What does immigration mean for European welfare states?

The armed conflict destabilizing some Arab countries has unleashed a huge wave of refugees headed for Europe. About 1.1 million came to Germany alone in 2015. At the same time, the adoption of the principle of freedom of movement within Europe has triggered massive, but largely unnoticed, intra-European migration flows. In 2014, Germany experienced an unprecedented net inflow of 304,000 people from other EU countries, and the number was probably similar in 2015.

Some EU members, including Austria, Hungary, Slovenia, Spain, France, and the initially welcoming Denmark and Sweden, have reacted by practically suspending the Schengen Agreement and reinstating border controls. Economists are not really surprised at this. In the 1990s, dozens of academic papers addressed the issue of migration into welfare states, discussing many of the problems that are now becoming apparent. I myself wrote much on the subject at the time, trying – mostly in vain – to raise awareness among policymakers.

A fundamental issue is at stake. Welfare states are defined by the principle that those who enjoy above-average income pay more taxes and contributions than what they get back in the form of public services, while those with below-average earnings pay less than they receive. This redistribution, channeling net public resources toward lower-income households, is a sensible correction to the market economy, a kind of insurance against life’s vicissitudes and the rigors of scarcity pricing that characterize the market economy and have little to do with equitableness.

Welfare states are fundamentally incompatible with the free movement of people between countries if the newcomers have immediate and full access to public benefits in their host countries. In such cases, countries can act as welfare magnets, attracting many more migrants than would be economically advisable, because the newcomers receive, in addition to their wages, a migration grant in the form of public transfers. Only if migrants received only wages could efficient self-regulation in migration be expected.

British Prime Minister David Cameron drew the right conclusion from this: Welfare magnetism not only leads to an inefficient geographical distribution of people; it also erodes and damages the magnet. That’s why Cameron is demanding a limitation of the inclusion principle, even for intra-European economic migrants. Even if they find a job, says Cameron, migrants should get access to tax-financed welfare benefits only after four years. As it stands, a substantial waiting period is in force only for non-working EU migrants, who must be resident in the United Kingdom for five years to gain full access to public benefits.

The proposal does not necessarily imply hardship for EU migrants; it simply means that any support they may require over the four-year period is to be financed by their home country. There is indeed much to be said for frontloading the home-country principle in EU rules: a migrant’s country of origin should continue to be responsible for providing social benefits for a certain number of years, until the inclusion principle is applied.

It is difficult to see why, for example, a German welfare recipient who is unfit for work should be supported by the Spanish state if he decides to live in Mallorca. It would be equally implausible to deny this person the right to choose his place of abode just to protect the Spanish state. If we are to take the free movement of people seriously, we should slaughter the sacred cow of immediate eligibility for host-state benefits.

This of course does not apply to economic migrants from non-EU countries, and even less to refugees. The home-country principle would usually be impossible to apply in these cases. But, for the same reasons outlined above, these migrants cannot be integrated by the hundreds of thousands into the welfare state without jeopardizing the system’s viability.

Therefore, the currently prevailing wage-replacement benefit system, which is applied when recipients do not work, should be replaced with a system offering wage supplements and community work. This would lower the benefits’ net costs and weaken incentives to migrate. Andrea Nahles, Germany’s labor minister, recently suggested as much, defending what Germans call the one-euro-jobs concept, which basically converts welfare into a wage.

That is sound advice in an otherwise chaotic state of affairs. If freedom of movement within Europe is to be maintained – and if high inflows of non-EU citizens continue – European welfare states face a stark choice: adjust or collapse.