Examine the impact of the international oil-price rise of 1973 on the economies of Western Europe

From observing statistics before and after the oil crisis, it does appear conclusive that there was a major impact on Europe’s economy. For example, the annual growth rate of the real domestic product (GDP) in the period 1969-1973 for the United Kingdom was 2.8 per cent; in France, 6.1 per cent; in West Germany, 4.5 per cent; and in Italy, 4.1 per cent. However, the annual growth rates of the GDP in the period 1973-1980, after the oil-price rise struck the world economy, shows considerable decline: in the UK, 1.9 per cent; in France, 3.6 per cent; in West Germany, 2.8 per cent; and in Italy, 3.0 per cent.5 These statistics do illustrate a sharp decline in growth following the oil crisis. However, this does seem unconvincing. Surely, the effects of the oil-price rise would play it out eventually; and thus not have the long-term impact that can be seen in the statistics above. There must be reasons why inflation and economic decline remained at a high level throughout the decade and even into the 1980s. Certainly, it is evident that the statistics show there were large national diversities in economic growth during the period.

For Britain, the oil crisis did pose a serious threat. Inflation rates and the levels of unemployment were severely higher than other Western European country. Both Derek Urwin and Anthony Sutcliffe agree that there was an immediate impact on Europe: countries quickly made preparations, such as hoarding valuable supplies, which meant a decline in production and production output. This had been the first decline in output since the Great Depression in 1929.6 Low exports also increased balance of payments deficit. Governments responded with deflationary measures and reducing energy demands but this did not prevent recession in Western Europe by 1975. There was a serious threat of high inflation and unemployment. For Urwin, the oil crisis called into question the traditional belief in a trade-off between inflation and unemployment: if inflation rose, then unemployment would decrease and vice versa. However, this was not the case after 1973: deflation simply increased unemployment, and inflation spiralled out of control when efforts were made to combat unemployment. The term ‘stagflation’ was given to describe the combination of increasing rates of inflation and high unemployment, which consequently limited recovery. The traditional Keynesian demand management proved ineffective against stagflation, and was soon replaced by the Monetarist theory. Monetarism encouraged governments to restrain money supply, reduce budget deficits and raise interest rates to overcome inflation. Also, a certain amount of unemployment was deemed necessary to avoid inflation. Urwin does not credit, however, the crisis of stagflation with the oil-price rise because he believes there had been problems including overproduction in declining markets and intense competition from industrialised nations outside Europe, such as Japan and America.7

In essence, the economies of Europe spiralled out of control. This is evident with the use of statistics again. Between countries in the Organisation for Economic Cooperation and Development (OECD), the annual average rise in commodity prices in 1973 was 7.7 per cent, but had dramatically increased to 13 per cent in 1974. It should be said that this statistic conceals significant diversity between countries: inflation in Britain peaked at 25 per cent in 1975; West Germany in contrast peaked at 7 per cent in 1974. In 1979, Britain, Italy and France still lingered in double-digit inflation. The unemployment rate within the OECD was nearly five per cent by the late 1970s. This figure is almost double the level of unemployment during the 1960s.8 It should be noted that rate of inflation and the levels of unemployment were relatively high, which reveal that there were growing problems leading up to the oil crisis.

Christopher Allsopp believes examining the condition of the Western European economies prior to the 1973 oil crisis would provide an explanation for why inflation remained pinned at a high level. For Allsopp, the oil crisis led to waves of speculative buying, which prolonged the commodity price boom in 1974. This was complimented with a decline in the overall rate of expansion of the world economy as a result of rapid growth. The early 1970s began with a ‘go for growth’ movement and the world economy experienced a sudden upswing in economic growth: between 1972 and 1973 industrial production in Western Europe increased by seven per cent. However, this rapid acceleration in growth meant the economy exceeded the inflation rates, which enhanced pressure on demand on resources. The over-expansionary policies affected the price of commodities and thus, deterred investment. The problem became open when further speculative buying occurred after the oil-price rise because oil by 1973 had become a major commodity, and therefore, inflationary expectations increased with the rising price of oil.9 The commodity price rise led Europe into a recession in 1975, which boosted inflation and unemployment. However, the damage had been done by over ambitious expansionary policies before 1973, and the oil crisis acted as a detonator, which forced the economies of Western Europe to become unmanageable.

In conclusion, the international oil-price rise of 1973 affected and brought to surface growing problems in an unstable and declining world economy. The economies of Europe were severely under strain from excess demand and rising inflation that the oil crisis merely triggered a violent reaction. The tense economy snapped and spiralled out of control causing production setbacks and unemployment. This led Europe into a new economic climate that differed from previous decades, and called to light new methods of economic management.  

Bibliography

1. A. Boltho, ed. The European Economy: Growth and Crisis (Oxford, 1982)

2. P.R. Odell, Oil and World Power (Harmondsworth, 1986)

3. R. Mabro, OPEC and The Price Of Oil (Oxford, 1992)

4. A. Sutcliffe, An Economic and Social History of Western Europe Since 1945 (London, 1996)

5. D.W. Urwin, A Political History Of Western Europe Since 1945 (London, 1997)  

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