It may not be a pressing matter for financial markets right now or even in the near- to medium-term, but nevertheless, the ongoing migrant crisis in Europe is an issue of such magnitude that it will certainly have repercussions for Europe, European economies and markets. Here are some key points for investors:
A Multi-Year Issue European Union interior ministers last week approved a plan for all member countries – even those that opposed the scheme – to divvy up 120,000 migrants among them. That figure, though, is just a drop in the ocean, said Michael Testorf, portfolio manager at R Squared Capital Management. “The number of migrants and refugees in Europe is something we’ve never seen before, and the amount of people coming in over the next years is going to continue to rise,” he said. “In Germany alone, we’ll see immigrants coming in to the tune of more than one percent of the entire population of the country.”
Strained Public Finances
The number of migrants pouring into Europe is going to strain Europe’s public finances and even the most resilient European economies will have problems, said Lauren Goodwin, associate practice leader for global analytics at Frontier Strategy Group, particularly given the EU’s stringent budget deficit limits. She believes the greatest impact will be felt in Southern and Eastern Europe, where there’s less “wiggle room” and therefore more room for civil unrest. “Greece, for instance, is undergoing a massive economic crisis of its own and now there’s this sudden perception of resources having to go to help Europe more broadly, which could cause problems and unrest in the population.”
The migrant issue could also stoke nationalist and extremist politics, an issue that’s already key in Europe and that could come to a head in 2017 and 2018, during big elections in Spain and France, among others, where extreme political parties could gain the upper hand.
… To Test EU Unity/Monetary Policies
This in turn will create new tension for European Union unity, Testorf said, and any extremist party victory in national elections could alter the course of economic policy. “Right now, Europe is doing well overall: We had quantitative easing, so there’s plenty of money in the system. The Spanish economy has recovered and though companies are not investing more, that’s more a question of how the global economy is doing, and the impact of a China slowdown and what’s happening in emerging markets,” he said. “But if we see major left-wing or right-wing shifts in Europe, particularly if the European economies are not doing well, we could see the implementation of measures that will be counter-productive and that will have an impact on economies and investor perception.”
New Blood/New Labor
One of Europe’s greatest problems is its aging population. This has repercussions for many things, so from that point of view, new migrants are a welcome addition for many countries. Businesses in Germany –where the majority of the migrants want to go – are also in clear need of qualified workers, Goodwin said, so to the extent that companies can hire migrants, that is a good thing. However although a new labor supply could prove a great business opportunity, training new workers quickly will be key. “Most European countries have very regulated labor markets so this isn’t a group that can be immediately productive, and the success of integrating a new labor force will depend on how well governments can integrate people into training programs,” she said.
Successful Integration is Key
That Germany has hired McKinsey to help with the migrant crisis is a sign that European governments are prepared to find the best way to integrate new arrivals, and this is key to the future of Europe, Goodwin said, given how challenging the issue is. Successful integration is also key to European business because the lack of a “really good framework for dealing with the crisis means a longer period of uncertainty for businesses with respect to policies,” she said. Right now, there is no talk of any legal disruption of the Schengen agreement, which allows for the free movement of people and goods throughout Europe, but there have been disruptions (trains stopped between Austria and Germany, for instance) that have caused setbacks to business, and not knowing where border controls will happen can prove to be an impediment to production and distribution Goodwin said.