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May Day madness in Europe

by Hans-werner Sinn

MUNICH — May 1, 2006, is a crucial date for Europe, for it is the deadline for implementing the European Union’s directive on freedom of movement into national law. Most countries have already changed their immigration laws, or have promised to do so before the deadline. Only Belgium, Italy, Finland and Luxembourg lag behind.

True, some of the old EU countries have opted for a prohibition of labor migration during a transition period that is initially set at two years and may be extended to April 2011. However, this prohibition does not apply to people who are self-employed or not working. Such people already enjoy full freedom of free migration today.

While the directive’s rules governing migration of employed and self-employed people hardly differ from previous EU law, the migration and social-welfare rights of non-working EU citizens have been significantly extended. According to the directive, every EU citizen has the right to a residence permit for up to five years in any member state, followed by the right to permanent residence. In principle, even inactive immigrants will then be eligible for social-welfare benefits, just like nationals.

The directive contains safeguards to limit potential abuse of welfare-state benefits during the first five years, including proof of health insurance coverage and a requirement that sufficient “resources” be shown when a residence permit of up to five years is requested. But it is not clear what these resources are meant to be. According to the directive’s preamble, the state cannot cite insufficient assets as a reason to refuse a residence permit, as this would be inadmissible discrimination. In theory, the resource requirement must be tailored to the individual circumstances of the immigrant. In practice, however, financial means in the form of assets or regular income are uniformly required from all immigrants, regardless of their individual characteristics.

Nevertheless, even during the five-year period, an immigrant will enjoy greater rights. If he becomes indigent after receiving a residence permit, he cannot automatically be returned to his home country, as was possible before. Instead, the welfare state must make its services available to him. Only “unreasonable” claims may be refused, but the state will bear the burden of proving unreasonableness. Nor can the duration of the residence permit be shortened simply because the immigrant claims welfare assistance.

When the five years of legal residence are completed, an immigrant automatically gains the inalienable right to permanent residence. The host country cannot deny this right even if an immigrant has no health insurance and no resources to live on. The immigrant will be fully eligible for all benefits the host country offers its domestic residents.

The incentives to make use of the new directive will be especially strong for East Europeans. Today, average nominal wages in the eight post-communist EU countries are about one-fifth of the West European level and often only a quarter to a half of Western levels of social assistance. The real differences in living standards are not quite as large, but they are a temptation nonetheless. This will be particularly true for Bulgarians and Romanians, who are invited to join the EU in 2007. Currently their nominal wages are only about 7 percent of the West European average.

Western Europe has already experienced three decades of indirect migration into the welfare state, as social benefits have created artificially high wages for the unskilled, simultaneously fueling excessive immigration and unemployment. Immigrants have crowded out domestic residents who prefer the benefits to engaging in low-wage competition with the newcomers. The directive on free movement implies a new era of direct migration into West European welfare states.

The result may be an erosion of these welfare states themselves. As no West European state wants welfare immigration, and because they are unable to discriminate between nationals and EU immigrants, they will begin to reduce their services. Europe will enter an extended period of competitive deterrence, during which it will gradually abandon its old social values.

To be sure, countervailing political forces will press for harmonization of Europe’s social-welfare systems. The draft EU constitution, which failed in the French and Dutch referendums last year, breathes the spirit of this approach. Unfortunately, harmonization would probably apply to wage replacement payments, implying uniform minimum-wage constraints for EU countries. Given the EU’s economic heterogeneity, this outcome would likely boost unemployment.

There is still time to avert these frightening effects. But, to do so, the directive on free movement must be changed, so that the right to immigrate does not automatically imply a right to social benefits. If the home country were to remain responsible for welfare services to non-working immigrants, the erosion of West European welfare states that the theory of systems competition predicts could be halted. But that would mean a substantial change in the direction of EU social policies, including revision of the draft constitution.