Why Europe’s capital cities are pulling away from their countries – and what we can do about it

European productivity: blue is high, red is low. Image: CER.

Europe’s capital cities are much more productive than smaller cities and towns: the average metropolitan worker produces about 50 per cent more output than workers elsewhere. The divide between capitals and everywhere else is growing, too. Europe risks becoming as divided as the US, where the economic and cultural fault-lines between the coastal ‘elite’ and the Rust Belt were one reason why Donald Trump won the presidency. At the Centre for European Reform, we’ve put together a model which explains what is behind this divergence Europe. It also points to some possible solutions.

Reason number 1: Europe’s largest cities, like black holes, have a kind of gravitational mass. Some of you may remember the gravity equation from high school: take two objects, multiply their masses together, and divide that by the square of the distance between them. We did the same equation with all of Europe’s regions, and the bigger economic heft of most capital cities make workers there more productive.

We have good theories about why that’s the case: cities allow companies, especially those producing high-value services that don’t need large factories, and workers to cluster together. Companies get the benefit of a large pool of potential workers, and can select the most productive ones for jobs. They can also cut the costs of services and goods that they need, because there is plenty of nearby competition between other firms seeking to supply them. With so many companies to choose from, workers can more easily find one that fits their skills. Result: higher productivity.

What’s a bit more interesting, though, is that how densely populated a region is doesn’t matter very much, but being close to other successful regions really does. Rural Surrey isn’t just a commuter dormitory full of antique shops, but has lots of productive businesses. That’s because it is easy to get to London by train. Berlin is the only European capital that is less productive than the rest of the country. It is still overcoming the legacy of the Berlin Wall and communist rule in the East, but it is also a long way from the heartlands of the German economy in the West.

Reason number 2: Regions with big graduate populations are more productive. If the graduate share of, say, Rome’s population rose by 1 per cent, then our model predicts output per worker would rise by around 0.4 per cent. That link between higher education and productivity has been on the rise, too. Back in the year 2000, 1 per cent more graduates would have meant 0.2 per cent more productivity.

We can’t be sure if graduates are becoming more productive, or whether they have been moving to places that are already productive. But we have good reason to suspect it’s mostly because graduates have been increasingly moving to capital cities (and other productive places). The graduate population has risen faster in most European capital cities than in the rest of the country – bar Brussels, for some reason.


Reason number 3: The older the population, the less productive the region. That link has been growing over time, too. That’s probably because Europe is ageing so rapidly, and retired people buy a lot of consumer services, like day trips, shopping and social care, which tend to involve jobs with low productivity. And, because many young graduates move away – and often abroad, if they’re from Central and Eastern Europe – we’re seeing a slow process of geographic sorting, with younger, more highly educated people clustering together.

So what should we do about it? The solutions are fairly straightforward, but they require quite a lot of public investment. First, Europe needs to bring rich and poor places closer together, with better transport and communications links between successful cities and peripheral towns. This way, the economic reach of the successful cities is widened, with smaller towns offering cheaper office space and housing that’s within reach of the metropole.

Second, post-industrial conurbations – think of the Ruhr area and Northern England – have the potential to become highly productive hubs themselves. But in order to get there, governments need to invest in universities and research centres in places like Essen, Duisburg, Manchester and Leeds, which will help to draw in a highly educated workforce.

Third, all young people should have some tertiary education. The pan-European expansion of university education in the 1990s and 2000s raised labour productivity. It’s wrong to think that there’s no point educating everyone beyond a certain point: that argument was made in the 1800s against universal primary education and in the early 1900s about secondary. In a services-dominated economy, people need to be highly numerate and literate to get good jobs – and it may be worth reforming humanities degrees to give people who take them a head for numbers.

These policies will be familiar to CityMetric readers: they’ve been suggested many times before. But action’s now quite urgent, given sluggish growth outside the metropoles, as well as Europe’s increasingly nasty politics.

John Springford and Christian Odendahl are economists at the Centre for European Reform.

 
 
 
 

“Without rent control we can’t hope to solve London’s housing crisis”

You BET! Oh GOD. Image: Getty.

Today, the mayor of London called for new powers to introduce rent controls in London. With ever increasing rents swallowing more of people’s income and driving poverty, the free market has clearly failed to provide affordable homes for Londoners. 

Created in 1988, the modern private rented sector was designed primarily to attract investment, with the balance of power weighted almost entirely in landlords’ favour. As social housing stock has been eroded, with more than 1 million fewer social rented homes today compared to 1980, and as the financialisation of homes has driven up house prices, more and more people are getting trapped private renting. In 1990 just 11 per cent of households in London rented privately, but by 2017 this figure had grown to 27 per cent; it is also home to an increasing number of families and older people. 

When I first moved to London, I spent years spending well over 50 per cent of my income on rent. Even without any dependent to support, after essentials my disposable income was vanishingly small. London has the highest rent to income ratio of any region, and the highest proportion of households spending over a third of their income on rent. High rents limit people’s lives, and in London this has become a major driver of poverty and inequality. In the three years leading up to 2015-16, 960,000 private renters were living in poverty, and over half of children growing up in private rented housing are living in poverty.

So carefully designed rent controls therefore have the potential to reduce poverty and may also contribute over time to the reduction of the housing benefit bill (although any housing bill reductions have to come after an expansion of the system, which has been subject to brutal cuts over the last decade). Rent controls may also support London’s employers, two-thirds of whom are struggling to recruit entry-level staff because of the shortage of affordable homes. 

It’s obvious that London rents are far too high, and now an increasing number of voices are calling for rent controls as part of the solution: 68 per cent of Londoners are in favour, and a growing renters’ movement has emerged. Groups like the London Renters Union have already secured a massive victory in the outlawing of section 21 ‘no fault’ evictions. But without rent control, landlords can still unfairly get rid of tenants by jacking up rents.


At the New Economics Foundation we’ve been working with the Mayor of London and the Greater London Authority to research what kind of rent control would work in London. Rent controls are often polarising in the UK but are commonplace elsewhere. New York controls rents on many properties, and Berlin has just introduced a five year “rental lid”, with the mayor citing a desire to not become “like London” as a motivation for the policy. 

A rent control that helps to solve London’s housing crisis would need to meet several criteria. Since rents have risen three times faster than average wages since 2010, rent control should initially brings rents down. Our research found that a 1 per cent reduction in rents for four years could lead to 20 per cent cheaper rents compared to where they would be otherwise. London also needs a rent control both within and between tenancies because otherwise landlords can just reset rents when tenancies end.

Without rent control we can’t hope to solve London’s housing crisis – but it’s not without risk. Decreases in landlord profits could encourage current landlords to exit the sector and discourage new ones from entering it. And a sharp reduction in the supply of privately rented homes would severely reduce housing options for Londoners, whilst reducing incentives for landlords to maintain and improve their properties.

Rent controls should be introduced in a stepped way to minimise risks for tenants. And we need more information on landlords, rents, and their business models in order to design a rent control which avoids unintended consequences.

Rent controls are also not a silver bullet. They need to be part of a package of solutions to London’s housing affordability crisis, including a large scale increase in social housebuilding and an improvement in housing benefit. However, private renting will be part of London’s housing system for some time to come, and the scale of the affordability crisis in London means that the question of rent controls is no longer “if”, but increasingly “how”. 

Joe Beswick is head of housing & land at the New Economics Foundation.