European cities: The Unsung Heroes of Grenoble, Wiesbaden and Coventry

The property world loves to rank cities, it’s a powerful method to condense the complexities of cities into a single metric. The usual ways of doing that come with a flaw, all too often absolute variables are used with the predictable result that the biggest cities lead the pack. But learning that a large Australian city like Sydney has more start-ups than little Wagga Wagga is not a great insight. Correcting that with per capita metrics makes rankings more meaningful but can produce questionable results as well. If the 56,442 inhabitants of Wagga Wagga produce only one start-up, they will have beaten Sydney on a per capita basis.

Absolute comparisons and per capita measures miss that cities’ urban socioeconomic indicators scale with population along super linear power laws with exponents of about 1.15. This means larger cities are disproportionally producing good things like innovation, wealth and art, but on the flip side also disproportionally of negative effect such as crime, health problems or pollution. There are two reasons why cities scale super linearly or have an ever increasing edge the bigger they are: Firstly, cities enjoy economies of scale with regards to infrastructure. For example, if a city population doubles, the road network does not need to double as well but only grow by roughly 85%. More importantly, however, cities benefit from social network effects. With the number of people increasing the connections between people grow exponentially. That is the effect which leads to disproportionally more innovation and ultimately wealth the bigger a city gets. This network booster is behind the success of extraordinary tech clusters like Silicon Valley or the innovative power of mega cities like Tokyo. 

The interesting question arising from this is to ask, which cities live up to their scale? Applying the 1.15 exponent scaling factor one can analyse which cities truly punch above their weight. Such comparisons are easiest done on an economic level playing field; hence most studies have used U.S. cities. In this analysis we have examined GDP levels across the three biggest economies in Europe: Germany, France and Britain. We use end 2019 data to exclude the pandemic effects and because at that time the U.K. was still in the EU. However, the odds are stacked in favour of German cities, as GDP per capita as of 2019 was $56,000 in Germany versus $49,000 in France and $48,000 in the U.K., making Germany about 17% more affluent than the U.K. The order of cities within one of the countries is not affected by that.*

The ranking is expressed as a Scale-Adjusted Metropolitan Indicator (SAMI), which measures a cities’ successes or failures relative to other cities, independent of city size. The methodology provides a more meaningful ranking of urban areas, compared to per capita indicators. In this analysis they allow direct comparison between any two cities by conditioning the rise or fall in GDP by the rise or fall in city size adjusted by the scalar effects.  

The results interpreted by SAMIs and what we can learn from this ranking:

1. More German cities have outperformed: Germany has a larger population than both France and the U.K., which is also less concentrated in the capital city, hence there are more German cities in the sample. Germany is also slightly more affluent, which together explains that ranking of the best performing cities in terms of affluence is dominated by German cities, with relatively few German cities at the bottom of the list.
2. Mediocre French and volatile Brits: It is striking that almost all French cities are middle ranking, with no true outperformer and only one real bottom feeder. That contrasts with the U.K., where cities are placed across the spectrum with some true outperformers, but also a number of left behinds.
3. Cities of any size can out- or underperform: With cities performance measured relative to their size the resulting level playing field shows that the characteristics of individual cities, their DNA, are the main driver of success. In each country some of the biggest cities (Munich, Düsseldorf, Paris, Lyon, Edinburgh) are ahead of the pack. The low rankings of Birmingham, Dortmund or Marseille is testament to the thesis, that size does not protect from underperformance.
4. Paris rules France, but London doesn’t rule the U.K.: Correcting for the outsized efficiency advantage of the mega city of Paris in France doesn’t dethrone the city from the top spot in France as the historically most dynamic and wealthiest place. The same can’t be said about London. While the U.K. is not quite as capital city centric as France, London is still by a large margin the dominant city of the country. However, eight U.K. cities manage to do better than the British capital. However, it should be noted that apart from Edinburgh, the capital of Scotland, and the oil city Aberdeen, all other national rivals are in the wider geographic orbit of London itself.
5. University cities have an edge: Many leading universities are not located in the biggest business or industrial cities in Europe. The concentration of smart people can give smaller cities an economic edge for example due to start ups spun out of university research. In many cases university cities also offer a rich cultural life attracting affluent folk. It is therefore no surprise that Edinburgh, Cambridge and Oxford lead the table in the UK. Multipolar Germany lacks dominant universities of that calibre, but it is no accident that small cities with highly respected universities such as Karlsruhe, Mainz, Münster, Bonn, Aachen and Freiburg are ahead of much larger cities in the country. In France Grenoble and Toulouse are prime examples, but the trend is less pronounced in France due to Paris based universities crowding out regional institutions. This could explain the inherent advantage Paris has in France that London benefits from to a lesser extent.
6. Escape from the rustbelt: The opposite end of the ranking is dominated by cities, which had their heyday when heavy industry not services underwrote the wealth of cities in Europe. In France cities such as Saint-Etienne, Marseille, Toulon, or Lille had to work through industrial legacies. The Ruhr area in Germany, the biggest heavy industry cluster in Europe, comes in last in Germany. And in the U.K., Sheffield, Leeds, Glasgow and Newcastle look back on an impressive manufacturing history but were less well placed in the service economy of the 21st century.  However, manufacturing does not need to be a burden. Cities, which have made the transition to high tech manufacturing can do very well. Unsurprisingly, German cities like Stuttgart or Braunschweig-Wolfsburg excel at that. But it is less well known how well manufacturing clusters like Derby and Coventry manage to compete in the U.K. city landscape, an economy, which has shifted much further away from manufacturing than Germany.
7. Two trillion euros later East Germany is still behind: Over three decades after German unification, the five former East German cities (including Berlin) are still less affluent on a relative basis compared to all former West German cities barring the Ruhr area. The Ruhr area is taken as one entity with over 5 million people notionally making it the biggest city in Germany. However, the metro area is comprised of 15 independent cities with three of around half a million people (Essen, Duisburg, Dortmund), which might limit the network effects compared to a fully integrated city. All the East German cities on the other hand are amongst the smallest metros but correcting for that disadvantage they stay the economically weakest cities within Germany. It can be interpreted as a disappointing outcome given that unification was estimated to have cost West Germany about 2 trillion euros. However, in the league table Halle, Erfurt, Leipzig and Dresden are ahead of some cities, predominantly in the North of England, the region currently targeted with public funding by the British government under the slogan “levelling up”. The German experience suggests, that even if the U.K. was able to invest more efficiently into left behind cities than Germany did, vast sums may be necessary to achieve a noticeable catch-up effect.

Our application of the SAMI concept to rank cities in the three largest European economies sheds some new light on some rarely talked about places. It highlights that it can be worthwhile to look beyond the gateway cities in the never-ending quest to identify the best cities for real estate investments.