The Refugee Crisis – Does Europe Benefit or Lose? The Angle Not Covered by the Media

© 2015 Prof. Farok J. Contractor, Rutgers University

Put aside, for the moment, the horrific scenes of human suffering, the fears that some ISIS sympathizers may be part of the herd swarming onto European shores, and the large immediate costs of resettling and giving aid to hundreds of thousands of souls. Then consider this question:

In the long term, does Europe benefit or lose?

Most of the migrants are young and will swell the labor force. From a simple Economics 101 point of view, yes—wages could drop very slightly as the supply of labor across Europe increases. But pictures on television and the media showing invading hordes miss the larger story:

1) The overall effect on Europe is slight because even 160,000 refugees (of which, say, half—80,000—could be added to the European workforce, the rest being children and homemakers) is a very tiny amount considering the total EU population of 508 million.

2) As in much of economics, the effects of any change are spread very unevenly. Germany will benefit as it needs workers and has full employment, while 25 percent of Greeks are out of a job. (But then, no migrants want to remain in Greece—they want to quickly move on and head toward the north.)

3) The fact is that some European countries, such as Germany and Sweden (certainly not all), are affected by internal population factors already:

• An aging (shrinking) population, with the labor force declining precipitously and fewer younger workers supporting pensions.[1]

• Jobs that are going begging—for example, the lack of skilled workers is a drag on Germany’s economy and exports.

• Youth unemployment below 6 percent in Germany, which is explained mainly by those between jobs or still in school—in terms of actual labor availability, the rate is effectively near zero.

• The need to inject youth and vitality into their culture as well as into their consumer base.

4) Another background consideration is that those who are migrating are not all fleeing war or problems. One sees faces in the crowds from Bangladesh, Nepal, and Afghanistan, where life is tough, but there is no open warfare, as in Syria. And almost all the migrants flooding into Europe are

• Literate, or in many cases relatively well educated

• Enterprising

• Resourceful

• Persistent

• Physically strong

• Skilled

In other words, these refugees are just the kinds of people a labor-short country wishes to induct into its society. Before 2013, long before the current influx, demographic data indicated that the mean age of immigrants into the EU was already below 25. (See Figure 1.)

Figure 1: The average age of immigrants in the EU is below 25.

Source: eurostat – Statistics Explained

Germans may be compassionate and caring toward refugees; but they are also calculating and smart about their own needs. So from a cold-blooded economics perspective, some countries, like Germany, will benefit considerably from the influx. And in Europe overall, the short-term costs of resettling refugees will be more than compensated for by the value of labor, talent, and ideas contributed by the (mostly young) migrants over the rest of their lives working in the EU.

But this net benefit is also a function of how well the new arrivals are integrated into each society as productive members. Germany and the Scandinavian nations do this well—and reap the benefits. France, on the other hand, has not integrated Maghreb Muslims well, many of whom languish in banlieues (poor suburban ghettos outside Paris, Lyon, and Marseille). Greece, Romania, and Hungary are examples of nations that are not integrated well with the rest of the EU in the first place, lack dynamic economies, and have a large unemployment problem of their own.

Of course, life is not all about economics. What about fears of migrants swamping, and possibly overtaking, Europe’s Christian and cultural heritage? This is indeed a long-term concern for any nation. But then consider:

• So far, only 6.3 percent of EU residents (around 32 million out of a total of 508 million) were born outside the EU.[2] (See Figure 2.) A few hundred thousand additional migrants are not going to bump that percentage up appreciably.

• Muslims (both native born and immigrants) comprise only 4 percent of the EU’s total population.[3][4]

• Fewer than 5 percent of Northern Europeans belong to a Christian congregation or claim affiliation with a Christian institution.

• Millions of completely assimilated children of US immigrants, like Senator Marco Rubio, strongly identify with their local culture. Rubio espouses conservative principles, quotes America’s founding fathers, and has been a staunch member of the Catholic, Mormon, and evangelical churches.

 Figure 2: Citizens of non-EU member countries are shown in blue.

Source: eurostat – Statistics Explained

The history of humankind and of globalization suggests that genes change, mutate, and meld (although Europe is in no imminent danger of overall genetic change, given the relatively small percentages of immigrants thus far). The fleshly carriers of ideas pass on and die. But worthwhile ideas themselves, and culture, persist and thrive beyond the lifetimes and genetics of their carriers.

---

[1] Akkoc, R. (2015). How Europe is slowly dying despite an increasing world population. The Telegraph, 16 February.

[2]  Wikipedia. Demographics of the European Union as of January 1, 2015.

[3] Pew Research Center. The Future of the Global Muslim Population, January 27, 2011.

[4] Pew Research Center. Table: Muslim Population by Country, January 27, 2011.

Why a Single Currency Works in the US, but Not Very Well in Europe: Three Minimal Conditions for the Eurozone to Function

© 2015 Prof. Farok J. Contractor, Rutgers University

America has been using a single currency since 1793, when the United States Mint in Philadelphia first began issuing US dollar coins. However, it is not the longevity of a currency that determines whether it succeeds, but institutional mechanisms. Such mechanisms are weak or lacking in Europe. To understand why, we need to examine how such mechanisms could help countries in a common zone to ride out economic cycle “booms and busts.”

When a country gives up its own currency (say, the drachma) in favor of a supranational one (such as the euro), it loses two important levers to help soften the blow of a recession: (1) It cannot unilaterally adjust its interest rates downward to stimulate its own economy in a downturn; interest rates could be held uncomfortably high by the supranational monetary authority if the economies in the other member states remain healthy. (2) And it is unable to devalue its currency in order to stimulate the nation’s exports.

For a single currency to function well, three conditions, or institutional pillars, must be in place: (1) fiscal discipline by member states, (2) labor and capital mobility, and (3) inter-regional balancing through transfer payments managed by a central government.

Fiscal Discipline by Member States

While American states are free to set their own budgets and raise money through taxes and borrowing, their excesses are curtailed by state constitutions that recommend or mandate balanced budgets; by an informed media that flags profligate spending; and by the discipline that the bond market imposes. Almost all US states manage to restrict their deficits to a few percentage points.

When the eurozone was introduced in the early 2000s, participating countries that gave up their own currencies made pious promises that they would restrict their budget deficits to no more than 3 percent. But no enforcement mechanism was put in place, and in the go-go years between 2000 and 2007 countries such as Greece ran up sovereign debts well in excess of that limit. By early 2015, Greek debt was estimated to be 177 percent of GDP[1]—in short, unpayable—according to a recently leaked IMF report.[2] In fact, previous Greek governments must have known they were taking huge risks because they hired investment banks such as Goldman Sachs[3] to devise complex swap instruments that hid the true size of their borrowings from other EU states and the public. In 2010, Angela Merkel called this “scandalous.” But she could do nothing about the situation without an EU enforcement mechanism in place.

Labor and Capital Mobility

Recessions and economic downturns impact states differently. If a worker in an Ohio “rust-belt” factory is laid off, he may consider selling his home and loading the family and Golden Retriever into the minivan and driving to Houston or Silicon Valley, where jobs are available. On average, 42 percent of Americans do not reside in the state of their birth. This willing mobility reduces the impact of recessions and unemployment, decreasing the pain in the most affected states. According to the US Census Bureau, after age 18 Americans will move 9.1 times during the rest of their lives.[4] By contrast, 47 percent of Italians, for example, live within 5 kilometers of their mamas. And although jobs are still going begging in Germany, the almost 30 percent of Greeks who are unemployed in 2015 do not wish to relocate because of cultural unfamiliarity and reluctance.

Europe is still a collection of separate cultures, employment regulations, and languages, and therefore labor immobility does not provide the smoothing-out effect seen across the United States. Capital, too, is less mobile across the EU, compared with the US, because varying company regulations and foreign-market unfamiliarity reduce the likelihood of a firm relocating or expanding outside its nation.

Inter-regional Balancing Through Transfer Payments Managed by a Central Government

In the US, most taxes are collected by a centralized federal government, which then allocates money to the states according to their needs. In Europe, each state collects its own taxes and is then reluctant to share any significant amount with the other “foreign” nations in the eurozone. On average in the US, a decline of one dollar in a state budget is offset by a transfer of 28 cents from the federal government.[5] More can be made up by additional taxes raised by the state, providing a cushion to smooth out the bumps over a recessionary period.

True, the EU (Brussels) does reallocate some funds to member states, but these are very small compared with US transfers from the federal government to US states. Moreover, most of the funds Brussels redistributes are project-specific rather than designed to alleviate recessionary suffering or boost flagging economies. Bailouts such as those given to Portugal or Greece have to be painfully negotiated each time and agreed to by all EU member states. And the member states have veto powers. So Brussels really is not a central government, by any means.

Conclusion: Monetary Union Without the Three Institutional Pillars

The euro is a noble experiment designed to foster a sense of pan-European identity (and, incidentally, to reduce currency risk and transaction costs for firms). Its architects had hoped that the façade of unity would then be followed by the construction of three institutional pillars to solidify the structure. Fifteen years hence, European institutions have barely evolved enough to build such pillars or, in other words, to fulfill the three requirements of a monetary union. An appetite for a central fiscal authority is lacking, as is a mechanism to restrain individual states from excess borrowing to boost their budgets. For cultural reasons, cross-border migration of labor remains sluggish, and transfer payments from the rich nations of the EU to support their poorer neighbors is already running into such resistance that countries such as the UK threaten to withdraw from the EU altogether.

Can the noble experiment survive?

Certainly, other nations that received bailouts, such as Portugal, have not only turned the corner, but have begun to pay back their debts.[6] It is possible that the shock of recent events can stem the profligacy of loose fiscal policies, especially if conditions are imposed on them. But the euro will remain a fragile construct, vulnerable to future shocks, whose survival will depend on the continued generosity of the richer members of the EU.

_______________________

[1] Eurostat (2014). Government debt as percent of GDP. Government Debt in Europe, August 24.

[2] Reuters (2015). Secret IMF report—Greece needs debt relief far beyond EU plans. Business News, July 15.

[3] Martinuzzi, E. (2010). Goldman Sachs, Greece Didn’t Disclose Swap Contract (Update1). Bloomberg, February 17. Also see Reuters (2015). Goldman Sachs could face lawsuit for helping hide Greek debt—report.RT Question More, July 12.

[4] US Census Bureau: Calculating Migration Expectancy Using ACS Data.

[5] O’Rourke, K. H., & Taylor, A. M. (2013). Cross of Euros. Journal of Economic Perspectives, 27(3), 167–92.

[6] Kowsmann, P. (2015). Portugal on Road to Recovery Post-Bailout, But Scars Remain. The Wall Street Journal, July 17.