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Issue 27/23 September 2010

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1) Tolls instead of traffic jams by Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich, President of Ifo Institute for Economic Research and Director of CES

hans_werner_sinnIt’s the same story every year. European motorists fight their way through heavy traffic on their way to their holiday destinations. Instead of comfortably stretching out their legs in their hotel rooms, they spend long hours cramped behind the steering wheels of their cars. Stress instead of rest and relaxation. Hours in taxing stop-and-go traffic until their long-anticipated goal is reached. This has got to stop. EU countries should be able to put an end to the chaos on their highways.

The popular slogan “free and open highways ahead for free citizens” cannot become reality by building more and more highways, bridges, and tunnels. That would be too expensive, and is also prevented by environmental concerns. Instead, the EU countries need to implement road tolls, finally, in order to regulate the traffic flow – on all of its roads. Freeways, highways, and city streets must be treated equally. Only with a comprehensive road toll can the available capacity of the roads be used in such a way that motorists hinder each other as little as possible.

Of course the toll must be dependent on where and when people drive. Whoever insists on driving when all others are on the road must pay an amount that will compensate the others for arriving at their destinations somewhat later. Whoever is flexible, however, and prepared to drive at a time when no one else is hindered should be able to drive more cheaply. This would regulate the flow of traffic and increase the load-carrying capacity of the roads far more than any road building programmes that stretch into the billions would do.

How could a road toll be structured in practice?
During the day, time zones could be created that take peak hours and holidays into consideration and distinguish between freeways, highways, and city streets. This in itself would help to distribute the flow of traffic more evenly. Countries that have flat rate tolls for trucks like Germany could replace them by a similar tariff structure. Later, in a second step, more complex control systems with instruments to monitor the actual traffic flow would be conceivable. Just as GPS systems now calculate the time to destination, in future they could also provide the price for alternative stretches of road and times.

Technically this is no problem at all. Today, the German toll system for trucks on the Autobahn is linked to GPS and mobile phones and functions very well and it could easily be expanded to include cars. France and Italy, as well as cities such as Oslo, Bergen, London, and many other places in the world already have more or less complex and functioning road toll systems. Italian drivers, for example, do not have to wait at overcrowded toll stations but have the toll charge, which is automatically registered when driving through the stations, debited from their accounts. The motorists pay their road tolls the same way they pay their electricity and telephone bills. Why shouldn’t this work everywhere in Europe? Europe has the technically most sophisticated road-toll systems in the world that have stood the test of time. Expanding them to cover automobile traffic with time- and locality-dependent rates would be no problem.

Won’t this cost a lot of money?
The cost argument against such a road toll does not hold water either. The road-toll revenue does not vanish into a black box. The extra money the ministers of finance take in can lead to a reduction in the road tax, or other taxes in general, or it can be invested in the infrastructure. And car drivers can save lots of time with a road toll. If every worker loses as little as two hours a week because of slow or stopped traffic, the value of times lost unnecessarily on the road amounts to more than €100 billion a year for a country like Germany alone.

Some argue that road tolls are antisocial as they supposedly affect the needy the most. But how poor is a car driver in comparison with a social-welfare recipient who cannot afford a car in the first place? The tolls could also be structured according to the size of a car. Romania considered it socially justifiable, in its transition to a market economy, to replace the lines in front of the milk shops with the same price for rich and poor – an encouraging example.

Automobile clubs once proposed widening and improving roads prone to traffic jams until these no longer occur. It can only be hoped that they have changed their view as it is indefensible. As we know, any good that costs money to provide and is offered free-of-charge, will lead to waiting queues – or traffic jams in our case. Providing so much more of a particular good at no cost until the queues subside only works in a dreamland. In a world of scarcity, attempting such a solution leads to a misallocation of resources that ends up making everyone poorer.

In Germany, both Federal Minister of Transport, Peter Ramsauer, as well as Jochen Flasbarth, President of the Federal Environmental Office, have both recently proposed introducing road tolls, if for different reasons. The one is primarily interested in revenue, the other in environmental protection. Also following the example of other countries was an argument. These positions deserve support, even if from an economic viewpoint other arguments are mustered.

The time has come for general road tolls on all roads in Europe.

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2) How to save the euro by Simon Tilford, Chief Economist at the Centre for European Reform

The gap between the rhetoric of an integrated Europe and the reality of national interests and politics usually does little damage other than to undermine the EU’s credibility. But this gap is proving lethal for the euro. A monetary union requires a very high degree of political and economic integration. Without it, a shared currency will do more harm than good. That is the start reality now confronting the eurozone

Poor economic growth prospects, rather than fiscal ill-discipline, lie at the heart of the eurozone’s problems. Without a sustained economic recovery, public finances in a number of member-states will remain in crisis. Reforms to the way the currency union is run must, therefore, centre on removing obstacles to growth. This requires a concerted drive to deepen the EU’s single market, improve policy co-ordination, recapitalize the banks and ensure a closer fiscal union. In short, reforms must tighten economic and political integration.

Unfortunately, current efforts to reform the eurozone are set to fall dramatically short of what is required to secure the future of the single currency. Eurozone governance will comprise little more than a beefed-up system for ensuring budgetary discipline. Trade imbalances within the currency union are to be treated as a matter for the deficit countries alone; surplus countries will not be obliged to strengthen domestic demand. And there will be no push to accelerate market integration or move to fiscal union.

Unless there is a rethink, the eurozone risks permanent crisis, with chronically weak economic growth across the region as a whole, and politically destabilizing deflation in the struggling member-states. This would create strains between the north and south of the eurozone and between France and Germany, in the process damaging the chances of progress in other areas of EU business.

To read the whole of this fascinating article, which includes a number of very useful diagrams, please click here.

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