What macroeconomic impact of the refugees crisis?
What views for the new European season?
A dim outlook for the global economy, with no strong recovery in Europe.
FreeExchange points at that the mood is decisively more somber that in early 2015. Erik Jones (hat-tip EuroIntelligence) highlights that the eurozone export-led growth strategy exposes it to global demand shocks. The OECD’s interim forecast focuses on a still impaired credit channel and an exceedingly slow process of deleveraging, and the lack of growth in the eurozone despite favorable conditions—with a 2016 forecast at 1.9 percent. A more optimistic viewpoint is provided by Marco Valli (Unicredit) who stressed that the eurozone recovery is a robust consumption-led one, powered, rather than credit-fuelled, by higher real income (thanks to low inflation), leaving some room for increases in households’ saving ratios back towards the long-run average.
Deflation is still on the horizon…
EuroIntelligence report on the latest Eurostat data to assess that the impact of QE has been limited (0.212 pp for headline inflation rates and 0.311 pp for core inflation), despite Peter Praet’s argument that QE has been working (see Eurointelligence) through a signaling effect, and through its impact on both market and bank credit dynamics.. The weakness in inflation is mirrored by an ongoing weakness in unit labour costs.
Solving short-term and long-term issues, more proposals…
Jean Pisani-Ferry (Project Syndicate) looks at two competing explanations for the lack of momentum in the global economy—(i) secular stagnation (Larry Summers), worrying because of a vicious circle between low demand, low investment, low inflation and low growth and (ii) the lack of structural reforms explanation (Bank for International Settlements) that argues that low interest rates, i.e., demand-side fixes, prevent needed improvements in economic efficiency through supply-side reforms, leading to another vicious circle of slower growth, artificial remedies and further erosion of long-term growth potential. For Pisani-Ferry, large output gaps continue to call for demand support, and across-the-board monetary normalization would be premature. Hans Helmut Kotz (Project Syndicate) calls on European leaders to embark on a broad economic-reform program that combines growth-enhancing supply-side reforms and demand-side efforts to support investment and job creation. The key is to implement both kinds of measures in lockstep. Simon Wren Lewis, in Mainly Macro, reflects on the lack of motivation for a complete fiscal and political union (see Philippe Legrain and Andrew Watt).
Wren Lewis sees three areas where the current union can be improved: sovereign default, competitiveness imbalances and the ECB. On default, he proposes using the IMF in a central way: with countries in difficulties going to the IMF, with default levels and conditionality decided then, prior to EZ assistance—i.e., the Eurozone would be contracting out (to the IMF) the tricky business of deciding whether a government’s debt is sustainable or not, avoiding political conflicts of interest. This proposals echoes Schauble’s “non-paper” on bankruptcy inside a monetary union (Handelsblatt, hat-tip EuroIntelligence) that calls for three changes to allow for restructuring: (i) debt obligations should contain a bail-in clause; (ii) for a country receiving funds from the ESM, debt obligation maturities would automatically be extended; (iii) an IMF debt sustainability analysis would be obligatory. To break the vicious circle between banks and sovereign, government bonds would no longer be treated as risk free assets.
Refugees and their macroeconomic impact in Europe
Background considerations
Goldman Sachs reviews the recent developments: the mass exodus of refugees seeking sanctuary in Europe, tensions between countries, failure by the 28 EU Interior Ministers to agree on a proposal by the EU Commission (President Juncker’s plan) to adopt mandatory quotas for the relocation of 120,000 migrants from frontier countries, the re-imposition of border controls by some countries (including Germany) (see Reuters, EuroIntelligence and the FT 1 and 2) and the UK’s ‘opt out’ from the EU asylum and immigration policy. Yves Pascouau (Policy Review) attributes this failure to the member states’ inability to plan ahead, their reluctance to adopt binding common rules and their central position in the implementation of EU rules. The situation has worsened uncertainty for asylum seekers and refugees, with the relocation mechanism likely to remain voluntary. Another extraordinary meeting of ministers [].
The OECD policy brief on the refugee crisis and migration outlook point provide a few key stylized: (i) the size of migrants is unprecedented since WWII, (ii) the diversity of asylum seekers is large, (iii) destination is largely determined by the economic conditions in the recipient countries, (iv) the legal and institutional framework is more solid than in the past but does not ensure a fair burden-sharing across countries, (v) this is a new and costly challenge for some countries, such as Hungary (Poland, Bulgaria). A chart by the Economist reflects the wide discrepancies in migrant acceptance rates across Europe.
To evaluate Europe’s true immigration capacity, Grace Choi and Reinhilde Veugelers (Bruegel) draw a parallel with the US green card system which grants permanent lawful resident status to about one million immigrants every year. Using various matrices, the authors find that there is ample room for awarding more permanent resident statuses in the EU, not just refugees status.
Assessing the implications and economic impact of refugees
Looking at the impact of the refugee crisis, Goldman Sachs writes that it exacerbates political risks but supports the economy. Guntram Wolff (Bruegel) argues that the arrival of younger migrants is welcome news, with manageable short-term costs and sizable long-term benefits to public finance and the sustainability of pensions.
On the negative side, the crisis gives another evidence of institutional and political weaknesses in the EU, and brings two inter-related risks: (1) the costs of absorption and assimilation of the refugee influx; and (2) the associated political challenges that threaten to amplify existing Euro-skepticism (see Wolfgang Munchau). This is illustrated by new risks to the Schengen agreement to abolish border controls. For a country like Germany, Wall (Deutsche Bank) estimates that the fiscal costs of refugees will be manageable—a high estimate of EUR 17 bn in 2016. Elspeth Guild (CEPS) highlights the specific challenges faced by countries in Italy and Greece, with stretched capacity (an issue that is even at play in Germany, according to FAZ).
The medium-term impact should be positive on growth if it weighs against Europe’s demographic challenges. And even in the short run, the fiscal response could serve to stimulate domestic demand: the associated fiscal costs are likely to imply more tolerance of EU authorities (e.g., by allowing a special status of the extra budget costs coming from the refugees crisis) in the Stability and Growth Pact—i.e., leading to an easier fiscal policy, especially in Germany.
Quantification of the potential benefits is tentative, but Andreas Rees, for example, estimates that German GDP will get a boost from receiving the estimated 800,000 refugees of about 0.3% in the short term (via higher government spending), and a lift of about 1.7% by 2020. For Rees, integration of refugees in the labor market will be key. Research has documented that foreigners currently living in Germany pay more to the state than they receive in social benefits. Further, there is no conclusive evidence that immigrants dampen wage growth.
The European response
The current “Dublin System,” discussed by Mark Wall (Deutsche Bank) consists of the “Dublin Regulation” (Reg (EU) No. 604/2013) and three further regulations stipulating administrative details. The Dublin Regulation has two aims: (1) it is to make sure that one, i.e. only one, member state is responsible for the examination of an asylum application and ensure an efficient procedure and prevent multiple asylum claims. (2) It defines a set of hierarchical criteria to identify the member state in charge of each asylum application and the provisions attached for the respective asylum seeker. Changes, including the Commission’s proposals for mandatory relocations, are highly controversial. Elspeth Guild et al. (CEPS) examine why the Dublin system of allocation of responsibility for asylum seekers does not work effectively. They propose a long list of recommendations to resolve these challenges from a practical, legal and policy perspective.
The European Commission made new proposals (following up on the European Agenda on Migration) to address the migration and refugee crisis, including an emergency relocation proposal for 120,000 refugees from Greece, Hungary and Italy, a permanent mechanism for relocating asylum seekers within the EU, a temporary solidarity clause, the issuance of a common Return Handbook and an EU Action Plan on Return to make return more effective, and a common EU list of safe countries of origin, to be debated by the Civil Liberties Committee. The plan to relocate 120,000 refugees across the EU was passed on September 23 by EU interior ministers, outvoting four eastern European countries strongly opposed to the scheme (Slovakia, Romania, Hungary and the Czech Republic) (see DW). The use of qualified majority voting to push ahead with the burden-sharing scheme — regarded as politically unacceptable in some capitals — is a rare move in a bloc that typically acts by consensus on sensitive issues.
Sergio Carrera and Karel Lannoo (CEPS) write that the EU’s response, both in scope and in ambition, is deeply disappointing (see also Ian Buruma in Project Syndicate) as they fail to address two key challenges: that existing EU rules do not fit the purpose and the systemic failure of states like Greece, Hungary and Italy to adhere to the democratic rule of law principles and fundamental rights. Daniel Gros argues in a CEPS Commentary that the EU needs to take action on two fronts (see also see the OECD’s policy recommendations): urgently boosting capacity to deal with asylum applications, to quickly identify who truly deserve protection, and improving burden-sharing in providing shelter.
Lucy Marcus (Project Syndicate) looks at the issue from a business perspective (see also the Federation of German Industries), focusing on the challenge of integrating refugees into workforces, a point also made by Andreas Rees at UniCredit. She argues that businesses should be involved early in the process of assessment, education, and integration planning to help shape policy from the outset, rather than complaining about the government’s failures after the fact.
The Short View… The radical-left, historically anti-EU campaigner, Jeremy Corbyn was elected to the leadership of the Labour party. For Erik Nielsen (Unicredit), Corbyn’s election is a political earthquake, resulting to almost half the shadow cabinet resigning, yet with one positive side effect: of forcing Cameron to take a stance in favor of keeping Britain in the UK. RealTime Brussels also writes that Corbyn will not shift Labour’s pro-EU stance.
