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4. Did industry benefit from Britain joining the EEC?

After the horrors of World War II, each of the major powers within Europe and America opted for foreign and economic policies that were in pursuit of peace and prosperity. The initial steps that led to economic integration were made by France and Germany, with Britain preferring to concentrate its financial prowess on the empire, in the formation of the European Steel and Coal Community in 1951 as both border countries sought to establish some semblance of a lasting trade agreement. As the success of this program became noted, a move towards full economic integration between European nations culminated in the signing of the Treaty of Rome in 1957 that formally established the EEC. The benefits that resulted were a dramatic expansion of trade with European partners (e.g. French trade with EC partners expanded from 30 to 57% and the share of consumption accounted for by imports rose 8% to 16% between 1959-1969) and exposed domestic industries to unprecedented levels of competition.

However, until 1973, Britain remained on the sidelines of Europe as it relied upon Empire links to serve as its main trading partner. This was as much imposed upon Britain, as it was self-inflicted in the sense that during the initial phases of European integration Britain focused upon fortifying its Empire links and as the benefits of integration became more pronounced, Britain was vetoed from joining the EEC on numerous occasions by other European powers.

During this stage of the post-war period, British industry was not exposed to the competitive pressure and the incentives of a larger market place that European integration would have ensued. However, there are drawbacks to European integration in the sense that greater amounts of regulation in industry is prevalent and that these European laws may not be suitable for the unique conditions faced by British industry at the time.

British industry gained a significant amount from joining the EEC and marked a significant departure from a period in which British industry remained relatively protected from market forces and thus stagnant in an age that was termed the ‘golden era.’ One of the aspects that industry gained was the increased exposure to competitive forces from European companies. Throughout the pre-1973 postwar ear, many sectors in the British economy were governed by an anachronistic industrial policy that was more suited to the protectionist age of the 1930s. For example, cartel agreements amongst the British banks to maintain interest rates or the late introduction of the Resale Price Maintenance Act of 1964 which permitted British industry to remain stagnant all proved that the government could only go so far in promoting competitiveness within the British economy.

Through British industry’s greater exposure to trade from the EEC, competition policy was effectively de-politicized and it meant that inefficient firms would be eradicated from the market place; whilst more efficient firms within Britain could improve, thrive and prosper.

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Moreover, another aspect in which the EEC directly benefitted British industry was the liberal trading policies that permitted a greater flow of goods and services between each party that allowed for a greater market for goods and competition in domestic markets from foreign competitors. Prior to Britain’s entry into the EEC, its main trading partner was with Empire countries, a policy that served Britain’s economic interests pre-1945. However, in the postwar world, Commonwealth countries were establishing the very industries that served British economic interests. For example, India established its own cotton production as well as the entrance of Japan in this market led to several ‘old industries’ under threat from new competition. On an aggregate level, empire markets were recording slow growth in the post-war era relative to European markets and thus British industry was allowed to gain full access to new and larger markets.

Through the greater market scale and competition, there were renewed incentives for British firms to firstly catch up with the business practices of their European counterparts innovate in order to become increasingly competitive in the world markets. Also, the greater efficiency in factor accumulation that Britain gained from joining the EEC benefitted the economy immensely especially given the shortfall in skilled workers that Britain faced during this period at management and shop floor level.

Conversely, European integration did provide some drawbacks for British industry in terms of the regulation that need to be implemented and conformed to which can effectively increase the cost of operating a business in Britain. Given the agreement of the EEC in 1973, the British Government agreed to conform to each European Law and thus could not refuse to implement these regulations.

Furthermore, trade with other countries will always contain frictions. Engel and Rogers (1996) indicate that even though the US and Canada have a free trade agreement there exist currency issues, the difference between the Pound and other foreign currencies, and informal trade barriers that exist between European partners (for example, language differences). Whilst British industry benefitted from EEC membership, trade will always suffer from frictions.

When considering the benefits of the EEC to British industry, it is important to note the state of British industry prior to joining. This was a period marked by the complacency of British industry by failing to sufficiently expand trade with other, more profitable, areas of the world and eradicate restrictive market practices that preserved the status quo rather than capitalizing on the substantial increase in economic activity domestically and abroad. However, British industry made substantial gains from joining the EEC in the sense that British firms that survived improved their competitive footing in the British economy and in world markets in response to the greater competition that was spurred by European companies as a result of the EEC. Moreover, EEC membership provided British companies with sufficient incentives to innovate and capitalize upon a greater market size that eradicated the anti-competitive practices that were the scourge of British industry pre-1973.

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5. Would Britain have been more successful had it privatized more, earlier?

The period prior to the era in which privatizations became central to government policy was marked by the declaration of Britain as the ‘sick man of Europe.’ Successive Conservative and Labour Governments perceived state ownership of companies as an effective means by which to ensure full employment and control aggregate supply under Keynesian economic thought.

In 1979, Margaret Thatcher, with the Conservatives, came to power with a new mantra of monetarism and free market approach towards economic policy. As a result, the privatization of state owned enterprises was seen as the only option to combat the spiraling costs that Government had to endure during this period to support loss making and inefficient state owned companies that were failing as a result of greater foreign imports. This resulted in a wave of privitisations that sought to transfer risk; ownership and control; and residual claims from the government to the private sector that was led by Nigel Lawson, the Chancellor of the Exchequer.

In many aspects, privitisation was an extremely effective policy in raising finance for governments and transferring risk to the private sector to avoid companies continually draining public funds. However, it is unclear whether the political climate would have permitted such steps to transfer ownership to the private sector in areas where government could not effectively respond to the wishes of the market in diversified industries.

Throughout post-war Britain it became clear that whilst the government effectively managed the economy during World War II, it could not match the forces of the free market in an era marked by dynamism and exceptional growth in consumer driven industries. Privitisation permitted government owned industries to become exposed to these competitive pressures and be withdrawn from taxpayer support. One of the areas that saw the greatest improvements through privitisation were the productivity figures for newly privatized industries. The state owned enterprises suffered from the amount of strikes and inefficient working practices that plighted their performance and thus through introducing this policy sooner a large sector of the British economy would be de-politicised and subject to the same kind of market forces that faced the rest of the economy. Thus, the private sector could have repositioned firms at an earlier stage to avoid the moral hazards that state owned companies faced at previous stages in their existence which meant they may have been more reluctant in adopting the practices that could have made them more profitable and competitive in domestic and foreign markets.

Moreover, the anti-competitive pressure placed upon the British economy by an over-diversified Government seriously threatened the aggregate economy. Given that the Government was dominant within many sectors, private companies were faced with the government backing of specific companies that it could not afford to compete with. For example, the private sector found the costs of Concorde astronomical and thus only BA and Air France only ever used the

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aircraft. This, in effect, held down competition and efficiency within the economy and thus reduced the competitiveness of British companies abroad.

Furthermore, privitisation also provided lower prices to the consumer as privatized companies were now subject to greater competition in the marketplace and price was the main tool at their disposal to compete with other companies in order to ensure success for their new shareholders. It also provided greater incentives to innovate and compete that could have meant that Britain became more prosperous in the private sector.

However, the policy of privitisation at an earlier stage may not have been successful prior to the 1980s owing to the volatility in the world economy in the 1970s. If government pursued privitisation policies of companies during these turbulent years then it may have soon reversed its decisions during the major oil crises that affected every state owned enterprise from BT to British Leyland. However, the scale of the effects faced by the oil crisis would have disastrous effects on the political situation at the time as unemployment would have increased dramatically not only in former SOEs but their suppliers. As governments faced elections during these periods, it would have been a political catastrophe.

Additionally, privitisation could not solve all of the ills faced by the British economy. Inflation was one of the main challenges that British companies faced during this period. Inflation became a problem as it restricted long-term lending and distorted optimal choices in the market. This was brought under control as a result of a contraction in the money supply and fought against throughout the 1980s. However, privitisation did allow prices to fall for some services and thus helped contribute to the declining inflation but it is perceived as a result of the greater responsibility in controlling the money supply that allowed inflation to decrease.

The debate rages on as to whether specific state owned enterprises should be operated in the public’s interest or whether they should be run like a business. Evidently, privitisations were successful in the early years of the postwar era with the privitisation of the road haulage business, however, they were not compatible with government policy towards the economy. If privitisations were carried out earlier by Conservative and Labour governments then it could have meant government bailouts during tough times, especially in the 1970s, given the commitment to full employment; socialist values; and their importance to the economy. Prior to Thatcher, privitisation seemed incompatible with the belief that Whitehall could manage the economy.

The problems that Britain faced prior to the 1980s could have been eradicated by a policy of privitisations in terms of the inefficient working practices producing sub-standard products for the market; the ballooning government deficits in the 1970s; the artificially high prices owing to the lack of competition; and low productivity levels. However, privitisation could have exacerbated the labour relations problem in the 1970s and meant the same amount of strikes in these industries. Therefore, privitisations could have improved the competitive

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nature of Britain before the 1980s but could have easily faltered in a period of economic crises in the 1970s in terms of labour relations and the oil price shocks.