An Iraqi girl and her family at a police station in Kos, Greece, awaiting the approval of their registration, 18 August 2015
“The first priority today is and must be addressing the refugee crisis.” Jean-Claude Juncker, President of the European Commission, set forth this ambition in his 2015 State of the Union address. Undoubtedly, the refugee crisis is the most significant humanitarian issue to confront Europe in the past fifteen years. The sheer number of asylum-seekers is staggering: Over 500,000 migrants have traveled to Europe this year, and another two million refugees are expected to arrive by the end of 2017. This massive influx certainly poses considerable social challenges to a politically fractured European Union. However, the migrant crisis also has serious ramifications for the health and stability of the European economy. European leaders must consider these economic impacts in order to formulate an effective policy response to the crisis.
Last week, the European Commission issued its Autumn 2015 European Economic Forecast, detailing its expectations for the European economy in the short term. The EC anticipates modest growth and inflation through 2017, consistent with the present macroeconomic climate. Significantly, the report also addresses the refugee crisis and its anticipated impact on the European economy, concluding that the influx of asylum-seekers will likely prove an economic boon in the short and long terms.
According to the EC, the short term economic benefit will derive from government spending. EU member states will be forced to increase spending to cope with the migrant influx, and these expenditures will contribute to private income and output growth — functioning, in essence, as fiscal stimulus. Increased public spending in response to the crisis is projected to boost GDP by at most 0.2 percent in 2015 and 2016, though this effect is expected to diminish in the long run as spending normalizes.
Nonetheless, the EC expects growth effects to persist over the mid and long terms. It anticipates that refugees will gradually integrate into the European labor force and enhance the productive capacity of the European economy. This follows from basic economic theory: Labor is a vital factor of production, and an increase in availability of this factor permits an increase in production, ceteris paribus. The EC essentially applied this logic to the EU, predicting an increase in output as a result of an increase in the labor force. Indeed, GDP is forecast to grow by approximately 0.26 percent by 2020 because of the migrant influx.
The EC’s predictions appear to be well grounded in economic principles. Government spending is typically stimulative, and an increase in resource availability does permit higher potential output. However, other factors can interfere with these effects. Financial instability and sociopolitical resistance to migration, for instance, could seriously undercut the potential economic benefits of the refugee crisis. The EC may have been too optimistic to dismiss these, and other, concerns.
Throughout the past five years, many EU governments have pursued deficit spending to cope with the financial crisis and the ensuing recession, causing EU debt levels to reach record highs, particularly in border countries such as Greece and Italy. Overleveraging pushed many EU sovereigns to the brink of default, and Europe has only recently regained stability following the debt crisis. Additional spending in response to the refugee crisis would certainly exacerbate Europe’s sovereign debt problem, threatening financial instability and jeopardizing the present economic recovery. Volatility and pessimism could lead to another serious contraction of credit and a corresponding drop in consumption, investment, and output. In this manner, increased spending to address the crisis could in fact induce short term economic contraction, contrary to EC projections.
The long term economic benefits of the migrant crisis are also doubtful. It is certainly true that a larger labor force would permit higher potential output in the EU. However, for this to occur the refugees would have to assimilate successfully into the European economy and society. Although this may not be an issue in accommodating countries like Germany, other EU member states such as Hungary have not welcomed the idea of migrant integration. Sociopolitical aversion to migration could interfere with proper assimilation and thus compromise the economic advantages of the influx. In any case, this resistance would at least delay the production boost provided by an enlarged labor force.
In light of these potentially serious economic consequences, it is clear that Europe must develop a concerted response to the refugee crisis. Unfortunately, discord currently plagues European member states, and their divided approach to the crisis will not likely yield economic benefits. Continued disagreement and poor management of the crisis will actually stress the fragile European economy and invite volatility. Thus European stability is at stake, and any significant threat to stability necessarily threatens the existence of the Union. Europe’s leaders must confront this issue to ensure the preservation of “the European project” and to rectify an egregious humanitarian and social crisis. Indeed, it appears that Europe needs union now more than ever.
Todd Lensman is a freshman in the College of Arts & Sciences at Cornell University, majoring in Mathematics and Economics.
Image Attribution: “p-GRC0151” by the International Federation of Red Cross and Red Crescent, licensed under CC BY-NC-ND 2.0