Of all the principles in European politics, few are held with more religious fervour than the freedom of movement. It is, after all, one of the “four freedoms” that have underpinned the EU since its earliest days — along with the freedom of goods, of capital and of services. In hindsight, we should hardly be surprised that David Cameron’s efforts to negotiate an exception for Britain were thwarted.
But here’s a thought: what if this golden rule — that EU citizens should be allowed to move across the continent at will — was flawed, and had been weakening the project for years? What if Britain should never have had to open its borders to the rest of Europe — not for reasons of closed-mindedness or isolationism, but because of straightforward economics? Finally, what if it were possible to believe this without ever doubting the economic logic that, for the most part, immigration is usually a good thing?
Our story begins back in 1992 with the Maastricht treaty, when Britain secured its opt-out from the single currency. Up until then the overarching assumption in Brussels was that every EU member would eventually join the euro, turning Europe into one giant market with a single currency, a single labour force and a single interest rate set in Frankfurt.
This makes perfect economic sense: to create an optimal currency area, as economists call it, all the ingredients are necessary. Try, if you can, to imagine an economic crisis happening in a eurozone country, let’s say, for the sake of argument, Greece. Thanks to freedom of movement, workers can leave the country to find jobs elsewhere — say Germany. The upshot is that Greek unemployment goes down (those workers leaving) while German unemployment rises and wages fall (those workers arriving). Weaker German inflation gives the European Central Bank room to cut interest rates, which in turn helps foster economic recovery in Greece. This, in theory, is how an optimal currency area should work.
Yet the converse is also true: when you have freedom of movement between different currency areas, strange things happen. So let’s take our Greek crisis and imagine the laid-off workers moved to the UK rather than Germany. In this case, there would be no downward pressure on German wages, since the Greek workers are now in London rather than Berlin. With German wage inflation still high, the ECB has less cause to cut interest rates, so the Greek crisis only gets worse.
And, to some extent, that is precisely what happened over the past five years. As the eurozone slid deeper into crisis the ECB sat on its hands for years, leaving interest rates perilously high even as parts of the continent faced deflation and depression.
Now, let’s not get carried away: freedom of movement did not cause the eurozone crisis. For one thing, the euro was always missing other features that would have made it optimal currency area, such as a central Treasury. Policymakers misjudged the scale of the problems in Greece and other Mediterranean economies, they chose the wrong solutions and took too long to write off bad debts (indeed, they still haven’t written off enough).
If only at the margin, freedom of movement may have undermined the euro’s capacity to react to its problems. And, ironically enough, as the eurozone suffered, Britain benefited, sucking up lots of Europe’s cheap (and mostly highly-skilled) labour.
How different history might have been had Britain been excepted from this rule when it opted out of euro membership back at Maastricht. But we are where we are.
Not long ago, questioning the wisdom and universality of freedom of movement would have seemed sacrilegious in the extreme, but such ideas are gaining currency (pun intended). A couple of months ago five prominent economists, including the former Bank of England deputy governor Paul Tucker, proposed a new model of EU membership for the UK. Under their “continental partnership”, Britain would leave the EU but remain in the single market, with a say in the formulation of its rules and, crucially, limits on freedom of movement.
This was a landmark moment. For the first time, leading European figures accepted that the single market could function well (they did not go so far as saying “better”) without free movement of people. Perhaps predictably, the proposal has since been almost universally panned by politicians on both sides. For Britain’s new government, the fact that it would have to contribute to the EU budget and obey European Court of Justice rulings makes it a non-starter. Meanwhile Europe’s policymakers cannot conceive of an EU without all four of the freedoms. This is not a matter of economics but of politics — faith, even. Marine le Pen benefiting if Britain were granted permission to control immigration while remaining in something resembling the EU doesn’t help either.
Yet the more one examines the economics, the odder it is. Here we are in Britain trying desperately to wriggle out of a policy that has helped to boost economic growth for decades; on the other side of the Channel, policymakers are clinging doggedly to a rule that has actually made their economies weaker.
None of this is to say a breakthrough is not possible. As some of us said before the vote, it is quite plausible that Britain is just as prosperous outside the EU as inside. But it was always going to take a superhuman effort, skilled negotiators and a dose of good luck.
Ed Conway is economics editor of Sky News