The Canutes of Europe

Critics urge that the euro should be scrapped. Or, at least, the euro-zone should be broken up – either excluding the strongest member (Germany) or the weakest member (Greece). All options, unfortunately, are framed from within an economic paradigm which, one way or another, will lead to further disasters in Europe. The latest plan is by Klaus Schwab, Executive Chairman of the World Economic Forum. The blind spot in his proposal enables us to identify the one issue that demands attention.

Schwab’s free e-book, The Re-emergence of Europe ( http://www.weforum.org/re-emergence-europe ) proposes reforms that amount to filling in all the pieces that were omitted when the euro was originally launched. This would create a super-state on consistent principles, including fiscal integration and the convergence of all the parts to create a “competitiveness” union.

What’s wrong with that? Assuming that the political structure faithfully represented the democratic wishes of the people, wouldn’t that be the fulfilment of the original intention – pre-empting the prospect of another war within continental Europe? Alas, we only have to look at other examples of fully integrated communities, such as the UK and the USA, to see the glaring omission in the Schwab scheme.

Remember, the epicentre of the western crisis was the property markets of the US and Europe. Nothing in the Schwab plan would mitigate the next property boom/bust. And that’s the weakness in all the options currently on the table. The politicians cannot be blamed for failing to adopt the correct reforms if they are not being told how to plug the flaw in the current economic paradigm.

Flat Earth Economics

The UK and the US are structured on the principles described by Klaus Schwab. Within those sovereign states, there is a yawning gap in competitiveness between the regions. Those economies, far from converging, continue to be divided with a yawning gap that is reflected in indicators like the increasing void between rich and poor.

But the data as it is now assembled fails to reveal the spatial dynamics of the market economy. The North/South divide in the UK is a natural phenomenon. Ditto with the US. And, similarly, the differential elements within Europe between the core and the periphery.

Two thousand years ago the high-value centre of Europe was Rome. Today it is the triangle between London/Frankfurt/Paris. The way in which we lay bare that reality is by measuring the rents that people pay for the use of the locations where they wish to live, work and play. By failing to factor in the economic reality (the rolling downward slope of rents from the centre to the economic margins), governments place themselves in the role of King Canute trying to hold back the tides. Their policies are based on a virtual reality that wipes out the spatial dimension to our existence.

Harnessing the Economic Tides

The most perfectly balanced system of producing wealth, based on the co-operative spirit (with no monopolistic distortions) would necessarily result in some locations being more valuable than others. That’s why firms “agglomerate” in (for example) science parks. It’s why bankers work shoulder to shoulder, factories congregate near distribution centres or energy supplies, and so on. This results in economies of scale that increase productivity, and the net gains are measured and captured through the land market.

But this does not mean that people living and working at the lower productivity margins should be disadvantaged. The mechanism that equalises everyone’s opportunities is the sharing of those rents through the public sector. This is the only mechanism for equalisation which then also delivers competitiveness based on the spirit of co-operation. It is also the only way to close the democratic “deficit”.

Under the current financial paradigm, the rules are rigged in favour of those who pocket the rents that we all help to create. This automatically generates the gap between rich and poor, as between individuals and between regions. It necessarily divides populations in the UK, USA and the euro-zone.

Read the Schwab plan. Then visualise how Europe would look if it democratised the public’s finances (drawing revenue from the rents which people freely volunteer when they select their preferred locations). The bad taxes on people’s earnings could be scrapped, making people employable once again. The equalisation measured in terms of efficiency and competitiveness would kick-start Europe on a new growth path that was sustainable. With that scenario as an option, the people would be free to make rational choices about the future of their Europe.

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