Philippe Martin, Professor of Economics at Sciences Po, where he founded and directed the Department of Economics, passed away in December 2023. This is a terrible loss for his many co-authors and friends (two of whom are writing this column) and for Sciences Po, where he was also Dean of the School of Public Affairs and an important member of the university’s main governing body (the Conseil d’Administration).

The loss is at least as important for the European research community in economics. Among many other roles, Philippe was a very active member of ‘le cercle des économistes’. (Indeed, he had been one of the early recipients of the prize for the best French young economist awarded by the cercle in 2002, together with Thomas Piketty). He was also president of France’s Conseil d’Analyse Economique (Council of Economic aAvisers) and Vice-President for Europe at CEPR.

Such an accumulation of high-profile responsibilities for a researcher has a very simple cause: Philippe had an amazing range of talents, spanning from producing influential papers in top academic journals to providing practical advice to policy leaders in how to deal with times of crisis. Being able to master those two extremes in the application of economic thinking – one being long-run driven and using the rigour of theoretical modelling; the other being able to get the most important ideas in a simple enough format to influence daily decision-making – is a very rare combination.

Philippe Martin did his undergraduate studies at Sciences Po (at a time when the institution offered much less quantitative economics than today, to say the least), before specialising in Economics at Dauphine University and then engaging in a PhD in Economics at Georgetown under the supervision of Carol Ann Rogers. He defended his PhD in 1992 and this early work already contained the diversity of themes in which Philippe would be interested for the rest of his career.

A key unifying theme was how globalisation in both trade and finance can generate dramatic changes that go beyond the traditional analysis of efficiency gains following specialisation. What got Philippe’s curiosity excited in those early years was the potential for extreme concentration of economic activity made possible by different types of self-reinforcing mechanisms: spatial agglomeration in trade and self-fulfilling expectations in international investment flows (and sometimes both combined).

In terms of toolkit, this early work by Philippe was following up on the main theoretical insights of Paul Krugman’s ‘new economic geography’ – how mobility of goods, workers and capital shape manufacturing and population spatial agglomeration. The combination of increasing returns with mobile factors of production and demand can generate ‘catastrophic’ agglomeration, and multiple equilibria where it is unclear ex ante which region/country gets to be the core and which gets to be the periphery.

This was a very exciting novel theoretical framework (and sometimes directly applicable, as in the paper Philippe later wrote with James Harrigan about the consequences of 9/11 for the resilience of New York’s attractiveness), but generally a little too extreme to be directly used for policy analysis.

In his early work with Carol Ann Rogers. Philippe modified the original model to allow for firms (tied to capital units) to choose locations optimally, while returns to capital are being redistributed to their owners, themselves immobile. This model, later referred to as the ‘footloose capital’ model, makes the analysis of agglomeration patterns much more tractable than the original approach. It makes it possible to work with simple and elegant analytic results, and therefore to extend the analysis to new topics while maintaining a certain degree of tractability.

Philippe applied his model to two main new questions. First, with Gianmarco Ottaviano and Richard Baldwin in particular, he asked what the impact is of the agglomeration of activities on the overall growth of a country or region. Is there more growth to be expected in a country more centralised around its capital like France, or in Germany where activities are more dispersed?

Combining the endogenous location of firms with R&D activity where innovation is subject to spillovers, one can study the conditions for a virtuous circle between clustering and growth. The main insight is that with localised spillovers, trade integration can trigger agglomeration, itself boosting knowledge creation. With small enough trade costs and large enough technological externalities, there can even be a mutual welfare gain despite the concentration of economic activity, since the periphery benefits from increased productivity gains embodied in goods.

The second major application asked whether public policies can reduce the spatial disparities in income that naturally emerge between the centre and the periphery – and should they? In other words, when aiming to reduce inequalities, should the spatial dimension be taken into account? Should equity between people or their territories be made the priority?

The main application of interest is transport infrastructure, such as a new highway from the centre to the periphery. Is this type of investment, which is quite common in regional policies at the EU level for example, an efficient way to rebalance economic activity across space?

A fascinating result of Philippe’s research is how those models can generate unexpected outcomes for well-intended policies. Building more infrastructure to ‘dis-enclave’ poor regions might actually empty them of their (rare) increasing returns to scale activities. The reason is that rich regions are the ones where demand and spillovers are higher. A new high-speed train or a new motorway might therefore give firms incentives to concentrate even more in the central places, since the periphery is now easier to serve. Building local infrastructure in poor and remote regions (with as little connection to the centre) might seem crazy at first sight, but if the objective is to reduce spatial disparities in activity, it could actually be a better idea.

This stream of research was elaborated with many co-authors during Philippe’s initial years at the Graduate Institute in Geneva and then at CEPII and CERAS in Paris. Most notably, a fantastic team with Richard Baldwin, Rikard Forslid, Gianmarco Ottaviano and Frédéric Robert-Nicoud synthesised this large set of advances in the 2003 book Economic Geography and Public Policy, published by Princeton University Press.

In retrospect, one of the striking features of this very influential book is that it is entirely theoretical. Theory was Philippe’s initial forte, but he soon realised that in this field, as in others, serious empirical validation had to be brought in.

When analysing public policy in spatial environments, one of the first empirical questions that comes to mind is how large the positive spillovers are that this literature is assuming. It was a time when France had decided to start a cluster policy called ‘Pôles de compétitivité’. In essence, this was planning to pour large amounts of public money into spatially clustered centres of innovation and production (the aerospace industry around Toulouse, microchips around Grenoble, and so on) without asking first, whether the assumed agglomeration externalities existed, and second, whether firms had a way to internalise them or whether public intervention was needed to reach the optimal clustering level.

It also corresponded to a period when Philippe moved to the University of Paris 1, where he met many more empirically oriented colleagues. Philippe put together a team with Florian Mayneris (a PhD student at the time) and Thierry Mayer on the one hand, and Gilles Duranton on the other hand, to evaluate the conceptual and empirical underpinnings of such policies. The results showed that local positive spillovers are indeed at work, but that the actual size of clusters is not very far from what the model predicts to be the ideal size (casting doubts on the need for large scale public intervention).

A remarkable fact is that in this research programme, Philippe had initially favourable priors about the rationale for clustering policy. For a theorist to allow their initial priors to be changed by their own empirical findings (after a lot of cross-validations for sure) is quite rare, and it testifies to his profound intellectual curiosity and rigour, never blinded by ex ante motivation. In the rest of his academic work, we always see Philippe asking for facts, ready to invest in serious empirics to validate… or invalidate his theoretical intuitions.

A particularly good example of this approach is the research programme started with Mathias Thoenig to understand the impact of trade integration on military conflicts between and within states. The initial expectation of the team was that trade openness would tend to reduce conflicts. But the first empirical investigations did not seem to want to cooperate overwhelmingly with that intuition.

On further scrutiny, the theory indeed showed ambiguity: the key factor on whether trade is indeed good for peace is again driven by geography. The main factor is how existing trade patterns shape the interdependence between the conflict-prone countries. Bilateral trade between a pair of conflict-prone nations raises this interdependence, making conflicts more costly, but trade with the rest of the world acts as insurance in the case of a military conflict. Whether one force dominates the other is an empirical question… with a pessimistic answer over the period of the great globalisation (1970-2000), for which trade integration has tended to have a net positive effect on the likelihood of conflict.

Inspired by his earlier theoretical work, Philippe also broadened the scope of his research, by moving towards international macroeconomics, where he applied frameworks borrowed from trade and economic geography to understand the geography of capital flows and the real effects of financial globalisation. His influential work with Hélène Rey started with a simple and powerful observation: financial assets are imperfect substitutes and subject to international trade costs (transaction and information costs) in the same way that goods are. Based on this idea, they modelled international demand for imperfect substitutable assets and were the first to derive a theoretical foundation for gravity in international finance, still a widely used empirical tool today.

Philippe applied this framework to explain the role of market size effects in global capital flows and asset prices, to revisit the costs and benefits of financial and trade globalisation, and of joining monetary unions. More specifically, he showed that trading financial assets internationally can foster financial instability in emerging countries that are not very open to trade in goods. Some countries have liberalised their markets for goods but not their capital markets; others choose to protect their industry with tariffs and other customs barriers but allow a free flow of assets. Philippe’s research addressed how policies on globalisation should be articulated to preserve financial stability and avoid financial crises.

In the same vein, with co-authors Nicolas Coeurdacier and Robert Kollmann, he modelled international risk-sharing when risky stocks are imperfect substitutes to revisit the origins of equity home bias, the valuation effects of external foreign asset positions and the dynamics of current account imbalances. With Giancarlo Corsetti and Paolo Pesenti, he brought novel insights on the importance of entry in the export sector to facilitate the trade adjustment of current accounts and mitigate the necessary depreciation of the dollar to close global imbalances.

Again, Philippe was motivated by the important policy implications of his research, at a time when global current account imbalances were a major concern for global financial stability. With similar concerns about imbalances in Europe on the eve of the euro area debt crisis, he contributed with Thomas Philippon to our deep understanding of the roots of the crisis, while providing the modelling tools for counterfactual policies aimed at mitigating the real consequences of such crisis in the future.

For a researcher who started as a macroeconomic theorist at the beginning of the 1990s, it is telling that in recent years, Philippe turned a lot of his interest to working on micro-level data to analyse firm competitiveness and markup adjustments to all sorts of cost shocks. This started with Nicolas Berman (another of Philippe’s PhD student from Paris 1 times) and continued recently with Lionel Fontagné and Gianluca Orefice, with whom Philippe went into a serious empirical investigation of what is sometimes called the international elasticity puzzle – the fact that the response of export flows to exchange rates tend to be much smaller than the response to tariff changes.

The authors came up with a very nice use of granular data with which they could use exogenous variation in firm-level energy costs to instrument for their export prices. This was the first such study where a sample of firms is used to estimate micro-level responses to three different sources of price variation. The authors did not solve the puzzle, but our knowledge of how firms respond to different cost shocks (a very policy-relevant question) was definitely improved.

In 2008, Philippe started a new adventure in Sciences Po. And adventurous it was, since the project was to start a Department of Economics from scratch in a university where most colleagues were not totally familiar with (or initially convinced by) the way that economists work. Creating an internationally competitive department, recruiting so many of its members, being its head for six years while convincing other disciplines that all this was a good idea was a real tour de force.

Such conviction power was not to be left unnoticed, which explains why the next steps of Philippe’s career involved embarking on economic policy advice to high-level decision-makers. In a related vein, Philippe Martin wrote a very large number of research-driven policy pieces. Most notably at the Conseil d’Analyse Economique, he wrote about an incredibly wide range of topics: from the reform of the international monetary system to taxation of multinational firms, youth unemployment reduction programmes, inheritance taxation, liberalisation of soft drugs, and the consequences of stopping energy imports from Russia.

The scope of Philippe’s research interests had only one limit: it should also be useful to society outside pure academic circles.

References

We organise below a list of selected publications by Philippe in its four main themes of interest:

Economic geography

Martin, P and C A Rogers (1995), “Industrial Location and Public Infrastructure”, Journal of International Economics 39(3-4): 335-51.

Martin, P (1999), “Public Policies, Regional Inequalities and Growth”, Journal of Public Economics 73(1): 85-105.

Martin, P and G Ottaviano (2001), “Growth and Agglomeration”, International Economic Review 42(4): 947-68.

Baldwin, R, R Forslid, P Martin, G Ottaviano and F Robert-Nicoud (2003), Economic Geography and Public Policy, Princeton University Press.

Duranton, G, P Martin, T Mayer and F Mayneris (2010), The Economics of Clusters: Lessons from the French Experience, Oxford University Press.

Conflicts and globalisation

Martin, P, T Mayer and M Thoenig (2008), “Make Trade Not War?”, Review of Economic Studies 75(3): 865-900.

Martin, P, T Mayer and M Thoenig (2008), “Civil Wars and International Trade”, Journal of the European Economic Association Papers and Proceedings 6(3): 541-550.

Martin, P, T Mayer and M Thoenig (2012), “The Geography of Conflicts and Free Trade Agreements”, American Economic Journal: Macroeconomics 4(4): 1-35.

International finance

Martin, P and H Rey (2004), “Financial Super-Markets: Size Matters for Asset Trade”, Journal of International Economics 64(2): 335-61.

Rey, H, and P Martin (2006), “Globalization and Emerging Markets: With or without Crash?”, American Economic Review 96(5): 1631-51.

Coeurdacier, N, R Kollmann and P Martin (2009), “International Portfolios with Supply, Demand and Redistributive shocks”, in NBER International Seminar on Macroeconomics 2007, University of Chicago Press.

Coeurdacier, N and P Martin (2009), “The Geography of Asset Trade and the Euro: Insiders and Outsiders”, Journal of the Japanese and International Economies 23(2): 90-113.

Coeurdacier, N, R Kollmann and P Martin (2010), “International Portfolios, Capital Accumulation and Foreign Assets Dynamics”, Journal of International Economics 80(1): 100-112.

Corsetti, G, P Martin and P Pesenti (2013), “Varieties and the Transfer Problem”, Journal of International Economics 89(1): 1-12.

Martin, P, and T Philippon (2017), “Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone”, American Economic Review 107(7): 1904-37.

Firm-level determinants of trade patterns

Berman, N, P Martin and T Mayer (2012), “How do Different Exporters React to Exchange Rate Changes? Theory, Empirics and Aggregate Implications”, Quarterly Journal of Economics 127(1): 437-92.

Fontagné, L, P Martin and G Orefice (2018), “The International Elasticity Puzzle is Worse than You Think”, Journal of International Economics 115(C): 115-29.

Fontagné, L, P Martin and G Orefice (2023), “The Many Channels of Firm’s Adjustment to Energy Shocks: Evidence from France”, CEPR Discussion Paper 18262.

Less than five months from a historic election, Portland may tweak campaign finance rules to stretch the city’s cash-strapped public financing program.

On Friday, city candidates were emailed a survey asking whether the city’s Small Donor Elections program should loosen its rules around the amount and type of in-kind donations nonprofits and other political organizations can give candidates.

The proposal, first reported by Willamette Week, has drawn both praise and alarm from those involved in city campaigns.

“We don’t need more money in politics,” said Marie Glickman, a candidate running to represent Portland’s new District 2, which spans North and Northeast Portland. “The ideas being discussed are anti-democratic.”

The small donor program rewards candidates who don’t accept individual donations over $350 by matching those contributions with public funds 9-to-1. The program was created to level the playing field for candidates who may have fewer deep-pocketed supporters than others — potentially hampering their ability to fund a competitive campaign.

This year’s general election has attracted a uniquely large pool of candidates, due to voter-approved changes that scrapped primary elections and set the stage for 14 city elected offices to be open all at once. Nearly 80 candidates have applied to participate in the program so far.

Due to the large number of participants and limited amount of available funding, the Portland Elections Commission in January chose to lower the amount of total funds council candidates can receive from the city through the program to $120,000 from the previous $300,000 cap.

Through the program, candidates are limited to receiving no more than $10,000 worth of in-kind donations from political committees and non-profits. Those organizations must receive at least 90% of their annual funds from contributions of $250 or less per donor, a rule meant to exclude committees fueled by wealthy donors. Those donations are limited to paying staff to canvas or run a phone bank, sharing donor lists, and assisting with general campaign planning.

The Friday survey asked candidates if contributing organizations should be able to spend more than $10,000 on in-kind donations and to broaden the donations included — like allowing organizations to donate space to host campaign events, fundraisers, and print and distribute for campaigns. It also asked whether organizations can still participate in the small donor program if they receive 90% of their funding from contributions of $350 or less — instead of $250.

Jake Weigler, a political consultant with Praxis Political, said this would allow political committees with wealthier donors to contribute.

“If your goal was to reduce the influence of large organizations in the campaign process, this undercuts that by giving them a larger role,” said Weigler, who is working on several City Council campaigns.

Susan Mottet oversees the Small Donor Election program and distributed the survey on behalf of the Portland Elections Commission, which makes recommendations on city election rules. She said these proposed changes could help campaigns stretch limited funds a bit further.

“With no ability to increase campaign matching caps, we have to look at options,” she said. “The Portland Elections Commission is trying to figure out if there is anything they have power to do to get candidates more support without making changes that undercut the intent of the program.”

She knows the spotlight is on her office this election.

“Obviously, the program succeeds or fails based on if a campaign is viable,” Mottet said.

Weigler said the proposed changes to the program reflect this pressure.

“I get the urgency that they don’t don’t want to fumble this, during such a critical election,” he said. “But it creates inherent tension. It makes it much easier for organizations to put their thumb on the scale and elevate a class of candidates they prefer.”

Some political insiders say these changes are vital for upholding the program’s intent.

“The theory of the original program is to limit the amount of money that organizations can give, and to mitigate that shortfall with city funding,” said Laurie Wimmer, the head of NW Oregon Labor Council, who has convened a group of labor leaders to endorse council candidates this year. “But if that money wanes, like it has this year, it’s only fair that something has to give on the other side of the equation to run a credible campaign.”

Wimmer, who led an unsuccessful campaign for state representative in 2020, said that the cost of sending out one piece of campaign mail could cost over $10,000, the current in-kind limit.

Doug Moore, the former head of the Oregon League of Conservation Voters, now leads United for Portland, a political action committee that represents business and industry groups. He called the current small donor program “disingenuous” because it potentially limits candidates from running what he considers successful campaigns.

“Not being able to fully match funds — that’s bad for democracy in general,” Moore said. “I appreciate the effort to try and help candidates be a little more flexible and able to run campaigns.”

He does worry that the more complex the election’s rules are, the more at-risk candidates are for breaking them, especially if the rules change in the middle of campaign season.

“It’s like they’re trying to build the plane as they’re flying it,” Moore said.

Council candidate Glickman said her campaign hasn’t been hampered by the limited public matching caps. She agrees that the timing of the proposed change is a problem.

“We shouldn’t change rules mid-game,” said Glickman, who is one of more than 20 candidates for District 2 who are participating in the small donor program thus far.

She said that allowing wealthier organizations to support low-cost campaigns is an even bigger concern. The fact that these possible tweaks may be needed, she said, is entirely the city’s fault.

“The city of Portland needs to be more consistent in its planning its programs, funding its programs, and implementing its programs in a responsible and transparent way,” Glickman said.

Not all candidates agree. Steph Routh, a candidate in East Portland’s District 1, was one of the first candidates to qualify for the small donor program. She said she’s been impressed with the level of transparency from the city’s elections program. However, she is cautious to fully endorse the proposed funding changes to the small donor program.

“We created a budget early on assuming we would have limited resources, and we’ve made it work,” Routh said. “I think the fundamental question before us is, ‘How do we create pathways to support a grassroots-based campaign to ensure no single actor or donor creates an advantage after election?’”

The Portland Elections Commission will discuss the survey responses at its Wednesday meeting and potentially propose a policy change. Any new administration policy requires four weeks of public feedback before going into effect, but they don’t require a sign-off from the City Council.

That means the earliest any changes could come to the small donor program could be late July, less than four months from election day.

S&P Global released its Eurozone economic outlook for Q3 2024 on Monday morning, highlighting that growth in the Eurozone has returned mainly due to a fall in energy and commodities prices. 

This is likely to allow gross domestic product (GDP) growth to increase from 0.7% this year to 1.4% in 2025, a slight rise from the 1.3% predicted by S&P Global in March. Eurozone inflation is also expected to come back to the European Central Bank (ECB)’s 2% target by mid-2025, if present conditions remain more or less constant. 

Productivity bouncing back, wages growing at a slower pace and profit margins stabilising should also contribute significantly to cooling inflation. It’s expected to average 2.2% next year, coming down from around 2.4% this year. 

The Eurozone economy has also mostly achieved a soft landing because last winter was milder-than-expected resulting in a knock-on effect on key sectors such as construction. S&P also expects consumer spending to bounce back in the latter half of the year, as retail energy prices abate further, benefiting consumers directly.

However, the report also highlights that the risks of higher inflation, tighter financial conditions and lagging growth have increased since March 2024.

The report also says, “The geopolitical conflicts in the Middle East and Ukraine remain the main risks weighing on our immediate economic outlook. That aside, other pockets of risks have intensified in recent months. These concern the decoupling of monetary policies on both sides of the Atlantic, political uncertainty in Europe and the worsening of Europe’s economic relations with China.”

What are some of the risks for Q3 2024?

Political instability also remains a concern, especially in the wake of the recent EU elections. Regarding this, S&P Global’s chief EMEA economist, Sylvain Broyer told Euronews, “We can definitely see some political uncertainty extending more from the national consequences of the European Parliament elections, rather than the elections themselves, with the French snap elections being at the top of everyone’s minds. 

“They are a source of uncertainty and that can definitely undermine confidence and then make the recovery in investments that we expect in 2025 more fragile.”

Another major risk that could be seen in the next few months is the possibility of escalating EU-China tensions, sparked off mainly due to the EU considering tariffs on Chinese electric vehicles, in order to protect and promote European automobiles. 

The report says, “In terms of trade, China is Europe’s second most important partner after the US. It accounts for 10% of total EU exports and 22% of EU imports, around half of which are products that are critical to the European economy.” 

Coming to how high these tensions could possibly go, Broyer said, “It is obvious that trade relationships between Europe and China are deteriorating and it is very likely that they will get even worse. I don’t think that this will escalate to a full-blown trade war. I also don’t expect the EU-China trade relations to worsen as much as the US-China trade relations. 

This is because the European economy and the Chinese economy are highly interdependent and the respective supply chains are much more intertwined than China is with the US supply chain. For instance, Europe is definitely reliant on China for the import of critical products, such as solar panels, necessary for the green transition, but China is also very dependent on European technology, not just for cars, but also for other transport equipment and electronics. 

Almost 15% of the value added by European companies to electronics is exported to China, so that shows the degree of interconnectedness.” 

There has also been an increasing risk of more European companies leaving the continent’s biggest stock exchanges in order to list elsewhere, in the US or in Asia. 

“This is definitely a sign that European financial markets are too fragmented, too national, too expensive for issuers and for retail investors. To cut a long story short, Europe needs to move forward on the Capital Markets Union, and that is definitely a top priority for the next commission”, says Broyer. 

Similarly, he also believes that streamlining financial and other regulations is key, to make sure that European companies are actually supported and empowered to meet the green transition goals. 

Coming to what the EU can do to attract more investment in the continent, as well as retain companies wishing to leave for the US and other markets, Broyer emphasises that this is not just a case of Europe wanting to win over external competition. It is also about the continent returning to its own previous higher productivity levels, seen in the last few years. 

There could also be a few challenges for the ECB to continue on its rate-cutting path in the near future, according to Broyer. 

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“The needle of the ECB is inflation and the central bank needs to see more progress on wage growth and the most domestic parts of core inflation, in the services prices. Another element which is becoming more and more obvious is the Fed. The longer the Fed waits and doesn’t deliver much guidance on when and by how much it will start cutting rates, the more it is a problem for the ECB to cut rates further.”

Broyer highlights that this decoupling in monetary policy between the ECB and the US Federal Reserve became increasingly obvious in the first three months of the year. 

“European investors have already shifted $50 billion into the US treasury market and probably, it will accelerate in the second and third quarter, so that’s definitely one limitation for the ECB, even if this issue of decoupling monetary policy is a smaller one for central banks generally,” he said. 

Why is Spain expected to see strong growth this year?

The Spanish economy is expected to grow more than Germany in Q3, for a variety of reasons. The report emphasises: “Lower energy costs helped the German economy to emerge from recession in the first quarter of 2024, thanks to a recovery in production in energy-intensive sectors such as the chemicals industry. However, the German economy still lags other large European economies in terms of growth. 

“Spain, noticeably, continues to beat expectations, with GDP growth accelerating for the third consecutive quarter to 0.7% quarter-on-quarter. The post-pandemic normalisation of tourism is not the only reason for this. Industrial production is continuously expanding in Spain. Last year, consumer spending was the main driver of growth, adding one percentage point of a 2.5 percentage-point increase in Spain’s GDP.

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“Second-round effects on core inflation have also been more muted in Spain than in many other countries. Stronger employment growth, stimulated by labour market reforms aimed at replacing limited-term employment contracts with open-ended ones, is another explanation. The dynamism in employment does not hinder productivity growth, in contrast to the other three major economies of the Eurozone, Germany, France and Italy.”