Spatial and Local Factors in Understanding Financial Crises

By Benjamin Sacks

Picturesque Pforzheim, Germany belies local and regional financial woes. (c) 2014 Wikimedia Commons.

Picturesque Pforzheim, Germany belies local and regional financial woes. (Image credit: Parlacre (CC 0)

Geography, economics, and finance are intimately linked disciplines, a relationship that is sometimes misunderstood or ignored entirely by contemporary media. Port access, weather, spatial and network relations between various tiers of government, private sector businesses, and third-party (e.g. academic) institutions, even the positioning of financial headquarters – as recent threats from Standard Life and Lloyds to relocate from Edinburgh to London in the event of Scottish independence demonstrate – can all drastically affect financial markets, long-term monetary stability, and the ability of particular precincts or sectors to recover from such recessions as the 2008-2010 global financial crisis.

In the most recent suite of articles in Transactions of the Institute of British Geographers, Reijer P Hendrikse (University of Amsterdam) and James D Sidaway (National University of Singapore) undertook a focused study of Pforzheim, a German city of some 120,000 people in Baden-Württemberg, near the French provinces of Alsace and Lorraine. In ‘Financial wizardry and the Golden City’, Hendrikse and Sidaway critiqued the media’s focus on national-level bailouts, arguing that provincial- and city-level bailouts and financial negotiations were just as, if not more important to comprehending both the scale of the 2008-2010 crisis as well as possible solutions. Further, they recalled and adopted David Harvey’s 2011 argument criticising French and German media pundits and financial analysts alike who saw ‘the crisis in cultural or even nationalist terms’; as somehow a ‘distinctive Anglo-Saxon disease’ based in London and New York City.

The authors chose to examine Germany, in part, because of that country’s apparent economic stability in the face of difficult industrial and economic issues in neighbouring Eurozone states. Berlin famously directed the bailout of several EU member states: Greece, Portugal, and Spain. But a closer examination revealed a significantly more complex and debt-ridden landscape. Various German cities were ‘like Greek islands within Germany’, Die Tageszeitung reported, ‘having slowly but surely drowned in their debts over recent years’ (p. 195). Pforzheim, following a trend blazoned by other cities in the Rhine heartland, bought a large series of Deutsche Bank interest-rate swaps. This speculative maneuvre, popular in the world of hedge funds and day-trading currency exchanges, permits institutions (e.g. a city) to obtain a more cost-efficient fixed-rate interest arrangement enjoyed by another corporation. Ideally, both parties benefit from reduced interest-rate-associated costs. However, the risks are highly variable, and dependent on the financial stability of both parties. As A R Sorkin described, and Hendrikse and Sidaway reiterated, German cities were ‘gambling that [their] costs would be would be lower and taking on the risk that they could be many times higher’ (p. 196).

Theoretically, Pforzheim should have been a model city. After enduring a horrific bombing campaign near the end of the Second World War, Pforzheim’s economic base recovered, thanks to longstanding jewelry and watchmaking industries in the city. But Pforzheim’s geographical location limited its growth. The city shares Baden-Württemberg with Stuttgart, Heidelberg, and Mannheim, each major cities with significant economic and political clout. These cities traditionally attracted major corporations away from such smaller, more specialised urban centres as Pforzheim. Although the financial stresses of the late-2000s put pressure on all German cities, smaller, less economically vibrant communities suffered significantly worse. A Pforzheim administrator summarised the city’s awkward geostrategic situation: ‘We are a jewelry- and watchmaking city that has brought a relatively mono-structured economy’, more sensitive to economic shifts than larger, more diverse cities as Frankfurt-am-Main and Cologne (pp. 198-99). In a dangerous game of financial roulette, Pforzheim and other small German cities engaged in increasingly complicated and risky collaborations with German and EU financial institutions – unaware of these banks’ own instabilities. Pforzheim’s recession, the authors concluded, was demonstrative of how integrated German and continental European financial markets are to Anglo-Saxon banking paradigms, even as they continue to assert a supposedly distinct, fiscally conservative methodology and culture.

60-world2Robert Peston, ‘EU Law may force RBS and Lloyds to become English‘, BBC News, 5 March 2014.

60-world2Robert Peston, ‘Is Standard Life alone?‘, BBC News, 27 February 2014.

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Reijer P Hendrikse and James D Sidaway, ‘Financial wizardry and the Golden City: tracking the financial crisis through Pforzheim, Germany‘, Transactions of the Institute of British Geographers 39 (2014): 195-208.

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David Harvey, ‘Roepke lecture in economic geography – crises, geographical disruptions and the uneven development of political responses’, Economic Geography 87 (2011): 1-22.

books_iconA R Sorkin, ‘Towns in Europe learn about swaps the hard way’, The New York Times 16 April 2010.

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