Economic take on immigration

The trend towards ever higher immigration into Europe does not show signs of slackening. All indicators are that it will be both “bad” migration as well as “good”.

“Good” migration is driven by wage and productivity differences. “Bad” migration is driven by the generosity of the welfare state. When in 2004 Germany adopted a new immigration law that made it easier for highly skilled people from outside the EU to immigrate, such immigrants actually earned above average incomes and were not a burden on the state. That was good migration. Then came the new draft EU constitutional treaty and a new directive on freedom of movement which came into effect on April 29, 2004, and had to be implemented into national law within two years. And that has been seen by labour market analysts as having opened the gates for the economically “bad” kind, viz welfare migration.

For some time there had only been two significant types of welfare migration into Europe. First, immigrant workers participated in the host country’s redistribution of wealth from rich to poor. As low earners their taxes and social security contributions did not cover the cost of the public transfers and the infrastructure from which they benefitted. Second, foreign workers migrated indirectly into the welfare system by crowding out native-born workers, pushing them into unemployment. By providing unemployment benefits and welfare, EU states fixed wages for simple labour above the market clearing level. That in turn stimulated excessive migration, and prevented the decline of wages that would have created new jobs for the migrants. Meanwhile native-born workers also preferred to sit in the chair that the welfare state offered them, instead of entering low-wage competition.

The directive on free movement made a third type of welfare migration possible: the immigration of inactive people. Every EU citizen had a right to a residence permit for up to five years in any member state. After that he or she would receive the right to permanent residence, with full social protection. Although there are safeguards against welfare abuse during the first five years – e.g. migrants must prove that they have health insurance and the necessary “resources” – it seems that there are none against claims after that period. At that point migrants get the right to permanent residency, even if they have no health insurance or resources.

The country of residence is also bound to make benefits available before the end of the five years if the immigrant falls on hard times for reasons out of his/her control. The EU’s directive makes clear that needy people must not be expelled simply because they require welfare assistance, and welfare beneficiaries should not be expelled unless they become an “unreasonable” burden on the state. The coming into effect of those rights coincided with the accession of the east European states to the EU, which in itself factually affected migration flows. In 2004 the wage rates in those accession countries was around 15 per cent of the West German rate, and between 255 and 33 per cent of West German social assistance for a family of four – around €1,550 per month. And all prospects were that it would not narrow quickly.

In reaction some countries, notably Austria and Germany, opted to prohibit labour migration during a transition period that could in theory have been extended up to last year. But this ban did not apply to inactive people. Germany, which in the past had absorbed two-thirds of all east Europeans entering the EU, became the primary destination for the additional welfare migrants which the new directive enabled. This resulted in a grotesque situation: immigration of working people was made more difficult in Germany and Austria, while immigration of inactive people was made easier. And the outcome of that was that these were two more reasons why several important western companies relocated to eastern Europe and elsewhere.

Over these last six or seven years one consequence of such immigration via these three channels has been that the welfare systems of western European countries have been seriously eroded. Benefits in several EU countries have been cut for various reasons; also because none of these countries wants to be seen as a destination for welfare migrants.

Can what often seems to be an impending disaster for “social Europe” welfare systems be averted? One suggestion which has been made is that EU member states adopt a “workfare” system. This would imply that, excepting for the disabled, welfare would be directed only to those who work. Limiting the right to immigrate into a country’s welfare system is a big problem, particularly on moral grounds. Making it known that workers will receive tax-financed benefits only after a delay, and obliging inactive migrants to receive welfare benefits from their home countries (some even say in perpetuity), are ideas which are at times thrown up.

Of course the problem is not only one that sees Europe as a target from its east. It is also the target of its own southern, Mediterranean, underbelly. Currently the issue is also accentuated by the wave of conflict-stimulated, but technically illegal nevertheless, immigration from North Africa, and the EU states’ own inverted pyramid current demographics. And it couldn’t have risen to its present worrying level at a worse moment for post-recession budget-deficit strapped EU governments. This is, yes, a big human problem but it is also a very serious economic one, and there are no evident signs that it will be going away within the near future.

Dr Consiglio lectures on International Economics in the Mediterranean Academy of Diplomatic Studies at the University of Malta.