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Brexit, Migration, and Increasing Economic Diversity Within the European Union

Posted by hkarner - 22. Juli 2016

By and on July 20, 2016  , RGE EcoMonitor

Migration is a sensitive issue today in many countries. In the UK people who voted for Brexit cited lack of control of the border as the most important issue that influenced their vote. In other parts of the EU, many countries imposed border barriers against non-EU migrants, in spite of their promises to keep borders open. There has been a sharp increase in political support for anti-immigrant parties across the EU. In the US, the success of Donald Trump, the Republican nominee for President, is at least partly attributable to his outspoken opposition to immigration.

Sources of Migrants to the UK

Brexiteers who considered migration to be excessive frequently cited migrants from EU member countries, Poland, Romania, and Bulgaria. These are three of the largest sources of migrants to the UK, and they are also among the poorest countries in the EU. Romania and Bulgaria are, along with Croatia, the newest EU members, and their citizens recently became eligible to migrate.

Migrants Respond to Income Differences

Migration is heavily influenced by differences in incomes and wages. Economic migrants typically move from countries with lower incomes and wages to destinations with higher incomes and wages. In terms of income per capita (see Table 1) Poland ranks 23rd out of the current 28 EU members, and Romania and Bulgaria rank 27th and 28th. The large number of Polish migrants to the UK is influenced both by the lower incomes in Poland and by the large total population of Poland. It is the 6th largest country in the EU with a population of 38 million. Romania is also a large EU country with a population of 20 million that ranks 7th in the EU. Emigration from relatively poorer member countries has contributed to the fact that all the EU countries with incomes at the level of Poland or below had declining populations in the last year (Eurostat).

Table 1

Incomes of Senders          GDP per capita 2014        % of UK

United Kingdom                       $38,370                           1.0

Poland                                        $24,090                           0.63

Romania                                     $19,030                          0.50

Bulgaria                                      $15,850                          0.41

% of US

United States                            $55,860                            1.0

Mexico                                       $16,500                           0.30

EU Enlargement: 1957-2016

The EU began in 1957 with 6 members who had similar income levels and no strong incentives for internal migration. Expansion to EU28 has produced much bigger income differences and stronger incentives for economic migration. Large differences in income between Mexico and the US have resulted in large migration and strong opposition to migration. Mexican income, adjusted for differences in purchasing power, is currently 30% of US income. EU expansion to 28 members has created income differences within the EU that are approaching those between the United States and Mexico. The gap between Bulgarian and UK incomes (41% when adjusted for differences in purchasing power) is not quite as large as between Mexico and the US, but it is getting close. The widening gap between richer and poorer EU members is a major source of the migration that undoubtedly influenced the outcome of the Brexit vote. The EU28 of 2016 is not only larger than the EU6 of 1957 and the EU10 that the UK joined in 1973, but it is much more economically diverse.

Future Enlargement 

The EU is currently discussing future enlargement, and the most prominent candidates are all poorer than the poorest current member, Bulgaria. EU leaders, including Angela Merkel and Francois Hollande met in Paris on July 4th and encouraged the EU candidacy of six Balkan countries (Economist 2016a). At the same time, they emphasized that the UK could not have access to the EU single market without accepting free movement of labor. If Brexiteers were opposed to immigrants from Bulgaria, Romania, and Poland, they will likely be more opposed to migration from the poorer Balkan candidate countries. Table 2 shows that the incomes of some of the Balkans are not only lower than Bulgaria, but also lower relative to the UK than Mexico is to the US. For example, Albania’s income is only 27% of UK income. Being a member of the EU in 2016 has different economic implications than being a member in 1957 or 1973. If the EU continues to add members, and if the new members are poorer than the old members, increased income gaps will add to migration. Is there a limit to enlargement? Among countries that have sought admission are Ukraine, Georgia, Moldova, and Turkey.

Table 2

BALKAN CANDIDATES

Montenegro                             $14,510                       0.38

Macedonia                                $12,800                      0.33

Serbia                                         $12,159                      0.32

Albania                                       $10,260                     0.27

Bosnia                                         $10,040                     0.26

Kosovo                                        $9,410                       0.25

Source: World Bank. World Development Indicators Database using Purchasing Power Parity.

The Principle of Free Movement of Labor: Proponents and Dissenters

As stated recently by Jean-Claude Juncker and Angela Merkel, free movement of labor is an essential feature of EU membership. If the UK is not allowed to reach an agreement with the EU without accepting free migration, there is no way to reconcile the desires of Brexiteers and EU leaders. This principle appears to apply also to certain non-members, such as Switzerland and Norway, who acquired access to the EU single market. But this principle is facing increasing opposition not just from the UK, but also from Switzerland. In a 2014 referendum, Swiss voters approved limits on immigration, and this result directly conflicts with the Swiss-EU trade agreement (BBC). The EU is now threatening to impose trade barriers against Swiss products. How essential is the migration issue for the EU? It seems essential for EU members, but the EU has trade agreements that include many different features with about 50 countries, and some have no requirement of free migration. The recently completed (after a seven-year negotiation) agreement between the EU and Canada does not have any requirement related to migration. Neither does the EU-Mexico trade agreement (in effect since 2000). Neither does the EU-Turkey trade agreement (in effect since 1995).

Mr. Juncker, Ms. Merkel, and many other EU leaders have stated that members are not allowed to pick and choose among the rules of the Union as they might in a cafeteria. However, the EU continues to allow formal and informal opt-outs from certain policies for certain members. The UK was allowed to formally opt-out of adopting the Euro. Sweden does not have a formal opt-out, but Swedish officials have found a loophole that has allowed them to informally opt-out of adopting the Euro ever since it was introduced.

EU officials appear to consider free movement of labor to be an essential requirement for all member countries that is as important as free trade in goods and services and free movement of capital. However, the EU does allow some minor restrictions on labor. Free movement only applies to citizens of EU, so that legal residents of EU states who are not citizens are subject to work permits issued by national governments. Secondly, when the EU expands, old members are allowed to impose temporary restrictions on migrants from new members that may last for seven years. In fact, workers from Romania and Bulgaria did face restrictions from some EU countries and Switzerland for seven years, and Croatia continues to face some restrictions from some receiving countries. Finally, the service sector employs most EU workers, and it remains heavily regulated by national governments in ways that favor domestic workers (Economist 2016b). National occupational licensing implies that an architect or notary licensed in one country cannot automatically be employed in another member country. So a Polish citizen who is an architect may be free to legally move to Germany, but if he cannot be employed as an architect in Germany, free movement of labor loses some of its value to him.

UK citizens have voted against the EU, prime minister Cameron has resigned, and the new government of Theresa May is preparing to negotiate their exit. Brexit will result in an economic loss for both sides. The EU will lose one of its largest, most prosperous, and most influential members. The UK will lose free access to one of the largest markets in the world. However, Brexiteers have proposed a new agreement between the UK and the EU that would not require free movement of labor. The EU agreements with Switzerland and Norway do require free movement of labor, but other EU agreements with Mexico, Canada, and Turkey do not. Is it possible to reach such an agreement with the UK that has more favorable labor requirements than the Switzerland and Norway agreements? If so, wouldn’t Switzerland and Norway seek similar terms? Another practical issue is that the EU and the world have become more protectionist. The European Commission has just announced a ratification procedure for the EU-Canada agreement that will make it easy for one country or even part of one country to block the agreement (Economist 2016c). It will require ratification by at least 36 governmental units, including the Belgian province of Flanders. The UK is a larger and more complex economy than Canada, and EU protectionists would likely find more reason to object to a UK agreement.

Some of the dissent about migration is limited to migration within the EU, but there is also opposition to attempts by authorities in Brussels to impose quotas on members related to migration from outside the EU. Hungary has scheduled a referendum on EU migration policy in September (Guardian). The Slovakian government is challenging EU migration policy in court. Foreign ministers of the Visegrad Countries (Poland, Hungary, Czech Republic, and Slovakia) issued a joint statement urging EU executives to devote less time to discussing “more Europe” or “an ever closer union” and more time to a “better Europe” (Guardian). Anti-immigration parties are gaining influence throughout Europe as critics blame the “elites” in Brussels and in national capitals for ignoring the concerns of the masses.

Conclusion

Migration is a sensitive issue that influenced the decision of UK voters to secede from the EU. Anti-immigrant sentiment is growing in the US and in Continental European countries. Current EU leaders seem committed to requiring that all members and some non-members with access to the single EU market accept free migration with the EU. While free movement of labor is a precondition of EU membership, it is not clear why it should be a requirement for non-member countries that seek access to the EU market on the basis of bilateral agreements. A mutually beneficial trade deal between the EU and Britain that does not require free movement of labor should be possible. Another key issue is that the implications of free migration have changed as the EU has grown and members have become economically much more diverse. While recent enlargement has been beneficial for new, less prosperous members, it has triggered a resurgence of anti-immigrant sentiment in the richer countries. This resentment has implications for future enlargement. The EU could delay enlargement toward lower income countries until a minimum of income convergence is achieved.

 

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