THE DESTABILIZING POTENTIAL OF EUROPE S MIGRANT CRISIS BY ANWITI BAHUGUNA, PH.D. 2016 GLOBAL PERSPECTIVES
THE DESTABILIZING POTENTIAL OF EUROPE S MIGRANT CRISIS Europe s worsening migrant crisis could lead to political turmoil not only in Germany, but also across the eurozone. The civil war in Syria has displaced nearly seven million people, many of whom are now making their way through the Balkans into Germany. While Europe has always been a destination for refugees and economic migrants from Africa, Asia and the Middle East, inflows have historically been limited to fewer than 100,000 per year. The current influx of migrants is expected to exceed one million people, bringing formidable integration challenges. ANWITI BAHUGUNA, PH.D. Senior Portfolio Manager, Global Asset Allocation Team Anwiti is responsible for asset allocation research and portfolio management of the asset allocation funds and separately managed accounts.
Applications per month Unprecedented flow of migrants threatens to destabilize the eurozone 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 1999 2000 2001 2002 EU asylum applications 2003 2004 2005 Source: Absolute Strategy Research, 11/15 2006 Projected applications* August 2015-137,749 July 2015-121,543 June 2015-94,205 * Based on available data through July and August 2015. Where data was unavailable, the previous month s rate of change was used. 2007 Merkel s domestic troubles Germany faces a demographic time bomb, as its dependency ratio (the ratio of non-working-age population to the working-age population) is projected to rise to unsustainable levels. The right mix of working age migrants, if trained and assimilated, could have positive effects on the economy. However, the fiscal spending required to accommodate more than a million migrants in Germany is estimated at 0.3% 0.6% of gross domestic product not an easy task for a country focused on balanced budgets. 2008 2009 2010 2011 2012 2013 2014 2015 German Chancellor Angela Merkel, who provided stability and pragmatism during the debt crises, now faces major domestic challenges as her position on welcoming the refugees is largely at odds with the rest of the country. We would point out the significant risks to the region should Merkel not survive the German political dynamics. There are no obvious candidates who could step in and provide similar leadership in Merkel s departure. Implications beyond Germany s borders The refugee issue extends beyond Germany and threatens to raise the risks of another eurozone crisis. Merkel s pro-immigration stance faces stiff opposition from other European Union (EU) members, particularly eastern European countries. In response, Germany is threatening to limit EU funding for countries refusing to accept migrants. In the south, the fiscal burden of accommodating migrants is reenergizing the anti-austerity debates in Greece, Portugal and Spain. It has refocused the Brexit discussion (Britain s impending vote on leaving the EU) and put into question the free movement of labor across borders within the Schengen zone of Europe. Monitoring a delicate situation Investors are expecting another sunny year in 2016 for eurozone risk assets. The eurozone economy has been recovering steadily from the depths of the crisis in 2011 2012 and European Central Bank (ECB) policies have kept the currency down, supporting exports, and the region has benefited from cheaper commodity prices. The migration issues have raised the risks of another eurozone crisis. Currently, the markets are not overly concerned and expect the ECB policies to be supportive of risk assets; however, delicate handling of the migration will be crucial so as not to hamper the modest recovery underway. The unprecedented flow of migrants and refugees is a significant development that needs to be carefully monitored as a potentially destabilizing shock to the eurozone.
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