MIGRATION: NOTES ON THE POTENTIAL IMPACT ON EUROPE

Looking for safety and a job. The rise in immigration has become a major issue in Europe. To some extent, the pictures of migrants trying to make their way north after having crossed the Mediterranean or Aegean Sea also illustrate an age-old truth: on top of fleeing war, unrest and often destitution back home, migrants also want to work. In Europe today that mostly means going to Germany, Scandinavia, Britain and some other places such as the Netherlands. As the free movement of labour is one of the founding principles of the European Union, many migrants will likely end up where the jobs are and, to a lesser extent, where other migrants from their home region have already settled to provide some start-up comfort and support.

THE POTENTIAL IMPACT ON THE EU ECONOMY
The magnitude of the issue: take Germany as an example, a favourite destination of the new migrants. As a rough guess, Germany may receive 400k – 500k more immigrants this year than it expected six months ago according to recent reports. If so, this would add 0.5% – 0.6% to the German resident population. For the EU average, the increase may be half that scale.

Common response: the EU needs some common response. That should include (i) a clearer foreign policy designed to stabilise Syria and Libya, to urge Turkey to play a fully constructive role and to put serious financial pressure on Eritrea to reform itself like next-door Ethiopia, to name some obvious cases; and (ii) a common definition as to who qualifies as a refugee and who can be sent back fast to safe countries of origin on the Western Balkans. Of course, a quota system to distribute refugees can make sense to process their claims fast. But those who are accepted may ultimately move to where the jobs are and not respect an initial quota distribution between, say, Germany and Hungary or Britain and France for very long.

Short-term economic impact: expect a small stimulus to aggregate demand. Extra spending on migration-related issues may amount to 0.3-0.4% of annual GDP in Germany and perhaps a few other places. Some further countries will likely quote is as a reason to exceed fiscal targets. On balance, the result could be a near-term stimulus to demand of some 0.2% of Eurozone GDP for 2H 2015 and probably 2016. It could lead to a small increase in consumption growth in coming years and to even marginally firmer real estate markets in the metropolitan areas the migrants are mostly striving for, possibly accentuating the divide between metropolitan and less favoured rural areas in real estate markets a little over time.

Long-term impact: the vast majority of migrants seem eager to work, despite occasional evidence that some originating from within rather than outside Europe may also drawn by welfare benefits. If the recipient countries integrate the migrants reasonably well, migration could be a boost to aggregate supply: firmer trend growth for a while. The faster EU member countries can process the claims of migrants, and the earlier those who can stay are allowed to work and are offered language training, the better. Even fiscal hawks should consider that to be money well spent.

The promise and the risk: to realise this supply potential, recipient countries need to keep their labour markets flexible and upgrade their education systems, with a focus on basic education such as language skills. If Germany gets this right, it may just be solving part of its demographic problem for the next decade. Migrants who take huge risks to get where they want to go often tend to be more entrepreneurial people. That may also help to keep an ageing economy vibrant. However, if Germany and countries with significant immigration get their policy response badly wrong, they may end up creating problematic banlieues with disaffected second-generation immigrants some 20-30 years from now. The domestic policy response, notably labour market and education policies, probably matters more than any decision about an initial distribution of migrants.

The worst-possible policy would be to tighten employment laws in countries which are currently a draw for immigrants due to their recent labour market dynamics. If Britain and Germany make it more difficult to create jobs, they could store up social trouble for the future. For example, raising minimum wages, tightening rules for temporary work contracts and erecting other barriers to entry into the labour market would not seem to be the right policies amid a rise in immigration.

THE POLITICAL TAIL RISK
Immigration is a contentious issue. It touches upon fundamental questions of culture and national identity. As an economist, I cannot comment much on these issues. But as an observer, I note that a rise in immigration often triggers some right-wing populist backlash. As discussed in our “chart of the week” on 4 September, such a backlash could present the most important tail risk to the cohesion of Europe in the next few years. In Europe, unease about immigration, globalisation and other perceived indignities of modern life usually morph into demands to “regain control over national borders”. The risk that Brexit referendum in the UK could turn into a de facto vote on immigration rather than on staying in the biggest single market in the world is the first market-relevant flash point to watch.

Due to the visible damage done to Greece by Tsipras and Varoufakis, the risks of left-wing populism will probably recede somewhat in much of the Eurozone in the foreseeable future (although possibly not within Britain’s Labour Party). However, we have to brace ourselves for more reports about a right-wing populist backlash across parts of Europe in coming months, with anti-EU parties possibly making gains in opinion polls. If Britain were to leave the EU, or if an anti-European party were to win elections in a any major EU member, the EU might have a problem well beyond the more technical issues once raised by the euro crisis. In such a case, a few ECB words would not suffice to defuse such risks.

The potential gain in support for right-wing populists is the key political tail risk to watch. However, the current rise in immigration may well be over by the time of the Brexit referendum (autumn 2016?) or the next national elections in France (2017) and Italy (2018). Right-wing populist parties, usually long on rhetoric and short on logic, have a tendency to self-destruct or at least to expose their nastiness rather visibly at times (may Jean Marie Le Pen be around for long enough to remind voters of what the party now headed by his daughter stands for). By the time of the next Italian election, many migrants currently coming ashore in Italy may have moved north in search of a job, lessening the impact on the Italian political debate.

For clear historical reasons, the big country many migrants seem to be heading for, Germany, is also the one in which a populist backlash against migration will probably be least virulent. Just as a hypothetical illustration, if the populist anti-immigrant AfD were to double its standing in opinion polls, it would go up from 4% to 8% – and even that seems unlikely. In our view, it would pose no serious risk to Germany’s pro-European political consensus.

Fortunately, tail risks usually do not materialise. The bigger story in Europe remains that, despite some near-term wobbles caused by emerging market troubles, the Eurozone economy has left the euro crisis behind and is now creating jobs at a reasonable clip, at least outside France. As long as it does not get its policy response badly wrong, Europe can cope with the economic and political impact of immigration, in our view. In a way, the fact that migrants are heading north is also a compliment for their chosen destinations: these countries must have done something right in their labour market policies in the recent past to make them more attractive than other countries for people coming from outside looking for safety and for work.

Holger Schmieding
+44 7771 920377

One thought on “MIGRATION: NOTES ON THE POTENTIAL IMPACT ON EUROPE

  1. Pingback: How will refugees affect European economies? | Bruegel

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