Paul Krugman backs temporary rent caps to curb housing speculation in Europe
Paul Krugman says modern income-stabilisation models preserve construction incentives while easing a currently "impossible" situation. He also warns French public debt could be "catastrophic" and urges Europe to adopt "temporary protectionism".
For almost two months, a wave of social unrest has been bringing crowds out onto the streets of several European countries, where the persistent rise in the cost of living has become an increasingly difficult burden to bear.
From Albania through Italy, France, Belgium and Germany to Portugal and Spain, the motives for the protests are not always the same, but one of the main grievances, particularly among younger people, is soaring housing costs, which in fact have been worsening since 2010.
Although a principle enshrined in the Universal Declaration of Human Rights (1948) and a basic condition for the economic security of the population is at stake, it was only last September that the European Commission put forward a legislative proposal (source in Portuguese) to act on this front. The problem is not confined to the old continent, Paul Krugman tells Euronews, and he accepts rent caps as a temporary measure with an immediate impact to contain speculation.
The American economist says that, from an economic point of view, the issue is simple: it is enough to build more homes and to remove the restrictions that make construction difficult. In places where building has been liberalised, he adds, property prices have fallen significantly.
Even so, Krugman acknowledges that the current state of the housing market is "impossible" to bear. In comments quoted by AFP in coverage of one of the recent demonstrations in Italy, a 21-year-old Italian university student reported that in Rome a single room has reached 1,200 euros.
In its opinion (source in Portuguese) on the Commission's housing plan, the European Students' Union warned that thousands of young people and students are being excluded from higher education by speculative practices. According to the European University Association, students who do not live with their parents spend almost 40% of their monthly income on housing costs.
The Commission itself and the European Parliament (source in Portuguese) also acknowledge that the financialisation of housing, meaning investment in this sector by funds that treat properties as profit-generating assets, is contributing to the sharp rise in prices.
In this context, and given that building new homes in several European countries takes at least three to five years, Paul Krugman opts for a pragmatic approach to the rental market, supporting the introduction of second-generation rent stabilisation models.
The 2008 Nobel laureate in economics notes that his home city, New York, is stabilising rents. He says the mayor, who in European terms would be described as a man of the left, is doing so while allowing incentives and more construction, and that he is not a purist on this issue, arguing that building and regulation can coexist.
The programme adopted in New York subjects annual rent increases to an index that sets a maximum percentage for uprating, and offers massive tax exemptions lasting up to 40 years to private developers in return for a substantial proportion of the new units being compulsorily brought under the regulated regime.
Berlin's model, extended until 2029, limits rent increases to 10% above the comparable local average, exempting homes that were first occupied and let after October 2014.
He says that it is an imperfect scheme, but that it will not last very long if building goes ahead, that we are talking about a few years at most, and that the positive effects are very rapid.
French economy is "too big to be saved"
In the broader economic picture, France's public debt, which stands at 119% of Gross Domestic Product (GDP), is causing anxiety on the markets. More than a decade on from the turmoil over sovereign debts, there are spectres once again looming over Europe.
Krugman stresses that if France were on a credible path towards fiscal sustainability, it would not need to implement short-term austerity, and that the French issue is relatively straightforward because the retirement age is absurdly low.
The economist expresses concern that France could face a crisis similar to the one Portugal went through between 2010 and 2012. In a scenario where Paris were to default, systemic imbalances could be unleashed.
He explains that this would be catastrophic for Europe and that if France experiences a crisis, it could bring down the entire euro system. Unlike Portugal, a peripheral country, France is the second-largest European economy and, in Krugman's view, has gone from being "too big to fail" to being "too big to be saved".
He warns that it is not possible to bail out 20% of the euro area GDP because there are not enough resources to do so.
Europe at risk of deindustrialisation
In addition to internal budgetary weaknesses, Europeans are grappling with external shocks caused by United States trade tariffs and China's overproduction, which is flooding the EU market with subsidised products.
Krugman believes that Europe is at risk of deindustrialising to some extent, but he also thinks that the old continent's car industry can become competitive again.
In the adjustment period there are many challenges ahead. He observes that the risk is that by the time Europe's car industry recovers from the mistakes it made in the past it will be too late, because the entire industrial ecosystem will have disappeared.
Therefore, he argues that some buffers will be needed. Krugman, known for defending open markets, makes clear that he still supports free trade but, given today's geopolitical landscape, recommends playing defence.
He concludes that now, unfortunately, it is time for some temporary protectionism.
