European economies

Freedom fried

Feb 9th 2006
From The Economist print edition

The four freedoms on which the European Union is based are under threat

TALK about threats to freedom in Europe at the moment, and the images that spring to mind are burning embassies and cowering journalists. But there is another threat to European liberties that is equally current—and has deeper long-term implications for the continent's prosperity. This menace is to the four freedoms that underpin the European Union's internal market: the free movement of goods, labour, capital and services.

The promotion of the four freedoms has increased the prosperity and liberty of ordinary Europeans. But now there is a backlash. More and more politicians are complaining that the EU is pursuing policies that cause economic insecurity. As a result, all four freedoms are now directly threatened.

For most Europeans, free movement of labour is the most practical benefit the EU offers. Unfortunately, at the moment it is also the most restricted. Worried about competition from low-wage labour from central Europe, 12 of the 15 EU countries in western Europe insisted on temporary restrictions on free movement of labour when the central Europeans joined the EU in 2004. This week a report from the European Commission concluded that the three countries that have opened their labour markets—Britain, Ireland and Sweden—have all benefited (see article). But facts seem unlikely to overcome fears. While some more EU countries like Spain may now open up, Germany, Austria and France all seem likely to maintain their restrictions—curbing personal freedom and driving economic activity underground in the process.

The free movement of capital is also under attack. In December France announced that it would protect industries in 11 areas from foreign takeovers. The European Commission seems likely to challenge this apparently flagrant breach of European law. But the French government shows little sign of backing down. On the contrary, it has reacted with deep hostility to a proposed takeover of Arcelor, a steelmaker that is a big employer in France. The French are not the only backsliders. Germany has fought hard to preserve a law that protects Volkswagen from foreign takeovers. And the new Polish government, which has regrettably protectionist instincts, is challenging an EU-approved cross-border bank takeover.

A moment of truth is also fast approaching for services in Europe. A proposed new law, which the European Parliament will vote on next week, would make it easier for everyone from plumbers to doctors and architects to ply their trade across the EU without falling foul of restrictive local regulations. Sadly, the parliament is likely to insist on far-reaching amendments to the law that may mean it excludes areas such as health, the media, postal services, electricity, water and gas. Hairdressers and personal trainers may be exempt—but at this rate the services directive will be barely worth having. One industry—energy—is already going backwards (see article).

The free movement of goods is the best-established of the four freedoms within Europe. But the EU is in danger of adopting an increasingly protectionist attitude to anything made outside Europe. Despite a recent fiasco over textile imports from China (the infamous bra wars), the commission is under enormous pressure to introduce new “emergency” restraints for other goods, such as shoes.

Fearful times

This new, frightened mood is partly a tribute to the changes that the EU has already fostered—Polish workers (legal or otherwise) are already a presence in much of western Europe; cross-border mergers are growing in number. At a time of high unemployment, changes like these create feelings of insecurity. But there is more to it than that. Many politicians have interpreted the defeat of a proposed EU constitution in referendums in France and the Netherlands last year as a backlash against economic liberalism. In a bid to save their cherished dream of political union in Europe, they have decided that their voters must be placated with more “social Europe”.

Such a scheme is, of course, incoherent. How can you promote political unity in Europe, while simultaneously throwing up nationalist defences against other European firms and workers? How can Europe aspire to be a global force, if it cowers behind protectionist trade walls?

Unfortunately, while the logic may be clear, the political climate is distinctly unpromising. The European Commission, which has done a good job expanding Europe's four freedoms over the past decade, may find that over the next year its most urgent task is to prevent those freedoms being rolled back.

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