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September 2016
Global Outlook

The migrant crisis was one of the major themes of the UK referendum campaign. It is probably the most important risk facing the European Union since the sovereign debt crisis and the most overlooked by investors. 

Over the past 15years, Europe has experienced three waves of migration. The first came from Central and Eastern Europe in the early 2000s following the enlargement of the Union to the East, and the second came from Southern Europe in the wake of the recent economic crisis. These two waves had a net positive economic impact because the European migrants filled low-skill jobs in Northern Europe. The current wave comes from the Middle East and Africa and has two specific characteristics: it consists mostly of Muslim migrants fleeing from war zones (Syria, Iraq, Afghanistan etc). This crisis clearly challenges the functioning of Europe’s consensus-based institutions and drives wedges between European states. To establish a unified immigration policy, the EU proposes a punitive financial pay-off clause that would apply to member states refusing migrants. This is certainly the worst possible policy option. By acting like a bogeyman, the EU accentuates the institutional crisis of the union and widens the gap between public opinion in the countries of Central and Eastern Europe and itself.

Basic economics

In theory, the migrant crisis represents an economic opportunity for Europe. The post-war economic model based on a large workforce paying high taxes to fund services for the young and old is challenged by the demographic change. The workforce is expected to dwindle as the replacement fertility rate remains under 2.1 births per woman in all the EU countries, except France, and as the baby boomers retire. 

According to Eurostat, the EU workforce will decline by an average annual rate of 0.4% from 2020. There are primarily three solutions to counter the declining workforce. The first is to promote generous parental benefits, like in the Nordic countries, France and also in Poland. The success of family policies hinges on the ability of the state to finance them in the long term, which is uncertain considering the

already high public expenditure in most European states. The example of Sweden highlights the limits of this strategy. In 1988, the country decided to make considerable financial efforts to support families. In the space of two years, the fertility rate rose sharply, but the effect did not last, and it returned to close to its starting level when the government was forced to cut spending because of the worsening economic situation.

Essential Trades for Q3 2016

The second solution is to raise the retirement age, which is between 60 and 65 in most European countries, but will gradually rise to 67. This process can be accompanied by a reduction in the size of pensions. This economic strategy cannot be effective alone and faces strong opposition from part of the

population, some political parties and unions. 

The third solution is to implement an open-door immigration policy. In principle, the arrival of new workers will fill labor shortages, and contributes to raise nominal domestic demand, which will create a virtuous circle of growth and higher job creation. In addition, new workers will broaden the tax base, improving the fiscal situation of the states and allowing them to pursue generous social policies. The influx of migrants makes economic sense for Germany.

According to European forecasts, the country could lose 10 million people between 2020 and 2060, which would have a negative impact on potential GDP growth from that date. This explains why Germany decided to welcome migrants with open arms. That would also make sense in the long run for the countries of Central and Eastern Europe and some southern countries, such as Greece, Spain and Portugal. The situation is particularly critical for Poland since its population may shrink by 15% in the next four decades.

Paradoxically, Poland is one of the most virulent opponents to immigration of foreign workers. However, opting for immigration is less relevant for France, Finland and the UK where demography remains a strong growth factor.

Employability and productivity

Economic theory often differs sharply from reality. Under the decisive influence of Germany, Europe has favored mass immigration instead of selective immigration, as is the case in Australia for example.This choice will have at least two significant consequences. Migration will help to solve Europe’s aging problem on condition that cultural and labor market integration of immigrants succeeds. The employability of migrants remains a question mark. Because of the trauma caused by the war, many migrants may not be immediately employable, and they could be a financial burden for host countries for longer than expected. Moreover, the migrant crisis will probably hasten the decline of EU labor productivity growth rates, whose slowdown has accelerated since the early 90s, and that affects all European countries. Nowadays, the main problem of the European economy is not competitiveness, but productivity.  Low-cost migrant labor may create a disincentive for companies to innovate and to automate production, which is crucial for Southern European countries. In addition, the money spent to integrate migrants could be at the expense of upgrading the skills of the entire workforce. It is simplistic to think that immigration will be able to stem the economic decline of Europe.

The other referendum

There is no reason to expect a solution to the migrant crisis and punitive financial pay-off clause issue this summer. The European Union will be too busy handling Brexit and its impact in the coming months. The way the EU works is unchanged: European leaders avoid dealing with problems for as long as possible and reach temporary agreements at the last minute, which does not solve anything. It is a never-ending story. This is what happened with Greece and the Italian banking sector recently. This is what is happening today with migrants. A Hungarian referendum planned for later in the year on whether the country should accept mandatory EU quotas for resettling migrants may shake the foundations of Europe again. If the “no” vote wins, there is no assurance that Europe will respect the vote of the citizens. We all remember the EU’s reaction when the “no” vote won in France’s 2005 referendum on the European constitution. It is, of course, too early to predict what will happen. But one thing is certain: it is highly likely that other countries will follow the example of Hungary, especially Poland, the Baltic countries and Austria. We used to say that Europe moves forward in times of crisis. Unfortunately, this is no longer the impression in light of the EU’s timid reforms of recent years. Europe appears more divided than ever. Mismanagement of the migrant crisis and economic sluggishness promote populism all over the continent. The result of the presidential election in Austria, where the extreme right-wing candidate almost won, and the unexpected outcome of the UK referendum are two serious warnings to Brussels. If Europe cannot solve the problem of migrants and manage to reconnect with the population, populism will inevitably spread.

By: Christopher Dembik
Christopher is an Economist at Saxo Bank, based in Paris, France. He is in charge of the macroeconomics and financial markets research for the Paris office. He holds a Master of Political Sciences from Sciences Po Paris and a Master of Business Administration from the Institute of Economics of the Polish Academy of Sciences.

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