Anaysis of the Migration Flows and the Economic Imbalance within the European Union
A much-debated issue
With the rise of the populist parties across Europe, migration has become one of the most controversially debated issues in current European politics. It was a key demand of the Brexit campaign to regain control over the British borders and it is one of the main topics dominating the current French elections as well. While one issue is how the EU should treat immigration from outside Europe, intra-EU migration is a separate matter. Every year, more than two million EU citizens change their country of residence within the Union. Freedom of movement guaranteed by the Schengen Treaty makes it easy and convenient for them to choose the country that offers the best working and living conditions. Economists generally view this as a positive sign of economic rebalancing and tend to disregard concerns about it as irrational. However, when migration flows consistently go into one direction, they demand closer investigation to see if there are structural problems that require political attention.
Paradoxical migration patterns
Especially since the Financial Crisis, we see a continuous flow of migrants from the South to the North, in addition to the migration from the East to the West caused by the Eastern Enlargement of the EU.
Graph: Immigration of EU citizens and re-migration of nationals net of emigration of EU citizens and emigration of nationals (source: Eurostat)
Normally, migration works as an adjustment mechanism within an economic union with free movement. If wages rise faster in one country than in the others, firms face higher costs and therefore become less competitive compared to the rest of the union – the country starts to run trade deficits. The higher wages then trigger immigration from the rest of the union. Increasing labor supply in the high-wage country results in a decrease (or at least a slower increase) of wages, while they rise faster in the other countries due to a decrease in the number of available workers on the labor market. This pattern of migration towards less competitive countries is what we are seeing in the case of Eastern Europe.
Intra-EU Trade Balances (EUR bn)
The issue of northward migration, however, is different. With a few exceptions, most notably the United Kingdom, people are migrating towards more competitive countries, which are running trade surpluses with the rest of the union. The wage-adjustment mechanism, putting downward pressure on wages in the North and upward pressure on those in the South, works in this case in the opposite direction and widens the competitiveness gap rather than closing it.
A matter of productivity
The North is more competitive than the South, although labor costs (the sum of wages and non-wage costs such as employer contributions to social security) are generally higher there.
Labor Costs by Country (2016, EUR per hour)
One reason for this could be differences in the availability of capital, but since the EU guarantees free capital flows and profits tend to be higher where the capital is scarce, this seems like an unlikely cause for the imbalance. But if the availability of capital is not the main problem, this leaves only inter-country differences in productivity. The modern speed of knowledge transfer makes it implausible that differences in technology play a major role. As for differences in labor productivity: The recent alcohol-and-women controversy shows that there is a notion in the North that cultural differences may be at least partly responsible for the productivity gap. This an argument which you may or may not buy into, but there exists very little empirical evidence in its favor. One factor that we are certain of is that of different legislatures. With different pension systems, different rates of corporate taxation, different levels of regulation and red tape for each individual member state, there is a great variety of potentially productivity-influencing factors across the Union.
A dangerous trajectory
What are the consequences? The trade imbalances between the North and the South are subject to controversy not just in the context
of the Euro Crisis. It creates growing levels of public and private debt and impedes growth in the crisis countries, while the North continues to pile up claims which it is increasingly unlikely to fully recover. Migration to the North is only likely to make this situation worse. In the long run, however, the consequences for the South might be even more detrimental. Statistically, predominantly the young and the well-educated tend to go abroad to improve their job prospects. This means that their home countries not only do not get to cash in on the education that they paid for, but also that they lose exactly the kind of people that they are in desperate need of. A high level of education is necessary to keep up with the pace of technological progress and the aging societies of Europe need young people to finance their growing elderly generations. Therefore, it is in the best interest of the entire Union to find a solution to this problem as quickly as possible.
Protectionism versus Harmonization
Does this mean we should give up the freedom of movement and compromise on one of the key pillars of the European Union? That would certainly be one conceivable way to tackle the issue. Admittedly, the problem of the competitive imbalance will be difficult to solve in the short run. The North could try, as many economists from Southern Europe demand, to decrease its surplus by promoting imports through expansionary fiscal policies. This strategy would, however, probably have the ‘unpleasant’ side effect of increasing wages in the north, accelerating the current migration flows. Likewise, a continuation of the current austerity policies in the South to regain competitiveness would have the same effect with respect to migration. Yet, a mix of both is what we are likely to see in the future, maybe more of the former in case of a Social Democratic victory in the upcoming German elections, maybe more of the latter in that of a conservative triumph.
But if we want to fix the economic imbalance of the EU in the long run, would it not make more sense to work at the root of the problem and try to eliminate the differences in productivity across the Union? We could leave people with the decision which country to live in if we could agree on a common set of social standards and economic policies rather than competing against each other on these matters. There are steps in this direction that are being debated right now, like the idea of a corporate tax harmonization or the recurring plan of more fiscal integration, recently championed by French presidential candidate Emmanuel Macron. One way or the other, the EU will have to make a decision, as the current course of action perpetuates what is already a dangerous situation for economic and political stability in the Union.