Saving the Eurozone: Is a ‘Real’ Marshall Plan the Answer?

Renewed calls are being made for a Marshall Plan for Greece. Yet this column argues that few people seem to understand what the Marshall Plan actually was. It suggests that repeating the 1940s’ recipe would mean a ‘structural adjustment programme’ targeting supply-side reforms and, as such, would probably appeal to Greeks even less than it would to Germans.

Sixty years ago, the Marshall Plan confronted a difficult situation not too dissimilar from today’s problems. At the end of the 1940s, Western Europe had a large balance-of-payments deficit. Western Europe also faced a fight with political extremists who were hostile to the market economy, it was struggling to ignite the growth process that eventually delivered the ‘golden age’, and it was reluctant to embark on the integration of European markets. Economic historians have little doubt that the Marshall Plan made an important contribution to solving these problems and, in the eyes of the person in the street, it has iconic status.

Could a new Marshall Plan come to the rescue of the Eurozone by making it less likely that countries like Greece would exit and that the risk of a more general exodus could be reduced? The attraction to its proponents is that Grexit would be avoided because aid would ease the pain of fiscal consolidation and it would help politically those in favour of staying in the euro. This could be attractive to European countries since a Greek exit would in all probability have a very damaging impact on their economies, while a break-up of the Eurozone would likely trigger a deep recession.

However, it is important to recognise how the Marshall Plan worked. As Brad De Long and Barry Eichengreen (1993) stressed, it was a “structural adjustment programme” along the lines of the Washington Consensus – “the most successful ever” – which succeeded by raising productivity growth. If this were well understood, then there would be a better chance of designing a plan that might work – but it would be much less attractive to the Greek politicians who call for it.

The Marshall Plan was implemented as follows.

  • First, European economies were allocated aid according to their dollar balance-of-payments deficits. These inflows amounted to about 2% of GDP per year. American goods were shipped to meet the requests of individual countries.
  • Second, each country deposited the equivalent amount to pay for these imports in a Counterpart Fund. The balances in this fund could be reclaimed for approved uses determined by the Marshall Plan authorities.
  • Third, each country signed a bilateral treaty with the United States which committed them to follow policies of financial stability and trade liberalisation.
  • Fourth, the OEEC1  provided ‘conditional aid’ to back an intra-West European multilateral payments agreement; in 1950, recipients had to become members of the European Payments Union.

Thus, conditionality was embedded in the Marshall Plan in several ways. It worked by tipping the balance in favour of pro-market structural reforms that raised productivity growth rather than through a direct stimulus (Eichengreen and Uzan 1992).

An attractive way to address the competitiveness and fiscal problems of southern Europe is to increase productivity growth. Provided wage increases are restrained, this could substitute for either internal or external devaluation and it would improve fiscal sustainability by narrowing or even overturning the gap between the real interest rate and the growth rate. There is great scope to improve the euro periphery’s productivity performance (Table 1). Pre-crisis TFP growth was very weak and there were large productivity gaps between Southern Europe and the EU15 median. In that context, productivity growth was, at best, mediocre and, at worst, very disappointing. This is underlined by the far superior labour productivity growth generally achieved by the 2004 accession countries. If this productivity problem could be effectively addressed and catch-up growth ignited as in the 1950s by a Marshall Plan, living happily within the Eurozone would look much more feasible in the long run.

Table 1. Pre-crisis productivity performance

2007 Real GDP/hour worked ($1990GK) Real GDP/HW growth, 1995-2007 TFP growth 1995-2007 (p.a.%)
Greece 17.29 3.36 0.61
Italy 25.63 0.46 -0.02
Portugal 15.62 1.16 -0.63
Spain 23.50 0.48 -0.58
EU median* 30.44 1.67 0.64
Czech Republic 14.51 3.87 0.79
Estonia 22.69 7.18 4.71
Hungary 10.66 3.08 0.21
Latvia 14.20 5.84 2.86
Lithuania 15.30 6.30 4.31
Poland 11.83 3.20 2.01
Slovakia 17.32 5.18 2.96
Slovenia 22.40 4.32 1.70

Source: The Conference Board

*EU15 refers to the pre-2004 accession EU countries and $1990GK indicates the levels are measured at purchasing power parity (PPP) in terms of 1990 US dollars.

In recent years, a large body of empirical evidence has resulted in a consensus on the reasons for disappointing productivity growth in southern Europe; there has been insufficient ‘structural reform’. This has slowed down the diffusion and effective assimilation of new technologies, impeded the entry of new producers and the exit of inefficient firms, and impaired incentives to innovate and invest. OECD economists have pointed to policies that could be reformed. These include education, labour market, product market regulation, and tax reforms. If all these were implemented to bring countries up to the OECD average, the study predicts that the long-run income level would rise by over 40% in Greece, 36% in Portugal, 17% in Italy, and 16% in Spain (Barnes et al. 2011). However, it is important to note that while much of the impact of regulatory and fiscal changes feed through within ten years, the full effect of educational reforms inevitably takes much longer to be realised.

The objective of a ‘Real’ Marshall Plan for Southern Europe would be to underpin European economic integration and the survival of the Eurozone by raising productivity growth. The central component, as in the 1940s, would be to formulate a successful structural adjustment programme with strict conditionality focused on improving productive potential rather than simply spending more of the EU budget. Staying in the Eurozone would, of course, be mandatory.

The structural reforms targeted by a real Marshall Plan would be those already identified. These include product market reforms, which would mean serious moves to implement fully the Single Market and, in the case of Greece, rapidly to improve its Doing Business score, fiscal reforms to broaden the tax base, a switch towards consumption and property taxes, labour-market reforms to increase flexibility and to reduce the NAIRU. Such changes would not only improve productivity but also go some way towards restoring lost competitiveness. These are changes in economic policy rather than investments in projects and, generally, incur political rather than monetary costs. In the longer term, improvements in educational quality should also be a focal point.

What does a real Marshall Plan have in its favour? Clearly, if it worked as well as its predecessor, then the prospects for the crisis countries of Southern Europe would be significantly enhanced. Growth prospects would improve and life within the Eurozone would become less difficult. There is considerable scope for catch-up growth based on a reduction of productivity gaps if structural reforms are taken seriously. From the perspective of Northern Europe, it is worth paying something to reduce exposure to a chaotic break-up of the Eurozone.

However, the record of structural adjustment programmes suggests this is a big ‘if’. The experience in the 1980s and 1990s was that the results were often disappointing both in terms of compliance and outcomes. More specifically, the success or failure of World Bank programmes depended mainly on domestic political economy considerations, so that “The key to successful adjustment lending is to find good candidates to support” (Dollar and Svensson 2000). Do Greece and Portugal shape up as good candidates? At best, this seems doubtful.

The EU does have recent experience of great success in using conditionality to achieve political and economic reform in the light of the accession process which led to enlargement in 2004. The key reason for this success was the incentive of a big prize, notably in the form of the perceived benefits of EU membership relative to the political costs of compliance, together with a credible threat to withhold it if the conditions imposed were not met (Schimmelfennig et al. 2005).

This implies that a real Marshall Plan would have to offer serious money to the crisis countries and pay most of it if, and only if, reforms had been satisfactorily completed. Although the politics of this is challenging, the arithmetic is not. Because the economies of Northern Europe are relatively so large, even a quarter of the aid offered by the US in the 1940s (0.25% GDP per year) would be a major boost to Southern Europe and could finance inflows of over 5% of GDP for both Greece and Portugal. A real Marshall Plan could not be based on the present design of the EU’s Structural Fund; rather, it would have to be delivered under the auspices of much stronger surveillance and with a credible threat to withhold funds for non-compliance. The EU’s track record with the Stability and Growth Pact does not inspire confidence.

So, for Greeks a ‘Real’ Marshall Plan would surely seem too onerous and for Germans it would look like a triumph of hope over experience.

This article draws on a recent paper by Crafts (2012).


•Barnes, S, R Bouis, P Briard, S Dougherty, and M Eris (2011), “The GDP Impact of Reform: a Simple Simulation Framework”, OECD Economics Department Working Paper No. 834.
•Crafts, N (2012), “Saving the Eurozone: Is a ‘Real’ Marshall Plan the Answer?”, The CAGE (Centre for Competitive Advantage in the Global Economy)-Chatham House Series No. 1.
•De Long, JB and B Eichengreen (1993), “The Marshall Plan: History’s Most Successful Adjustment Program”, in R Dornbusch, W Nolling and R Layard (eds.), Postwar Economic Reconstruction and Lessons for the East Today, Cambridge, MIT Press, 189-230.
•Dollar, D and J Svensson (2000), “What Explains the Success or Failure of Structural Adjustment Programmes?”, Economic Journal, 110:894-917.
•Eichengreen, B and M Uzan (1992), “The Marshall Plan: Economic Effects and Implications for Eastern Europe and the former USSR”, Economic Policy, 14:13-75.
•Schimmelfennig, F, S Engert, and H Knobel (2005), “The Impact of EU Political Conditionality”, in F Schimmelfennig and U Sedelmeier (eds.), The Europeanization of Central and Eastern Europe, Cornell University Press, 29-50.
1 The OECD was originally called the Organisation for European Economic Co-operation (OEEC) from its start in 1948 to 1961.

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About Nicholas Crafts 4 Articles

Affiliation: University of Warwick and CEPR

Nicholas Crafts is Professor of Economics and Economic History at the University of Warwick, a post he has held since 2006. He is also Director of the ESRC Research Centre on Competitive Advantage in the Global Economy (CAGE), at Warwick. His main fields of interest are long-run economic growth, British economic performance and policy in the 20th century, the industrial revolution, and the historical geography of industrial location. He has published many papers in academic journals and has also contributed to research by the International Monetary Fund and the World Bank.

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