The Four Freedoms!? Three, then? Maybe two...

  • 2004-07-01
  • By Morten Hansen
What's known as the Four Freedoms - free mobility of goods, services, capital and labor - is a cornerstone of the European Union. Although having been mentioned in EU treaties since the Treaty of Rome in 1957, the concept did not come fully into force until the Single European Act in 1987, which established the single (or internal) market.

The idea behind the Four Freedoms is not just a noble one; it is strongly founded in economic theory. If goods and services are allowed to be produced in places where they can be done most cheaply and sold where they can fetch the highest price, if labor can move to where it receives the highest wage and if capital can locate where it receives the highest return, this raises total welfare (and tends to equalize prices, wages and returns to capital due to competition). Assisting this process is the single currency - i.e., the euro, which facilitates trade across borders.
In the first paragraph of the Single European Act it is stated that the Four Freedoms have been fully incorporated by now. If only they were! At present many services are not fully free to cross borders. More importantly, and certainly more controversially for the EU's new member states, most of the old EU countries have adopted transition measures with respect to the free movement of labor (as an additional slap in the face to the new members from Eastern Europe, this does not apply to Cyprus and Malta).

Germany especially has instated rather harsh transition measures. The horror scenario for German trade unions seems to be an invasion of Polish riff-raff willing to work long hours at low pay in dangerous and dirty jobs, thereby putting downward pressure on wages in Germany. True, some German workers might face lower wages and thus lose from such a situation, but goods and services would be produced in Germany at lower costs and thus ultimately lower prices - good for German consumers and excellent for German competitiveness. The argument that this huge migration is unlikely to happen and certainly never happened after previous enlargements does not carry much weight these days.
So, Germany, together with France, may like to see themselves as propelling Europe closer to integration, the reality is obviously different.
A blatant expression of hypocrisy and double standards was displayed recently when German Chancellor Gerhard Schroeder warned the new East European member states against what he called "unfair tax competition."
The argument runs like this: In a borderless European Union, firms can set up business where they find it most profitable. This is what is meant by free mobility of capital. This could be, for example, where corporate taxes are the lowest, and that is definitely not in Germany. The East European members of the EU, and not least of all the Baltic countries, impose very low corporate taxes. Estonia even has a zero-tax rate on reinvested profits. In a EU of free mobility of capital, firms will come to Estonia bringing new technology, creating jobs, producing goods - all of which will raise income in Estonia (and profits of firms), but possibly reduce employment in Germany.
Rather than Estonian taxes being too low, might the problem not be taxes in Germany, which are too high? And what is the point of European integration if East European workers are not allowed to work in high-wage Germany and West European firms are not allowed to relocate to low-tax countries?
With free mobility of labor and capital there would still be lots and lots of jobs and firms in Germany. It is one of the most productive countries in the world, but it has been sliding recently. Whereas Germany was thought of as the country of the Wirtschaftswunder - the economic miracle - in the 1960s and 1970s, it is now more closely associated with Euro-sclerosis: high unemployment, little or no growth, a seriously inflexible labor market and an over-regulated economy.
The Baltic countries surely have their share of problems and are certainly worse off than Germany, but as high-growth areas their labor markets are quite flexible and they attract foreign firms.
It may sound paradoxical, but perhaps capitalist Germany should look east, to the former Soviet countries of the Baltics, to learn a thing or two about free market economics. o

Morten Hansen
is an economics lecturer
at EuroFaculty,
the University of Latvia
and the Stockholm
School of Economics in Riga.