Rays of economic sunshine break out behind dark clouds of refugee crisis
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Rays of economic sunshine break out behind dark clouds of refugee crisis

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The influx of refugees into the southern Mediterranean and eastern Europe has dominated European politics for the last 12 months, but the economic implications have been overlooked. While it presents a short term cost, it could offer long term benefits — if handled well

Whenever there is a humanitarian crisis, a natural disaster, a terrorist attack or an outbreak of war, one cry that tends to fall on deaf ears is: “Let me through, I’m an economist.”

It is not to the dismal science that people turn first when confronted with human suffering and tragedy, such as the 3,770 migrants reported to have died trying to cross the Mediterranean in 2015.

Yet it is important for policymakers to understand whether this mass migration is an economic burden as well as a social issue or whether in fact it could bring long term fiscal benefits.

The pictures and stories of refugees from Iraq, Syria and Afghanistan who have battled against incredible odds to seek safety in Europe while watching relatives and friends die in appalling circumstances have tugged at heartstrings. The flight of Ukrainians from the conflict with Russia has also garnered sympathy.

Yet these humanitarian crises have also triggered a political backlash among the populations in countries that have found themselves the unexpected — and sometimes unwilling — hosts to these bedraggled victims of war and genocide.

Often this anger is fuelled by a genuine worry among local citizens that they will shoulder the burden in the form of higher taxes to pay for food and shelter and reduced job opportunities as these frequently skilled refugees become attractive to employers.

As Suma Chakrabarti, the EBRD’s president, said earlier this year, refugees pose “large economic, social and political challenges” for the host communities.

“In the face of the strong inflow and the multifold strains it causes, more and more people are asking ‘Can we handle this?’” he said, before answering: “We must. Failure to address the issue will only make the crisis worse.”

BUILDING ANGER... AND FENCES

Nowhere has this resentment and anger been more visible than in countries in central and eastern Europe (CEE), many of whom are still making the transition from communist rule to free market democracy under the auspices of the EBRD. They have borne the brunt of migrants passing through.

Some authorities clearly see it as an economic threat rather than an opportunity. Philippe Dauba-Pantanacce, senior economist and global political analyst at Standard Chartered Bank, says that political debate is becoming “increasingly polarised”.

“In Europe, the EU is increasingly at odds with the governments of Hungary and Poland, which are accused of taking measures that erode the rule of law and go against the spirit — and sometimes the letter — of EU legislation,” he says, adding that in Slovakia, an openly neo-Nazi party won a tenth of parliamentary seats in the March 2016 election.

“Under pressure from anti-immigration parties, various eastern European countries have refused to accept any migrants,” he says, pointing to Poland, Slovakia, Hungary and the Czech Republic.

Hungary’s populist Fidesz party has erected razor wire fences on its borders with Croatia, which is an EU member state, and Serbia, which is applying. The crisis helped boost the majority of the conservative Law and Justice (PiS) party in elections in Poland.

Carsten Hesse, emerging Europe equity strategist at Berenberg, a German bank, says that the immigration topic was less of an economic theme in CEE outside Turkey last year as most refugees went to Germany or Sweden.

“But it strengthened the populist anti-immigration parties — the PiS in Poland and Fidesz and Jobbik in Hungary,” he says.

However, he plays down the impact of refugees in Hungary, pointing out that most of them went quickly to Germany and Austria, meaning that there was unlikely to have been a big impact on the economy either positive or negative.

“They built a fence which cost them around €80m but this is too small to have a measurable impact on the economy,” he notes.

However, he acknowledges that erecting fences will not just damage tourism but could lead to long delays at the border for commercial traffic — although this is a negative impact from the government’s reaction rather than the migration itself.

“This could damage the economy as a lot of companies depend on just-in-time delivery and many cities near country borders depend on cross-border traffic/tourism,” Hesse says.

The real concern is not over one-off border closures but a collapse of the wider Schengen zone, where passport and any other types of border control have been abolished at the mutual borders of 22 EU states.

Dauba-Pantanacce at Standard Chartered says the crisis has exposed a “deep fault line” in the Schengen agreement, which he describes as a “bedrock of the European project”.

“The migrant crisis has put unprecedented pressures on the European project,” he says. “The potential for the number of refugees to double would surely substantially heighten this stress, with a growing rift developing between countries of entry in the south and other European countries.”

Mahmood Pradhan, deputy head of the IMF’s European department, said at the EBRD headquarters last week the Fund was analysing the impact on CEE/SEE if border controls were reintroduced across Schengen. Around 1.7 million people in the EU work in a different country from where they live.

OLD VS NEW EUROPE

But despite the moral outrage expressed by many politicians in old European countries at the attitudes of their new neighbours as well as CEE states not yet in the EU, these latter countries are counting the cost.

Last year Hungary was the second most popular place for asylum applications as more migrants made the journey overland through Greece and the western Balkans.

It had 177,130 applications by the end of December 2015 — or 13% of the European Union total. Within the CEE part of the EU Bulgaria, Poland and Romania have also received asylum seekers.

According to figures from Eurostat, Hungary has allowed in asylum applicants at a rate of about 1,700 for every 100,000 local citizens. This compared with an EU average of 260 and figures as low as 60 in the UK and 32 in Spain.

However, in general, the economies of the CE4 — Czech Republic, Hungary, Poland, Romania — are in good shape, with GDP growing around 3%-4% a year.

This should mean they have room for manoeuvre in terms of higher revenues and smaller budgets to cope with the refugees if they wish to.

Several countries in southeastern Europe (SEE) saw large numbers of refugees crossing into their territory. For instance, more than 145,000 migrants, mainly of Syrian origin, are estimated to have transited through Serbia since January 2015, a 10-fold increase on the number of transits in 2014. The EBRD acknowledged earlier this year in its regional economic outlook that this presented

logistical and fiscal challenges for the countries’ governments, which have provided medical and social care, food, water and accommodation.

A January 2016 report by the International Monetary Fund, The Refugee Surge in Europe: economic challenges, conceded that short term fiscal costs of feeding, sheltering and caring for the asylum seekers could be “sizeable” in some countries — albeit only 0.1% of GDP in Croatia and Serbia and zero in Czech Republic and Hungary.

REAPING THE BENEFITS

However, most economists believe that this influx of refugees should be seen as an opportunity.

Dauba-Pantanacce says the experience of previous migrations shows the first economic impact is seen in a slight GDP growth because of fiscal expansion triggered by the needed support, and the investment in emergency responses.

The International Monetary Fund report attempted to put numbers on this by calculating the net fiscal impact of immigration between 2007 and 2009. It found that the average outturn was a positive contribution of 0.35% with 13 gaining, including the Czech Republic, Slovenia and Estonia, gaining by more than 0.5% and only two worse off by more than that.

As Christine Lagarde, the IMF’s managing director, said at the report’s launch: “The study indicates that, with appropriate policies — especially effective integration into the labour market — the potential from refugees can be harnessed for the benefit of all.”

Carsten Hesse at Berenberg Bank says that, in general, the impact of the refugees on the host economy, assuming they stay, should be positive.

“The government is increasing spending and non-EU migrants in the past overall received less in benefits than they contributed in taxes,” he says.

“But for the future it also depends on how quickly they learn the local language and with which degree of skills they enter the labour market. Also some lower paid workers could lose out in the short term due to the competition from the refugees.”

Economists at the European Commission said the large influx of people to the bloc from Syria and other conflict zones is likely having a positive effect on growth, employment rates and long term public finances in the most affected countries.

“The longer term effect is really all about the ability for a country to integrate these newcomers, especially in the labour market,” adds Dauba-Pantanacce.

EMIGRATION, ACTUALLY

Furthermore Europe has a demographic deficit — its ageing population is not being replaced fast enough with youngsters to help look after the old and keep productivity up.

Indeed, in a separate IMF report published on the eve of the EBRD meetings that looked at economic issues facing central, eastern and southeastern Europe (CE/SEE) the issue was not the cost of immigration — but of emigration.

It said over the past 25 years, close to 20 million people had emigrated from CE/SEE, accounting for 6.25% of the region’s working age population. Cumulative real GDP growth could have been seven percentage points higher on average in the absence of migration.

According to a major piece of analysis of global demographics by RBC Capital Markets, Greece, Bulgaria and Latvia stand out for their higher old-age dependency ratios — the number of dependents (aged 0-14 and over the age of 65) to the total population (aged 15-64).

“The overall population growth rate in eastern Europe is currently negative and expected to stay there for most of the century,” says Jay Govender, RBC’s cross asset strategist. “This will push the dependency ratio higher over time as the population pyramid inverts and we see a dearth of working age citizens.”

William Jackson, an emerging markets economist at Capital Economics, agrees, saying that demographic prospects are “poor across the region”. “The region’s dire demographics mean that the size of the region’s labour markets is likely to shrink over the coming years.”

TURKEY TEST

Luckily for the economists there is one country that can provide a test bed for seeing how migration impacts in a positive or negative way.

Turkey, which is on the border rather than in CEE but is an EBRD country of operation (the bank’s current portfolio of projects is worth €5.8bn), has taken in more than 3.1 million refugees from Syria, Iraq and other countries, or 4% of the population.

Immigration has indeed had a big impact on the economy. Turkey has already spent more than €7bn on refugees, or a little over 1% of GDP and will receive up to another €6bn from the EU up to the end of 2018.

“Local brokers have reported to me that house prices were on the up due to strong demand by Syrians and that they triggered increased sales in the furniture and white goods sector,” Berenberg’s Hesse says.

However, any calculus has to take account of the impact on the country’s tourist industry, which saw revenues fall at an annual rate of 8.3% in 2015 to $34.4bn.

Other important impacts will be on the local labour force. Research for the World Bank by two economists, Ximena del Carpio at the World Bank and Mathis Wagner of Boston College, found that the inflow of refugees into Turkey, who overwhelmingly do not have work permits, pushed out mainly informal, low-educated, female indigenous workers, primarily in agriculture.

However this had two unexpected — broadly positive — results: as low-income Turkish workers dropped out of the formal labour force, the average wage recorded in the formal sector rose. Secondly, the influx of refugees seems to have also bolstered school attendance, particularly among young women who dropped out of the labour force.

On the other hand, the IMF’s January 2016 report acknowledges that in the face of an influx of refugees, concerns among native workers that they will face lower wages and higher unemployment are “understandable”.

“Yet, past experience with both economic and humanitarian immigration indicates that adverse effects on wages or employment are limited and temporary, possibly because of low substitutability between immigrants and native workers, and because investment usually increases in response to a larger workforce,” it concludes.

Of course refugees or migrants are not coming just from the Middle East. The crisis in Ukraine that has seen Russia seize Crimea and Russian-backed troops invading the east of the country has created its own refugee crisis.

“Poland had strong growth last year, around 3.6%, so I would not be surprised if the Ukrainians were responsible for a small part of this increase,” says Hesse.

As many as one million Ukrainians have entered Poland according to the country’s prime minister Beata Szydlo, which would represent around 2.5% of the population.

OPPORTUNITY LOST?

But whether they look at it as an opportunity or a threat, governments in CEE and SEE may find that the refugee question becomes less relevant — peak refugee time may have passed.

At the time of writing, the deal between the European Union with Turkey, which has agreed to police its borders better and take back migrants without a genuine claim for asylum, is — so far — working quite well.

Far fewer refugees are arriving in Greece and therefore fewer migrants will come to CEE, which obviously leads to a smaller long term impact on the economy.

Figures from the UNHCR (UN High Commissioner for Refugees) show that the number of migrants and refugees arriving in Greece has dropped sharply from a peak of more than 7,000 per day last October 2015 to an average of 230 a day in the first six days of April 2016.

“The so-called ‘Eastern Med/West Balkan’ route is viewed as closed now to aspiring migrants,” says Dauba-Pantanacce.

But however solid the economics, that will count for little if the political opposition from both the authorities and from the grassroots of the population becomes so strong that it makes it impossible for far sighted policymakers to take advantage of the economic opportunity.

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