrees to convert anything over that amount into dollars. Belgium
is already holding $ 4 million worth of sterling. Norway owes Belgium $ 2
million and has sterling equal to that amount. If Norway paid Belgium in
sterling, Belgium would hold $ 6 million worth of British currency and the
British would be obliged to turn $ 1 million of it into dollars. Not wishing to
do this, Britain would refuse permission for the transaction … and there could
be no clearing of the Norwegian-Belgian debt." (Diebold 1952: 24)
A second attempt was made in October 1948 with the
Intra-European Payments and Compensations Scheme, which involved all OEEC
countries except for Portugal and Switzerland. It was based on estimates of the
expected surpluses and deficits of each country. Debtors were granted
"drawing rights" up to an amount equal to their forecasted deficit by
the creditors, who in turn received the same amount as "conditional
aid" from the ECA. The idea was to create an incentive for the surplus
countries to provide credits. Yet, this would have worked only if conditional
aid had been granted in addition to the amount a country received under Marshall
Aid. This was not the case, however. As with the First Agreement, automatic
settlement was limited to cases where it did not augment the overall balance
(Kaplan/Schleiminger 1989: 25). Thus, its effects remained very modest. By 1950,
the end of the ERP was in sight but Europe was not even close to any
self-sustaining economic order. Hence, the United States pushed vigorously for a
functioning settlement mechanism of multilateral clearing.
Pressure in itself, however, did not suffice. Only when
the U.S. decided to back the clearing system financially could Europe's
resistance be overcome. In fact, without the injection of $ 350 million working
capital by the United States, European governments would probably not have
risked moving towards multilateral clearing (Diebold 1952: 107).  On July 7,
1950, the Council of the OEEC agreed to the establishment of a European Payments
Union (EPU).  EPU differed from earlier attempts in two ways: (1) it truly was a
multilateral compensation system which overcame bilateralism; (2) additional
credit, hence liquidity, was provided for.
(1) Rather than settling balances bilaterally, each
country now reported its net balances with all the other countries at the end of
each month to the BIS, which would then cancel offsetting claims automatically.
Moreover, an overall balance was calculated for each country against the Union
as a whole. As a result, deficits with any particular country could move well
beyond former ceilings (credit margins) as only the trade balance with EPU
countries taken together mattered. In this way, inter-convertibility of the
currencies of participating countries was achieved (cf. Travers 1983: 10). 
(2) In addition to full multilateral clearing, EPU also
comprised a credit mechanism. In line with its trade volume a quota was assigned
to each country. This quota defined the credit made available to deficit
countries. As a country accumulated debts the percentage share of gold used to
settle it increased gradually. Whereas small deficits - up to 20% of a country's
quota or the first "tranche" - were covered entirely by EPU credits,
gold payments by debtors thereafter would rise successively to 20, 40, 60, 80,
and 100% of the debts. When a country had piled up a deficit as large as its
quota, each additional credit would have to be paid for entirely in gold.
Surplus countries, in turn, had to grant credits to the Union. The EPU
obligations towards them were settled in 50 percent gold and 50 percent credits
after the exhaustion of the first tranche.  The merits of this credit mechanism
were twofold. First, liquidity was inserted as countries with
balance-of-payments deficits were able to draw further credits. Second, the
gradual growing obligation to repay one's debts in gold kept a check on payments
Since bilateral balances with EPU clearing became less
important, another obstacle to intra-European trade could be removed. European
countries used to deploy a strict set of import quotas to control the outflow of
hard currency. Through initiating multilateral clearing these measures could now
be tackled. Hence, in conjuncture with EPU, the OEEC countries accepted a Code
of Liberalization, which obliged them to remove import quotas by a number of
steps. The first one required freeing 60 percent of imports of their quotas by
October 1950 - in general across three product groups, food and fodder, raw
materials, and manufactured goods (Asbeek Brusse 1997: 128). Further steps
followed, requiring a liberalization of 75 and 90 percent in 1951 and 1955
respectively. Although there were setbacks and continuous wrangles over the pace
of liberalization, member countries eliminated the largest part of their import
quotas during the first half of the decade.
Taken together, the arrangements of the EPU resolved a
number of economic problems Europe had faced. Multilateralizing payments meant
that far higher a volume of intra-European trade could be realized than it could
with bilateral agreements. Consequently, existing trade restrictions, mainly
import quotas, could be removed, which further stimulated trade. Perhaps
crucially, Western Germany was reintegrated into Europe's trade system through
the framework of the EPU. It became a major supplier of industrial goods at a
very rapid pace, partially replacing the United States. In sum, these
developments greatly reduced the dollar gap and eased Europe's
balance-of-payments deficit with the U.S. (cf. Dickhaus 1997: 185-186; Buchheim
Summary: The Art of the Possible
From the point of view of economic stabilization, the
OEEC's accomplishments are noteworthy. It was mainly through the work of the EPU
that intra-European trade had been multilateralized and liberalized. By 1958,
intra-European trade by and large was freed from import quotas and most European
currencies were freely convertible. Postwar reconstruction turned into a postwar
boom, which was so exceptional that the third quarter of the century is commonly
referred to as the "golden age of capitalism." 
However, prior to 1958/59 Western Europe's economic order
was not characterized by "embedded liberalism" but instead by
"postponed liberalism." Though eventually convertibility was realized,
it was fourteen years after the Bretton Woods agreement was signed.
Intra-European trade was liberalized but at the price of discriminating against
third countries, notably the United States. In fact, it was one of the merits of
the more limited EPU framework that it was flexible - or toothless - enough not
to jeopardize domestic policies. As James (1996: 76-77) argues:
had as a major objective the restoration of convertibility and the elimination
of discrimination; while the raison d'être of the EPU was discrimination
against the dollar as a way of restoring a limited convertibility (albeit in the
context of a code of trade liberalization)."
U.S. concessions as well as
financial aid helped to minimize the costs of adaptation as Europe was shielded
against international market pressures. EPU substituted a more appropriate
framework for the ambitious, albeit unrealistic one drafted at Bretton Woods
(cf. Milward/Sørensen 1994: 7) - a framework that not only contradicted some of
the latter's goals, however, but actually harmed its institutions.
Marshall Aid and the OEEC pushed the IMF decisively to the
sidelines long before the kind of economic order it was supposed to govern ever
came into existence in Europe. First of all, the inauguration of the European
Recovery Program proved that the means available to the IMF were inadequate for
the kind of reconstruction policies European countries followed. The IMF was
underfunded and could not resolve bilateralism. Marshall Aid was seen as a
substitute for the IMF revenue, and recipient countries did not have access to
short-term borrowing from the Fund. Secondly, France's decision to adopt a
multiple system of foreign exchange rates of the franc and Britain's
devaluations in 1948 and 1949 respectively, both violated the IMF principles and
dealt a blow to any authority it might have enjoyed before (cf. Mundell 1969:
476-478). Thirdly, continuous trade discrimination against non-EPU countries was
not the kind of liberalism that had been envisaged at Bretton Woods. Lastly,
multilateral clearing operations were conducted by the Bank for International
Settlements rather than the IMF (Bean 1948: 406, note 9). None of this happened
by accident. The incongruence of domestic and international aspirations led to a
procrastination of the latter in favor of the former.
For all of those who considered a quick return to
liberalism to be the best remedy for postwar Europe's ills its prolonged
reconstruction period definitely meant - if anything - a second-best solution.
Yet, European governments feared that any early move towards convertibility
would have come at economic, political, and social costs they were not ready to
bear. Thus, EPU was "… the art of the possible" (Diebold 1952: 110).
Integration: Changing Course
In terms of economic stabilization, the OEEC was
successful. With regard to its second goal, at least as envisaged by the United
States, it must be judged a failure. It was not a device to promote European
political integration, let alone a government in nucleus. When at first the U.S.
promoted integration through the OEEC neither Great Britain nor France was keen
to follow. Britain objected to any transfer of sovereignty to an international
organization and France was concerned primarily with circumscribing Germany's
room for maneuver without limiting its own. In fact, only after France had been
forced to learn that its strategy towards Germany was running aground did it
turn instead to integration as a means of control. This was not done out of some
kind of European idealism but rather out of necessity given its own goals. The
OEEC, however, was seen as ill-suited to this purpose.
France's postwar policies were driven by two
considerations. On the one hand, the international order should not call into
question domestic economic objectives. Rapid economic progress was required to
pacify society and to overcome existing social cleavages (cf. note 13). On the
other hand, there had to be safeguards for France's security. These two points
were linked closely since France's security depended on achieving an economic
advantage over Germany. Domestically the Monnet Plan of 1946 promoted both
points. It strove to modernize the French economy through investment in key
areas such as infrastructure, coal, steel, and agriculture. Defined output
targets were to be met by improving technology and increasing productivity.
Successful steps in this direction would make exports more competitive, thus
enabling French products to replace German ones. If these goals were to be met,
though, it was mandatory that French economic progress would have to precede
German reconstruction (Dinan 1999: 19).
The problem France faced, however, was that it lacked the
resources for achieving the aims of the Monnet Plan. Most importantly, France
depended on imports of coal and coke. It was from this that its claim to the
Saar region was derived, as was the demand to detach the Ruhr from Germany and
the call to control it internationally. The importance of these points can
hardly be overestimated since only access to these resources would allow
domestic needs to be satisfied and economic strength to be built up. From this
point of view, it seems impossible - even analytically - to separate economic
interests from foreign policy and security matters as Moravcsik (1998: Ch. 1)
claims. France's strategy as well as the first steps towards integration can
only be understood as a conjuncture of both.
Recently it has been argued that there were three possible
ways to secure French interests: direct control of Germany in alliance with
other states, namely the U.S.; combined Franco-British leadership to prevent
German dominance; pooling of sovereignty in some form of supranational
organization, specifically the promotion of partial integration with Germany
(Parsons 2002 356: 57-58). All of these positions could command considerable
support in the French Parliament. Because of a peculiar ranking of preferences
within each supporting group, the government was able to foster a majority for
whatever course it chose.  What tipped the balance in favor of the third option,
Parsons argues, was the integration-mindedness of leading figures such as Robert
Schuman. Yet, this interpretation hinges on the assumption that all three
strategies "… were viable domestically and internationally" (Parsons
2002: 60). A look at the chronology of events casts doubts on this
interpretation since the choice for integration only came after the French had
realized that both other strategies were blocked.
In 1946, in the Allied Control Council, France demanded
that the Ruhr area be separated permanently from Germany so that its resources
would be accessible to neighboring states.  The Ruhrgebiet should be turned into
an internationally controlled state ("Ruhr-Rhénanie") detached from
the rest of the country. This included direct control over output and allocation
of the Ruhr's resources. Yet, these ideas met with little support from Britain,
which instead proposed putting the mines under state control by the regional
government of the Land.  Both plans were opposed by the U.S., not least by the
military occupation regime in Germany, which was most vigorous in its
opposition. Already in 1947, the ECA as well as the Benelux countries and Italy
supported the hastening of German recovery. Consequently, American policymakers
wanted to include Germany in the Marshall Aid program and in 1947 came to an
agreement with Britain to permit a higher level of industrial output in the
bizone of Germany. This seemed utterly unacceptable to the French as it
questioned their plan to improve competitiveness well before German
reconstruction got under way. When France in response threatened not to
participate in the CEEC, an uneasy compromise was struck on permitted output
levels. Nonetheless, the "German question" remained unresolved. In
1948, at the London conference, the discussion on Germany's future was taken up
once more. Retreating from their initial demand the French gave up the idea of a
separate Ruhr state but requested "internationalization" instead. To
them this basically meant foreign (French) management of the actual mines as
well as the right to allocate their output (Milward 1982: 520). Again, this was
not acceptable to United States officials. They did agree, though, on the
establishment of the International Authority for the Ruhr, which, however, had
more limited objectives and hardly represented a suitable tool for French
control of Germany (Hogan 1987: 364).
Much to French dismay, American policy towards Germany had
by 1948/49 turned into one of benevolent control. U.S. policymakers regarded
reintegrating Germany into Western Europe as vital for Europe's economic
reconstruction - and for its own aim of containing the Soviet influence on
Europe with the Cold War intensifying. Security concerns, from their point of
view, were best met by integration through the OEEC. As Allied control over
Germany did not promise to serve its purpose, France was left with a second
option, closer cooperation with Great Britain to control Germany. However,
mainly for domestic reasons - Britain wanted to maintain its economic relations
to the sterling area - the British were constantly opposed to involving
themselves too closely in any purely European organization.  They preferred
containing Germany through transatlantic cooperation in NATO. In fact, after two
years of the OEEC, it was obvious that Britain would stay clear of any heavy
European entanglement. It wanted to remain the principal ally of the U.S.,
maintain its international role within the Commonwealth, and keep London the
center of the sterling area (Bullen 1988: 201).
By 1950, two formerly conceivable strategies had ceased to
exist. Neither did the U.S. support France's stance towards Germany nor would
Britain substitute its global role for a European one. At the same time,
however, France had not managed to achieve its economic goals. Even intense
efforts to modernize its own coal industry had not diminished its dependence on
coal imports to any adequate extent. France remained the world's largest
importer of coal and coke and the prime supplier again was Germany (Lynch 1988:
119). Hence, the German problem was very far from being solved.
"By mid-1950, then, all lines of French policy had
been stymied. The French had not been able to forge a European union balanced
between Britain and Germany, nor a continental system that excluded the Germans.
They were certain that Germany's power would continue to grow as the United
States pushed forward with plans to loosen the remaining restriction on German
production. […] Time was running out for the French. They had to strike a deal
with the government in Bonn while they still had the upper hand, and they had to
do so even if it meant risking the future of Anglo-French cooperation on which
they had earlier pinned the hopes for security against the Germans. The result
was a dramatic reassertion of French leadership on the Continent." (Hogan
This reassertion of leadership was, of course, the Schuman
Plan. It constituted a considerable break with previous strategies and meant
that France was changing course. The Schuman Plan, announced on May 9, 1950,
proposed to pool German and French coal and steel production under a common
supranational agency ("High Authority") whose decisions were to be
binding for both governments. Whereas earlier plans had aimed at permanently
circumscribing Germany's sovereignty, none of them meant to impinge on France's.
Joining a new organization on equal footing with Germany was a change of
strategy incomprehensible without the knowledge of the defeat of preceding ones.
Yet, it was but a change in strategy, not objectives. Gillingham (1987) shows
that France's principal goals did not change in the postwar era though the means
to achieve them were adapted to changing circumstances. On the objectives of
this move towards sectoral integration the declaration was very clear:
politically, pooling these basic industries would make war between France and
Germany impossible; economically, it should guarantee a modernization of
production and, crucially, secure the "… supply of coal and steel on
identical terms to the French and German market," thus ending the German
practice of dual pricing considered harmful to France. Its main addressee was
Germany but other countries were invited to participate as well. In line with
earlier American reasoning, the Schuman Plan considered sectoral economic
integration as "… the realization of the first concrete foundation of a
European federation indispensable to the preservation of peace."  Whether
this was merely a rhetorical reference or more substantial a claim, the driving
force behind the declaration certainly was not European idealism but material
The U.S. welcomed France's initiative although it had not
been consulted fully in advance whereas Britain responded negatively (Bullen
1988). By then, however, British participation was no longer considered
indispensable. In June 1950, Belgium, France, Italy, Luxembourg, the Netherlands
and West Germany signed the Schuman plan. These states also signed the Treaty of
Paris establishing the European Coal and Steel Community on April 18, 1951,
which came into force July 1952.
There is much to be said about the period from 1952
onwards until the Treaty of Rome was signed. This is not the focus of this
article, however. After six European states established the ECSC, the
organizations looked at in this paper - the IMF, OEEC, ECSC - existed in
parallel and at last a set of institutions had been established that stabilized
The IMF's importance was already significantly reduced by
the time the Marshall Plan was launched. It became more meaningful again between
1958 and 1971 with a large number of countries adhering to currency
convertibility - even though, by then, the Bretton Woods system had turned into
a fixed-rate dollar standard which depended primarily on the behavior of the
United States, whose actions were beyond the IMF's reach. This system crumbled,
consequently, when the U.S. perceived a growing gap between national aspirations
and the international order (Block 1977: 203; Zimmermann 2001: 56-64).
The OEEC was transformed into the Organization for
Economic Cooperation and Development (OECD) in 1961; the U.S. and Canada became
full members. The OEEC's most successful arm, however, the EPU, fell prey to its
own success. After payments had been multilateralized, trade restrictions
removed, and both actions had contributed to an astounding increase in
intra-European trade, the Union was not needed any longer. Thus, in 1958 it was
dissolved. By then, Europe's economic stabilization had been achieved and, in
the absence of any further aid being distributed, the OEEC was designed to lose
influence. Especially since alternative forums for political cooperation
existed, most notably those connected with the European Economic Community.
Today we know that the Monnet Plan and the ECSC were but
the beginning of European integration. As the preceding sections intended to
show, this development had not been predetermined but resulted from a specific
historical sequence. During the formative phase of stabilizing postwar Europe it
was not clear which institutional shape eventually would prevail. The path of
European integration became predominant as an institutional forum was created
that allowed for deals to be struck which proved advantageous for those
involved. The road taken, though, was a very different one than the Americans
had hoped for when they first promoted integration. Already the OEEC had
replaced a worldwide regime by much narrower a focus. The EPU became the pivotal
institution for economic reconstruction, the ECSC the institution for political
stabilization, by addressing France's economic and political needs. Regional
integration was an inferior solution compared to worldwide multilateralism from
an American point of view. Integration was not seen, however, as contradicting
the aim of interdependence but rather as a vehicle towards it. Establishing a
liberal economic order within Europe would pave the way for a more liberal
regime worldwide. In accordance with this reasoning, the U.S. accepted trade
discriminations against the dollar. Once a common external tariff was
established it would be possible to push for lowering it through the General
Agreement on Tariffs and Trade (GATT).
Yet, integration came with some strings attached. First of
all, the "Little Europe" of the six was a far cry from any sort of
integration based on OEEC membership. Secondly, it came at the price of
excluding Great Britain. Up until the point when the Schuman Plan was announced,
it had been taken for granted that any form of closer European cooperation would
have to include Britain as the largest trader of that time and America's
principal ally.  Thirdly, sectoral integration could also be used to permanently
shield a geographical area from the pressures of outside competition.
Integration in that case would point only selectively towards interdependence.
In fact, protecting agriculture from outside competition has been a central part
of the integration process until today. As economic exchange gravitates
predominantly towards intra-European trade there is no automatic mechanism
feeding into more liberal relations with third countries. Lastly, to choose a
different organization for pursuing integration meant to diminish American
influence. The OEEC had been established in response to American demands and was
considered by the U.S. as a channel through which to influence European
politics. Marshall Aid provided some leverage by which to influence European
governments - and proved remarkably successful in the case of the EPU, hardly so
with regard to political integration. The new cooperative framework created
within Europe thereafter worked against direct American influence.
These points lead to a noteworthy conclusion. For those
European states that chose the path of integration it was not the Bretton Woods
system that allowed for domestic welfare policies and industrial adjustment.
Instead, it was the creation of a protected regional space in Western Europe
that finally reconciled domestic and international goals (Romero 1994: 180). If
we regard the task of postwar stabilization as the struggle to find an
international framework that did not violate domestic welfare ambitions, one
cannot but wonder at what point subsequently this objective vanished from sight.
It is one of the more startling conversions that "integration for
protection" turned into "integration for liberalization" once the
golden age had ended.  The very same institutions created to shield national
welfare arrangements from adamant outside pressure became in due course
instrumental in disembedding the latter from the 1980s onwards. As the virtues
of market forces moved center stage once again, the specter of Polanyi's
negative utopia of the self-regulating market apparently reappeared.
There has been a debate over the question of whether
Marshall Aid really was necessary for Europe's economic reconstruction. Alan
Milward, probably the most authoritative source on these questions, takes great
pains to show that the 1947 economic crisis in Europe was caused by unjustified
economic policies and that reconstruction would have been possible even without
Marshall Aid - albeit at a slower rate (cf. Milward 1984: 54-55, 107). Yet, the
counterfactual that governments could have procrastinated "delivering the
goods" (Maier 1987b: 161) to their constituencies seems questionable.
Moreover, to focus on the economic effects of Marshall Aid in isolation risks
missing the point. Rather, the ERP was part of a larger effort to stabilize
Europe economically as well as politically (Berger/Ritschl 1995: 474).
Stabilization - as used in this paper - refers to three points. First,
successful economic reconstruction rested on transcending purely national
strategies. Unable to come to grips with their problems independently of each
other, European states had to cooperate. Second, cooperation in turn depended on
a political framework that was able to meet their security needs. This meant
basically that a way had to be found to control Germany. Third, any solution to
the first two points had to meet the precondition not to jeopardize the ability
of governments to pursue national welfare aims. Taken together, these three
points explain much of the early postwar history and the fate of the
Short-term strategies by European states for a speedy
economic recovery proved incompatible with the set of rules devised at Bretton
Woods. It was mainly for domestic reasons - postwar governments depended on
economic success for their legitimacy - that these states did not adhere to the
principles conceived of in 1944, such as currency convertibility and trade
liberalization. Marshall Aid, then, helped to maintain a high level of
investments and continued imports from the United States. Yet, only the EPU
provided a framework to increase intra-European trade and reinstall Germany as
both a supplier of capital goods and a market for European products, thereby
facilitating subsequent steps of trade liberalization. With regard to solving
the "German problem", the OEEC could have succeeded if only Great
Britain had accepted joint political leadership with France. Moreover, as U.S.
policymakers began to see Germany as an important factor in Europe's economic
recovery and as a bulwark against the Soviet Union, the very success of this
approach increased France's security concerns. If Germany were to have exclusive
control over the Ruhr's resources this would not just call into question the
Monnet Plan's domestic ambitions but at the same time create the danger of
German domination. The OEEC, however, was ill-equipped to control Germany
effectively as it had never become more than an intergovernmental organization,
and Great Britain remained skeptical at best about greater involvement in
Europe. As neither transatlantic ties nor cooperation across the English Channel
had promoted its interests, France turned towards a different strategy, namely
incorporating West Germany into a continental European framework. Sectoral
integration served both its economic and security needs. In addition to foreign
policy goals the Schuman Plan also saved the Monnet Plan of modernizing French
Early postwar history in Europe was shaped both by
American pressure - employing sticks and carrots - and by reluctant cooperation
from leading European states. Whereas the EPU on the one hand would not have
been created without its pressure and financial backing, the U.S. on the other
did not manage to positively influence political integration. It never convinced
Great Britain to agree to any kind of European political unity and eventually
settled for a geographically more limited concept of integration, excluding
Britain, which in the past had been considered devoid of any meaning.
"Little Europe", moreover, was promoted by France outside the OEEC
framework, in defiance of direct American influence.
The principal reason for the resistance of European states
can be found in domestic politics. After the abysmal experiences of the
inter-war period, many governments concluded that full employment and social
protection against the vagaries of the market were vital to uphold legitimacy:
their own legitimacy as well as that of a capitalist social and economic order.
Stabilizing Europe therefore depended to a large degree on the question of
whether this aim could be achieved or not. The search for a suitable
international framework mirrored this concern. In retrospect it seems that by
1958 this attempt to stabilize Western Europe had succeeded.
This paper has taken another look at the formative postwar
years when the agenda was set for European integration. It has stressed the
importance of national interests, their domestic underpinning and, crucially,
the historical sequence that led to three international organizations existing
side by side. Since the particular "road taken" shaped Europe's
integration and any divergence from this path in line with the growing diversity
of member states became increasingly costly, the initial institutional choice
was a crucial one. Unfortunately, approaches which aim at explaining
institutional continuity by referring to path dependency have concentrated much
more on factors that reinforce a given path than on those which explain path
Making a strong case for a path dependent development
usually rests on three elements . First, the beginning of the path is contingent,
i.e. in a formative phase there is more than one path possible and the one that
prevails is chosen quite by chance or at least for reasons not systematically
related to its properties. Second, once this critical juncture is passed, the
costs of diverging from the path increase constantly. A chosen path reinforces
itself and is altered only in case of exogenous shocks. Third, the outcome of
that path is inferior to alternatives. Although it clearly is suboptimal,
changes are blocked by the costs of switching paths. Whenever these three
elements are present, they offer an elegant argument for the prevalence of
dysfunctional institutions (cf. also Mahoney 2000: 510-511).
However, though elegant, this account does not provide a
strong explanation for how exactly a path is selected or sustained. Therefore,
the "new institutionalism" (Hall/Taylor 1996) and historical
institutionalists in particular have tried to spell out different mechanisms of
path reproduction and, by the same token, of institutional inertia (Pierson
2000a; Thelen 1999). Less frequently have the origins of institutions been
focused on - either because their existence is explained by the functions they
perform at a later point in time (Pierson 2000b) or because contingency is
understood as randomness. However, emphasizing randomness deletes path selection
(institutional origins) as an explanandum open to theorizing. While there might
be instances of random path selection, there is no reason to assume this always
is the case. On the contrary, there are probably many cases best explained by
power, interests or ideas. Therefore, we can try to account for the outcome of a
formative phase with established political science concepts.
Accordingly, the question "Which institutions for
postwar Europe?" was not decided by chance but resulted from a sequential
matching of the national interests of key players. It can be explained by
self-interest, power, and adapted strategies in the face of altered
circumstances. Though the outcome was contingent, it was not random.
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This paper originates from archival research on the OEEC and
the EPU at the Historical Archives of the European
Communities in Florence. It also relies substantially on the
work of contemporaries and secondary analyses. For helpful
comments I would like to thank Sigrun Kahl, Simone Leiber,
Margitta Mätzke, Wolfgang Streeck, Oliver Treib and Amy
Institutions are defined "… as the formal or informal
procedures, routines, norms and conventions embedded in the
organizational structure of the polity of political economy.
[…] In general, historical institutionalists associated
institutions with organizations and the rules or conventions
promulgated by formal institutions" (Hall/Taylor 1996:
938). Thus, postwar institutions were embedded in and
enforced by organizations.
Historical accounts of European integration often draw an
ancestral line from persons who had supported the idea of
European unity - Maximilien de Béthum Duc de Sully, William
Penn, Jeremy Bentham, Jean-Jacques Rousseau, Henri
Saint-Simon, Victor Hugo, Richard Coudenhove-Kalergi etc. -
right down to Jean Monnet and Robert Schuman (e.g. Urwin
1995; Heater 1992). However, the somewhat Hegelian image
that the idea of European unity gained momentum through the
centuries until it finally was realized in the aftermath of
the war is false. Instead it was a hardheaded decision by
France in the light of vanishing alternatives.
Hegemony facilitates cooperation but also depends on
cooperation rather than coercion: "To be considered
hegemonic in the world political economy, therefore, a
country must have access to crucial raw materials, control
major sources of capital, maintain a large market for
imports, and hold comparative advantages in goods with high
value added, yielding relatively high wages and profits. It
must also be stronger, on these dimensions taken as a whole,
than any other country. The theory of hegemonic stability
predicts that the more one such power dominates the world
political economy, the more cooperative will interstate
relations be" (Keohane 1984: 33-34).
Walther Funk (1880-1960) was the German Minister of
Economics as well as President of the Reichsbank throughout
World War II.
Both plans can be found in Horsefield (1969b): Keynes' plan
pp. 19-36, White's plan pp. 83-96.
In fact, early drafts of the White Plan entailed creating an
international bank that was to provide international
liquidity on a large scale. Thus, on this point, his ideas
were not too far from Keynes'. However, references to the
bank were dropped in later drafts, probably because of
anticipated resistance by Congress (cf. Block 1977: 43-46).
On the White Plan, see Mikesell (1994: 5-12), who was a
member of the American delegation. For further details on
the Keynes Plan, see Cartepanis/Herland (2002).
Apparently Keynes was increasingly frustrated by the
negotiation style of his American colleagues. His
exasperation is captured nicely in the following couplet
which was found among White's personal papers at Princeton
(cf. Boughton 2002: 3):
"In Washington Lord Halifax
Once whispered to Lord Keynes
It's true they have the money bags
But we have all the brains."
The Articles of Agreement are reproduced in Horsefield
As James (1996: 54-55) points out, ambiguous wording in the
Articles on controversial issues such as the speed of the
transition towards convertibility was chosen deliberatively
to facilitate compromises.
There is a parallel with the present time. The rules of the
Stability and Growth Pact under EMU are designed for a
situation when member countries' budgets are
close-to-balance or in surplus (European Commission 2003:
2). Yet, they do not specify how to get there. Applying them
while deficits are still high and the economic situation is
deteriorating hampers the functioning of "automatic
stabilizers" and their effect can be pro-cyclical, thus
potentially worsening a downturn.
In the 1946 national elections, Communist parties gained
18.9 % and 28.3 % of the votes in Italy and France
respectively. Though these states certainly were not on the
verge of a revolution, the strength of these parties was a
cause of some concern for national as well as U.S.
Formally, the Soviet Union and Eastern European states were
also invited to participate. Yet, the Soviet Union declined
the offer. Only Czechoslovakia applied for aid but had to
withdraw under pressure from Moscow.
American policymakers urged European governments to follow
the example of the United States, which, in their eyes,
readily proved the virtues of a large, unified market. Cf.
the speech by Paul Hoffman to the OEEC Council (Historical
Archives of the European Communities (HAEC), Council Minutes
OEEC, C(49)176, October 21, 1949). Hoffman, a former
Studebaker manager, was first head of the U.S. Economic
Cooperation Administration (ECA), an autonomous agency which
had been set up to administer Marshall Aid.
It took the European countries by surprise when they learnt
that they had to put forward a recommendation on the
distribution of aid themselves. Cf. HAEC, Council Minutes
OEEC, C(48)60 final, July 16, 1948.
Neo-functionalism was spelled out most prominently by Ernst
B. Haas, who, indicatively, takes as a starting point the
founding of the ECSC in 1950. This paper, in contrast,
conceives of the ECSC as the result of earlier developments.
For his concept of "spill-over" cf. Haas (1958:
Members were: Austria, Belgium, Denmark, France, Greece,
Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway,
Portugal, Sweden, Switzerland, Turkey, and the UK. The FRG
became an associate member in October 1949.
See for example: HAEC, Council Minutes OEEC, C/M(48)8, May
10, 1948, which reports that Turkey, Greece, Norway,
Austria, France, and the UK disapproved of the amount of aid
allocated to them.
Cf. statements by Paul Hoffman on August 16, 1949, and on
October 31, 1949, respectively, where he strongly supports
the idea of economic integration (HAEC, Council Minutes
OEEC, C(49)127 and C(49)176).
Thomas Schelling worked for the ECA from 1948-1950.
Denmark, Greece, Norway, Sweden, the United Kingdom, and the
French zone of Germany joined as "occasional
members" in 1947, while Austria and Portugal followed
in 1948. The cooperation of the occasional members was
voluntary and not enforceable. The bizone of Germany became
a permanent member in 1948.
Robert Bean was an economist on the staff of the U.S. Board
of Governors of the Federal Reserve System.
Why was U.S. financial support necessary? "ECA's dollar
contribution will serve a triple purpose: (1) to make up any
difference between debtors' gold payments to EPU and
creditors' gold receipts from EPU that might arise in the
course of EPU operations; (2) to provide funds for the
redemption under certain conditions of existing
European-held sterling balances; and (3) to constitute a
separate fund which will permit ECA to intervene when a
country experiences extraordinary and unforeseen
difficulties in its intra-European payments relations"
(Hirschman 1951: 51). Albert Hirschman was an economist on
the staff of the U.S. Board of Governors of the Federal
A thorough account of EPU's history and functions can be
found in Kaplan and Schleiminger (1989), who both were
members of its managing board.
Harry Travers was an official of the OEEC from 1948 to 1961
and of the OECD from 1961 to 1982.
For further details, see Triffin (1957: 170-171), who was
the architect of the system.
On the virtuous interplay of contributing economic factors,
see Glyn et al. (2000).
This reasoning follows the Condorcet Paradox: if three
groups rank their preferences the following way: ABC, BCA,
CAB, whoever chooses first will be able to command a 2/3
majority since at least one of the others will prefer its
second-best outcome over the least favored one.
On the issue of France's policy towards the Ruhr area, see
Milward (1984: Ch. IV) and Gilingham (1991: 148-177) for
Moreover, the British feared that protecting their
occupation zone from economic chaos would come at an
enormous cost if the Ruhr area were to be severed (Greenwood
Cf. Monnet (1988: 354-380).
Both quotes are taken from the
original text of the Schuman speech.
This is not to dispute the historical dimension of Schuman's
initiative. After all, the failure to find an institutional
answer to the allocation of coal and steel in Europe after
World War I had had disastrous consequences, as was already
foreseen by Keynes in 1919 when he analyzed the Treaty of
Versailles (cf. Keynes 1971).
On the British policies towards continental Europe, see
Milward (2000: Ch. 7) and Greenwood (1992).
Ziltener (1999) describes the two contrasting integration
projects that characterize the history of European
These three elements are based on Arthur's (1989) account of
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