Although its roots go back some considerable time, in the summer of 2015 Europe was suddenly and unexpectedly confronted with a dramatic increase in the number of refugees seeking sanctuary and asylum. The “refugee crisis”, as it is often portrayed, raises primarily humanitarian, political and ethical issues, both for individual member states and, not least, for the European Union as a whole. In particular the sharing of costs and issues relating to the freedom of movement between EU countries raise thorny issues. Xenophobic and nationalist elements have sought to make political capital out popular fears associated with the inflow of refugees.
Against this background, the sharp rise in refugee inflows also raises questions about the likely economic, fiscal and labour market effects. There is still considerably uncertainty about the size of current inflows, not to speak of their composition in terms of country of origin, age, skill level, or their likely distribution across Member States. It is also unclear for how long elevated inflows from countries like Syria and Afghanistan, blighted by war and acute physical and economic insecurity, will persist. Last but not least, the economic, fiscal and labour market effects of the influx will depend on the policies implemented by Member States; as these are currently being formulated, against the background of a controversial public debate, these also, remain clouded in uncertainty.
With these important caveats in mind, an attempt is made here to collate the existing information. Where necessary making various assumptions, orders of magnitude of the impacts that might be expected, both positive and negative for EU countries and their domestic populations, are indicated. On this basis suggestions for an appropriate policy response that maximises benefits and minimises costs are made.
The size and composition of refugee inflows
In a recent report the UN High Commissioner for Refugees (http://unhcr.org/556725e69.html) identified 2014 as a record year for global forced displacement due to conflict or persecution. By the end of the year total forced displacement amounted almost 60 million persons, with almost 14 million being displaced during the year. Although the majority of these were displaced within the borders of their home country, almost three million were forced abroad. Refugee numbers built up inexorably in the vicinity of countries worse affected by violent conflict: Syria, Iraq, Afghanistan and north-east Africa. By the end of 2014 there were more than one million refugees in Turkey, Pakistan and tiny Lebanon, and more than 600,000 in Iran, Ethiopia and Jordan.
For reasons not yet fully understood, but clearly linked to the dwindling perspective of refugees in these camps of soon being able to return to a functioning and peaceful homeland, in the summer of 2015 hundreds of thousands of refugees sought to reach the safety of an EU country. Most arrived via the Mediterranean/Aegean Sea in Greece and Italy, many subsequently heading for core EU countries overland via Hungary or countries of the former Yugoslavia.
Fig. 1: Asylum seekers, EU and selected countries, monthly totals
As shown in Fig. 1, asylum registrations had fluctuated around 20,000 per month until the spring of 2012. This then rose steadily to just over 60,000 by the end of 2014. During the current year, the number of asylum registrations shot up dramatically, reaching over 130,000 in August. Figures for Germany are available until October, with almost 55,000 registrations there in that month alone. Hungary, Sweden and Austria, in view of their smaller size, have also been disproportionately affected.
These figures substantially understate the true extent of the refugee inflow due to delays in registering the asylum seekers. The figures for Greece and Italy, where most refugees initially arrive are notably rather low. Because of the de facto suspension of the Dublin asylum rules within the EU, in many cases refugees are no longer registered in their EU country of arrival, seriously understating the pressures that support systems in these so-called “front-line states” are facing. At the same time it is clear that, in the medium-term at least, the prime destinations for refugees are the prosperous countries with relatively favourable labour market situations: in absolute terms above all Germany, and in relative terms also countries such as Sweden and Austria.
Of course it is impossible to know at what level refugee inflows will be maintained and for how long. On the one hand, underreporting in the crisis and delays in registration suggest that reported figures will initially continue to rise. The onset of harsher weather will, though, limit the numbers making the risky crossing by sea. Summing total registrations for the year until August and maintaining the reported August level for the remaining four months of the year suggests a figure in excess of one and a quarter million refugees in 2015. With refugee camps in neighbouring countries bursting, and barring a swift improvement in the situation on the ground in Syria and Iraq, permitting the displaced to return under acceptable conditions, the EU seems likely to experience a refugee influx of a comparable order of magnitude also in the coming year and possibly beyond.
Labour market and demographic potential
In order to assess likely effects we would need to know much more about the composition of the refugee population. The Eurostat data permit merely a breakdown by gender and age group. Of the asylum seekers registered in 2015 more than 70% were male and under 30% female and they are disproportionately young.
In terms of the potential ratio of employed to non-employed persons, this must be considered a favourable distribution. The gender distribution of the EU population as a whole is 48.8% males to 51.2% females, while the employment rate among men (20-65) is 75.0% compared to 63.5% for women. Almost one fifth of the EU population is 65 or older (18.5%) and, with few exceptions, out of the labour force, whereas the share of retirement-aged persons among refugees is negligible (less than 1%). The working-age (here: between 18 and 64) share of the total EU population is less than 63%, around ten percentage points lower than among recent refugees.
And this static view understates the dynamic demographic benefits. At just under 19% the share of the EU population under 18 is considerably lower than among refugees (27%). In terms of the future labour supply this constitutes an important potential. Moreover, the average age within the working-age population is substantially higher among EU-residents: The asylum-seeker data indicate that more than half of the total intake (55%) are aged between 18 and 34, while a further 18% are aged between 35 and 64. Calculations on Eurostat population data indicate that the proportions are more or less reversed: just 21% of the overall population consists of (potential) workers in the younger age category, while 41% are in the 35-64 age bracket.
To put it another way, an intake of 1.25 million refugees adds just under a quarter of one percent to the EU overall population, but 0.64% to the younger working-age cohorts and just 0.1% to the 35-64-year age bracket.
Moreover, it seems likely that – even if a more effective redistribution and relocation system is established in time – a substantial proportion of the incoming refugees will settle in Germany. Here the demographic situation and especially the prospects are much less favourable than the EU average from an economic point of view. 21% of the German population is aged 65 or above, while the share of children and younger workers is lower than in the EU as a whole. If we assume that 40% of the refugees reside in Germany (i.e. half a million), the German overall population would increase by 0.62% a year – on top of net migration from other sources – but the working-age population by 0.72%. Most dramatically the cohorts of young workers (18-34) would expand by 1.68% a year.
For decades already the population of Germany has only been stabilised, and further rises in average age prevented, thanks to substantial net immigration. Following a hiatus during the economic crisis, it was until recently running at around 400,000 p.a. In the absence of any immigration (or change in retirement laws) the domestic labour force is expected to contract by as much as 4.5 million people in just ten years. Germany’s rate of potential growth would decline towards zero raising questions about the sustainability to pension systems.
Skills and labour market integration
While the demographic potential is clearly positive and significant, the realisation of positive economic effects depends, obviously and critically, on the successful labour market integration of incoming refugees. This is uncertain ex ante. Little information is yet available on the educational and skill profiles of refugees. Syria, from where most recent refugees originate, has generally rather high educational levels; other countries such as Afghanistan and Somalia much less so. There may also be a selection effect to the extent that the costs of successful migration to western Europe are high and this privileges wealthier (and thus as a rule better qualified) persons.
The research institute of the German public employment service (IAB), referring to a number of unrepresentative and possibly unreliable surveys and comparisons with existing migrants from the current countries of origin of refugees, concludes that formal educational levels are comparatively high, but vocational qualification are often lacking. The coming months will bring greater clarity in this regard.
An additional issue is that the value on destination-country labour markets of qualifications acquired in countries of origin is uncertain, particularly in the light of language barriers. Even in the context of post-2004 intra-EU labour migration, studies found strong evidence that qualified migrants, at least initially, overwhelmingly performed, rather unskilled work or jobs that did not match their qualifications; over time, the higher-skilled were to some extent able to upgrade their labour market position.
Combining the large share of younger refugees with uncertainty about the effective value of existing human capital and known language barriers clearly suggests a need for a substantial investment in providing early and comprehensive language tuition for all refugees, followed by swift integration in school, tertiary education and vocational training programmes and paid employment. Policymakers should also examine and where necessary amend existing rules on the recognition of qualifications.
Member state policies regarding the asylum process itself will also be decisive for the speed with which refugees enter the domestic labour market. Normally, until refugee status has been formally granted, asylum-seekers are not permitted to take up formal paid employment. This suggests that reducing application processing times is an important way of reducing the time during which refugees are dependent on welfare benefits. In any case educational and other integration procedures should available as early as feasible, where possible before formal recognition, to promote social and also economic integration. Member States should avoid constellations in which refugees’ asylum application is rejected but repatriation is not carried out. Those affected are left in a legal limbo with a high risk of drifting into the informal economy if not criminal activity. The acceptance/rejection rate for asylum applications is clearly a decisive parameter for the size of the potential labour market effect. For the foreseeable future applicants from war-torn countries, particularly Syria, are virtually certain to be permitted to stay. This might, of course, change, either if, unexpectedly, the violence can be brought to a halt or, sadly more plausibly, government policies become more restrictive in the wake of populist pressures.
There is a considerable literature on the impact of immigration on the wages and employment of existing workers. The preponderance of the evidence – and economic common sense – suggests that workers competing with newly arrived immigrant labour will, all else equal, tend to experience downward pressure on their earnings and/or employment opportunities. On the other hand, those citizens that purchase goods and services produced by such labour will enjoy an increase in their real incomes. Unless refugees’ skills are improbably highly skewed to the upside, this almost certainly implies a potential for income redistribution among the resident population (including other recent immigrants) from the bottom up, even if the magnitude of such effects is uncertain. Given that this pressure comes on top of existing trends towards greater social inequality, policymakers should be conscious of and take appropriate steps to mitigate such effects. Financing educational and language-proficiency programmes (which will intensify competition in the middle and the top, rather than at the bottom of the distribution) out of progressive income taxation would seem appropriate in this context, for instance.
A number of commentators – for instance the German Council of Economic Experts – have called for the abolition of or restrictions to minimum wage legislation and for other labour market liberalisation measures in order, so the purported logic, to ease the integration of refugees and migrants into the labour market. Given that these commentators were long opposed to the introduction or maintenance of such measures, it is hard to avoid the conclusion that the refugee crisis is being exploited for political purposes. In the case that exemptions from regulations are given explicitly for the refugees there is a risk of displacement processes. This will lead to resentment amongst native workers, stoke social tensions, and be grist to the mill of the xenophobes. A general lowering of standards introduced explicitly in response to the refugee influx will, if anything have even more damaging effects. In any case the right approach to maintaining and expanding employment opportunities is to institute active educational and labour market policies as indicated above and to address what are the real causes of high unemployment in EU countries, in short the institutional inability to ensure adequate aggregate demand.
Short-run fiscal and demand effects
So far we have focused on the medium and longer-run effects on the supply side resulting from the expansion of labour supply. We must also consider short-run fiscal effects and impacts via the demand side. There is no doubt that increased public spending is being called forth and more will be necessary. Arrival and transit countries must shoulder the fiscal costs of ensuring the safe arrival, registration and recognition, initial accommodation, food and healthcare, and onward passage of refugees, while maintaining security. For some of this expenditure compensation is available from EU funds. Destination countries will, in addition to longer-run administrative, accommodation and subsistence-benefit costs, need to invest in providing the needed integration, educational and training services.
Estimations of the size of this additional fiscal spending vary somewhat but generally point to modest effects. The European Commission in its Autumn Forecast foresees additional spending averaging out at 0.2% in the current year, rising slightly in destination countries the following year. Sweden is forecast by the Commission to experience the largest spending boost, of around 0.5% in 2015. The OECD reports national budget plans, including a 0.5% additional spending in Germany each year through to 2017. Broadly consistent with this, the German Council of Economic Experts estimates additional expenditure of 0.2-0.3% of GDP in 2015 and 0.3%-0.5% in 2016 in Germany.
Given the priority accorded to fiscal deficit reduction by policymakers, with the European Commission very much to the fore, where even +/- 0.1pp of fiscal deficit is treated as a matter of the greatest policymaking import, a critical view of this additional spending might be expected. Indeed, to the extent that European policymakers insist on the maintenance of given fiscal targets, it is implied that additional spending on refugees will need to be offset by cuts in other budget areas (or higher revenues). However, the European Commission in its Autumn Forecast does not push this point. Indeed it now recognises that such additional spending will have a reduced impact on the fiscal position because of the multiplier effect, although it believes that the multiplier is below one. The OECD is more sanguine, noting the potential for a boost to GDP from the demand-side thanks to additional spending, which will largely be on domestically produced goods and services (OECD Economic Outlook Autumn 2015 p. 18).
Consistent with a view that the European economy is primarily constrained on the demand side, the current constrained effectiveness of monetary policy, and thus the continued need to backload fiscal austerity, the multiplier on fiscal expenditures more generally is likely to be substantially in excess of one, and particularly so in the case of spending on refugees. Refugees are “credit-constrained households” par excellence, while the import leakage (especially the extra-European leakage) of spending on support services, housing etc. is likely to be extremely limited. And for as long as there is a significant negative output gap, additional induced spending rounds are to be expected from the higher private-sector incomes generated by the additional government purchases; the previously underemployed contractor erecting temporary refugee accommodation, for example, will spend part of the additional income on domestic goods and services. This effect will push the multiplier comfortably above one at least for as long as the output gap is substantially negative and monetary policy constrained. A short-run boost to European GDP of several decimal points of one percent seems plausible on this basis.
Consequently there is no contradiction between policies that maximise the longer-run benefits of the additional immigration and short-term fiscal concerns.
Moreover, there is a favourable spatial dimension, at least potentially. First, wealthy countries with rather comfortable fiscal positions (most notably Germany, but also for instance Sweden and Austria) will be constrained to run a more expansionary fiscal policies than they would otherwise have done; this will raise GDP in those countries and have (limited) positive rebalancing effects across the euro area. Second the crisis offers an opportunity to ease the fiscal constraints on some struggling “front-line” states, most prominently Greece, but also countries such as Italy and Spain. Funding from the EU’s Asylum, Migration and Integration Fund or the European structural funds should be expanded. And demands – from among others Italian Prime Minister Renzi – to exclude the additional spending on refugees, which undoubtedly has a European dimension, when evaluating national budget positions should and probably will be given a favourable hearing.
The analysis of the economic, fiscal and labour market impacts of the influx of refugees – with all due caution given the many uncertainties and unknowns – suggests among other things that:
- the short-run impacts and pressures on Member States economies, labour markets and fiscal positions will be noticeable but reasonably contained in size;
- the short-run macroeconomic impact of increased fiscal spending will be positive in the current context;
- the medium and longer-run impacts on the labour market and on European demographics are potentially quite substantial and positive;
- the realisation of such potential, however, requires substantial additional public investment needs which will continue even if the inflow were to subside;
- for as long as there is a substantial output gap and monetary policy is constrained, there is no short-run/long-run policy trade-off;
- attention needs to be paid to possible distributional effects. Attempts to use the refugee “crisis” to roll-back labour market regulations and reduce minimum wages are opportunistic and should be resisted.
 According to at least one recent report, an aggravating factor, if not more, inciting Syrians to undertake the risky passage to Europe was the cutting of international financial support to refugees in the camps. See Frankfurter Allgemeine Zeitung, 8.11.2015 “Wie der Hunger die Syrer in die Flucht trieb“, http://www.faz.net/aktuell/politik/fluechtlingskrise/wie-der-fluechtlingsandrang-aus-syrien-ausgeloest-wurde-13900101.html/
 All the following EU population data refer to the situation on 1 January 2014, the latest figures available.
 The age breakdown used for refugees is different from the broad categories usually used for the demographic statistics for EU citizens. The latter were recalculated to make them comparable with the former.
 On this and the following see Deutsche Bank Research, Influx of refugees: an opportunity for Germany, November 13th 2015.
 See IAB, „Asyl- und Flüchtlingsmigration in die EU und nach Deutschland“, Aktuelle Berichte 08/2015 and IAB, „Flüchtlinge und andere Migranten am deutschen Arbeitsmarkt. Der Stand in September 2015“, Aktuelle Berichte 15/2015.
 In drawing implications for other EU countries it needs to be borne in mind that, in EU comparison, Germany has low shares of the population with tertiary academic qualifications but high shares with vocational qualifications.
 Cf. the studies collected in Galgoczi, Leschke, Watt (eds.) EU labour migration since enlargement. Trends, impacts and policies, Ashgate (2009) and their EU Labour Migration in Troubled Times – Skills Mismatch, Return and Policy Responses, Ashgate (2012).
 In some countries an application for permission to take up work can be made, which may be granted after a waiting period. See OECD Economic Outlook, Autumn 2015, p. 18.
 One of the reasons that some studies failed to find effects was that other things are not equal: in particular migrant workers tend to flock to towns and regions with favourable labour market conditions which tends to put upward pressure on local wages. Thus comparisons between cities/regions experiencing and not experiencing a migrant labour inflow, a methodology frequently employed, can be misleading.
 See Chapter 2 of the Independent Annual Growth Survey 2016, http://www.iags-project.org/documents/iags_report2016.pdf/
 Sachverständigenrat, Jahresgutachten 2015/16, pp. 12ff. See also Deutsche Bank Research, Influx of refugees: an opportunity for Germany, November 13th 2015.
 OECD Economic Outlook, Autumn 2015, p. 17.
 See Chapter 1 of the Independent Annual Growth Survey 2016, http://www.iags-project.org/documents/iags_report2016.pdf/; Rannenberg, A., Schoder, C., Strásky, J, (2015)
“The macroeconomic effects of the Euro Area’s fiscal consolidation 2011-2013: A Simulation-based approach”, IMK Working Paper, Nr. 156, http://www.boeckler.de/imk_5279.htm?produkt=HBS-006147&chunk=1&jahr=/