How to Make EU Integration Popular [Archives:2007/1031/Business & Economy]

March 8 2007

By: Daniel Gros and Stefano Micossi
Across the European Union, fears about globalization and antipathy to integration and immigration have produced massive political fallout, including the failed French and Dutch referenda on the Union's draft constitutional treaty and a de facto moratorium on accession talks with Turkey. The European Council and the Commission have watched helplessly, as if the matter was not in their hands.

Conventional wisdom suggests that the EU's inability to meet the challenges of integration is due to rigid economic structures and inadequate human capital – weaknesses that can only be tackled effectively by national policies, where the Union has little role to play. But substantial policy spillover across the EU justifies strengthened policy coordination for labor-market and welfare reform.

Outdated labor-market rules are the key reason why the full benefits of the internal market and monetary union have failed to materialize. Labor-market rigidities – above all in France, Germany, and Italy – impede adjustment to the increased competition of integrating markets. Those who lose their jobs cannot find new ones because of barriers to entry, while high long-term unemployment makes those who do have jobs feel threatened. Viewing immigrants and internal market integration with alarm, both groups thus have increasingly turned against Europe.

If they cannot reform, France or Italy eventually may be tempted to renege on free movement of goods, services and labor – and perhaps even abandon the euro – with disruptive consequences for all members. Therefore, there is a common interest in fostering national policies that are consistent with integration in the internal market.

The benefits of coordination are likely to be reinforced by policy “learning,” as confirmed by evidence that reforms tend to spread in waves. Structural reforms are usually resisted because of uncertainty about the costs and their distribution. One way to weaken this resistance is to involve not only ministers and heads of government in exchanging information on policy design, but also those who resist change, notably trade unions.

After all, a clear message by the European Council would have a much stronger effect if it expressed not only the wishes of heads of governments, but also broad acceptance at all levels of society. Only then can one hope for full implementation of reforms and the virtuous circle of improved expectations and economic performance that should have been set in motion by the European Council's Lisbon summit seven years ago.

The experience of successful reform in the Anglo-Saxon and Nordic countries shows that Europe need not be condemned to stagnation, provided that it renounces rigid employment protection. The key to overcoming resistance is to give affected workers grounds to hope that they can find a new job. The European Council might also recommend that any relaxation of employment protection be accompanied by the establishment of a minimum wage – determined as an agreed proportion of the statutory wage for regular long-term employment. With such a comprehensive policy package, resistance to change would likely diminish.

Immigration poses even greater policy challenges, since newcomers are widely perceived as threatening jobs and crowding out natives from social services. There is ample evidence that restrictions on immigration in one country divert migrant flows to other EU countries, and that migration is attracted by generous welfare entitlements. Moreover, well-functioning labor markets attract migrants with higher qualifications, while countries with rigid employment protection are targeted by the low-skilled and those willing to work illegally. Labor migration also presents challenges for source countries, for it diminishes their pool of young and educated workers.

Policy coordination can provide effective remedies to these negative spillovers. Two measures would be particularly useful. First, the old member states should immediately lift remaining restrictions on the freedom of movement for workers from new member countries. Any minimum wage would automatically also apply to immigrant workers, mitigating “unfair” competition for low-skilled jobs.

Second, the EU should enact a common scheme for admission of immigrant workers from outside the Union. Such a scheme should include a “point system” for selecting applicants for residence and work permits, which would assign each applicant a score based on objective criteria, typically including language ability, education, and experience. This approach has been successfully implemented in Australia, New Zealand, and Switzerland; Germany and Great Britain are following suit.

By establishing a common “welfare floor” throughout the EU, providing an effective safety net to native workers whose jobs are threatened by integration, and adopting a coordinated policy on immigration, European citizens would be reassured. This, in turn, might reduce their hostility to migrant workers while offering migrants an equitable and fair legal framework.

These labor-market and immigration policies should become the focus of policy coordination within the EU. By concentrating on policies to sustain integration while at the same preserving the European social model, the European Council would again become a relevant policy forum where the real needs and hopes of citizens could find effective responses.

Daniel Gros is Director of the Centre for Economic Policy Studies, Brussels, and Stefano Micossi is Director General of Assonime, a business association and think tank in Rome, and a former Director General for Industry at the European Commission. Copyright: Project Syndicate, 2007.