The Surge Of Refugees In The EU: Boon Or Burden For Sovereign Ratings?

The Syrian refugee crisis is the worst since the millions displaced by the Bangladesh Liberation War almost half a century ago, in the absolute numbers of cross-border displaced people, not counting those leaving other countries in Europe, the Middle East, and Africa

We expect the number of asylum seekers in Western Europe is to surpass previous peaks in the early 1990s during the turmoil surrounding the violent breakup of Yugoslavia. By far the largest contingent of today’s arrivals is coming from Syria, where the security situation continues to worsen and whose neighboring countries are progressively overburdened with the sheer number of arriving refugees. Turkey, Lebanon, Jordan, and Iraq have so far taken the vast majority of the 4 million refugees that have left Syria.
The German government expects to receive up to 1 million refugees in 2015, over 1% of its population. Those coming from the Western Balkans (Serbia, Albania, Kosovo) will unlikely gain asylum and therefore the right to legally stay in the EU. In any case, they come on top of inward immigration into Germany that has reached over half a million in recent years, mostly from other EU member states, up from 100,000 a year before the eurozone financial crisis.

Is this rise of inward migration into the EU a boon or a burden for sovereign ratings in the region? It could be argued that this latest migratory wave could have ramifications for government budgets, economic growth prospects, as well as for governance and decision making. Standard & Poor’s Ratings Services believes the latter might be the most relevant for sovereign ratings in the EU. Whether the current refugee crisis could have any implications on creditworthiness, we believe, will depend on how well the EU works together to face the challenge.

The Budgetary And Economic Impact Is Unlikely To Move The Ratings

Case in point: Germany
The fiscal implications are significant in the short term: EU members will have to administer shelter, subsistence, and education, including language courses. The German federal government, for example, will set aside €6 billion of extra spending on refugees in 2016, some 2% of overall spending, or 0.2% of GDP. The government intends to absorb this extra spending by cutting back elsewhere, thus safeguarding its objective of no new net borrowing. Spending pressure will also increase on local and state governments. Nevertheless, the overall direct cost appears to be fairly modest. We believe that additional public spending will be similarly modest in other countries, and therefore we don’t currently expect any sovereign rating consequences. Plus, the increase in costs is unlikely to be permanent. Asylum requests will either be rejected (likely for most Balkan applicants) or accepted (the vast majority of cases from Syria, Eritrea, Afghanistan, and Iraq). And before too long, those who are granted asylum will enter the labor market.

Syrian refugees are not fleeing structural poverty and destitution but an acute, devastating, and merciless war.
According to World Bank data, the Syrian population appears well educated, compared to those of many other Arab countries (see “Jobs And Skills, Not Infrastructure, Are Key To Overcoming Gulf Sovereigns’ Oil Dependency,” published on Nov. 17, 2014, on RatingsDirect). Close to one-third of the adult population has been enrolled in tertiary education, both women and men. This should allow many of them to escape social transfer dependency in their host countries and participate in the labor market–especially in those countries where unemployment is low, particularly Germany. All other things being equal, this could have a mild positive impact on growth, which could grow over time as language skills improve and with it the ability to climb the ladder toward more productive and better remunerated jobs.

The refugees are on average also younger than the population of Germany and the other aging populations of European host countries. The new arrivals could thus alleviate the looming economic and fiscal challenges that demographic trends will bring (see “Global Aging 2013: Rising To The Challenge, published on March 20, 2013). This assumes that integration indeed succeeds and most will be staying for good–even if peace were to return to Syria one happier day.

But one should not expect the influx of refugees to solve the EU’s future pension and healthcare problems as the indigenous population ages. Even in the highly unlikely scenario that all internally or externally displaced Syrians–that some estimates put at over 10 million or one-half of the prewar population–were to arrive and settle in Europe, this would be equivalent to 2% of the current EU-28 population. Realistic arrival numbers will be much lower than that. In comparison, UN estimates suggest the resident working-age population in Western Europe will decline by 6.5% between 2015 and 2030 (see “Four Reasons Why QE Won’t Restore Eurozone Growth,” published on March 19, 2015).
In Germany alone, the EU’s most populous member state, the population in the 20-to-67 working-age bracket will decline to just over 36 million (2060) from almost 51 million (2020), assuming precrisis net-immigration patterns of around 100,000 a year (see table 1 in Destatis: “Bevölkerung Deutschlands bis 2060,” 2015). In short: Syrian refugees
can neither fix Europe’s demographic problems, nor will they put downward pressure on sovereign ratings.

What May Matter Most: The Politics
The biggest uncertainty that the refugee crisis poses for sovereign ratings relates to the ability of European institutions and governments to find cooperative solutions to what is effectively a continental challenge. In the recent past, speedy decision-making in the face of European crises has often proved elusive, which we believe can be detrimental to credit quality. For example, we placed all eurozone sovereign ratings on CreditWatch with negative implications in December 2011, and downgraded nine of them the following month. One reason for the rating actions was our view “that the effectiveness, stability, and predictability of European policymaking and political institutions have not been as strong was we believe are called for by the severity of a broadening and deepening financial crisis in the Eurozone.” (See “Standard & Poor’s Takes Various Rating Actions On 16 Eurozone Sovereign Governments,” published on Jan. 13, 2012).

Obviously, the economic and financial stakes of today’s refugee influx are on a much smaller scale. Yet, the current situation also calls for swift and effective collective decision-making. No sovereign, or group of EU sovereigns, can resolve the problem on its own. One could see the difficulty that European governments have so far encountered in their quest for a consensus on the distribution of refugees across the EU as the same governance problem it faced during the initial stages of the financial crisis. The narrow national interests of nation states may still constitute an obstacle that hampers their ability to arrive at a swift and appropriate collective response. An EU failure to collectively and swiftly agree on the pressing issue at hand may suggest that its ability to deal with a future financial crisis may still be compromised.

Specifically, if the refugee question is being inadequately addressed and communicated to the electorate, it bears the  risk of strengthening populist and even outright xenophobic parties and candidates (see “European Sovereign Creditworthiness Might Diminish If Eurosceptics Take Power,” published on Jan. 23, 2015). Such a development might shift the focus of incumbent governments toward containing the populist surge, and move it away from pushing ahead with budgetary and structural reforms. However, fiscal sustainability and a more dynamic growth potential underpin all sovereign ratings. Slowing down or even backtracking on policies conducive to achieving those dual goals could over time increase downward pressure on sovereign ratings.

Should a populist backlash occur, it could furthermore complicate the ability of European sovereigns to act cohesively if and when financial crises re-emerge in one or several member states. An acrimonious fracas over the distribution of refugees across nation states has the potential to sour the collaborative mood among EU member states. The consequences of such a scenario are difficult to predict, but it is possible to imagine scenarios that make the approval of future financial support packages politically more difficult. For example, such political willingness to provide support for a eurozone member state may suffer if it is perceived as having dragged its feet on the road to a common EU solution to the refugee problem, aiming for a free ride instead. Such a turn of events could weigh on the likelihood of default of the recalcitrant member in need of a bail-out. Similarly, an unwilling eurozone member that feels forced to accept more refugees than the national government or population want to accommodate may be less willing to agree to needed financial support for eurozone sovereign peers. All the more so if they are among those perceived to be moving along refugees that enter the EU through their country–instead of administering to the refugees themselves as called for by the EU’s Dublin Regulation.

In an extreme albeit unlikely case, a refugee backlash could even swing the public mood against EU membership altogether. We continue to stress that we believe that abandoning EU membership would be negative for creditworthiness, both for the exiting member state as well as for the EU itself (see “Brexit Risk For The U.K. And ItsFinancial Services Sector: It’s Complicated,” published on June 23, 2015, and “European Union Supranational Outlook Revised To Negative; ‘AA+/A-1+’ Ratings Affirmed,” published on Aug. 3, 2015).

Moritz Kraemer – Primary Credit Analyst – Standard & Poor’s