10 May 2024

CER's Springford: Europe must choose: Multiculturalism or stagnation?

The radical right is likely to make big gains in the European Parliament next month, with the ‘great replacement’ theory becoming increasingly influential. The theory holds that liberal elites are promoting immigration from outside Europe to undermine ethnic and cultural homogeneity. Many politicians on the centre-right have chosen to accept the premise of this civilisational rhetoric, rather than confront it. Ursula von der Leyen made the Commission’s migration post ‘the Vice-President for Promoting the European Way of Life’. In France, the leaders of the centre-right Républicains party decry mass immigration and the “submersion” of France. Germany’s Christian Democrats said “all those who want to live here must recognise our dominant culture without any ifs or buts” in their draft manifesto, published last December. Meanwhile, Britain’s Conservatives are detaining asylum-seekers in the hope of deporting them to Rwanda.

The practical problem with this lurch to the nativist right is that Europe is ageing rapidly, and fewer immigrant taxpayers mean higher taxes on workers, to pay for pensions, healthcare and other public services for the elderly. That is well known, but what is less understood is the limited extent to which free movement of people within Europe and higher employment rates will help alleviate the scarcity of labour. 

Free movement has largely been a win-win for Europeans. Sending countries have lost workers, but expats have received big rises in income from working in other countries, with many sending home remittances that substantially raise spending in their home country. Wages and tax revenues in Central and Eastern Europe have risen rapidly, in large part because of the single market, despite workers leaving. Receiving countries in Northwestern Europe have benefited from higher employment and larger tax bases, raising services output and helping to pay for pensions. The loss of workers has been controversial in Central and Eastern Europe, and in his recent report on the single market former Italian prime minister Enrico Letta argued for reforms to promote “the freedom to stay”. But that appears to be happening without policy change: the rise in numbers taking advantage of free movement has slowed – in part because of the convergence in living standards. Employers are increasingly looking to workers from outside Europe to fill vacancies. The choice between ethnic homogeneity and prosperity is set to become more acute over the next decade.

Chart 1 shows the increase in employment of EU nationals from another member-state has slowed markedly since 2016, with only a small rise of 200,000 since 2019. The difference in wages between newer and older member-states has fallen substantially, and is likely to fall further in the future, if forecasts of relatively fast growth in Central and Eastern Europe are right. This has reduced incentives for Europeans to move. So have the EU’s improved macroeconomic policies: high unemployment during the euro crisis led many Southern Europeans to leave for jobs elsewhere. No central bank can control the economic cycle, but the self-defeating policies of the European Central Bank in the 2010-2012 period are unlikely to be repeated. By raising interest rates in 2010 and 2011, and then refusing to stand behind government debt, the bank raised unemployment, triggering deflationary pressures, and failed to meet its inflation target. Ukraine joining the EU could give migration within Europe a boost, but the war must be won first, and accession before 2030 is unlikely.

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