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Gross domestic product iwd 10. August 2016

The capital city effect

There is a wide prosperity gap between London and the rest of the United Kingdom. The situation is the same in many other Member States of the European Union – with one exception.

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Not all Britons voted to leave the EU. Residents of the City of London district pleaded for the United Kingdom to remain in the European Union with a large majority of 75 percent and high turnout.

What distinguishes the City of London from the rest of the country, or rather: what distinguishes the United Kingdom from its capital city? Brits have a strong opinion on the matter, according to a survey by the opinion polling institute YouGov: they see London as overcrowded, too expensive, and simply not a good place to live with one’s family. They say the strengths of their capital play no role in the economic situation of their home region, yet most respondents think that the British economy as a whole indeed benefits from the financial industry in London City. And this impression is not misleading (image):

Factoring out London and its residents, the 2014 average gross domestic product (GDP) per capita decreases by 11 percent.

Nearly one out of every four pounds of the British GDP is earned in London. With its economic superiority, the capital on the River Thames is indeed a striking example among Europe’s capitals, but it is not alone.

Still more distinctive is Athens for Greece. That country’s economic output per capita would be as much as 20 percent lower without its historical, cultural and economic centre.

The Paris effect also has a pronounced impact on a centralised France: without Paris, the French economic output per capita would decrease by 15 percent. Nearly a fifth of all French live in the Île-de-France capital region – and are responsible for a third of the gross domestic product.

Following on the ranking come the next most important economic capitals – seen from the national point of view: Prague, Lisbon, Copenhagen and Helsinki. Without their impact, the prosperity in their respective countries would shrink by 13 to 14 percent.

Germany, however, manages to buck this trend. Berlin may be poor, but it’s sexy – according to ex-mayor Klaus Wowereit, who knew how to sell the capital well and thereby hit the nail on the head: Berlin only contributes 4 percent of German GDP, and even has a slightly depressant effect of 0.2 percent on Germany's per capita income. It would be even more without the inter-state fiscal adjustment and the special capital grant from the federal government. Berlin’s minor economic role is unusual for Europe, but typical for Germany: it is an expression of the federalist business model. The fact that the famous German "Mittelstand" is strong in rural areas, is one of the unique characteristics of the German economy.

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