Three Cheers for the EU ‘Single Market’ (but Not Four)

Now that the dust kicked up in the hubbub preceding and succeeding the Brexit referendum result is beginning to settle, the real options facing the UK (and indeed the EU itself) are becoming visible as battle lines are drawn for the playing out of the Article 50 process. Or perhaps the lines were always clearly delineated, just obscured by the obfuscations of the Leave and Remain campaigns. On two things, however, there appears already to be broad agreement.

First, it is in the economic interests of both the UK and the remnant EU for there to be continuing economic co-operation along the broad lines of what currently prevails under the terms of the so called “Single Market” in relation to the free exchange of goods, services and capital.

Secondly, it is not in the political interests of the leaders of the remnant EU to offer this to the UK, or more accurately to be perceived as doing so, without forcing the UK to accept as the ‘price’ of such continued co-operation the relinquishing of control over immigration of EU citizens. But following the vote for Brexit, this has become politically unacceptable to the UK.

Thus an irresistible force, as it were, meets an immovable object. In order to understand how this situation might resolve itself, let’s ask ourselves some of the questions which rather naturally spring to mind. Most obviously, why is it that the idea of a simple mutually beneficial trade deal is so anathema to the guardians of the EU, with the “price” levied being that the UK government relinquish control over its immigration policy? The standard answer put forward is “pour encourager les autres,” to borrow a phrase from Voltaire. In other words, to discourage other EU countries from seeking a deal similar to that offered to the UK. But if this is truly the thinking and motivation of political leaders across the EU, it betrays a rather anti-democratic sentiment: in the first place a recognition by EU leaders that the electorates in a significant number of countries currently in the Single Market would prefer for the EU not to have control over their immigration policies; and secondly an explicit willingness to hold the threat of recriminations over the heads of electorates to discourage them from giving expression to this will or seeking to extricate themselves from the system that constrains their freedom thus. There is in fact a technical term for such behaviour: it is more commonly referred to as a protection racket.

A further argument that is often put forward is that this fourth component of the single market, free movement of human beings, is inseparable from the other three and has been since the inception of the EU. This is a partial truth. While it was the case that the automatic right of EU citizens to work in other countries was enshrined in the Treaty of Rome in 1957, the extent of the rights of such workers has progressively grown (for example to receive welfare and housing benefits), as has the degree of wage inequality driving the flow of migrants. Indeed recognition of such issues (see resulted in EU countries being allowed to impose restrictions for a number of years on accession countries from Eastern Europe. So there is precedent that the “fourth component” is recognised as being not necessarily entirely indivisible and sacrosanct, nor indeed without its problematic aspects.

This being the case, we might ask ourselves how reasonable is the proposition that the four “freedoms” of the Single Market are and must remain indivisible? I would suggest that philosophically and in practical terms the fourth is very different in nature from the first three and that therein lies the problem. For on the one hand, goods, services and capital flow across borders consequent upon deals being concluded by private individuals and corporations. Only the willing parties to those deals are directly impacted. However if human beings in one country decide to move to another and settle, there will be an asymmetric impact on the host population in terms of displacement from jobs, and a need to provide healthcare, welfare benefits, housing, education, etc. Of course immigration is not without its benefits to the host population too (or to parts thereof). But there is a limit to what rate of immigration can be supported without it becoming an issue as an ever-increasing proportion of the host population inescapably find themselves adversely affected. This asymmetry makes it quite different in kind from the other three “freedoms” which are only enjoyed by mutual consent.

The question then arises: where should the decision-making power lie as to who is allowed to enter a country, under what conditions and in what numbers? Logically this decision should be taken at the level where financial and moral responsibility for the consequences of immigration lie, namely with national governments. But instead the rules are set at a European Union level where there is no fiscal accountability or ultimate responsibility taken for any of the problems that might be caused by a country being unable to constrain immigration from other EU countries. So one is not surprised to find that no sovereign nation outside the EU has willingly entered into any similar arrangement of giving up control over its immigration policy.

This is the contradiction at the heart of the forthcoming negotiation. It is the reason why there was so much uncertainty during the referendum debate and why so much remains. How will it all end up? At this stage, who knows! But whatever EU leaders may be saying about the inseparability of the four “freedoms”, the underpinnings of the fourth — moral, philosophical and in terms of being an unequivocal benefit — are less sound than they would have us believe.

By Colin Turfus

Colin Turfus is a quantitative risk manager with 16 years experience in investment banking. He has a PhD in applied mathematics from Cambridge University and has published research in fluid dynamics, astronomy and quantitative finance.

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