Jonathan Portes / Sep 2016
Already, as many of us anticipated before the vote, the key tradeoff in the upcoming negotiations over the terms of the UK’s relationship with the rest of the EU appears clear: free movement versus Single Market membership. The UK wants the latter, but can no longer (for political far more than economic reasons) accept the former; other EU countries argue that it’s a package deal.
The EU stance is based on two key arguments:
- First, that of principle. Free movement is one of the four freedoms, set out in the original Treaty of Rome which spoke of the “abolition, as between Member States, of obstacles to the free movement of persons.” They argue that an integrated market requires the removal of barriers to labour mobility as well as to trade and investment
- Second, a cruder “tradeoffs” argument. The UK cannot be permitted to have the “benefits” of the Single Market – barrier-free trade - without the “costs” – barrier-free access for EU nationals to the UK labour market.
However, it’s not clear that either argument stands up to much scrutiny, at least from an economic perspective. Other free trade areas (for example the North American Free Trade Area) or even customs unions like Mercosur do not typically involve free movement of people. And while most economists think that (contrary to very simplistic models of trade) labour mobility does yield benefits that are additional to that of trade, that does not mean that the former is necessary for the latter. Free movement increases the economic benefits from the Single Market – it certainly makes an integrated Single Market in services far easier - but its absence, or some restrictions on its full extent, would not negate them entirely.
In fact, although free movement was enshrined in the Treaty of Rome, the renewed push for practical measures to break down barriers to labour mobility actually came after the Treaty of Maastricht. And here the economics is indeed very strong: the standard theory of optimal currency areas suggests that the costs of giving up the exchange rate as an adjustment mechanism (as a consequence of entering into a monetary union) are greatly reduced if other adjustment mechanisms, in particular labour mobility, can operate. But the UK, of course, is not part of the Eurozone. Arguably the priority for Eurozone countries, at least, should be breaking down the practical barriers that still exist to mobility within the Eurozone – social security harmonisation, mutual recognition of qualifications, etc.
And does the UK’s openness to EU migration benefit other countries, to the extent that they should insist on it as a condition of continued Single Market access for the UK? There certainly have been considerable benefits. Migration, like trade, is not a zero-sum game – it is absurd to argue that because the UK gains from migration source countries lose. The ability of surplus workers to migrate to the UK was very welcome for the new Member States in the first decade of their membership - it reduced unemployment, pushed up wages and generated export income via remittances, as well as being a powerful political symbol of European integration. And more recently migration to the UK has operated as a safety valve for countries where unemployment, especially youth unemployment, has been very high. But looking forward rather than back, it is far from obvious that other EU member states will benefit from a continued flow of younger, relatively skilled workers moving to the UK. This is particularly the case for countries – the Baltic States, and some in Southern and central and Eastern Europe – that face significant demographic challenges.
By contrast, of course, migration to the UK is in no real sense a “cost” for us. There is a very strong consensus amongst economists that the impacts of EU migration on the UK economy and labour market have been broadly positive; and that while there have been local pressures on public services, the overall impact on the public finances – and hence the government’s ability to finance public services- has also been positive. The main loser from any restrictions on free movement will be the UK.
So why does the EU-27 insist on free movement? Part of the motivation is purely political. And of course other Member States have a legitimate interest in the rights of their nationals already here. But going forward we have something of a paradox. In the negotiations to come, the EU-27 will be arguing that the UK should not have the right to shoot itself in the foot. Perhaps they should simply say “Fine. Choke off a flow of motivated, well-educated young workers who want to work for relatively low wages. See what happens to the sectors – from finance to agriculture – that depend on them. Accept the loss of tax revenues. See if your voters- the ones you claim simply can’t tolerate the current volume of immigration – thank you for it.”