The sacred cow of free movement in the EU

Writing in The Guardian this week (29th September) Anatole Kaletsky argues that if the 27 other members of the EU could be persuaded to take a different, less hard, line on the principle of ‘free movement of people’ and ‘other symbolic issues related to national sovereignty’ the UK might not have to leave the bloc.

As an economist Kaletsky should be aware that the principle of free movement of the factors of production (goods, capital and labour) has been the guiding light of the EU since its very earliest days as the Coal and Steel Community and indeed its chosen route to statedom.   The principles were established by ‘experts’ in the form of economists who used economic theory to demonstrate that, within a customs union, an internal single market would require the uniformity, harmonisation or at least approximation of the conditions that determine the location of the factors of production to ensure economic efficiency and maximise welfare.  The theories, and their application to the emerging European Union, can be found in a series of reports including Tinbergen (1956), Neumark (1962) and Tempel (1970) and followed by many others through the decades.   These reports laid the foundation for the theories that the guardians of the Treaty, the Commission, relied upon in bringing forward their proposals for legislation.

It is worth looking closely at the Neumark report, available only in an unauthorised English translation as far as I can discover.  To ensure that the distribution of the factors of production was ‘efficient’ in a single market all differences in taxation should be ironed out, at least in relation to the structure and base of taxes.   Cosy within its protectionist tariff walls the ‘customs union’ could then gradually morph into a single internal market in which the factors of production would be free to move in the interests of maximum economic efficiency. The theory was constructed on the assumption of a small open economy which was less unreasonable when there were only six relatively homogenous members and globalisation had not taken its great strides forward. The basic major premise on which the theory is constructed may not have held in 1956 and certainly does not hold today.

The Commission has stuck to this theoretical scenario through thick and thin although, in a Union of 28 very diverse member states,  it has had continually to retreat from the perfect model of harmonised income and capital taxation, even giving in on the origin principle for VAT (see earlier posts on this blog).  Its latest ‘relaunch’ of proposals for Corporation tax demonstrates clearly the extent of its retreat.  It can only rely on judgements of the European Court based on the principles of the Treaties.  The result is a mess.

The free movement of people, originally ‘workers’ i.e. the labour means of production, remains as a sacred cow, untouched by modification in the light of reality.  While capital remains relatively immobile – even after the restrictions on capital movements were lifted there is little sign of a really integrated capital market throughout the EU -labour has shown itself to be mobile.  People have migrated to the UK in particular because they believe that they can gain employment easily and earn enough to live on.  Capital will only move to the less developed parts of the EU if the risks are mitigated by EU grants and loans.

As yet few seem to have appreciated that the economic theories of the 1950s and 1960s have been superseded by more modern approaches that bring into economic considerations not only the pure and unrealistic assumptions necessary to build a theory but include the real facts of life as it is on the ground.  Just as the EU as a whole has a problem in absorbing millions from Africa in search of peace and work so the UK, a small offshore island, has had problems in being the favoured destination of all those from Romania, Poland, Italy and even France unable to support themselves  and their families in their native lands.  As Kaletsky rightly concludes a new approach is required to the sacred cow of free movement but wrongly he has an expectation that the mindset of 50 years can be changed by facts.

The UK’s ‘red line’ on freedom of movement makes a lot of sense in the circumstances of the 21st century but our negotiators are up against blind adherence to a defunct economic theory.

 

 

 

The Italian waiter’s view of the EU

We have been on holiday – the last week of which was spent in Southern Italy.

EU leaders held a summit in Bratislava on Friday – our last full day in Italy.  The summit came to no observable point and the Italian Prime Minister refused to take part in a press conference with the French and German leaders on the grounds that he (and by implication Italians) did not agree on issues of immigration and the future of the Euro.

Shortly after this event, and before we had learned of it, we had a long conversation with the desk clerk in our hotel in Capri as we were checking out prior to an early departure the next morning.  Like so many we met on the island he spoke good English having studied in Cambridge.  He was not an ignoramus. His views, however, which echoed those of his Prime Minister were such as to fall in to the category condemned by Pierre Moscovici, the French EU Commissioner, as ‘populist’.  Moscovici in an interview on 20th September with the Guardian, Le Figaro and Suddeutsche Zeitung said that the EU ‘Executive’ (by which he meant the Commission) was determined to push back ‘against populists’ destructive agenda, which can lead us to a dead end…this Commission is an anti-populist commission.  We believe that fighting anti-European populism is part of our mission’.

What precisely did our Italian hotel clerk tell us?  He opened the conversation by remarking that we British were fortunate to be leaving the EU.  His particular complaints were that the EU has not been able to control immigration and that the Euro had destroyed the Italian economy.  Naples, he said, was full of immigrants. ‘You will not hear Neapolitan spoken today in Naples’.  Neapolitan is the local dialect which is considerably different from Italian and which my husband never mastered in all the years he lived in the city.  These immigrants come here, he said, and demand food and houses and everything.  ‘If I lose my job I am out on the street and no one will help me’.  As for the Euro he blamed the high price of bread on the introduction of the Euro – bread prices being extremely symbolic as all students of revolutionary politics from ancient times onward will know.  On both counts the EU had failed, he concluded.

Our nice friendly Italian hotel employee was expressing the ‘dangerous’ populist ideas so despised by the elite grandee in Brussels, Moscovici.  The Commissioner really ought to get out and about a bit and listen to ordinary people, many of them well educated and working in the only jobs available despite their qualifications.  Rather than despise their views and attempt to crush them he, and the rest of the Commission, needs to learn that these are the real views of real people who, in the end in a democracy decide the fate of governments.  But then the EU is not a government, is not subject to the demands of democracy, and its ‘Executive’ thinks it can push on regardless.