The Impact of the Oil Crisis on Europe: A Historical Analysis
The oil crisis of 1973 was a turning point in the history of Europe. It marked the end of sustained growth, as high rates of inflation combined with rising unemployment created unprecedented economic insecurity. This crisis demonstrated the need for structural changes to the economy to move away from old industries and with much pain, damaging levels of inflation were brought under control. However, it also exposed the limit of the international relationship, leading to a new and dangerous phase of superpower confrontation.
Table of Contents
- Economic Impact of the Oil Crisis
- Political and Social Impact of the Oil Crisis
- Monetary Policy Responses
- Rise of Neo-Liberalism
Economic Impact of the Oil Crisis
Q: What was the economic impact of the oil crisis on Europe?
A: The economic impact was severe, with economic growth rates more than halving in Europe in the twenty years that followed the oil crisis. Industrial production increased by 10% in 1972-3, leading to overcapacity and inflation. Keynesian theory offered no solutions to the rising inflation and increased public expenditure, with pumping money into the economy only adding to inflationary pressures. Rising unemployment alongside inflation confounded classical economic analysis, leading to stagflation. The most buoyant economy, West Germany, coped relatively well, while Britain and Italy were worst affected. Britain faced poor growth rates, while Italy had inflation of 17.6%.
Q: What were the long-term economic and political failings of Britain that made it so badly affected by the oil crisis?
A: The long-term economic and political failings of Britain were significant factors in its sorry state. The Labour government’s attempts to reform the trade unions were a failure, and the Conservative government under Edward Heath did no better in managing the economy and industrial disputes. Inflation and prices continued to rise, leading to a miners’ strike in 1972 that saw the government concede to a pay rise, fueling inflation even further. The crisis in industrial relations came to a head in 1974 when the National Union of Mineworkers demanded a pay rise, leading to a state of emergency and a three-day week in industry. The Labour administration acceded to the miners’ pay demands, leading to a wages explosion and an increase in inflation and unemployment. Inflation reached its peak in 1975, leading to the government seeking a loan from the IMF, and the resulting spending cuts brought reduced deficits but also slowing state revenues from taxation.
Political and Social Impact of the Oil Crisis
Q: What was the social impact of the oil crisis on Europe?
A: The social impact was equally severe, as rising unemployment and inflation created greater economic insecurity than most people had experienced since the war. The number of days lost in industrial disputes rose to a post-war peak, leading to the “winter of discontent” in 1978-79, and a rise in political violence.
Q: How did the oil crisis impact politics in Europe?
A: The crisis exposed the limit of the international relationship, leading to a new and dangerous phase of superpower confrontation. In Britain, the Conservative Party, led by Margaret Thatcher, won the general election in May 1979, signalling a turn to neo-liberalism and a rejection of Keynesianism.
Monetary Policy Responses
Q: What was the reaction of European countries to the oil crisis?
A: The major European industrial countries moved to construct a narrow band within which their currencies could fluctuate against the dollar. The “snake” soon proved a failure as countries were primarily concerned with their domestic difficulties through national policies. The unsatisfactory currency “snake” was converted in 1979 into the European Monetary System. The move to floating currencies was prompted by the problems of the ‘snake’, with the idea of European monetary union seen as a pipe dream due to West Germany’s economic dominance.
Q: How did economists respond to the economic crisis caused by the oil crisis?
A: The resulting monetarist philosophy was the core of neo-liberalism, which had a lengthy intellectual pedigree and was supported by economists such as Ludwig von Mises and Friedrich Hayek. Theoretical work of economist Milton Friedman was gaining popularity, and he rejected Keynesianism and advocated for an economy self-regulated by the free market and argued that inflation could be controlled by tight control of the money supply, even at the cost of higher unemployment.
Rise of Neo-Liberalism
Q: What was the impact of the oil crisis on economic theory?
A: The crisis marked the end of the optimism of sustained growth and the dominance of Keynesian economics. The resulting rise of neo-liberalism was a response to the failure of Keynesian economics to deal with the crisis.
Q: What is neo-liberalism?
A: Neo-liberalism is an economic philosophy that advocates for free markets, limited government intervention, and individual responsibility. It is based on the belief that competition and market forces are the most efficient means of allocating resources and creating wealth.
The oil crisis of 1973 had a profound impact on political, economic, and social structures in Europe. The crisis demonstrated the need for structural changes to the economy to move away from old industries already in decline. Neo-liberalism was born out of the failure of Keynesian economics to deal with the crisis. The long-term impact of the crisis was significant, with economic growth rates more than halving and stagflation becoming the norm. However, the crisis also spurred on necessary changes, such as the construction of the European Monetary System and the rise of neo-liberalism.