GED Under the Radar – April Edition

Every month there are some economic stories that fall through the cracks. In this series the GED Team presents those economic stories, which we found most interesting each month but felt received less popular media attention than they actually deserved. These stories can come from all over the world. They can be relevant and important for the global economic system as a whole or just affect a select group, they can be serious or they can be humorous. In any case they will be interesting. This is “GED Under the Radar”!

Aprils’s Radar Stories in Short:

• Could globalisation bring the beloved French croissant to an end?
• How bright is the socio-economic situation in Germany’s “poor but sexy” capital city?

Butter Crisis in France

In recent months, France has been on the edge of social chaos. Supermarkets all over the country have faced a shortfall of butter. For a country that consumes on average 8kg per person, the news has been received with disarray by the population. Soon supermarket shelves, already poorly supplied, completely emptied – even in the biggest butter producing regions such as Brittany or Normandy.

Alarmed by the shortages, bakers of the famous French delicacy composed of one third butter, the Croissant, rose up in droves. What circumstances brought the French butter market to such a shortfall?

The butter shortfall is the result of the particular “perfect storm” of variables making it a textbook case for any established or aspiring economist. These factors are the following: quota deregulation, increased demand, lower supply and fixed prices. The whole sprinkled with media coverage a little too alarming.

To understand the actual butter shortage, one must go back to early 2015. On March 2015, the EU put an end to the milk quota to increase European milk producers’ competitiveness and enable them to fit the growing milk demand worldwide. Following this deregulation, the milk supply surged and prices collapsed. Facing this drop in milk prices, producers sharply diminished their production which increased milk prices anew and consequently butter prices.

At the same time, demand in butter increased worldwide pulled both by a rising demand in developing countries such as China, India and the Middle East and by a global shift from vegetable-oil products such as margarine back to butter as public opinion on the health risks from butter were alleviated.

This increased demand and lower supply brought up the price of industrial butter from 2.500 euros a tonne in April 2016 to 6000 euros from July to September 2017. But then, what brought an actual shortfall in France and not a simple rise of prices in supermarkets?

A last factor entered into the equation in France. There, butter prices are fixed once a year by supermarkets. For the year 2017, it happened in February. Thus, as the market price of butter rose, it became unprofitable for producers to sell to French supermarkets. The latter were indeed not ready to increase their buying price as their selling prices were fixed. Margins being more attractive elsewhere, producers found new markets and French supermarkets faced a shortfall in butter.

This shortfall dynamic was ultimately exacerbated as media announced the butter shortfall and in France anxious customers rushed into supermarkets to stockpile their esteemed butter.

Berlin, forever “poor and sexy”?

Klaus Wowereit, mayor of Berlin from 2001 to 2014, was claiming that Berlin was “poor but sexy” at the beginning of his term in office to promote the city’s attractiveness. Back then, he already had the idea of making Berlin a hub for creative and technological innovation in Europe. The figures for tourism, start-up investments and the aura Berlin has gained in the culture and creative areas in recent years would force any remote observer to say that Wowereit achieved his goal. However, once one take a closer look, things appear less bright than they would seem at first glance. Less than 30 years after its reunification, where does Germany’s capital city stand in terms of economic and social development?  What has been done and what has failed? Let’s dive in a little deeper.

A recent study published by the IW Köln measured the economic impact of capital cities on their country’s economy. If France without Paris would lose 14.8% of GDP per capita or Denmark without Copenhagen would lose 14.1% of GDP per capita, Berlin is, among all European capital cities, the only one that drags down the economy of its country. Namely, Germany without Berlin would increase its GDP per capita by 0.2% (See Fig.1).

In the last ten years and despite this disappointing figure, Berlin has grown as the second tech hub in Europe behind London, attracting almost 1.5 billion euros of investment (see Fig. 2). The same trend has been observed in Tourism as the number of visitors reached 12.7 million in 2016 compared to 7 million in 2006. Berlin saw its GDP grow at a rate of 2.6% in 2016, one of the highest growth rates in Germany, the average being 1.9%. To top it all, Berlin hasa  record low unemployment rate of 10.7% in 2016 (19% in 2005) and its average wage has, over the last years, significantly increased. What are then the factors that hinder further development and growth of Berlin as a major growth engine in Germany?

The most prominent and also most used example of Berlin’s struggles is its new airport. This year for the seventh time, the opening of the Berlin Brandenburg Airport, first planned in 2012, was rescheduled. And this problem is only the tip of the iceberg for the capital city, which relies heavily on federal government subsidies and has numerous administrative services struggling to get by: schools, courts, etc. Hence, the airport issue illustrates per se the major problem in Germany’s capital city: governance. The fact is that this lack of proper governance hurts Berlin and exacerbates the already huge existing fractures within the city.

One cannot deny the progress Berlin has seen in the recent years, but relative to other regions the capital-region remains among the poorest with a very high unemployment rate and one of the highest ratios of social benefits recipients. The gaps in the results of the 2017 federal elections and in the educational background and the repartition of social beneficiaries, exposes the disparity within the city as much politically as socially. If nothing is done to stop that trend, this gap might further deepen as rents are rising in central neighbourhoods which the highly-qualified, international workforce is quickly gentrifying – pushing poorer inhabitants to the margins of the city.

The case of Berlin is representative of the economic development of not only Germany, but of Europe and the world at large. Growth is less and less inclusive and the beneficiaries of globalized capital flows are more and more concentrated. Berlin is not spared by this trend. The city is undergoing rapid changes and must promote inclusive policies in order not to see its population further divide.