Across the European Union, fears about globalization and antipathy to integration and immigration have produced massive political fallout, including the failed French and Dutch referenda on the Union’s draft constitutional treaty and a de facto moratorium on accession talks with Turkey. The European Council and the Commission have watched helplessly, as if the matter was not in their hands.
Conventional wisdom suggests that the EU’s inability to meet the challenges of integration is due to rigid economic structures and inadequate human capital – weaknesses that can only be tackled effectively by national policies, where the Union has little role to play. But substantial policy spillover across the EU justifies strengthened policy coordination for labor-market and welfare reform.
Outdated labor-market rules are the key reason why the full benefits of the internal market and monetary union have failed to materialize. Labor-market rigidities – above all in France, Germany, and Italy – impede adjustment to the increased competition of integrating markets. Those who lose their jobs cannot find new ones because of barriers to entry, while high long-term unemployment makes those who do have jobs feel threatened. Viewing immigrants and internal market integration with alarm, both groups thus have increasingly turned against Europe.
If they cannot reform, France or Italy eventually may be tempted to renege on free movement of goods, services and labor – and perhaps even abandon the euro – with disruptive consequences for all members. Therefore, there is a common interest in fostering national policies that are consistent with integration in the internal market.