Ifo Viewpoint No. 43: Twenty Mezzogiornos
13 February 2003
Europe will soon have a new constitution. But if the draft presented by Valery Giscard d'Estaing is anything to go by, it will be imbued with old ideology. The document ignores the free-market economy. There is not a word about the protection of property, and no commitment to free enterprise and the division of labour. Instead, it contains dubious secondary objectives like "sustainability" or "balanced economic growth", as if a constitution could ensure that such concepts become reality.
Far too little thought has been given to legal and economic ramifications of these grand constitutional proclamations. Take the proposed creation of European citizenship together with the prohibition of discrimination on the basis of national citizenship. Both were implicit in earlier treaties and are central to the European idea: Europeans have joined together and should not discriminate against each other. But the new draft would give these principles the status of constitutional law. If applied to other "rights" enumerated in the document, such as social cohesion and social protection, they could create social harmonisation by the backdoor. That would have grave consequences for the European economy.
Under the current principle of inclusion, an EU citizen who moves from one EU country to another to work is immediately and fully integrated into the social system of the host country. The EU migrant pays taxes and social insurance contributions and together with his family receives access to all the state benefits available to domestic employees. A migrant worker with a below-average income profits from the income redistribution of the welfare state just as a national does. By the calculations of the Ifo Institute, the net benefit that Germany has been granting amounts to €2,300 a year in the first 10 years. By restricting these equal benefits to working migrants the cost is limited. Those who migrate for reasons other than employment receive no welfare benefits apart from emergency health care. However, the current draft constitution could mean that the inclusion principle would apply to all migrants from EU countries, including those who do not come for the purpose of working. This is not explicitly stated. But the draft includes no restrictions on the rights, so the courts would probably interpret the concept of social inclusion even more generously than they do already.
Current problems with the principle of inclusion will only be amplified. If having work is no longer required before immigrating to a welfare state, the flood-gates will be opened. Masses of poverty refugees would flow from eastern European countries to seek their fortune. To prevent this chaos, EU migrants should have to wait for full welfare benefits, such as rent subsidies and public housing, while enjoying access to public services and other benefits they pay for via taxes and social insurance contributions. If differential treatment of this sort is not allowed, governments will be forced to compete to trim welfare benefits so that they are no more attractive as destinations than their neighbours. Traditional welfare states would not survive.
Harmonisation of social standards could prevent a downward spiral. But economic conditions are far too varied for this to work. In all eastern European countries, wages are less than one third of German social welfare assistance, and even in some Spanish, Portuguese and Greek regions, wages are less than half of German social welfare assistance. Harmonising welfare at a level still acceptable to western Europe would lead to the deindustrialisation of whole regions in the south and east.
The economic pain would then have to be eased by large fiscal transfers between governments. Theoretically, this is possible. Indeed, the draft constitution provides for such social cohesion. But the results could be disastrous. Look at Germany and Italy. The German government contributed to the eastern Länder's lack of competitiveness by offering western welfare payments which were pushing wages above productivity. Similarly, the Italian social system has prevented wages in southern Italy from falling to a competitive level. Consequently, both eastern Germany and the Italian Mezzogiorno suffer from mass unemployment. Productivity is stuck at only 60 per cent of the other regions. And they are dependent on vast financial transfers.
It would be unwise to impose the Italian-German model onto Portugal, Spain, Greece, eastern Poland, Slovakia, Romania or Bulgaria, but this is precisely what a European social union would do. There would not be two but twenty Mezzogiornos in Europe if the non-discrimination planned in the draft constitution is applied without restrictions to social benefits for all EU citizens.
Professor of Economics and Public Finance
President of the Ifo Institute
Published as "There is no European Right to a Place in the Sun", Financial Times, Feburary 13, 2003, p. 11; see also "Zwanzig Mezzogiornos", Financial Times Deutschland, February 13, 2003, p. 30.