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The level of production that existed in Western Europe after World War II, in 1946, was only 1/3 of the level in 1936. Of the countries affected most greatly by the devastation of war, France and Germany were two that exhibited “miraculous” growth in the immediate years following World War II. This paper will explore the reasons for the incredible setbacks in the economies of France and Germany caused by the destruction aspects of World War II. After doing so, this paper will investigate the reasons for the phenomenal comeback of both economies. A tremendous, if not the most important, aspect in the short-term collapses of the French and German economies following World War II, was the enormous amount of capital lost because of the war. A good deal of fighting took place in the territories of France and Germany, resulting in the destruction of capital equipment, machines, plants, and factories. The Ruhr Valley, considered the industrial heart of Europe, was removed from Germany’s direct control after the cease of World War II. Without control over the production within and the allocation of goods from this area, Germany lost much of its industrial production power. Another reason for the loss of capital, in the case of Germany, was the stripping of capital equipment after the surrender of Germany to end World War II. The reparations imposed on Germany after the conclusion of the war required Germans to decrease capital equipment in order to “reduce her war-making capacity” (Balabkins 29). Loss of capital stock critically affects the level of production because it decreases the capital to labor ratio. When an economy exists at a point other than its equilibrium level of capital for each laborer, workers are unable to be as productive as possible, resulting in lower levels of production. The Solow growth model can visually explain why a loss in capital will cause a country to deviate from its steady-state growth rate and cause major setbacks in the country’s level of production. (Refer to model on page….). When level of capital stock drops while labor stays the same, the capital-labor ratio (K/L) will drop. Loss in capital will also cause production to drop and cause the output-labor ratio (Y/L) to drop. In order for Y/L to return to its original state, increased investment is needed in order to boost capital and, in turn, raise K/L. As K/L rises, Y/L will also rise, until K/L and Y/L eventually reach their steady states. One reason why Germany’s recovery was so amazing is because it was so difficult to invest in the early years after the war. When allies took over post-WWII Germany, they continued the wage and labor controls that were devised under Nazi control, including the wage freeze imposed in 1938. Although wages were frozen, prices continued to rise, as did levels of taxes. This combination left workers with dramatically reduced real incomes. For many workers, especially those in already low-paying jobs, the income they received was barely enough to live on, leaving incomes of nearly zero after accounting for consumption. The frozen wages that existed in Germany after World War II hindered economic growth not only by reducing investment, but also by lessening worker productivity. In the years following WWII, the low real earnings received by workers were coupled with a shortage of food, caused by the “loss of Germany’s former breadbasket” (Bulabkins 100). This combination made sufficient levels of caloric intake nearly impossible to achieve, leading to lessened productivity both because of unhealthy, weak workers and because of increased absenteeism as workers scrounged the countryside for food. In France, workers’ wages remained above price levels until 1947 when price level surpassed that of workers’ earnings and the French began to experience the same problems as the Germans in the form of insufficient wages. These low wages eventually caused many frustrated workers to strike, leading to lost workdays and decreased production. (Esposito 10). One factor that helped France out of its post WWII hardship was the central planning of the government. The French, led by Jean Monnet, created a system of indicative planning, beginning with the First Plan in 1948. The French’s planning set goals for economic indicators such as inflation, unemployment, and national product. Although these goals were not expected to necessarily be met, indicative planning helped set progress in motion and worked as a self-fulfilling prophecy, causing citizens to act with confidence that the economy would improve. The French’s planning also increased the flows of information in the market and led market players to be more optimistic about the future of France’s economy, driving them to greater investment. Another problem in the French economy in the years after World War II was that much of France’s planned industrial production regarded increased production of steel, which was dependent upon inputs from Germany’s Ruhr Valley. After the War, the control over the production and allocation of goods in the Ruhr Valley became one of international concern. France’s plan to lead in the production of steel, a title once held by Germany, was hindered because they were unable to attain the needed inputs of coal and coke from the Ruhr Valley. An agreement was finally reached as the Schuman Plan allowed for resources of the Ruhr Valley to be shared by both France and Germany. The allocation of resources was controlled so that both countries would be allowed to attain enough resources to allow productivity, leaving France with an opportunity to produce steel but not so much that steel became their key to economic recovery. A leading factor in the rescue of France and Germany from their crumbling economies, along with the rest of Western Europe, was the help of America through the Marshall Plan of 1948. The Marshall Plan, although extremely beneficial to Europe, was not an altruistic act or a moral endeavor. The United States realized that without their help Europe would continue to suffer and their suffering would be harmful to America both economically and politically. The United States was already suffering from lack of open trade in Western Europe and they feared that the poor earnings of workers would lead them to elect communists into Government in hopes of improvement. Realizing the imposing danger, America proposed the Marshall Plan. Perhaps the most important aspect of French and German recovery, as well as the recovery of the rest of Western Europe was the success of international trade policies, spurred by the Marshall Plan, but developed within Europe. One reason that the issue of trade was so important was because of the interdependence of the recovering nations and the common conditions that they were experiencing. The majority of Western Europe suffered from decreased trade, fears of inflation, and hopes for improved standard of living. By working somewhat together, and allowing less restrictive trade policies, France, Germany, and other nations were able to increase both imports and exports, allowing for greater productivity. One of the most substantial improvements in the international trade in Western Europe after World War II came in 1949 when nations began to trust the system of multilateral payments, allowing a greater flow of trade between countries. Bibliography: n/a Word Count: 1242
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