Free movement of goods, labour and capital. Miss out one and you don't have a free market, you're just being scammed.
The European Union is a Union until you need it to behave like one, and then it isn't.
Schengen was originally a treaty outside of the framework of the EU but has since been taken over by it. There are EU countries outside of Schengen (GB, Ireland) and there are non-EU countries part of Schengen (e.g. Norway, Vatican, Switzerland). However all countries that join the EU now eventually have to join the Schengen area.
Besides Visa free travel for residents of these countries Schengen also includes a common Visa for foreigners traveling to these countries (so you only need one Visa to to travel to France and Germany) and allows the police to cross the border when perusing suspects and detain them on the other side.