EU Internal Policy

Brexit: four pillars of the EU are crumbling but it still hasn’t noticed

UK Prime Minister Theresa May with French President Francois Hollande. Picture: AFP.

At the heart of the European Union sit four key principles: the free movement of goods, services, capital and labour. The “four freedoms” were enshrined in the 1957 Treaty of Rome and reinforced in the Single European Act in 1986, the 1992 Maastricht treaty and the Lisbon Treaty of 2007.

They form the bedrock of the single market, designed to lift member states by generating trade, boosting productivity through broad credit provision and offering workers richer opportunities. It’s a laudable ideal but it’s not working properly.

Fifty-nine years since the Treaty of Rome, the four freedoms need updating. Economic thinking has evolved enormously in that time, as has the EU, but its principles remain ossified in their small-world setting.

Brexit was an existential shock but not unique. Disillusion with Brussels is even greater among the French, Spanish and Greeks and just as bad in Germany, according to the Pew Research Centre. If the EU wants to survive, it needs to adapt. Britain’s referendum was only the canary in the coalmine.

The EU today is a very different creature from the one formed by Belgium, West Germany, France, Italy, Luxembourg and the Netherlands in 1957. Or even the 12-member European Community of 1992. Back then, free movement of labour was “motivated by theoretical arguments about optimal resource allocation and … its potential to serve as an adjustment mechanism in the face of economic shocks”, Jonathan Portes, principal research fellow at the National Institute of Economic and Social Research, has written. “It had not been seen as operating in an area where there were large, persistent differences in wage levels.”

EC members were of similar economic size. Until 2004 free movement was “largely a symbolic right used by multinationals, senior professionals and retirees”, according to David Goodhart, a director of the Policy Exchange think tank. All that changed with the accession of eight former Soviet bloc states in 2004. Drawing them into Europe’s embrace was geopolitical in intent but had lasting repercussions for free movement. From then on it was no longer about resource allocation but economic migration, plain and simple. The circumstances changed but Brussels remained rigid.

A similar tale can be told about free movement of capital. In principle it provides vital funds for investment but, in practice, proved central to the eurozone’s malaise. German lending overheated consumer spending in the periphery. When the crash came, the “sudden stop” in capital flows caused agonies for them.

For decades the IMF had been the world’s leading advocate of free capital flows. In 2012 it switched tack and declared that capital controls can aid stability. It now advocates “targeted, transparent and generally temporary” controls, having acknowledged that fully liberal markets can “make countries more vulnerable”. Yet the Treaty of Rome stands unaltered.

The four freedoms don’t need to be scrapped, just updated. Some, like Mr Goodhart and Open Europe, have argued for modifications to free movement that put transitional arrangements around members whose GDP per head is less than 75 per cent of the host nation, effectively restoring the original principle. Others have spoken about monitoring strains on public services and combining that with migrant impact funds or even emergency brakes. IMF-style capital restrictions could be introduced to pre-empt imbalances. As for services, free movement has never even been fully realised.

It may be too late for the UK but Brexit has given the rest of the EU a chance. Inflexibility offers no future.

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