The Battle of (Great) Britain
Fear of Decline, Migration and Sovereignty

„We decide on something, leave it lying around, and wait and see what happens. If no one kicks up a fuss, because most people don’t understand what has been decided, we continue step by step until there is no turning back.“ (Jean-Claude Juncker, 1999)

Now they have really done it. On the 23 June 2016 the British decided to turn their backs on the EU. They were always an important part of Europe, but they kept their distance from the EU. They arrived later and now leave earlier. As a nation of “shopkeepers“ they welcomed free trade, and had nothing against the free movement of capital. However, they had anxiety when it came to the free movement of persons. This was not always the case. After the eastward enlargement the UK did not make use of the transition period. They immediately opened the labor markets. Only in recent times has the fear of being overwhelmed by immigrants grown. The reason was the massive immigration from within and outside of the EU. The process of the “deepening“ of the EU was met with undisguised skepticism by the British since the start of their membership. They were againstny loss of national sovereignty. Membership contributions to the EU were a daily reminder that others were spending their money. To them, a political union has always been an abomination, and all the steps in this direction were suspect. And the EU, driven by the Commission, took many such steps. Britain therefore also kept its distance from the EMU, Schengen, or the Social Charter.

The Long Shadow of Globalization

The British have decided upon the Brexit for at least three reasons. One is the fear of decline due to accelerated deindustrialization. For over a quarter century, the world has been noticeably changing economically. More open markets and technological progress make the world “flatter“. The European internal market has reinforced this development. Structural change was accelerated, sectors and regions were turned upside down, and qualifications were revalued. The industrial sector is on the losing side. This situation affects the Midlands more strongly than other UK regions. Once flourishing industrialized regions are becoming economically desolate. Industrial workers are unemployed. Unskilled labor for men in particular is dying out. It seems that in times of globalization, their wages are less strongly determined in London than in Peking (Richard Freeman). The winners of this change are services, both economic and personal. “Greater London“ is one of the regions that benefit from it. There, well-paid jobs are emerging which produce economic (financial) services. However, even unskilled labor wins if it specializes in personal services.

Voters in losing-regions are not on good terms with current policy. This is true all around the world, and in the UK as well. However, the workers who can only offer unskilled labor do not themselves have a majority in elections. If the thesis of polarization is true, low-skilled manufactory workers must admittedly lose. On the other hand, similarly low-skilled workers in the personal services sector are better off than before. A political majority will first be achieved by the malcontents only when large sections of the middle class solidarize with them. And this occurs more and more often. At least the lower middle class, and increasingly prosperous parts of the middle class, have for some time now been living in the fear that they and their children could descend socially. In fact, in England it was particularly in the industrialized regions, which have long acted as an economic lubricant, that a majority voted for the Brexit. Why these voters turned against the EU cannot, however, be explained solely by deindustrialization. Ultimately, globalization and technological progress are a global rather than a European phenomenon. With the “internal market“ the EU has at best strengthened this inevitable development.

The “Polish“ Plumber

British voters have, however, not given top priority to addressing the fear of decline due to deindustrialization. This is shown by surveys conducted after the referendum. Much higher up on the agenda for a Brexit was immigration. Since the late 90s, the net immigration to the UK has increased by leaps and bounds (here). However, up until the mid-2000s it was just the number of immigrants from non-EU countries that was rising. Only after the eastward enlargement did increasing numbers of citizens from EU countries immigrate to the island. At present the two groups are almost equal in size. In 2015 a net total of approximately 360,000 immigrated to the UK. 48% of the current immigrants from EU countries come from the “old“ EU countries. Their share has risen sharply since early 2013. At this time, 27% emigrate from countries of the first (2004) eastward enlargement (“Polish Plumber“), 24% from the second (2007). Since early 2012, however, the emigration from Bulgaria and Romania has disproportionally increased. Empirical studies show that since the 2000s the “migration fear“ in the UK has been steadily increasing (here).In France and Germany it first rose only very recently.

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The fears arising from massive immigration are not new. On the one hand it is believed that the increased supply of labor puts pressure on the wages for unskilled labor. That is certainly true. However, it applies more strongly to the first generation of immigrants than to the natives. They see themselves as being in intense competition with the second generation. If less qualified natives move up the qualification ladder due to pressure from immigrants, the lower parts of the middle class may run into trouble. Meanwhile, the criticism is made that foreigners do not immigrate into the labor markets, but rather into the welfare state. EU citizens can do this via free movement of persons. This development is heavily criticized on the island. The EU’s agreement with David Cameron prior to the referendum stipulated that the UK should be allowed, at least for some period of time, to suspend the immigration of EU foreigners into the British welfare state. However, immigrants do not only come to enjoy social benefits by way of the free movement of persons. Non-EU foreigners also immigrate into the welfare state. Here, however, the EU carries none of the blame.

Loss of National Sovereignty

But the most important point seems to have been another one. Almost half of the respondents who voted in favor of the Brexit feared a further loss of national sovereignty. The long-simmering discontent of the British with the EU has at least two causes. First, they accuse the EU institutions of a lack of democracy. The Brexiteers have campaigned with the slogan: “No more tax and regulatory harmonization without representation“. The accusation of lack of democracy is only partially justified. The European Parliament is democratically legitimized. The same applies to the European Council. Only the democratic election of the European Commission rests on shaky foundations. But on the other hand, there is also the further allegation that the Commission is promoting the wrong integration strategy in Europe. Here, the belief is that far too much is being lumped together. This objection is justified. Growing prosperity and a constant flow of new members have led to preferences becoming more heterogeneous. This applies to both countries and regions. It is a gross error to respond to more heterogeneity with centralization. What is needed is not centralized unity, but rather diversity in practice (here).

The EU wanted nothing to do with that.  It never seriously considered more clearly distributing the competencies vertically. The principle of subsidiarity was, admittedly, invoked in soapbox oratory. It was, like so much in Brussels, no more than empty rhetoric. It always lacked concrete content. This development was convenient for the EU Commission, the guardian of the treaties. It allowed the Commission to strengthen its position. The member countries didn’t apply any pressure, quite the contrary. For them, the European Commission was often a welcome scapegoat. Unpleasantness which they didn’t want to tackle at a national level they transferred to Brussels. The result is a powerful Commission. Its strategy of integration was a centralized one, and it focused on broadening and deepening. The principle of subsidiarity was turned upside down. The reality became more heterogeneous, the integration more centralized. Nowhere were competencies transferred back. Everywhere, there was only one direction: more Europe, more centralization (here). This development was favored by less and less members of the EU. The British were the first to consistently decide against this direction of integration. They want out. Others will follow.

The Dilemma of Globalization

The majority of Britons suffer from the long shadow of globalization, unbridled immigration from the EU, and the loss of national sovereignty to a non-democratically elected European Commission. That is why they voted for the Brexit. Can they alleviate this suffering by leaving the EU? The process of deindustrialization is driven by globalization and technological progress. It is more advanced in the UK than in similarly developed countries. This has produced many industrial losers: at first mainly unskilled labor, but later skilled labor as well. The positive side of the structural change is the considerable gains made by an expanding service sector. There is, however, a bias in favor of economic services. Personal services expanded less. The losses of unskilled manufactory workers could thus far not be compensated. The winner is mainly (highly) skilled labor. No wonder that the distribution of income has become more unequal. However, the UK has an advantage: it has almost completed the inevitable sectoral structural change. Other EU countries, such as Germany (here), must still deal with it.

Because the worst is over for Britain structurally, it would like to see the internationally tradeable (financial) services sector continue to expand. However, this requires open goods and factor markets throughout Europe and worldwide. Trade in services, though, has a special feature: many services are closely linked to people. It is not enough to keep only the markets open. High mobility of (qualified) labor is also necessary. The British face a dilemma. They will attempt to reach an agreement with the rest of the EU on the most open goods and services markets possible. However, the gains from trade in services arise only when labor is mobile across national boundaries. Therefore, an EEA solution of the Norwegian or Swiss variant would be economically rational for the UK (here). Then, however, the British would not have gained anything. They would have to accept (all) of the rules of the internal market, must continue to pay membership contributions, but would no longer have a say in defining the rules of the EU internal market. This would put the UK in a worse position than before the Brexit.

Migration can be designed

The referendum has shown that a majority of Britons are afraid of immigration. In this, they are not alone in the EU. The rise of left- and right-wing populist parties attests eloquently to this. The voters indeed differentiate themselves. They have little problem with the immigration of skilled labor. This is probably because these workers either close the gaps in the national labor supply or compliment nationally supplied labor (here). Criticism always runs high when less skilled labor immigrates. This can put pressure on the domestic labor conditions (wages, employment). But it is also possible that the migration does not take place in the labor markets, but in the welfare state. Particularly this second aspect has stirred emotions in the UK. There it was not about the streams of refugees, which led to resistance in the other EU countries. Britain is not a member of the Schengen area. The criticism was directed primarily at the free movement of persons in the EU. It was thus under fire because foreign EU nationals could also assert claims to the British welfare state.

In the “Brexit avoidance negotiations“ led by David Cameron and the European Commission, a solution to this problem was found. The concession would be granted to the UK that the British welfare state only be required to provide services to immigrants after they had been in the country for a certain time. Welfare state immigration is not a specifically British problem. It affects many EU countries, including Germany. Following a ruling by the ECJ, Andrea Nahles has also considered reforming the unemployment benefits for EU nationals. What is needed is a solution for the entire EU. As early as the mid-50s Herbert Giersch, the great economist who dominated the policy debate in Germany before Hans-Werner Sinn, had already put forth a proposal. He argued for the home country principle. Payments should not be determined and financed by the host country, but by the home country. The incentives to immigrate to richer countries would remain intact if individuals immigrate into the labor markets of the host countries. They would strongly decrease if no jobs were added. In such a solution, migration into the welfare state would not need to be formally restricted. It would have been worthwhile for the UK and the EU to take on this difficult project in the EU.

Bureaucrats are ubiquitous

For a long time, the British have more vehemently criticized the loss of national sovereignty than others. This is understandable. More than 80% of the laws and regulations are no longer national. These decisions are made by a non-democratically elected European Commission in Brussels and the ECJ. National governments are left with little to say. They must push their own ideas through the bottleneck of EU conformity. There is not much variety remaining. The British run up against this barrier. And they are not alone in this. Where the contracts of the Commission deny its right to decide, for example in employment policy, it does not concede defeat. It uses the “open method of coordination“ to camouflage itself as it acts centrally. The idea of learning from the best is pushed to absurdity. And the EU Commission uses every opportunity to pull in more tasks. This gravitational pull does not just apply to centralized budgets. Central bureaucracies also work like a magnet. Here, the European Commission often turns the principle of subsidiarity on its head. Two examples: agricultural policy is more centralized, and a common defense policy still does not exist.

The British criticism of this combination of exuberant bureaucracy and preference flouting centralization is absolutely correct. In this area, the advocates of the Brexit have stuck their finger into a gaping wound. Debureaucratization and decentralization are powerful engines of economic growth. The question remains, however, whether a UK outside of the EU will manage to heal from the two European diseases of bureaucracy and centralization (here). Unfortunately, there is much evidence that bureaucracies are like weeds. Pull them out at one location and they grow all the more strongly at another. The national bureaucracy replaces the European one. The situation now depends on whether the government on the Thames can parlay the Brexit into debureaucratization. And there is still more food for thought. The government at 10 Downing Street has thus far clearly failed to install anything like competitive federalism in the UK. The desire for secession is widespread in Scotland, after the Brexit more so than ever before (here). The acid test for less national bureaucracy and more regional sovereignty after the Brexit is still pending.

Conclusion

The majority of Britons are plagued by fear of social decline through deindustrialization, mass immigration to England, and the noticeable loss of national sovereignty. They hold the EU responsible for all of this. Therefore, they want out. Deindustrialization is driven by globalization and technological progress. It is foolhardy to hold the EU accountable for this. The free movement of persons is not the real issue of immigration; rather it is the migration into the welfare state. The EU has thus far been unable to solve this problem. The loss of national sovereignty is part of the DNA of European integration. The strategy of centralized integration has screwed up the EU. Whether Britain is better off via the Brexit is, however, questionable. For the path into the service sector, the British require the European internal market along with free movement of persons. The problem of immigration into the welfare state affects everyone. It must be resolved quickly by the EU one way or another. Populist parties will force the EU to change its strategy of integration. The direction is clear: more Europe à la carte. It would be better if Britain stays in the EU.

Hinweis: Dieser Beitrag ist die englische Version von „Die Schlacht um Großbritannien. Abstiegsängste, Migration und Souveränität.“ der am 13. Juli 2016 in „Wirtschaftliche Freiheit“ erschienen ist. Er wurde von Michael Labate übersetzt. Herzlichen Dank!