Old Europe’s Young Again—and Fretting (Fortune Classics, 1963)

November 6, 2011, 6:30 PM UTC

By Robert Lubar

Editor’s note: Every week, Fortune.com publishes a favorite story from our magazine archives. This week, we turn to an article from the February 1963 issue, when Western Europe found itself at an inflection point folloiwng years of fast growth after the end of World War II. It was five years after the Treaty of Rome created the European Economic Community — a common market that was the precursor to the European Union as we know it today. Then, as now, the only certainty was uncertainty.

Paris– rush hour on the Champs-Elysées

The traveler today can see Europe in either of two perspectives. If he stands back and lets the sights and sounds sink in, he is stunned by the spectacle of dramatic change. Church steeples have yielded their domination of the skyline to towering glass-and-steel slabs that look as if they came off the same drawing boards as those on New York’s Park Avenue. The picturesque platoons of bicyclists and even the motor scooters have given way to the automobile and its satanic byproduct, the traffic jam. So many factory workers drive their own cars to work that the laying aside of valuable real estate for parking space has become an appreciable cost item in industry. Class distinctions in living, dressing, and eating have been blurred by an affluence that, for the first time in Europe’s history, reaches deep down.

But if the traveler gets close up and listens to people talk about what is on their minds at the moment, the landscape seems crowded with problems and tensions. The fantastic pace at which European economies were expanding a year or two ago is slowing to a more normal gait, and the euphoria of businessmen has given way to mundane worries about thinning profits, bearish stock markets, stiffer competition at home and abroad, depressed areas, abrasive relations with government.

These two sets of impressions constantly intruded on each other during a recent trip this writer made to France, Britain, Italy, Germany, and Belgium, a trip that included talks with some fifty corporation executives, bankers, and government officials. Many of these people were engrossed in their own difficulties and grievances, and these deserve serious consideration in any report on the current state of Europe. But the foreground specifics should not be allowed to obscure the bigger story: the evolution in Europe of an economic environment much like our own.

American ideas and American capital have, of course, helped bring this about. A vast number of U.S. corporations, big and small, have made heavy commitments in European plant and other facilities, formed joint ventures with European firms, introduced new products, technical processes, and distribution methods. The on-the-spot evidence of the U.S. presence is overwhelming. It is conceivable that a European executive could wake up in the morning, adjust the Minneapolis-Honeywell thermostat on his central heating system, brush his teeth with Colgate, eat a Kellogg cereal for breakfast, drive to his office building in an Opel (General Motors (GM)), ascend in an Otis elevator, make a few phone calls on General Telephone equipment, consult data from an I.B.M. (IBM) machine, discuss a plant-construction project with Foster Wheeler engineers, and so on. The frontier of the U.S. economy, clearly, is no longer the Atlantic.

But what is most significant about this change is not the influence the U.S. has had on it, but what the Europeans have done themselves. They have accomplished far more than staging a remarkable recovery from a devastating war. To understand what has happened, it is necessary to consider why this highly developed and eminently civilized continent, where modern industrialism got its start, found itself far behind the U.S. There never was any conclusive evidence that Europeans were less energetic or technically ingenious. But what they did lack was a continental mass market that would enable their production and distribution to take full advantage of the great technological developments of the twentieth century. Even before World War I, Europe’s pace was lagging behind that of the U.S. because economic nationalism divided the Continent into cramped compartments, within which large-scale production was severely inhibited if not prevented. Sheltered by tariffs and other protective devices from the invigorating effects of competition, industry had neither the Incentive nor the opportunity to develop its true potential. This became possible only when six nations took the bold, history-making decision in the 1957 Treaty of Rome to tear down the compartment walls and form a European Economic Community.

The country that surprised everybody

Milan– subway construction below the cathedral

The idea of the Common Market has taken effect well in advance of the formal technical arrangements. The reduction of tariffs between the six Common Market countries is well ahead of schedule, but they are still at 50 percent of their former levels, and a number of other, more subtle trade restrictions remain in force. Nevertheless, businessmen are behaving as if national borders had already disappeared. They are merging and consolidating, forming joint ventures, and setting up bases to assault new markets. The resulting upheaval must be what Jean Monnet, prophet of European union, had in mind when he predicted that the Common Market would touch off “a second industrial revolution.”

Like any revolution, this one has plenty of confusion, uncertainty, and casualties. As patterns of competition change and artificially protected preserves are opened up, weak firms must seek shelter or get trampled upon and strong ones cannot take their strength for granted. Yet everyone seems to be looking forward with gusto to the test. A few businessmen expressed concern about what the Common Market might do to their immediate prospects, but none even hinted that he would like to see the process stopped or reversed.

The business community that started out with the best reasons to be frightened now embraces the new adventure with the most enthusiasm. A few years ago France looked like the weak sister of Europe. Its politics were in disorder, its morale depressed by the impasse in Algeria. Moreover, its notoriously inefficient industry, fragmented into old, tariff-protected family firms, seemed sure to be overwhelmed by resurgent German rivals. Yet who’s on top now? France–brimming with greater self-confidence than it has enjoyed since 1914.

Obviously the liquidation of the Algerian mess had a lot to do with it. So undoubtedly did Charles de Gaulle’s ruthlessly masterful transformation of the political system. But quite independently of these factors, the French economy displayed unsuspected strength of its own. (As a matter of fact, some businessmen are not only unwilling to credit de Gaulle but are positively vituperous in their denunciation of his “Bonapartism.”)

Far from being overwhelmed by invading hordes of Volkswagens and Fiats, the French cars–Renaults, Simcas, Citroens, and Peugeots–have held their own at home and made significant gains in export markets. (A good way to feel the vitality of the French auto industry is to try to get to a Paris appointment on time. As many a tourist knows, it is possible to spend forty-five minutes edging up the Champs Elysees from the Place de la Concorde to the Arc de Triomphe.)

The French chemical industry, which looked like a sitting duck for Italy’s Montecatini and the big German firms, has taken wing and is flying high. It promises to do even better now that Pechiney and Saint-Gobain have merged their chemical interests. These two great integrated companies have been at the forefront of the French revival. Pechiney, preeminent in aluminum, recently secured a beachhead in the U.S. by acquiring effective control of Howe Sound Co., a diversified metal manufacturer. Saint-Gobain, which proudly claims to be the world’s oldest manufacturer of industrial plate glass (it was founded under Louis XIV), now has a formidable network of interests throughout Europe and opened a plant not long ago in Tennessee.

E. Russell Eggers, who is stationed in Paris to advise on Common Market developments for the Chase Manhattan Bank, is fond of pointing out that “the only completely predictable result of a tariff cut is a surprise. The Common Market is full of surprises.” France’s success is his prize example.

Cold comfort from the South

Some French industries, to be sure, are going through the wringer. When quotas on refrigerators were abolished in 1961, imports jumped from 85,000 a year to about 285,000. The victims included not only dozens of small French firms but also General Motors, which manufactures Frigidaires in a big plant in Gennevilliers, on the outskirts of Paris. When the writer visited Gennevilliers, the wounds were still fresh. G.M. had had to lay off 684 employees, thereby drawing an angry blast from French Minister of Industry Michel Maurice-Bokanowski (who, it later turned out, was offended mainly by the fact that he hadn’t been consulted in advance).

Most of the new imports are Italian models that beat French prices partly because they are made with cheaper labor–even, one manufacturer in France confided, by child labor (he was presumably referring to the Italian use of apprentices on some production lines). The French Government has applied to the Common Market Commission under the “hardship safeguard clause” of the Rome Treaty for the right temporarily to suspend refrigerator imports from Italy; the commission is still considering the request. Meanwhile, the refrigerator industry, resigned to a hard battle for survival, is going through a badly needed consolidation that will result in a smaller number of stronger firms.

The great game of le plan

London– skyscrapers in the background of Buckingham Palace

Anyone who concludes, however, that French enterprise is ready to embrace wholeheartedly all the conditions of a free, competitive market economy must reckon with le plan. In Paris it turns up in any discussion of business performance and prospects, and it is invariably mentioned with veneration. There is some dispute over exactly how much it has contributed to the growth rate; it can be convincingly argued that France’s resurgence was really made possible by the monetary reforms and trade liberalization policies introduced by economist Jacques Rueff in 1958. But hardly any Frenchman–or American operating in France–questions the indispensability of le plan, at least for the present. As a part of the way of life, it is more solidly entrenched than the long lunch.

Le plan is an elusive concept. The first four-year plan was inaugurated in 1946 as a means of mobilizing and rationing national resources for postwar reconstruction. Now, in better times, the idea broadly is to coordinate and harmonize economic expansion. Instead of leaving it to individual companies to estimate future demand and how much they can profitably build up their plant, the plan sets a common goal and sponsors a collective investment decision by the firms in each industry.

But French planning does not extend to current production, nor does it limit price and product competition. Great point is also made of the voluntary character of the scheme. The government neither dictates nor formally enforces the details of the plan; its experts simply lay down general guidelines, and committees from the various sectors of the economy (business, labor, agriculture, etc.) do the rest. There is an interesting description of the function of planning in a speech by Pierre Masse, head of the government’s Commissariat du Plan (he is not, however, called a commissar): “It lays down a general line of programing that promises each branch of activity that it will acquire its factors of production and sell its products on balanced markets. However, the promise is fulfilled only if everyone joins in the game. The promise encourages participation in the game but it does not make it compulsory, so that the plan reduces uncertainty without eliminating it completely.”

A shrewd German described le plan succinctly as an “investment cartel.” Any American with a medium-long memory would see in it at least a faint hereditary resemblance to Franklin Roosevelt’s NRA. But where the Blue Eagle concentrated on “codes” fixing wages and prices, the leverage of le plan is exerted at the point where new investment flows into business. French businessmen “voluntarily” go along with schemes that have the effect of dividing up markets and controlling the rate of expansion, because they might not be able to get new capital if they did not play the game. An adequate money market simply does not exist in France today. French industry has been financing half to three-quarters of its expansion out of retained earnings; most of the rest comes through government credit channels, such as the Caisse des Depots et Consignations, which siphons off small savings accounts from all over the country and lends some of the money to industry. A company that doesn’t conform to le plan has to reckon on being denied access to such loans.

Eventually perhaps, as industry expands and becomes more aggressive, it might find its reliance on the government credit institutions more and more cramping. Then a free private money market with real vitality might materialize, thus knocking over one of the underpinnings of le plan. Meanwhile, however, it is sharing the glory of French prosperity and, in fact, winning admirers all over the Continent, even though some of the conditions that make le plan successful in France are not duplicated in other countries.

Fifty-first state?

The flight north over the English Channel takes one from a land glowing with self-assurance to one shaken with self-doubt. Even the local reaction to London’s gleaming new skyscrapers and elevated highways is more often a sarcastic quip than a show of pride. The downbeat feeling is mostly directed at the economy. Considered in isolation, it isn’t doing as badly as public discussion in Britain makes it sound. In the South and the Midlands, industry is healthy, jobs are plentiful, the quality of living is visibly improving. The 5 percent unemployment rate in the north of England and Scotland is headline material, but even the situation there is hardly alarming by comparison with, for example, West Virginia.

British confidence was already worn down by the loss of empire and decline as a world power. For some years after the war, Britons were busily telling one another that they must lower their sights; some even suggested that the best their nation could do would be to become another Sweden. Then came the shock when continental economies took off on their spectacular climb. As a result, fear dominates the current British debate about joining the Common Market. The perils of going in are pitted against the danger of being left out in the cold. At lunch in a Soho restaurant, an engaging Lancashireman told about his fears. Frank Rostron is head of the Cotton Board, the cotton-textile industry’s powerful development council, and also a director of Ferranti Ltd., the Manchester electrical equipment manufacturer. Both the textile and the electrical industries, he insisted, had everything to lose and nothing to gain by going into the Common Market. The climax of his argument was a rhetorical question: “Dare we abandon protection of strategic industries when one of the members of the E.E.C. has attempted–twice in the lifetime of so many of us–to wipe us out completely by force of arms?”

On the other side of the fence, Monty Pritchard, managing director of F. Perkins Ltd., a worldwide diesel manufacturer, regarded the Common Market as an opportunity for a bold new sales offensive. But to clinch his case, even he raised a specter: “Unless we join and join soon, we might be well advised to seek admission as your fifty-first state.”

This division in public opinion weakened the chances of Britain’s entry bid even before De Gaulle last month demanded that negotiations with the British be suspended indefinitely. Prime Minister Harold Macmillan was quite eloquent about the wonders that membership would perform in restoring the competitive tone of British industry. But he was unable to whip up much popular fervor for entry. The government felt compelled to adopt a negotiating posture full of hedging, lest it be accused of accepting terms a fearful British public would consider a sellout.

This posture was further weakened by the lack of bipartisan support. The opposition Labor party was itself split on the Common Market issue. One wing feared that, in joining, Britain might have to give up the right to plan its own economy, which sounds like economic nationalism with socialist overtones. For reasons that have nothing to do with their Common Market policy, Macmillan’s Conservatives have been in a trough of unpopularity and would probably lose office if an election were held today. They counted on success in Brussels to restore their fortunes.

The Europeans were not inclined to oblige Macmillan by concessions. The prevailing official view at Common Market headquarters was that the British must not come in under terms that would adulterate the original grand design of the Treaty of Rome; in other words, while the club is getting established, it can’t afford to start relaxing the membership rules. Consequently, the Brussels talks dragged on without any noticeable will to succeed.

Into the desultory but still hopeful negotiations, De Gaulle threw his bombshell. His dramatic attack on the Atlantic Alliance has, of course, significance far beyond the scope of the Common Market itself; but it certainly seemed to close the door to Britain’s entry. A number of leading Europeans have always felt that their fledgling community needs Britain in it, and they are now trying to keep the door open. Though it is too early to write off their efforts, it seems as though they waited too long to speak up. U.S. policy, which has been based on the assumption of an expanding Common Market membership, had better prepare itself for the strong possibility that Britain will be kept out.

The two capitals of Italy

In Italy, a different kind of interplay of politics and business is straining relations between the country’s two effective capitals, the industrial one in Milan and the official one in Rome. Milan sits at the foot of the Alps and looks beyond them to the European market. Milan came into its recent glory during Italy’s boom, which was more spectacular than its neighbors’. The city seems to be in a frantic hurry to obliterate its past and remake itself into a replica of Manhattan (though some of the skyscrapers have a great deal more originality of style than New York’s ziggurats). Not only is there a new building going up on nearly every block, but there is a great gash right through the center of the city including the great cathedral square–where construction gangs are at work on a subway.

From Milan to Rome it is only a little more than six hours by the marvelous Settebello, a special train that hurtles along at ninety-eight miles an hour as smoothly as a jet plane; it is much favored by businessmen, who can telephone their offices en route. But in Rome the modern industrial world seems to have about as much reality as the commercial life of the ancient empire, so vividly recorded in the ruins of forums and marketplaces. Moreover, Rome has been engrossed in a great gathering of its own special “industry”: the Ecumenical Council.

The differences between Milan and Rome are more than a matter of mood. The businessmen and industrialists in the northern metropolis see in the current tendencies of the Rome government a potential threat to the economic miracle they have so brilliantly wrought. Their fear derives from the concessions that Christian Democratic Premier Amintore Fanfani has made and may yet have to make in order to keep the support of Pietro Nenni’s Socialist party, which until recently traveled with the Communists. The specific act that has aroused Milan is the nationalization of the electric-power industry. The announcement of the government’s intention last year was enough to send the Milan stock market into a tailspin from which it has not yet recovered.

Nationalization itself is no shocking innovation in Italy. Even without electric power, around 40 percent of the economy is fully or partly owned by the government. This includes most of the big banks, a large part of the steel industry, most of the shipbuilding, four major shipping lines, air transport, a variety of manufacturing, including the Alfa Romeo auto plant, and, of course, the great E.N.I. complex put together by the late Enrico Mattei, which is involved in oil, petrochemicals, nuclear energy, and even textile fibers. This enlarged public sector is mainly an inheritance from the 1930’s, when the banks were under pressure and the Mussolini regime took over the portfolios of industrial securities they had accumulated. The public industries are organized into corporations that are independent of political control and operate much like private companies.

What seems to be especially upsetting about the takeover of electric power is that it represents an invasion of flourishing private-enterprise territory; the dominant firm, Edison, is one of the giants of Italian industry. Nationalization is a symbol that has shaken that intangible thing called “business confidence.”

The body snatchers

Dortmund– Italian workers in Germany, homeward bound for vacation

What is more, it comes at a time when Italy’s economic possibilities no longer seem limitless. A number of things contributed to the boom–a sudden release of native entrepreneurial energy and ingenuity, an infusion of American capital and industrial ideas–but an especially important factor was the abundance of cheap labor. This enabled Italian firms to undersell competitors in export markets as well as to accumulate fat profits to fuel further expansion. The labor surplus has melted away rapidly. Unemployment has fallen to only about 500,000-2.5 percent of the labor force. This figure needs some qualification. It does not take into account the many underemployed who are doing uneconomic work, especially in the depressed South. Milan has received a steady migration of these Southerners, but they are not easy to absorb into industrial society because they lack not only specific skills but even elementary education.

Italian industry has been replenishing its supply of skilled labor by training and schooling teen-age apprentices on the job. And around three-quarters of a million workers have gone north to take jobs in labor-starved Switzerland, France, and Germany, where they are learning skills that–it is hoped–will someday be put to good use in factories at home. A lot of Italian employers wish these temporary emigres would come home right now, because a serious pinch is beginning to develop in many skilled categories. In advanced industries, where there is a big demand for technicians, employers are engaged in body snatching on a large scale. Count Eduardo Visconti, head of Carlo Erba, a growing Milan pharmaceutical firm, lamented, “I hire people from universities, train them two years, then another firm hires them away for higher pay.”

The unions have taken advantage of the situation by putting on the pressure for wage raises. They have increased their leverage by changing the pattern of collective bargaining. Formerly the Confindustria (Italy’s N.A.M.) would sit down with the big union federations, the Communist dominated C.G.I.L. and the Christian-Democratic C.I.S.L., and hammer out what was in effect a schedule of minimum wages. In individual plants, the employer set his own conditions after nominally consulting the foreman. Now the unions are getting into the bargaining act at the plant level, w here they can play one employer off against another. In partly nationalized industries, the technique has been to win concessions from the more pliant public corporations, then hit the private plants. Where employers resisted, the unions have shown little hesitation about striking. In the first half of 1962 walkouts cost Italian industry about 64 million man-hours.

According to the Ministry of Labor, industrial take-home pay rose an average of 19 percent from mid-1960 to mid-1962. The prices of Italian products also crept up, arousing fears about the future of export markets, and production costs rose enough to start Milanese industrialists complaining about a profit squeeze. Any crimp on profits could affect future expansion, because Italian industry relies so heavily on reinvested earnings.

Like France, Italy lacks an adequate private capital market. With the stock market useless–at least for the present –as a source of funds, companies have had to turn more and more to the banks. Fearing an overcommitment in industrial loans such as occurred thirty years ago, the government has long forbidden commercial banks to grant long-term credit. To get around this, the banks allow their customers liberal short-term credit, which can be renewed indefinitely on an informal basis. It is even possible to build a factory on an overdraft–roughly equivalent to buying a house by overdrawing your checking account. It seems like a comfortable arrangement for everybody except those farsighted Italians who are uneasy about what even a mild setback in industry might do to the country’s whole financial structure.

The view from Duisburg

Germany is proof that miracles don’t last forever. The country that, a couple of years ago, was looked upon as a paragon of the economic virtues is having balance-of-payments woes; its currency has weakened; it has a bad case of wage inflation, and an attack of jitters over its competitiveness as an exporter. Germany is by no means headed for a recession–its G.N.P. is expected to grow by 4 percent this year–but it has come down to earth with a bang.

The Ruhr looks as prosperous and economically invincible as ever, but its mood is dour-as is reflected in the remarks of an executive at the Duisburg headquarters of Demag AG, the great manufacturer and worldwide supplier of heavy machinery. Alfred E. Schulz is Demag’s export director and also head of the foreign-trade committee of the National Association of German Machine Industries., Speaking in the latter capacity, he gave a gloomy account of the trials of German industry.

According to figures he cited, hourly labor costs average 4.25 Deutsche marks, against 3.51 for France, 3.58 for Belgium, 3.02 for the Netherlands, and 2.99 for Italy. In some third markets, he said, U.S. manufacturers are selling machinery items for less than it costs German plants to produce them. Schulz’s main complaint was that German exporters do not start off on even terms with their competitors. The 5 percent revaluation of the Deutsche mark in 1961, aimed at trimming the then huge export surplus, did its job too well. The liberal depreciation incentives, so helpful in Germany’s recovery, were knocked off too soon, and now depreciation allowances are lower than those in most other industrial countries. And finally, German firms sometimes can’t compete in export credit because they have to do their own financing. Said Schulz: “Foreign businessmen can get in and’ out of a project in a few months, leaving financing to the banks. Here we have to be industrialists and bankers at the same time. German banks won’t lend our customers money.”

Such complaints are typical in the Ruhr. Most of the blame is focused on “the professors” in Bonn, an ironic echo of a familiar U.S. business target. In this case, “the professors” are Economics Minister Ludwig Erhard and the old-fashioned libertarians who work with him in shaping German economic policy. They are accused, not of interfering with business, but of leaving it too much on its own. To an outsider, it comes as something of a shock that the man who gave German industry its head back in 1949 should now be so unpopular in the industrial community. It is explained by the fact that German businessmen, like the French, have an ambivalent attitude toward free competition. What seems to rankle them most is Erhard’s implacable hostility toward cartels. They feel that they are being cast loose like lambs in a Common Market full of cartel wolves. They are fascinated by France’s plan though, as one Ruhr industrialist admitted, it would not work in Germany unless it were compulsory.

If Erhard succeeds Konrad Adenauer as Chancellor next fall, as is now generally expected, it will be because ordinary Germans still revere him as the miracle maker of the 1950’s. There will be no rejoicing in the executive offices of German industry.

From hero to scapegoat

When they get through sticking pins in Erhard, the industrialists turn to the labor shortage. It is truly without parallel in modern industrial history. It has forced Germany into an importation of workers on a scale that is without precedent. Trainloads of them, mainly Italians, Spaniards, and Greeks, pour endlessly into the new foreign villages that have sprung up around the big industrial centers, such as the Volkswagen works in Wolfsburg. And still there aren’t enough.

To ease the shortage, companies put lots of loving care into apprentice programs, taking in fourteen-year-old boys and giving them a high-school education as well as technical training. But no firm can expect to be rewarded with eternal fidelity, even from the employees it has trained. Workers are constantly shifting jobs, and in great numbers, in response to better offers from other employers. Such bidding up accounts for a good deal of the rise in labor costs, though the newfound aggressiveness of the labor unions plays a bigger part.

Once the hero of German industry, the worker has become its scapegoat. Quite emotionally, German businessmen accuse workers of laziness, of faking illness, of malingering on the job, and of endangering the nation’s future by demanding so much pay and fringe benefits. The most extreme indictment came from Fritz Berg, the outspoken president of the Federation of German Industries. By way of explaining to this writer why he favors the present very costly system of subsidizing Germany’s inefficient small farmers, he declared that the farmers are the country’s only bulwark against Communism; a totally industrialized Germany would be laid open to the Russians because industrial workers always have been at heart “Socialists or Communists.”

The best of many possible refutations of Berg’s thesis was provided by a visit to the headquarters of Opel in Russelsheim. Opel will soon be manufacturing 650,000 cars a year (the German industry as a whole turns out more than two million). A large number of its own workers are its customers. They scrimp and save, pool their family earnings, and then plunk the cash down on the counter and drive away. If such people still harbor a Marxian class grudge, they are certainly concealing it well.

The costs of success

No doubt the demands of labor are putting a strain on the economy–and not only in Germany. The first traces of such a strain in Italy have already been noted. And it may well show up soon throughout Western Europe. Having tasted the better life, workers are hardly likely to suppress their appetites, no matter how vehemently they are reminded of the danger of rising industrial costs.

But this is, after all, one of the consequences of the sheer rapidity of Europe’s takeoff. The shortage of labor is another; a slower, more orderly development would have permitted industry to make more efficient use of manpower and to absorb and train people now still wastefully employed in distributive trades and farming. Likewise, the inadequacy of capital markets can be at least partly explained by the fact that industry suddenly developed a powerful hunger for funds before the public got the habit of investing savings in stocks and bonds. On another plane, the ubiquitous traffic jams illustrate the same point. Car ownership has grown from one to every forty Europeans in 1952 to about one to ten today, while the road and street system is little changed from what it was at the dawn of the auto age.

These problems are riot to be underestimated. But they will not check Europe’s march, nor should they divert American eyes from the main drama. A great deal of excitement has been stirred in recent years by the emergence of new nations in Asia and Africa, but no event has been so inspiring and heartening as the regeneration of these old nations of Europe, which were, after all, the source of the glories and richness of our own civilization.