by Philip Whyte

When the EU expanded its membership in 2004, the UK was one of only three EU countries – Ireland and Sweden were the others – fully to open its borders to migrants from the ten new member states. The decision resulted in an unexpectedly large influx of migrants from central and eastern Europe. Ever since, the debate in the host countries has focused on the domestic impact of this wave of immigration. But it is time the debate moved on. For there is strong evidence that few of these migrants have any intention of settling permanently.

The host countries’ initial focus on migratory inflows is entirely understandable. When the EU enlarged its membership in 2004, the British government projected that the annual inflow of central and eastern Europeans to the UK would average between 5,000 and 13,000 through to 2010. It was being too modest. British statistics on migration are a mess, but most estimates suggest that official projections were out by a factor of twenty. Close to a million central and eastern Europeans are thought to have migrated to the UK since 2004.

The conservatism of the government’s initial projections was not unreasonable. By and large, Europeans are a sedentary bunch: they are disinclined to move within their own countries, let alone across national borders (with all the attendant difficulties of adapting to new languages and cultures). Previous enlargements – including the Iberian one in 1986 – had not provoked a dramatic increase in migration across national borders. So why expect the admission of the former Communist-bloc countries to produce different effects?

But the UK under-estimated the strength of the ‘push’ and ‘pull’ factors at play. Low income per heads, allied to housing shortages and high rates of joblessness (particularly among the young), encouraged many central and eastern Europeans of prime working age to seek their fortunes abroad. And by a happy coincidence, the EU countries that had thrown their borders open to them were enjoying buoyant economic growth and had numerous job vacancies to be filled. Migration was lubricated by low-cost airlines and Skype.

The scale of the influx did not go unnoticed in the host countries. Nor was it universally welcomed. Elements of the UK’s notoriously noisy press spoke of being ‘flooded’ and went out of their way to cast the new entrants as ‘benefit tourists’ – a scurrilous charge, given their exceptionally high rates of employment. Nevertheless, government policy was forced to adapt to this new context. When Bulgaria and Romania were admitted to the EU in 2007, the UK did not feel politically able fully to open its borders to nationals of these countries.

The irony, however, is that government policy has hardened at precisely the moment when the factors that drove migration to the UK in 2004-07 are going into reverse. The over-leveraged UK economy faces a nasty economic downturn and rising joblessness. Sterling has weakened markedly against most European currencies (reducing the relative wage that migrants earn in the UK). Meanwhile, unemployment in central and eastern Europe has been falling while incomes have risen. Against this backdrop, half of the 1 million central and eastern Europeans who came to the UK have returned to their home countries.

In other words, few migrants from the new member states have been escaping their home countries to settle in the wealthier EU member states. Instead, most have been using host countries as revolving doors through which they can enter and exit. Their aim is not to build a new life abroad, but a better one at home. The debate and policy response in the host countries needs to adjust to this reality – particularly as migratory flows will become more evenly distributed across the EU as restrictions on labour movement are gradually relaxed.

Philip Whyte is a senior research fellow at the Centre for European Reform.

by Simon Tilford

The British tend to deride France as a hopelessly statist, anti-entrepreneurial country full of bolshie workers intent on extracting disproportionate rewards for their labour and a state too weak to resist them. This characterisation is not wholly inaccurate. But the implicit (and sometimes explicit) assumption is that the UK is everything that France is not. This is not the case.

In some respects, Britain now looks worse than France. For all its faults, France produces good public services and decent social outcomes, such as relatively low levels of poverty and high overall skills levels. Britain, by contrast, now combines a very big state, patchy public services, generally poor social outcomes and increasing barriers to wealth creation. This is a poisonous mixture. The situation can be rescued, but not without breaking some eggs.

The figures are arresting. Britain has gone from having one of the smallest states in the EU to one of the largest. In 2000, public spending accounted for 37% of GDP in the UK, just three percentage points above the US and a full 15 percentage points below France. By 2010 the OECD estimates that state spending will account for 49% of GDP in Britain, against 53% in France (52% in famously high-spending Sweden). Britain has already overtaken Germany and the Netherlands (44% and 46% respectively).

This unprecedented expansion of the British state would be less of problem if the UK now had Scandinavian (or even French) levels of public services or first-rate physical infrastructure. But improvements in British public services over the last ten years have been nowhere near big enough to justify the increase in expenditure. Most of the money has gone on increased employment and wages, rather than improvements in services. Perhaps unsurprisingly, given the stranglehold that the unions have on the public sector, productivity has stagnated.

It is also notable that Britain’s welfare-state is not comparable to that of Germany or the Netherlands, let alone France or Sweden. Unlike in these countries, many of the ordinary Britons currently losing their jobs will receive only derisory sums in unemployment benefits because these are means-tested. And only a forensic scientist could spot significant improvements in the country’s physical infrastructure. Britain’s roads remain as congested as ever and its railways expensive and unreliable.

Of course, the tax burden in the UK is still lower than in France. In 2008, taxes accounted for 49% of GDP in France compared to just 42% in Britain. But the gap between tax and expenditure in Britain is completely unsustainable, given the parlous state of the country’s public finances. How it is closed will to a large extent determine Britain’s economic prospects. If the gap is bridged by cutting expenditure, the UK stands a chance of returning to a relatively strong growth path. But if it is closed primarily through increased taxes, Britain will have a bleak future. The tax burden will be among the highest in the OECD, but public services (and the country’s social outcomes) will be nowhere near good enough to justify the tax take. In short, Britain will have Scandinavian levels of taxation and American levels of public services and social welfare.

The Labour party is poorly placed to sort out this mess because of its close links to the public sector unions. Under Labour the public sector has become a privileged class that is impervious to change and reform. By way of illustration, public sector wages are currently rising by close to 4% a year at a time of economic crisis. And this despite the fact that public workers are on average better paid than their private sector counterparts and enjoy generous pension entitlements. What about the country’s physical infrastructure? On the government’s forecasts, public investment will halve over the next 4 years. In fact, the only significant cuts the government intends to make are to investment.

The Tories stand a better chance of taking on entrenched public sector vested interests, but it will be a battle. Moreover, they will need to avoid the mistakes of the 1980s when they reduced spending by cutting services and investment rather than by increasing public sector efficiency. If they do this again, UK taxes will remain very high relative to what those taxes deliver in terms of services.

Britain still has strengths, of course. It is straightforward to set up a business in the UK and the labour market remains flexible. But overall Britain looks increasingly like one of the sick men of Europe, and certainly as sick as France. The French state is an efficient provider of services and quasi-state institutions construct and manage first-rate physical infrastructure. France, unlike Britain, has bitten the bullet on public pensions, increasing the retirement age to 65. The French have no qualms about allowing private companies to provide healthcare. Even the Tories do not appear to have the stomach for dismantling the NHS’s near monopoly on the provision of public healthcare.

The British need to get over the idea that they took all the difficult decisions in the 1980s and that Britain is an example for others to follow. It has a huge state, yet has poor social outcomes. Much of its growth in recent years has been down to a turbo-charged financial services industry and an unsustainable expansion of the public sector. Both trends have now run their course and the public sector has become a dead weight on the economy. Britain needs to concentrate on improving the climate for wealth creation. This will require much better public sector productivity and high levels of investment in human capital and physical infrastructure.

Simon Tilford is chief economist at the Centre for European Reform.