Migrant tax would slash illegal entry into Europe

It is time that Europe’s politicians admitted to voters that governments cannot stop people moving across borders. Despite efforts to build a Fortress Europe, more than a million foreigners bypass its defences each year: some enter covertly; most overstay their visas and work illicitly. While draconian policies do curb migration somewhat, they mostly drive it underground.

That creates huge costs: a humanitarian crisis, with thousands drowning each year trying to reach Europe and thousands more detained; the soaring expense of border controls and bureaucracy; a criminalised people-smuggling industry; an expanding shadow economy, where illegal migrants are vulnerable to exploitation, labour laws are broken and taxes go unpaid; mistrust of politicians who cannot fulfil promises to halt immigration; corroded perceptions of immigrants as law-breakers rather than enterprising people; and the mistreatment of refugees to deter people who want to work from applying for asylum, besmirching our commitment to help those fleeing terror.

These problems are blamed on immigrants, but they are actually due to our immigration controls. Far from protecting society, they undermine law and order, just as Prohibition did more damage to America than drinking ever has. Pragmatic governments ought to legalise and regulate migration instead.

All the more so, since immigrants are not an invading army, but mostly people seeking a better life who are drawn to Europe by the huge demand for workers for low-end jobs which our increasingly well-educated and comfortable citizens do not want. The only way to reconcile aspirations to opportunity for all with the reality of drudgery for some is via immigration.

Migration’s benefits are akin to trade’s. Filipino care workers, Congolese cleaners and Brazilian bar staff are simply service providers who ply their trade abroad – and just as it is often cheaper and mutually beneficial to buy IT services from India, it often makes sense to import menial services that are delivered on the spot.

Moreover, because newcomers are more willing to move to where the jobs are, and to shift jobs as conditions change, they make the economy more flexible and boost growth as Britain’s recent experience shows. And just as women entering the workforce did not cost men jobs, nor do immigrants: they create jobs as they spend wages. Far from competing with native workers, immigrants often complement them. A foreign child minder may enable a doctor to return to work, where hard-working foreign nurses and cleaners enhance her productivity.

Immigrants’ diversity boosts innovation because foreigners with different perspectives and greater drive can help solve problems better. Consider Silicon Valley: Intel, Google and Ebay were all co-founded by immigrants. As China catches up, Europe must open up to foreigners to stay ahead.

Those who claim that tougher measures could stop immigration are delusive. Even if Europe became a police state, its borders would be permeable. Even if the EU built a wall along its vast eastern border, deployed an armada to patrol its southern shores, searched every arriving vehicle and vessel, denied people from developing countries visas, migrants would get through: documents can be forged, people smuggled, officials bribed.

If open borders are politically unacceptable, Europe should create a legal route for people from developing nations to come and work, regulated through an extra payroll tax on foreign workers. This would be transparent and flexible, raise revenue that would highlight migrants’ contribution to society, and give companies an ­incentive to hire, or train, domestic staff.

Even if set relatively high, it would undercut people smugglers and slash illegal immigration. Who would risk death, exploitation or deportation if they could come to work within the law by paying an extra tax? And if foreigners could come and go freely, many would stay only temporarily, since most do not want to leave home for ever. Over time, the tax could be gradually lowered – or raised again if migration led to unexpected problems.

Politicians should have the courage to stop fighting an unwinnable war. Treating immigration as an opportunity, not a threat, would enhance its benefits and mitigate its costs. ­London’s cosmopolitan dynamism shows how a more open Europe could thrive.

The socialist who can breathe life into free trade

From September 1st, the shaky prospects for freer world trade will rest on the shoulders of a French socialist. With the World Trade Organisation's Doha round deadlocked and little time left to reach agreement, the new man in charge of the WTO, Pascal Lamy, faces a daunting challenge. Unless the former European Union trade commissioner can help break the deadlock and hammer out the outlines of a deal before trade ministers meet in Hong Kong in December, hopes for a successful outcome to the Doha round will fade. That would be a disaster for the world economy and for export-reliant developing countries in particular.

The omens are not good. The potential gains to poor countries from freer world trade dwarf those from debt relief and increased aid. But at the Group of Eight summit in Gleneagles in July, when public pressure for progress in "making poverty history" was intense, the leaders could not even bring themselves to set a date for eliminating rich countries' agricultural export subsidies, a relatively minor but pernicious weapon in the protectionist armoury. If farming lobbies are powerful enough to outgun the Live8 campaign under the global media spotlight and refuse to make even token concessions towards helping the world's poor, the chances of them giving up their subsidies at the WTO look slim.

Talks on freeing up farm trade have reached an impasse. The end-of-July deadline ministers set last year for reaching the outlines of a deal has been missed. The Group of 20 agriculture-exporting developing countries is demanding big cuts in rich-country subsidies and tariffs, but the EU and the US are stalling by quibbling over details. Developing countries are refusing to agree to big cuts in tariffs on industrial goods. Offers to open up to international competition markets for services remain paltry. The lack of progress is partly due to posturing and brinkmanship. But time is running out. Unless Mr Lamy can work some magic when negotiators return later this month, Hong Kong will be a rerun of the Cancún fiasco two years ago.

Optimists argue that President George W. Bush's success in convincing a recalcitrant Congress to approve the Central American Free Trade Agreement (Cafta) augurs well for the WTO talks. They say it demonstrates the Bush administration's commitment to freeing trade, its willingness to face down powerful protectionist lobbies for the greater good and its ability to win over a sceptical Congress.

Perhaps. More likely, Cafta highlights the limits of what the administration can hope to achieve. The prospect of being cut out of export markets such as the Dominican Republic and Nicaragua, to which Cafta will give the US preferential access, is hardly likely to strike fear in Brussels and force the EU's hand at the WTO. And even though the Cafta countries are so small that they pose little threat to American farmers and manufacturers, the Cafta deal scraped through the House of Representatives by only two votes. What chance is there that the administration will seek an ambitious Doha agreement that would increase competition from China? What hope is there that Congress would approve such a deal? And if not now, when? Mr Bush's fast-track authority, which allows him to negotiate trade deals that Congress must approve or reject unamended, expires in 2007 and is unlikely to be renewed.

Weak and unpopular leaders in America and Europe are ill-placed to face down protectionist lobbies and persuade anxious voters to embrace freer trade. Americans are worried about their ballooning trade deficit, with China in particular. They prefer to blame the deficit on foreign foul play rather than on their own weaknesses, not least the urge to splurge on all things foreign. Many Europeans fear that globalisation threatens their comfortable way of life. They have lost confidence in political elites, who appear to have no answers to high un employment and feeble growth, but are not convinced that economic reform can be married with security and social justice. If the Doha round is to succeed, it will take more than a mercantilist bargain between the likes of Brazilian farmers, Chinese manufacturers, European insurers and American retailers. Political leaders also have to persuade voters that globalisation is an opportunity not a threat, that booming China's cheap exports are a boon and that free trade is not a race to the bottom but a ladder up for all.

Mr Lamy should lead by example. Although he has few formal powers, this longtime friend of French farmers can disprove the doubters and become a forceful advocate of freer trade.

No-voters score own goal against Europe

Tony Blair must be thanking his lucky stars. The British prime minister never wanted to fight a referendum campaign on the European Union constitutional treaty that he stood a good chance of losing. Now, thanks to the No votes in France and the Netherlands, it looks like he will be spared the ordeal. When, in April 2004, he caved in to demands for a referendum, it looked like a gamble that would take Europe off the agenda in this year's election but potentially destroy his premiership shortly thereafter. Now it looks like a stroke of genius. But even so, Mr Blair, and more importantly Britain, will not escape unscathed from the aftermath of the No votes.

For a start, the constitutional treaty was a triumph of British diplomacy. It put paid to dreams of a federal European superstate, making clear that the EU was and would remain a union of independent nation states that chose to co-operate to varying degrees in different areas where it suited them. It anchored Britain, if not at the heart, at least in the mainstream of European politics, with its relative importance, economic success and defence capabilities offsetting the loss of influence from its non-membership of the euro and its lukewarm attitude towards closer European integration. It made possible greater co-operation in defence and foreign affairs without undermining Nato or circumscribing Britain's ability to pursue its own policies where the EU could not agree a common position. It made big steps towards common EU policies on immigration and asylum but left Britain the right to opt in or out of them. It opened the door to the further enlargement of the EU, thereby spreading stability and prosperity east and south and diluting French and German influence over the EU's direction. It contained significant reforms to make the EU more effective, notably the appointment of a permanent president of the European Council to drive forward the agenda of national governments rather than that of the European Commission. And it would have made the EU more democratic, by giving national parliaments more say over EU legislation and creating a citizens' initiative right.

Britain is likely to suffer from the ensuing crisis in the EU. Jacques Chirac, France's president, has interpreted the French No vote not as a rejection of his stale and bankrupt leadership but as a protest against what is seen as the threat to France's social and economic model from globalisation and the liberalising forces in the EU. And while France may no longer lead in Europe as it once did, it can usually marshal a coalition to block reform.

In March, Mr Chirac had already blocked the EU's proposed services directive, which would finally create a single market in services which account for 70 per cent of the EU economy and boost jobs and growth. Hopes that it might be revived soon have almost certainly been dashed. This is a particular blow for British business, whose advantage in media, law, accountancy and banking meant it had much to gain from liberalisation. Britain will also suffer from the likely stalling of economic reform in France, Germany and elsewhere, which will make the European Central Bank even more reluctant to cut euro interest rates: both will cramp economic growth in the EU, which accounts for over half Britain's exports.

The French No will also make the forthcoming EU budget negotiations even more acrimonious. Britain will come under immense pressure to give up its budget rebate, which will put it at loggerheads with the other 24 members of the EU. At the same time, France's opposition to reforming the Common Agricultural Policy, an important British objective, will harden. And if France and others refuse to agree to CAP reform, prospects for the Doha round of negotiations at the World Trade Organisation look bleak.

Indeed, protectionist pressures in Europe are already rising. Peter Mandelson, the EU's trade commissioner has been forced to threaten restrictions on Chinese textile imports under pressure from Paris.

The French No vote will lead to a prolonged period of stagnation and bitterness that will harm Britain's interests in Europe. It also deprives Mr Blair of the chance of lancing the boil of British euroscepticism. An effective, broad-based Yes campaign could have won a referendum next year, securing Britain's position in Europe and adding to Mr Blair's legacy. The battle not fought may indeed have saved Mr Blair from a humiliating defeat. It has also deprived him of a crowning triumph.

The high cost of resisting the Euro

The government must soon decide. It has pledged to deliver its verdict within six months. As judgment day nears, a consensus is forming. Not yet, the Treasury will opine. Naysayers marshal a battery of arguments. The euro economy is floundering. It can only aspire to Britain's superior monetary and fiscal arrangements. Why jeopardise the UK's hard-won economic success by hitching ourselves to such a dodgy venture?

Not so fast. The euro economy is not a basket case. The denizens of Westminster and Fleet Street who are so quick to write it off should venture out and see. German trains run on time. The French can pop in to casualty to see a doctor after work - and still be home in time for dinner. New penthouses overlook the BMWs that fill Dublin's streets. Most Britons would love to live in such a disaster zone. Statistics confirm this favourable impression. Eight of the 12 eurozone countries are richer than Britain. Five have faster economic growth. Living standards have risen faster in the eurozone (2.2 per cent a year) than in Britain (2.1 per cent) and the US (0.9 per cent) since the euro was launched.

Anti-Europeans are particularly dismissive about Germany. They date its decline to its decision to swap the D-Mark for the euro. Undeniably, Germany faces serious difficulties. Its labour and product markets require radical reform. The costs of unification still weigh heavily. But the pessimism is overdone.

Even after averaging the much richer west of the country with the ex-communist east, Germany's gross domestic product per person is 6 per cent higher than Britain's. German workers are 29 per cent more productive than their British counterparts. And the gap is widening. Whereas labour productivity in Britain has risen by 19.8 per cent since 1992, it has soared by 29.2 per cent in Germany.

Anti-Europeans claim that if Britain joined the euro it would import Germany's weaknesses - though, oddly, not its strengths. But places that share a currency do not become identical. The North East and South East of England share a currency but not a growth or unemployment rate.

For sure, German economic growth has disappointed over the past year. But although domestic demand is weak, exports are faring well. Against the backdrop of a sputtering global economy and falling world trade, German exports rose by 10.9 per cent in the year to September. Clearly, foreigners still prize German products - and the undervalued euro has helped price them into new markets.

Arguably, Germany might have lower interest rates if it still had the D-Mark. But it would almost certainly have a stronger currency too. Nor is it clear that its government would be reflating with gay abandon were it not for the stability pact. It has traditionally been fiscally conservative and the Bundesbank was always quick to curtail any temptation to splurge.

The Bank of England's record is not as sterling as it seems. The housing market looks like a bubble, threatening a return to dreaded boom and bust. The economy looks seriously unbalanced, with the persistently overvalued pound punishing exporters while permitting consumers to spend beyond their means. National monetary autonomy is not all it is cracked up to be.

There is no denying that the stability pact is less sophisticated than the chancellor's fiscal rules. Our partners recognise this. That is why the pact is under review. But even in its current guise, the pact scarcely constrains Britain's fiscal flexibility. The spending plans in Gordon Brown's recent pre-Budget report do not fall foul of it.

The bigger picture is that monetary union is helping to drive a restructuring of the eurozone economy, making it more competitive. Germany's trade with other European Union countries has shot up from 27.2 per cent of GDP in 1998 to 32 per cent last year - boosting economic growth. France's has risen from 28 to 31.4 per cent. But Britain's has fallen. By remaining isolated from the euro, we are also losing out on the inward investment that has done so much to create jobs and spread productivity-enhancing technology in the past 20 years. In 2002, our share of foreign direct investment in the EU is set to slump to a mere 5 per cent, according to the UN, compared with Germany's 18 per cent.

The conclusion is inescapable. Britain is paying a rising price for excluding itself from the euro. The government has pledged to recommend that Britain join the euro if it is in our national economic interest. It can hardly fail to say Yes.

The trouble with sterling

The British government says it will only join a successful single currency. With three and a half years' experience of the euro in operation, we can now make that judgment. On the issue of trade the answer is clear: Britain is paying a high price for keeping the pound.

Sterling always seems to be causing trouble - not least now. Exporters complain that its strength stunts their sales. Business and trade unions agree that it destroys jobs. The Bank of England worries that a currency collapse could spark inflation. Most economists believe the pound is overvalued. All the signs suggest so. Britain's trade deficit swelled to £21.7bn in the year to June. Exports in the first half of 2002 were 4.5 per cent down on the same period last year.

This overvaluation is exacerbating the economy's growing imbalances. The sheltered (predominantly service) sector is faring better than the internationally exposed (predominantly manufacturing) sector. Manufacturing output was 5.3 per cent lower in the second quarter than a year earlier. This fall is not entirely due to sterling's strength. Manufacturing has long been in structural decline; weakening export demand has scarcely helped. But sterling is making the problem worse, not better.

Were the pound a helpful adjustment mechanism, it would be depreciating gradually, thus boosting the traded sector. In fact, sterling remains painfully strong. Its trade-weighted exchange rate was as high at the end of July this year as a year earlier.

Now that international capital flows freely, the whims and passions of foreign exchange dealers, not cross-border trade, drive currencies. Whereas world trade amounts to £4,000bn a year, nearly £1,000bn changes hands on currency markets each day. And since currency markets are essentially bets on an unknowable future, prices jump around erratically as traders' expectations change. They are prone to bubbles. So sterling can - and does - deviate for long periods from a rate that would help balance trade.

The immediate costs of sterling's volatility and misalignment are bad enough. But the long-term burden is even greater. Just as Britain's accentuated boom-and-bust cycle has deterred long-term investment, so sterling's ups and downs damp trade and economic growth. Next year, a pound might buy 10 per cent more euros - or 20 per cent fewer. Who knows what it will be worth in 2007?

This uncertainty greatly complicates planning for the future. It discourages British companies from seeking markets abroad and deters foreign ones from exporting to the UK. So Britain trades less than it ought to. Less trade means less competition, higher prices, less consumer choice, less specialisation in what Britain does best, fewer economies of scale and a slower spread of technologies. Less trade means economic growth is slower than it could be.

Contrary to conventional wisdom, companies cannot hedge all their exchange-rate risk at little cost. An uncertain stream of revenues that will arrive in uncertain amounts at uncertain times over several years cannot be hedged. Joining the euro would insulate half of Britain's trade from currency moves. Adopting the US dollar - as some Europhobes suggest - would protect only 16 per cent.

One study estimates that the pound is akin to a 26 per cent tax on both imports and exports. Jeffrey Frankel of Harvard University and Andrew Rose of the University of California at Berkeley say joining the euro would increase Britain's trade with the euro area by 62 per cent of gross domestic product, eventually raising British GDP by 20 per cent. Most of this would come within 20 years, allowing Britain's economy to grow nearly 1 per cent a year faster.

There are already signs that the euro may be starting to work. Since the euro was introduced in January 1999, Germany's trade with the EU (exports plus imports) has risen from 27.2 per cent of GDP in 1998 to 32.2 per cent in 2001, and France's from 28.0 per cent to 32.2 per cent. If Mr Frankel and Mr Rose are right, the 5 percentage point rise in the share of its GDP that Germany trades with the EU has boosted its economy by 1 per cent. The 4 point rise in France has lifted GDP by 1 per cent. Britain's trade with the EU has fallen from 23.4 per cent of GDP in 1998 to 22 per cent in 2001, shaving 0.5 per cent off GDP growth.

The trade benefits of joining the euro are clear. So Europhobes have to explain why, although they generally favour free trade with the EU, they want to deny Britain some of its benefits. Joining the euro would complete the single market to which Margaret Thatcher signed up. They also have to justify why, although they want Britain to compete on a level playing field, they want to handicap its trade with the euro area. They will find that very hard, because joining the euro is in Britain's national interest.