Migration: Notes on Potential Impact on Europe

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 illustrates an age-old truth: Besides unrest, destitution back home and attempts to flee war, migrants also want to work.

In Europe today that mostly means going to Germany, Scandinavia, Britain and other places, such as the Netherlands.

As free movement of labor 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 start-up comfort and support.

Magnitude of the issue

Take Germany, a favorite destination of the new migrants, as an example. According to recent reports, Germany may receive 400,000 to 500,000 more immigrants this year than it expected six months ago.

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.

The EU needs some common response. That should include:

• A clearer foreign policy designed to stabilize 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.
• A common definition of who qualifies as a refugee and who can be sent back 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. However, 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 on economy

Expect a small stimulus to aggregate demand. Extra spending on migration-related issues may amount to 0.3% to 0.4% of annual GDP in Germany and perhaps a few other places.

Some other countries will likely quote this as a reason to exceed fiscal targets. On balance, the result could be a near-term stimulus to demand of some 0.2% of the eurozone GDP for the second half of 2015 and probably all of 2016.

This could lead to a small increase in consumption growth in coming years and to even marginally firmer real estate markets in the metropolitan areas that the migrants are mostly striving for.

This, in turn, will possibly accentuate the divide a little between metropolitan and less favored rural areas in real estate markets over time.

Long term impact on economy

The vast majority of migrants seem eager to work despite occasional evidence that some originating from within, rather than outside Europe, may also be drawn by welfare benefits.

If recipient countries integrate the migrants reasonably well, migration could be a boost to aggregate supply: firmer trend growth for a while.

The faster the EU member countries can process the claims of migrants and the earlier they are allowed to work, the better. Even fiscal hawks should consider that to be money well spent.

The promise and the risk

To realize this supply potential, recipient countries need to keep their labor markets flexible and upgrade their education system, 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 often tend to be more entrepreneurial people.

That may also help keep an aging economy vibrant. However, if Germany and countries with significant immigration get their policy response wrong, they may end up creating problematic areas with disaffected second-generation immigrants some 20 to 30 years from now.

The domestic policy response, notably labor market and education policies, matters more than any decision about an initial distribution of migrants.

The worst-possible policy

The worst policy would be to tighten employment laws in countries that are currently a draw for immigrants due to their recent labor 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 labor market would not seem to be the right policies amid a rise in immigration.