Germany’s Immigration Challenge

Germany is considered a rational, fact-driven country, not an emotionally driven one. And yet, based on the current immigration debate in Germany, even the advocates of more immigration have little more to offer than emotional arguments.

Given our nation’s history, Germans want to help wherever and however possible. Offering asylum to those in danger is deeply rooted in our society and even those who look for a better living are welcomed by a large segment of German society.

The advocates of more openness point to the benefits which an aging and shrinking population receives from more immigration and they see the potential costs as rather minimal, at least for a rich country like Germany.

That is a rather rose-tinted assumption because it underestimates the financial costs, overestimates the benefits from immigration and clearly overestimates the financial capacity of Germany.

Being overly optimistic helps neither the immigrants themselves nor the cause of promoting greater openness in German society.

Tremendous costs

Proponents of more immigration to Germany refer to the shrinking workforce and the significant unfunded liabilities for pensions and health care, estimated at least at about four times the country’s GDP.

The ultimate answer about how significant more immigration is in that context depends on what the net contribution of immigrants is to the German economy.

Aside from the fact that the answer is very contested, even well beyond the realm of politics in the field of academic literature, there is an additional problem. No one can tell for sure, as the qualification of immigrants, especially refugees, is not registered.

Supporters of immigration point to the high number of academics immigrating, such as Syrian doctors. Critics point to a high number of uneducated and illiterate people. Most probably, Germany is receiving a mix of both, very well educated and uneducated people.

Even making a very optimistic assumption — that 50% of the one million immigrants expected in 2015 are well educated, willing to be integrated and want to contribute to the German society, while the other 50% will remain largely dependent on public support — we can make a simple calculation.

If the 50% share of skilled immigrants before long were to earn 80,000 euros on a per capita basis — well above Germany’s average income of about 40,000 euros – and paid taxes of 40%, their annual contribution to society in form of taxes would be about 16 billion euros per year.

Availability of only high-skill jobs

At the same time, assuming a social welfare cost of about 25,000 euros per “non-productive” immigrant, those costs would total 12.5 billion euros annually. That would still leave a positive net contribution to German society and the nation’s economy

This underscores that it is obviously critical from an economic point of view to attract a high share of productive immigrants.

But this matters for more than just economic considerations. As an advanced industrial democracy, Germany offers plentiful immigration opportunities for skilled people.

However, unlike the past when large swaths of low-skilled people came to Germany, the supply of low-skilled jobs in the manufacturing sector is drying up quite rapidly, not least due to the increased automation of German industry.

What is available are jobs in the services economy which require language skills and an ability to do abstract reasoning. Germany ought to be quite focused on this issue – not because it is heartless but prudent.

The country has made plenty of mistakes on the immigration front in the past, which ought not to be repeated. Not embracing an active, skills-based approach to the management of immigration – à la Canada or Australia – was one such mistake.

Does it matter?

Of course, one could conclude that net costs of a few billion per year do not matter for a country as rich as Germany. This is true — but only from the current perspective.

If one shifts from static to dynamic analysis and realizes that immigration into Germany may very well continue at the current speed, the picture looks quite different.

• Assuming a total pool of five million immigrants flowing in and a more likely mix of 30% skilled immigrants to 70% unskilled or low-skilled ones, the net costs would rise to 38 billion euros per year.
• Over a time horizon of 30 years, this would easily lead to costs of more than one trillion Euros. That is close to the entire costs of German reunification between 1990 and 2010.

Not as rich as it claims

Let’s also understand that Germany is not as rich as it claims. Besides the unfunded liabilities for the aging society of more than 400% of GDP, the strategy to exit from nuclear energy is expected to cost German consumers and businesses about 1 trillion euros.

Even that might be manageable if the euro were structured in a sound manner. As things stand, rescuing the Euro will at least cost another trillion euros. Add in the backlog of investments in public infrastructure and another trillion euros is gone.

A plan for immigration

Obviously, Germany needs to spend its money intelligently. But we also need to change our behavior.

From both an economic point of view, as well as from a humanitarian point of view and from the vantage point of providing of solid integration perspective in German society, we have to make the best out of the wave of immigration coming to Europe and Germany.