There is much debate about European labour mobility. Many question that full mobility of labour is possible in a group of countries with high and low levels of their standard of living and, in particular, with high and low levels of social protection. However, labour mobility cannot be seen separate from the question of the employment rate in the country of origin and the country of destination. The question of whether someone will emigrate depends mainly on two factors: the gain in real income that can be expected (compared to the home country) and the probability of achieving that higher income (compared to the home country).

The crucial factors are therefore the situation of the labour market in the emigration and the immigration country and the differences in remuneration between the two countries. Schematically, it is about the difference between low-wage countries and high-wage countries as well as about differences in the rates of employment and unemployment.

Take the case of a country like Denmark that operates at nearly full employment and where the new immigrant labour is being rewarded exactly the same wage as everyone else (i.e. there is no country of origin principle, which has been seriously considered in Brussels for some time). Where is the problem in this case? After all, the non-national workers are eligible to high social protection standards. But these workers contribute to the national product, pay taxes and social contributions on their wages and have therefore the full right to social benefits, unemployment benefits, etc.

I seriously doubt whether so-called ‘social tourism’ (emigration in order to make use of better social welfare systems abroad) that is often being suspected is at all significant or will become so. In case there is low unemployment in a low-wage country and high unemployment in a high-wage country, it is not likely that mass migration towards the high-wage country will occur because generally people, even or perhaps especially if their living standards are low, prefer work and stability in their own country to the possibility of higher income but at a higher risk of being unemployed. The dynamic is of course different between a high-wage country with low levels of unemployment and poorer countries with high unemployment levels. Those with little or no prospects at home and a low standard of living will find it beneficial to emigrate. However, for the high-wage country with low unemployment it is easy to cope with immigration. Any well-functioning economy is capable of absorbing the immigration that is taking place within the EU. If this is not the case, other economic factors are in play.

To keep migration flows in Europe (both from within and abroad) within manageable limits, you need above all a sensible economic policy. This is easily said, but it is poorly understood. The most important rule in economic policy (within a monetary union) is without a doubt that it is tolerable to let smaller and poorer countries to quietly beggar their neighbours or engage in mercantilism for some time, but that the same behaviour must be absolutely forbidden to the largest and the richest country (i.e. Germany). If the richest country engages in mercantilism, which is exactly what we are experiencing nowadays (the largest and richest country also has the lowest unemployment rate), it not only attracts migration from within the EU but also from outside the union.

Even such levels of migration can be absorbed, not with a new mercantilism, but, again, with sensible economic policies. With this, I mean primarily monetary policy. In normal times, monetary policy will do. In times of stagnation or crisis, we need of course also fiscal policy, especially public investment. Even the often-touted problem of idiosyncratic shocks (so called by mainstream economists because it makes them sound intelligent), i.e. shocks that affect only one country or a group of countries, is of little real importance. At least, so far the European Monetary Union has not been hit by any such shock. On the contrary, the effects of external shocks have been similar to all the countries (at least the big ones).

Serious divergences in competitiveness are caused by real devaluations and revaluations as a result of incorrect policies with respect to the commonly agreed inflation target (primarily in Germany). One must not ignore the fact that without divergences in wages and prices, the development of other divergences, such as Hans-Werner Sinn’s famous difference in real interest rates between Germany and Spain, would also not have occurred.

In a monetary union where all countries respect the inflation target, there is little that can give rise to serious divergences and unsustainable foreign trade imbalances (i.e. the problem that arises because of the loss of competitiveness of countries). That countries with similar interest rates do not grow at the same tempo is not a problem and neither are the dynamics between high growth countries and low growth countries and the resulting current account balances between them. Whoever says otherwise, will have to show that countries with below-average growth rates need real devaluations, even if there are no unsustainable trade imbalances as a result of previous real appreciations. This would be a very difficult argument to make.

It is possible to look at the same question from another other angle and ask about the impacts that changes in currency exchange rates can produce. The answer is clear and unambiguous: changes in exchange rates can compensate for divergences in inflation so that prices of internationally traded goods, calculated in a single currency, remain equal. That this is the only impact that such changes can have is because currency exchange rates have been designed in such a way. From this it follows that, by a transition to a monetary union, it is precisely this function that ceases to exist within the economic system.

It is therefore absolutely imperative that all countries strictly adhere to the inflation target (and thus to the unit labour cost target) and from the first day of the monetary union onwards. In which way they achieve this goal (with which wage policy or level of state intervention) is unimportant. If they do not adhere to the target the monetary union is doomed to fail. This means that all the countries which, for whatever reason, did not follow the unit labour cost target and the inflation target are to blame for the failure of the monetary union. It is in this way, then, that all other problems in and between countries, including the problems of labour mobility, continue to exist. And then ways must be found to solve them as if there is no monetary union.