Tue Dec 27th, 2011 at 08:23:03 AM EST
Recently, we've had lots of discussions about Eurozone imbalances, with Migeru pointing out that without investment in the productivity of workers in countries like Spain, the imbalances are destined only to return - no matter what temporary solutions are found in the next few months.
This brought my mind back to an occupation from the boom days, when I (and I think many at ET) could see the world economy heading towards some kind of finance system "iceberg" but we didn't have a good handle on the impacts.
Back then, I was looking at the patterns of migration, inside the UK and inside the reunified Germany - and wondering what it all meant. I still don't know what it "means" in some ways, but the Eurozone experience has added to the picture...
front-paged by afew
I think it's plausible to treat a single currency area (with the EU single market rules) as very similar to a single country. From there, we can compare to experiences in the UK and Germany to get a view on what the pressures at work are - and the likely result.
So what do I mean by "underlying pressures" - essentially, the economic pressure of a market system inside a currency zone, operating across regions which do not have either the political or cash power to use policy as a counterbalancing force. I do not want to present this as "historical inevitability" - by far the greatest lack is the lack of political will and even a short discussion on ET generates solutions. These tides can be modified and resisted - but we should understand that the tides are made very powerful by the current economic consensus.
It's worth noting in passing here, perhaps, that part of what makes these underlying pressures seem so obviously inhuman in the context of the Eurozone is that it is a major currency area that covers many languages and cultures. I use the word "inhuman" on purpose, because the economic logic is only partly flawed (there are concerns about the long term) - rather it is the human cost that really made me write this piece.
Pieces of the puzzle
So what are the forces at work here?
Note: this is a short to medium term analysis and will speak of many things as "zero sum games." This is not true in the long term, but we need to recognise that in the short to medium term, many changes in industrial configuration occur in a zero sum fashion.
A) The "exogenous" economic situation. In effect, is there a booming outside world? (Or set of technological advances or natural resources propelling the internal economy?)
Simply put, since we're not in some "happy days are here again" situation, every economic adjustment, every migration is more painful and closer to a zero sum game in the short term.
B) Economic geography and clustering. Krugman got a Nobel for this, but he was building on many years of observation. Industries begin somewhere, often because of the location of "natural resources" or "trade routes" or "infrastructure" - and these often become clusters where the industry finds efficiencies in concentrating.
C) Cluster competition - here I'm going to make some assumptions, which I'm open to discussing in the comments, but I don't think they are unreasonable. In the short to medium term, clusters draw in both companies and workers from inside the country or regions. The cluster's economic success is dependent on (A) above and (C) which is the competition with similar clusters in other countries. Clusters can grow, shrink or even be destroyed depending on their performance relative to competition from outside the zone.
D) Rise of the city and then the "megacity." For "knowledge industries" (a contested term - perhaps better to say "white collar work") observation shows that clusters still occur, but beyond historical accident they are located alongside cities with universities and amenities that attract people to live and learn in the area. Alongside this, cities have economic efficiency on their side in general - it's generally easier to provide infrastructure to a gathered population - and the sheer presence of the gathered population creates an easier market for the development of new service businesses in particular. This is not a new development, in Europe the big boost to city population of the Industrial Revolution is very old news. However, the technological rise of the "megacity" implies that smaller cities will lose out more than ever to the bigger ones - and that has big implications for the Eurozone.
Putting the puzzle together.
Once, in a very old ET diary, I pondered whether areas like the North of England (where I'm from) and Eastern Germany had any long term future - or were they destined to return to rural backwaters. After years spent interfacing with Regional Development efforts in Yorkshire, I personally gave in and moved to London. Overall, I think that personal decision reflects my best guess about how the puzzle comes together.
At a meta level, both Eastern Germany and the Northern half of England represent very similar stories. Heavy industry and manufacturing became established for a variety of reasons - mostly natural resources - in times gone by. The new situation is that those industry clusters have largely been destroyed (not completely - but enough to put many people out of work) by foreign competition. In both cases, we were able to observe an immediate, large migration effect, because the downfall of the clusters was very sharp due to political effects. Reunification instantly rendeded East German industry less competitive - likewise in the UK, political decisions to change trading rules and tariffs led to mass closures of coal, steel and other plants in a very short time period.
The first reaction was an instant wave - anyone with the skills to get a job elsewhere, they went and got one. The second was a slower one as the support firms started to fail. The light industrial sector that served the bigger firms didn't die the day the heart was ripped out of the cluster, because many of them had other customers. However, over time, they either migrated to another cluster (sometimes not too far away) or lost out to foreign competition too. The third wave is of the young people. Those coming out of education with skills (even from good universities) were much more likely to migrate because the local economy was on the skids.
Of course, local people and local politics were not completely dead. Various efforts at redevelopment have been made. EU money in particular came into my part of Yorkshire. However, private money flowed more to the thriving clusters of finance and services in London and the South East. The economic logic almost always favours investment in an existing cluster.
It's about 25 years since the clusters of the North of England were dismantled. And 20 years since German reunification. That's a good amount of time to come to some judgements about the longer term effects.
The regions in question are not empty and they remain part of the national economy. People live their lives - fewer have jobs than in other regions, but there is an economy, with people working and earning. However, the populations are down, in some areas still declining, in others just about stabilised at a lower level. Despite attempts at regeneration, there seems no reason to believe clusters of the size and importance of before will arise. Smaller, high-tech clusters, particularly around old, established universities exist and each city has done better than the surrounding region at holding on to some talent. Still, there's no question that the cities suffer by comparison to those in other areas with surviving clusters. Talent moves from the North to the London and South East belt where big companies still have facilities and various industry clusters are thriving.
I can write in more detail about the North of England in the comments, if desired - and others can help fill out details of Eastern Germany. But I think the broad brush is enough for us to move on to the Eurozone.
Eurozone, Economics and Migration
It is my contention that the Eurozone and single market creates the economic logic of a country across the zone. Thus, we should expect patterns of investment vs migration to follow the same cluster based model. In effect, whole regions of Europe will be relatively depopulated. Wherever existing industrial clusters are strongest, whichever cities seem historically positioned to become megacities (in part because of their relationship with existing industrial clusters) - these areas will draw people in.
The people will come from the zones where industry has been shrunk by competition outside the zone - low end manufacturing is an obvious one, rural zones are likely another.
I am saying that there will be no real investment in the productivity of workers outside of existing clusters. I am saying that the experience of 30 years in the UK is that clusters cannot easily be rebuilt inside a single market. I am saying that we will see migrations on a large scale.
We're seeing the migrations out of Greece, but the talent drain from Spain and Italy (for example) has only just begun. We can expect certain industries to survive and even prosper, but those that compete (for example) with the German manufacturing cluster (and the hinterland out to Eastern Europe) are destined to shrink. There is no business case to invest in the productivity of Spanish general manufacturing, because the bigger cluster has greater potential. And the single market rules make it very difficult to attract investment through local policy.
And what about the long term, will new clusters arise? History is a cycle after all. If the Eurozone and single market rules change, countries could be more like countries again and nurture local industries.
Absent that, the long term prospects for Southern Europe depend on Africa - the development of trade could produce reasons to relocate some functions. Beyond this, the hope lies in the randomness of new technologies. Maybe the next breakthrough in energy comes at a southern university and a new industry is born? That seems a vague hope though.