LBS logo London experience. World impact.

Migrants can strengthen the EU economy

04 Mar 2016

Why closed borders aid terrorists and harm European growth

Migrants_482x271

EU countries that want tighter border controls risk missing out on the economic benefits that migrants and refugees bring, according to Hélène Rey, Academic Director of the AQR Asset Management Institute and Professor of Economics at London Business School. 

Professor Rey believes countries such as France and UK accept a “pitifully low” number of migrants, despite the positive effect they have on growth and employment rates. She added that right-wing parties use the threat of terrorism as an excuse to call for limits on the number of migrants and refugees entering their countries.  

“Economic history has many examples of the detrimental effects of protectionism on prosperity,” she said. “By championing national preferences and the dismantlement of Europe, extremist parties would lead countries towards a path of decline and pauperisation, with societies missing out on innovation and opportunities.

“It is all too clear that if big, courageous actions are not now forthcoming at the European level, if we do not show solidarity, terrorists will insidiously destabilise our societies by promoting fear among our people and killing more innocents.

“Their awful acts are playing into the hands of European xenophobic parties whose mantra is to close up everything, to retreat behind borders and to blame migrants for all ills. Like the Front National in France, European extremist parties sell the electorate a delusional view of the world, in which people are supposed to take comfort in being protected behind some kind of fortified Maginot line, while forgetting our values and ruining our economies and therefore our future strength.”

On the move
More than a million migrants and refugees – mostly from Syria, Afghanistan, Kosovo and Iraq – entered Europe in 2015, sparking a crisis for EU nations that are struggling to handle the influx. Most crossed by sea, with more than 800,000 travelling from Turkey to Greece.  

The European Commission estimates that three million asylum seekers will arrive in the EU by 2017 – one million in 2015, 1.5 million in 2016 and half a million the following year. 

France and the UK have pledged to accept 24,000 and 20,000 asylum seekers and refugees respectively from 2015 to 2020; far below the 800,000 that Germany was expected to receive just last year. 

Critics claim that migrants and asylum seekers put a strain on their nations’ economies, public finances and services such as housing, hospitals and schools. But the European Commission’s autumn 2015 forecast said that the refugees arriving by the end of 2017 would contribute annual GDP growth of 0.2% to 0.5% in EU countries.  

The report added that by accepting just 4,000 a year between 2015 and 2020, Britain would likely miss out on the economic benefits that refugees bring. In contrast, countries such as Germany and Sweden that have taken in proportionally high numbers of refugees are expected to benefit the most.

“For the EU as a whole, the growth impact is small, but it can be more sizeable in some Member States,” the report said. 

“In Sweden, which has among the highest share of refugees as a percentage of the population in the EU, the impact on the headline balance is expected to be closer to 0.5 per cent of GDP [2015].”

According to the report, the EU’s labour force will increase by 0.3% in both 2016 and 2017 if half of the arrivals are granted asylum and three quarters of those are of working age. 

Meanwhile, GDP across the EU will increase by 0.21% in 2016 and 0.26% in 2017 if the accepted migrants have the same skills as the citizens in the countries that accept them. 

The Commission’s report says that the influx of migrants will add 0.43% and 0.56% to Germany’s GDP in 2016 and 2017 respectively. 

The figure would rise to 0.72% by 2020, although the additional goods and services provided by accepted migrants will not be enough to boost the overall wealth of all Germans. The report added that German GDP per capita will fall by 0.6% in 2016 and still be 0.3% lower in 2020.  

Germany’s public finances will be affected, with the German budget recording a net cost of 0.25% of GDP in 2016 if the migrants have the same skills as locals. A small, but still negative impact of 0.05% is forecast for 2020.  

Time to pay up
The funding to support migration and strengthen European borders should come from the European Council through the issuance of bonds, according to Professor Rey. 

“Organising European funding would allow countries who have no fiscal space to invest enough resources to enable a better integration of refugees and to allow the swift sorting of refugees from other migrants at external borders.

“There should be some sharing of defence spending, including for operations on foreign soil aiming at achieving collective security in Europe. There should be coordinated diplomatic efforts.

“Scaling up European spending by several tens of billions of euros on these projects is warranted and probably the best investment Europe can make now. It [European Council] should do so very swiftly; the human, political, humanitarian and even economic dividends would be enormous. We should not let our civilisation die because of national budget rules.”

About Hélène Rey

Hélène Rey is a a Professor of Economics at London Business School. She is also one of the Academic Directors of the AQR Asset Management Institute at LBS.


She teaches on the following programmes: