New monetary policies: fuelling metropolisation and megalopolisation in Europe?

City Skyline and Main River in Frankfurt, Germany. Valerian Alecsa / Shutterstock

Polarisation across European territories is becoming an important phenomenon. It is characterised by powerful metropolisation dynamics and simultaneously shrinking processes. Even among big cities, the trends are strongly heterogeneous, as reported in the table below, with the value of the office building stocks.


Between 2009 and 2016, building wealth rose from 782 to 1,229 billion euros. During the same time, the European monetary aggregate (M2) increased from 8,000 to 11,000 billion euros due to [new monetary policies](]. The GFC in 2008 introduced a breakdown in the central bank’s policies with the implementation of the unconventional quantitative easing (QE). Analysing their potential impacts on the office markets is a necessity.

Two transmission channels exist:

  • In the first, money supply stimulates the economy and the demand for office spaces: new development projects are launched. However, as the real estate supply is inelastic (construction takes time, and land use is complex), it also induces a price increase.

  • The second is related to the investment decisions of institutional investors when bonds are less attractive. Today, three elements are very favourable to the property markets: less regulatory capital is required for real estate investments compared to stocks investments, stock markets are often seen as too risky, and metropolising cities generate an important urban investment demand. The bond outflow leads to an urban inflow, and prices increase.

However, these effects are heterogeneous across Europe. To better understand this phenomenon, we consider two levels of analysis.

The case of London

In the 1990s, growing concerns about the competitive position of London led the central government and the private sector to become increasingly involved in the promotion and the maintenance of London as a “world city”. Twenty years later, this city has become an emblematic example of a global city. It has added numerous high rises and architecture projects to rebrand its global identity (Kaika, 2010); more than 50 new towers have transformed the London skyline since 2000 (Appert, Montes, 2015).

Traditionally, the variables that explain office prices are the employment in services, the vacancy rate, and the stock index. In our study (Coën et al., 2018a), we also took into account the evolution of the international monetary aggregates. We established that the money supply was not significant for explaining the price dynamics in London until 2007, but they have become strongly and positively significant since 2009 and the launch of the various QEs. Moreover, and surprisingly, the vacancy rate – the main risk in a real estate investment – is no longer significant on that period, at the market level.

The case of the western European metropolises

In a second study (Coën et al., 2018b), we estimated the elasticities of sixteen office markets regarding the new monetary policies. We considered both the role of the international and European monetary aggregates. The results indicate that when the international aggregates increase by 1%, office prices increase by 0.13%. As for the European aggregate, a 1% increase generates a price increase of 0.53%.

However, heterogeneity matters:

  • First, the largest markets have doubled elasticities, whereas secondary markets did not take advantage of these flows, not even the one coming from the European Central Bank (ECB). Between 2009 and 2016, the difference in the building stock wealth evolutions between these two groups was equal to 25%.

  • Second, the German markets also have doubled elasticities compared to the zero elasticities for the non-German markets (taken in their whole). The difference in the wealth evolution is equal to 30% and the market vacancy rate is no longer significant for the German cities.

  • Third, we considered the segmentation between the megalopolitan markets and the peripheral markets. The European megalopolis is a territorial band stretching from the enlarged Rhineland system in the north to Northern Italy in the south (Braudel, 1982) we retained a narrow definition, excluding London, Paris, Lyon and Berlin. The megalopolitan markets are not influenced by the international money supplies; however, they are able to capture the ECB liquidities, contrary to the peripheral markets. Regarding the evolution of the office stock wealth, the difference is striking; it reaches 60%.

In summary, the new monetary policies heterogeneously increase office prices and can surprisingly affect the fundamentals that drive the markets. They reinforce the largest markets, the German markets and the megalopolitan markets, whereas the secondary, the non-German or the peripheral markets do not take advantage of these measures. Astonishingly, the so-called “unconventional” monetary policies actually generate some very conventional and well-known urban and regional effects.

From a macroeconomic point of view, a monetary union with persisting divergences in prices and productivity and without sufficient consistency in its fiscal and economic policies may generate an unstable economic environment. More precisely, an optimal federal monetary policy in a not-completely federal union tends to produce implicit wealth reallocation movements across states. The office markets constitute a relevant occasion by which to observe these implicit lines along which the driving forces are acting, favouring, or even leveraging some metropoles and forgetting others.

The “ECB conservatism”, a supposed Bundesbank legacy for which the European institution is often blamed, is a hardly defendable opinion today after the strong evolution of the ECB mandates. However, the paradoxical effects of the new monetary policies, essentially made to support peripheral markets but mostly favouring the largest cities, the German cities, and the megalopolis, raise some challenging economic and political questions. Should Europe consider derogative measures for the Stability and Growth Pact to compensate for these unwanted effects? Would new European planning investments be necessary to rebalance these divergences?

However, independently of these questions, it is now certain that an awareness of the urban and regional role of the new monetary policies is required.