From the FT, it's basically about agglomeration, but also about the optimal size of a currency area in the absence of big intra-area transfers:
Sir, A simple lesson in geography explains why periphery states could never compete in the euro.
Take an approximately 1,000km circle round Cologne. Such a circle will reach as far north as Dundee and Oslo, as far east as Warsaw and Dubrovnik, as far south as Naples, and as far west as Dublin; 1,080km will get you to the Spanish border. That’s what a truck or van driver could achieve in a day’s intensive driving from the Rhine valley, if the regulations allowed it.
Take a similar distance from Lisbon and you get as far as Bordeaux. You wouldn’t make it to Barcelona*. From Athens and you won’t even get as far as Belgrade**.
Now think for a moment how many people live in each of these circles, the market available for a salesperson to jump in his car from his factory in Düsseldorf or Cologne, compared with that available to an entrepreneur in Lisbon, Madrid or Athens. Hermann has a market on his doorstep of more than 350m people within a 12-hour drive. Alfonso can reach out to only 57m, if he’s lucky, unless he flies. Spiro, on the other hand...
Patrick J d’A Willis, Director, Loans Trading, Exotix, London.
* Lisbon-Barcelona is 1,006 kilometres, allegedly.
** Athens-Belgrade is only 806 kilometres, allegedly..
Quick update
3 hours ago
15 comments:
But.. 16th century England was far from the major population centers but that did not stop her from become a world empire.. (and so did Spain).
It is human ingenuity that will ultimately make a difference.
Greece is strategically located to bridge Europe and Asia. It was the corrupted political system that consigned them to misery.
EBM
EBM, read the full letter and apply commonsense.
In olden times, we didn't have lorries or railways, and shipping was the best/cheapest way of travelling or transporting goods for long distances. So the countries with the best Atlantic coastlines/most maritime experience (UK, Portugal, Spain) had the biggest empires/did the most trade.
The letter also explains that the parts of the USA with the lowest population densities tend to be the poorest, and the Eastern and Western coasts are the wealthiest.
Hi Mark,
Sure... but we are oursourcing services to India nowadays via the wires under the sea.
The guy who wrote this presses buttons in London and care less whether his counter party is 1 mile away or 10000 miles away.
The benefits of geographical advantages now count far less then it used to be. Productive economy = prosperous, unproductive economy=disaster.
Traditionally, Japan main trading partners were thousand of miles away and they were able to give Western manufacturers are real hard time in their own land.
There are quite a few economies around China (lots of people) who are total basket case still.
The US = it worth a think of which one is the course, which one is the effect. People go to the big cities because the economy are advanced, or is it that economy becomes advance because people go to the cities? Or both ?
EBM
EBM, yes, UK used to have a comparative advantage because shipping was best kind of transport, Germans now have advantage because have most customers, with increase in non-material business, India is viable because of telecomms improvements (call centres etc), the cheaper container shipping becomes, the more stuff the Chinese can export, what goes around comes around.
But having lots of people will always trump everything else. Do you think the call centres in India are in the big cities or out in the countryside? Are Chinese factories near the big cities or out in the countryside?
"People go to the big cities because the economy are advanced, or is it that economy becomes advance because people go to the cities? Or both?"
Both, the effects reinforce each other (see also: why land values are much higher where population is densest).
And remember: even with financial/banking stuff, which could all be done over the phone, internet, there is a huge concentration of bankers/ financial services in just a few very small geographical areas in the world (City, Docklands, Wall Street and Hong Kong). It's called "agglomeration".
This is why I want to put the U.S. capital in Kansas City, Missouri.
Or maybe Springfield, since it's even closer to the population center, and we can pretend Homer Simpson lives near the White House. :)
(I know, wrong Springfield.)
Snarf, that doesn't work. In Australia they couldn't decide which of their two largest cities (Syndey, Melbounrn) should be the capital so in the end they built a new one half-way between them at huge expense and for little reward (Canberra). The German capital was in Bonn for ages, but once it shifted back to Berlin, Bonn went back to being a little provincial town.
PS, I never knew that Kansas City has slipped over the stateline into Missouri. Or did some idiot draw the border in the wrong place?
He's just in a roundabout way commenting on the Ricardian law of rent. Of course those in the centre are going to find it easier to trade than those on the periphery, and these advantages will capitalise into land selling prices. It says nothing about the viability of the Euro: the geometry remains the same whether there's a single currency or not so these problems will always exist.
CD, at the margin, yes.
So agglomeration explains why the centre has higher land prices and/or is more successful economically.
But it has also been observed (and explained) many a time that currency areas only work if either
- all parts of it are economically at the same speed (i.e. all good, or all crap, but not half-half);
- there are transfer payments from the wealthy to poor areas (as happens within the USA, the UK or most other countries), or
- the rulers are so hard hearted that they just leave the less successful bits to rot (seldom happens). By being in a strong currency area, the poor areas do WORSE than they would with a free-floating (downwards) currency).
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Having thought about this a bit more, the 1,000 km radius is not so far fetched; the wealthiest parts of Italy or Spain are in the North of those countries; the wealthiest parts of the UK or Nordic countries are in the South of those countries etc.
MW, I'm aware that the drawbacks of the Euro have been posited a number of times but I've always taken these assertions with a pinch of salt as they usually eminate from the monetary obsessed faux-lib crowd.
If a number of people find they're living in unsustainable areas they'll simply have to move. It's not hard hearted to leave the less valuable locations to rot, indeed it's part of the Georgist paradigm. Ricardo's law states that returns at the margin influence remuneration at the centre so in order to raise wages across the board more people need to live in and around the economic hub.
Whatever we do the club med countries will always perform poorly in comparison Germany, the Euro just helps clear a class of unnecessary currency speculators out the way (which is why ex-traders such as Farage were strongly opposed from the outset)
>PS, I never knew that Kansas City has slipped over the stateline into Missouri. Or did some idiot draw the border in the wrong place?
There is a Kansas City, Kansas, too. It's just on the other side of the Missouri River from Kansas City, Mo. Pretty confusing, I know. :)
Every street beggar knows this. You set your pitch in the middle of town, not out in the suburbs.
One of our (LVTC) members once took the OECD productivity figures and found that there was a linear fall-off of productivity proportional to distance from Frankfurt, which can be considered as the population centroid of Europe.
Scandinavia is a bit of an exception for reasons which were not explained, and which I cannot explain either, given the amount of time and energy expended in clearing away snow between November and March. It may be something to do with the amount of hydro-electric power that is available, but it should not be forgotten that the economy is a strange mix of extreme high-tech and primary extraction (timber, iron and non-ferrous metal ores)
Within Britain, the same relationship holds as in the rest of Europe, with somewhere like Oxford as the centroid.
EU membership is disastrous for the west side of the country as it throws away the advantages of the west coast ports. Once goods are loaded into the hold of a ship it costs little more to send them half way round the world than to deliver them anywhere in mainland Europe.
Perhaps the economics experts and politicians should be made to live on the proceeds of begging for a few months, then they would understand that geography matters.
CD, no, in real life the Euro was doomed to failure and the 'right wingeres' were spot on (possibly for the wrong reasons).
On a purely emotional level, I would have been delighted if it had succeeded, but it couldn't have succeeded until the conditions on the ground (similar economies, OR massive fiscal transfers, OR indeed willingness for people to move away from their home countries) were in place.
These things aren't in place, never will be, the whole Euro was just the bastard offspring of power-crazed politicians and fee hungry merchant bankers.
Conversely, the North European/Germanic currency zone (Germany, Austria, Switzerland, Benelux, possibly Denmark or France) came into being spontaneously and lasted decades, precisely because the first of the three conditions was fulfilled.
Snarf, I checked on a map, it straddles the state line.
Phys, one of my clients from work sold up his business and went back to university, he told me he was studying exactly that topic - why do some industries do better in some places? What influence does geography have on the economy? and so on.
But even if we accept that 'geography' or historical coincidence matters, what are we going to do about it, apart from avoid obvious mistakes?
Preconditions for the Euro to work.
1 Balanced budgets in all member countries
2 Robust unavoidable taxes in all member countries ie LVT
3 Fiscal transfers from the centre to the edge, probably by sharing out a common fund of land rental value.
I would put my bet on porcine aviation being achieved before any of that happens.
Phys, yes, we can agree on 2, and 1 sounds like a good idea and 3 is required to smoothe over cracks, but are you sure that 1 and 3 are compatible?
If 3 happens, then 1 need not, as the local deficit could be set equal to the transfer.
Or do you mean '1 balanced budget' at government level and '3 fiscal transfer' at purely individual level, i.e. Citizen's Income?
And I bet that Hell freezes over before pigs can fly.
Funds need to flow back from the central countries eg Germany, to the peripheral ones. Whether this happens at government or personal level I am not quite sure. Though an EU-wide Citizens' Income might be worth a look.
But as you say, hell will have frozen over before then.
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