international accords on floating-rate regimes were powerless to restrain. This in turn undermined the efforts of individual governments to manipulate local interest rates and maintain the value of their national currency. Currencies fell. And as they fell, so the cost of imports rose: between 1971 and 1973, the world price of non-fuel commodities increased by 70 percent, of food by 100 percent. And it was in this already unstable situation that the international economy was hit by the first of the two oil shocks of the 1970s.
On October 6th 1973, Yom Kippur (The Day of Atonement) in the Jewish calendar,Egypt and Syria attacked Israel. Within twenty-four hours major Arab oil-exporting states had announced plans to reduce oil production; ten days later they announced an oil embargo against the US in retaliation for its support for Israel and increased the price of petroleum by 70 percent. The Yom Kippur War itself ended with an Egyptian-Israeli cease-fire on October 25th, but Arab frustration at Western support for Israel did not abate. On December 23rd the oil-producing nations agreed to a further increase in the price of oil. Its cost had now more than doubled since the start of 1973.
To appreciate the significance of these developments for Western Europe especially, it is important to recall that the price of oil, unlike almost every other primary commodity on which the modern industrial economy rests, had remained virtually unchanged over the decades of economic growth. One barrel of Saudi light crude—a benchmark measure—cost $1.93 in 1955; in January 1971 it went for just $2.18. Given the modest price inflation of those years, this meant that in real terms oil had actually got cheaper. OPEC, formed in 1960, had been largely inert and showed no inclination to constrain its major producers to use their oil reserves as a political weapon. The West had grown accustomed to readily available and remarkably cheap fuel—a vital component in the long years of prosperity.
Just how vital can be seen from the steadily growing place of oil in the European economy. In 1950, solid fuel (overwhelmingly coal and coke) had accounted for 83 percent of Western Europe’s energy consumption; oil for just 8.5 percent. By 1970 the figures were 29 percent and 60 percent respectively. Seventy-five percent of Italy’s energy requirements in 1973 were met by importing oil; for Portugal the figure was 80 percent.[197] The UK, which would for a while become self-sufficient thanks to newly discovered reserves of oil in the North Sea, had only begun production in 1971. The consumer boom of the late fifties and sixties had greatly increased European dependence on cheap oil: the tens of millions of new cars on the roads of Western Europe could not run on coal, nor on the electricity now being generated—in France especially —by nuclear power.
Hitherto, imported fuel had been priced in fixed dollars. Floating exchange rates and oil price increases thus introduced an unprecedented element of uncertainty. Whereas prices and wages had risen steadily, if moderately, over the course of the previous two decades—an acceptable price for social harmony in an age of rapid growth —monetary inflation now took off. According to the OECD, the inflation rate in non-Communist Europe for the years 1961-1969 was steady at 3.1 percent; from 1969-1973 it was 6.4 percent; from 1973-1979 it averaged 11.9 percent. Within this overall figure there was considerable national variation: whereas West Germany’s rate of inflation from 1973-1979 was held to a manageable 4.7 percent, Swedenexperienced a level twice as high. French prices inflated at an average of 10.7 percent per annum in those years. In Italy the inflation rate averaged 16.1 percent; in Spain over 18 percent. The UK average was 15.6 percent, but in its worst year (1975) the British inflation rate exceeded 24 percent per annum.
Price and wage inflation at these levels was not historically unprecedented. But after the stable rates of the fifties and sixties it was a new experience for most people—and for their governments. Worse still, the European inflation of the seventies—compounded by a second oil price rise in 1979, when the overthrow of the Shah of Iran produced panic in the oil markets and a 150 percent price increase between December 1979 and May 1980—did not conform to previous experience. In the past, inflation was associated with growth, often over-rapid growth. The great economic depressions of the late nineteenth century and the 1930s had been accompanied by
Instead, western Europe began to experience what was inelegantly dubbed ‘stagflation’: wage/price inflation and economic slowdown at the same time. In retrospect this outcome is less surprising than it seemed to contemporaries. By 1970 the great European migration of surplus agricultural labor into productive urban industry was over; there was no more ‘slack’ to be taken up and rates of productivity increase began inexorably to decline. Full employment in Europe’s major industrial and service economies was still the norm—as late as 1971 unemployment in the UK was 3.6 percent, in France just 2.6 percent: but this meant that organized workers who had grown accustomed to bargaining from a position of strength were now facing employers whose generous profit margins were starting to shrink.
Pointing in justification to the increased rate of inflation from 1971, workers’ representatives were pressing their case for higher wages and other compensation upon economies that were already showing signs of exhaustion even before the crisis of 1973. Real wages had begun to outstrip productivity growth; profits were declining; new investment fell away. The excess capacity born of enthusiastic post-war investment strategies could only be absorbed by inflation or unemployment. Thanks to the Middle East crisis, Europeans got both.
The depression of the 1970s seemed worse than it was because of the contrast with what had gone before. By historical standards the average rates of Gross Domestic Product (GDP) growth in western Europe through the 1970s were not especially low. They ranged from 1.5 percent in the UK to 4.9 percent in Norway and were thus actually a distinct improvement over the 1.3 percent average growth rates achieved by France, Germany and the UK over the years 1913-1950. But they contrasted sharply with the figures of the immediate past: from 1950-1973 French growth per annum had averaged 5 percent, West Germany had grown at nearly 6 percent and even Britain had maintained an average rate above 3 percent. It was not the 1970s that were unusual so much as the ’50s and ’60s.[198]
Nevertheless, the pain was real, made worse by growing export competition from new industrial countries in Asia and ever more costly import bills as commodities (and not just oil) increased in price. Unemployment rates started to rise, steadily but inexorably. By the end of the decade the numbers out of work in France exceeded 7 percent of the workforce; in Italy 8 percent; in the UK 9 percent. In some countries—Belgium, Denmark— unemployment levels in the seventies and early eighties were comparable to those experienced in the 1930s; in France and Italy they were actually worse.
One immediate result of the economic down-turn was a hardening of attitudes towards ‘foreign’ workers of all sorts. If published unemployment rates in West Germany (close to zero in 1970) did not climb above 8 percent of the labor force despite a slump in demand for manufactured goods, it was because most of the unemployed workers in Germany were not German—and thus not officially recorded. When Audi and BMW, for example, laid off large numbers of their workforce in 1974 and 1975, it was the ‘guest workers’ who went first; four out of five BMW employees who lost their jobs were not German citizens. In 1975 the Federal Republic permanently closed its recruiting offices in North Africa, Portugal, Spain and Yugoslavia. As the 1977 Report of a Federal Commission expressed the point in its ‘Basic Principle #1’: ‘Germany is not an immigrant country. Germany is a place of residence for foreigners who will eventually return home voluntarily.’ Six years later the Federal Parliament would pass an Act to ‘Promote the Preparedness of Foreign Workers to Return’.
Voluntarily or otherwise, many of them did indeed return ‘home’. In 1975, 290,000 immigrant workers and their families left West Germany for Turkey, Yugoslavia, Greece and Italy. In that same year, 200,000 Spaniards returned to Spain in search of work; returnees to Italy now outnumbered emigrants for the first time in modern memory, as they were shortly to do in Greece and Portugal. By the mid-seventies, nearly a third of a million Yugoslav emigrants had been obliged to return to the Balkans, where their expectation of employment was no better than in Germany or France. The northern European jobs crisis was being re-exported to the Mediterranean. Meanwhile France imposed strict restrictions on immigration from Algeria and its former African colonies, and the United Kingdom placed ever tighter limits on would-be immigrants from the South Asian sub-continent.
The combination of structural unemployment, rising oil import bills, inflation and declining exports led to budget deficits and payments crises all across Western Europe. Even West Germany, the continent’s manufacturing capital and leading exporter, was not spared. The country’s balance-of-payments surplus of $9,481 million in 1973 fell within a year to a deficit of $692 million. The British national accounts were by now chronically in deficit—so much so that by December 1976 there appeared a serious risk of a national debt default and the International Monetary Fund was called in to bail Britain out. But others were little better off. French payments balances fell into the red in 1974 and remained there for most of the ensuing decade. Italy, like Britain, was forced in April 1977 to
