The EU post-Covid recovery plan is the largest European-wide fiscal stimulus in 70 years. This post revisits the experience of the Marshall Plan by highlighting the role of structural effects, conditionality design, the need to prepare the plan exit, the influence of fundamentals and the importance of the plan’s success as a vector of European integration.
Sources: Mutual Security Program, BIS, US Congress, ECA, FRED, Eurostat, Commission. Authors' calculations.
Note: Aid in $1948 and €2020 over GDP in 1948 and 2020, recovery plan investments estimated on the basis of the NRRP. In the case of the European recovery plan, aid consists of available loans and grants.
As part of the Marshall Plan, between 1948 and 1952 the United States transferred to 16 European countries – not including Soviet bloc countries – an amount of close to 10.5% of their GDP. Today, the European Union's response to the Covid-19 crisis – including the potential disbursements under the NextGenerationEU (NGEU) recovery plan and the April 2020 support measures (SURE, ESM and EIB) – is of a similar magnitude, amounting to almost 10.1% of its GDP. The levels of long-term investment set out in the Marshall Plan and provided for by NGEU are also very similar (Chart 1), at around 4% of GDP.
However, the composition and origin of financing differ. The Marshall Plan was largely implemented through grants (90%) rather than loans (10%) and was financed externally by the United States. The European plan has a more heterogeneous composition, with potentially 54% loans, 31% grants and 15% of guarantees, financed by the EU.
The contexts in which the two plans were set up are also different. In 1948, the recipients of the plan were emerging from a centrally planned war economy and faced monetary instability, as well as budget and current account deficits (Bossuat, 2008; Crafts, 2011). This macroeconomic background made it particularly difficult to finance the necessary investment for post-war reconstruction (Eichengreen and Uzan, 1992). Additionally, there were significant political and social risks, including the threat of countries shifting towards the Soviet bloc. NGEU, on the other hand, aims to support countries whose public finances have been severely constrained by the Covid-19 crisis in their economic recovery and reform process, as well as in financing their green and digital transitions.
Both plans, however, have a common dual objective of providing macroeconomic stabilisation and supporting the renewal of the capital stock through public investment (Chart 2). We quantify the latter using, respectively, data from the Mutual Security Program for the Marshall Plan and data from the National Recovery and Resilience Plans (NRRP), which define the investment projects (fixed, human and natural capital) to be implemented until 2026.
Thanks to the Marshall Plan, significant investments were made for the reconstruction and modernisation of the European capital stock. Most of the plan was allocated through counterparty funds, financed by the sale of US equipment and raw materials to domestic agents and managed jointly with the administrators of the US Economic Cooperation Administration (ECA) in Europe.
The ECA's conditionality strategy was characterised by its flexibility, which made it possible to use counterparty funds differently in each country (Table 1). While the United Kingdom employed most of the plan for fiscal and monetary stabilisation purposes, Italy, Germany, and France largely increased public investment.
However, the success of the Marshall Plan did not rest primarily on its direct macroeconomic effect. Indeed, the amounts committed can only mechanically explain a small share of the large growth acceleration of the 1950s (Eichengreen and Uzan, 1992). Crafts (2011) suggests a direct effect of around 0.3 points of growth on average over 1948-51 for every 2 points of GDP transferred through the plan.
The structural component of the Marshall Plan played a key role in the growth of the recipient countries, making it the "most successful adjustment plan in history" (De Long and Eichengreen, 1991). First, the plan was conditioned on a minimum level of macroeconomic stabilisation, including ending price and production controls. This helped provide a solution to the supply shortages that justified wartime economy measures in the first place.
Second, the plan promoted the liberalisation of intra-European trade. Part of the counterparty funds were allocated to the multilateral settlement of this trade, while the creation of the European Payments Union (EPU) in 1950 laid the foundation for further European integration. Finally, US technical assistance and training programmes also contributed significantly to raising productivity (Giorcelli, 2019).
The plan's financial aid created an environment conducive to stabilisation and reform. External aid enabled recipient countries to secure the fiscal space and political capital needed to ensure institutional stability in the context of the Cold War. This provided the foundation for the strong growth of the Trente Glorieuses, largely based on a social model combining labour productivity and high levels of investment (Crafts, 2011).