European economic integration: Undoing 1914-1945

Nikolaus Wolf 29 May 2008

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The European division of labour is a stubborn beast. As shown by the case of Germany after the formation of a nation state in 1871, it took a generation of political effort, a war, and the Great Depression to tear apart what had long been growing together (Wehler 1973). German regions remained deeply embedded in a European division of labour while there was no “unified” German economy before 1914. Seen from this perspective, the process of European integration after the Second World War looks less like a spectacular political undertaking and much more like a return to economic reason.

The post-war decades saw the transformation of the patchwork of European nation states into a single economic area, with a strong common currency and an improving coordination of its institutional framework. When we let history begin in 1945, this economic cooperation across the previously hard-fought European borders appears nothing short of miraculous. However, a long-run perspective reminds us that the process of European integration had been under way for some time before nationalism in all shades and colours made every effort to contain it towards the end of the 19th century. Germany provides us with an intriguing case study of how the project of a “national” economy at the heart of Europe in 1871 was cutting across the long-standing network of European economic cooperation. In my paper “Was Germany Ever United? Evidence from Intra- and International Trade, 1885-1933”, I explore the process of integration within and disintegration across the political borders of Germany over the 50 years or so following the foundation of the German Empire in 1871.

A large and very detailed sample of trade flows between German regions and the regions of neighbouring states allows us to trace the geography of trade costs across all parts of Central Europe over the period 1885 – 1933. The data clearly indicate that regions within Germany were not much better integrated with each other than regions on two sides of the German state border prior to 1914: coal and iron ores, steel, chemical products or grain were shipped in large amounts along the Rhine from and towards Rotterdam, northern Germany remained closer to England than to Bavaria, and the Polish speaking parts of Prussia were integrating with the Kingdom of Prussia in the Russian Empire.

On the flipside of this, German policymakers struggled to unify the various parts of the German Empire of 1871 into one “national” economy. But rising tariffs, a common currency and national infrastructure policies were not enough to cut across the economic network that had emerged along the lines of geography and cultural heritage: heterogeneity in languages and religion. Central European trade continued to largely follow the natural routes along the three big waterway systems of Rhine-Main, Elbe-Oder and Danube and railways did surprisingly little to change this prior to 1914. By implication, there was a “natural” border separating Germany roughly into two: a western and an eastern German economy, with surprisingly little economic interaction between the two. Berlin sourced its coal supply from Saxony, Upper Silesia or England, but only negligible amounts from the Ruhr. And the industrial centres of western Germany in turn were fed by the agriculture of Westphalia, the Palatinate or even grain from the New World arriving at the North Sea ports rather than by the estates of East-Elbian Junkers.

All this changed only with the Great War of 1914-1918 and the Great Depression, when economic exchange started to follow political boundaries much more closely than ever before. This was essentially driven by two separate sets of factors, namely border changes and a massive rise in tariffs and non-tariff barriers to trade along those borders. First, the new borders after the treaties of Versailles, St. Germain and Trianon did not change randomly but largely followed the patterns of cultural heterogeneity, which continued to affect trade flows as they did already prior to the war. Put differently, the “treatment effect” of the new borders across Central Europe was quite limited, simply because they changed to better reflect pre-existing lines of fragmentation. By losing the weakly integrated parts of the economy, the Weimar Republic was better integrated than the German Empire had ever been.

However, second, the trade barriers along these new borders were rising during and after the war, mainly in the wake of the Great Depression. When worldwide deflation pushed up real factor costs from 1929 onwards, most governments attempted to isolate their national economies from external shocks. Tariffs reached previously unseen levels, and many non-tariff barriers, like quotas or foreign exchange controls, choked off cross-border trade. It was then, at the end of the Great Depression in 1933, that Germany was finally “united” from Bavaria to Hamburg and the Ruhr to Brandenburg. In essence, it was the disintegration from their European neighbours that tied Germany’s regions together.
The process of European integration after 1945 and even more so after 1989 reopened the opportunities of cross-border cooperation, which more often than not resembled old patterns of exchange. Given the many doubts about and the foreseeable pressures on Europe’s single market and the Eurozone, this is a reassuring lesson from history: the European division of labour is a stubborn beast.

References

Wehler, Hans-Ulrich (1973), Das Deutsche Kaiserreich 1871-1918, in J. Leuschner (ed.) Deutsche Geschichte Bd. 9, Göttingen: Vandenhoek and Ruprecht.
Wolf, Nikolaus (2008), “Was Germany Ever United? Evidence from Intra- and International Trade, 1885-1933” CEPR Discussion Paper 6796.

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Topics:  Europe's nations and regions

Tags:  Europe, EMU, division of labour, Great Depression