Ifo Viewpoint No. 53: Directive on Free Movement: Free Ticket to the Welfare State

Hans-Werner Sinn
Munich, 8 July 2004

Just in time for the Constitutional Summit in June and for EU accession of the Eastern European countries, the new EU Directive on Freedom of Movement, which had been passed by the European Parliament on 10 March 2004, became effective on 29 April 2004. It will have to be translated into national law within a period of two years. The directive will facilitate and make uniform the migration of non-working EU citizens between the countries of the Community, and it anticipates and makes concrete the rights proposed in Article II-34 of the draft constitution for immigration into the welfare state.

Heretofore, only employed and self-employed EU citizens had the right to reside freely in other EU countries and be included in their welfare systems. This will change now. According to the Directive, every EU citizen will have the right to a residence permit for up to five years in any Member State and thereafter he will receive the right to permanent residence. Even inactive immigrants will, in principle, be eligible for social welfare, just like nationals, although there are safeguards to limit the abuse of the system during the first five years.

The only safeguard that the new directive contains against the direct immigration into the welfare state is proof of health insurance protection and the requirement of “resources” that must be shown when a residence permit is requested. These resources are calculated to last for the intended duration of the stay. They are to prevent the immigrant from claiming welfare assistance.

It is not at all clear what exactly is meant by resources. According to the preamble, the state cannot cite insufficient assets as a reason for refusing a residence permit. This would be inadmissible discrimination. The resource requirement must be tailored to the individual circumstances of the immigrant.

Whatever the required resources may be: Those concerned will find ways to prove them. One can already imagine how fast the required funds will circulate between the accounts of some immigrant groups.

The welfare state must make its services available if the immigrant loses his funds after having entered and received a residence permit. Only “unreasonable” claims can be refused, and the state bears the responsibility for proving unreasonableness. The duration of the residence permit may not be shortened because the immigrant becomes needy during his stay and claims welfare assistance. Once in, he is in. The welfare state cannot easily get rid of him.

Moreover, there are no safeguards against welfare claims after five years of residence. When the waiting period is over, the migrant has the right of permanent residence even if he has no health insurance and no resources to live on. He will then be fully eligible for welfare payments.

The incentives to make use of the new freedom of movement will be enormous for Eastern Europeans. Today the Slovak wage rate is one seventh of the German rate and a fifth of west German social assistance for a family of four. This will not change very quickly. Even if the wage convergence of Eastern Europe, at 2% per year, is twice as fast in the future as it was in Western Europe, the Slovak wage will reach only 40% of the west German wage by 2020.

Some countries like Germany or Austria have opted for a prohibition of labour migration during a transition period that is initially set at two years and may be extended up to 2010. However, this prohibition does not apply to self-employed and non-working persons. Germany, which in the past has absorbed two thirds of all East Europeans entering the EU, will in all likelihood be the primary target of the welfare migration that the new EU directive will trigger in two years’ time. Just as the Berlin taxi market is currently being taken over by small Polish enterpreneurs, Germany must prepare itself for poverty immigration from the far ends of Poland and the Slovak Republic.

This is truly grotesque. Immigration of working people is made more difficult in Germany, and immigration of non-working people is facilitated. Two more reasons for German companies to leave and relocate in Eastern Europe or elsewhere. The marginal groups of Slovak society will now be able to come to Germany, and the German automobile industry will relocate an increasing part of its production capacity to Bratislava. No wonder that the Slovak Republic fares well with a corporate tax rate of only 19%, while Mr. Eichel has sleepless nights despite his high tax rates.

The consequence of immigration into the West European welfare states will be an erosion of these states themselves. The states will reduce their services in a competition of deterrence, because none of them wants to become a destination for welfare migrants. There will be one cut of welfare benefits after another, and in the end Europe's social welfare will resemble that of the United States.

This outcome can still be averted, but toward this end another constitution would have to be agreed, one that would grant the right to free movement within the EU but not the right to immigrate into the welfare state. The home country would have to remain responsible for the welfare services to non-working immigrants. Maybe there will be a new chance for Europe after the British referendum.

Hans-Werner Sinn
Professor of Economics and Public Finance
President of the Ifo Institute

Published under the title "Freifahrt in den Sozialstaat", Süddeutsche Zeitung, 25th May 2004, p. 20.