The Economics of Refugees: Boom or Bust for Germany?

Photo: Laszlo Balogh / Reuters

In the last two years, nearly a million refugees have arrived in Germany, and an additional three million are projected to arrive in Europe by the end of 2017. Welcoming migrants is nothing new for the Germans: the memory of reunification of West and East Germany — when thousands of East Germans flooded into the West — is still fresh. However, circumstances are less joyous this time, as Germany's open-door policy is being called into question for its projected social and economic consequences.

Internal pressures have led President Joachim Gauck to call for a cap on the number of refugees Germany can take in. At the same time, Germany's admirable open-door policy has been hailed for its post-war humanitarian ideology. Optimists believe the migrants are exactly what Germany needs to offset its aging population, yet pessimists believe that the massive influx of migrants (and their underlying cultural differences) will damage an already fragile German welfare state. With the rise of internal anti-refugee sentiment, however, the economic benefit of refugees will be miniscule — if not nonexistent — for the German economy and its rather heterogenous society.

Similar to many other developed countries, the German workforce is aging at a rapid pace, and the country is in dire need of fresh blood in its labor force. Although the positive economic impact of refugees has been demonstrated in the Scandinavian countries, this does not necessarily apply to Germany. Many incoming refugees lack the skills needed to immediately contribute to the German economy, and in combination with language barriers and cultural differences, the cost of processing asylum seekers outweighs the economic benefits.

As the massive migration flow is still in its early stages, experts have been debating the exact long-term impacts the refugees will have on European economies. Those who are optimistic cite the relative youth of the majority of the migrants. According to the calculations of the German Institute for Economic Research (DIW), the young migrants will be able to contribute to the German economy for 40 to 50 years and will only take as long as five to six years to become revenue positive. David Folkers-Landau, head of the Frankfurt-based think tank Deutsche Bank Research, believes that the rather sluggish German economy can benefit by pumping new blood into its aging workforce. Folkerts-Landau claims, "Successfully integrating the refugees would be a win-win situation, and allow Germany to cement its position as Europe's economic powerhouse."

Others are not as optimistic, and rightly so. Against the backdrop of an extensive welfare system, a large proportion of migrant workers will have to spend many years working before becoming fiscal contributors to the already crippling German welfare system. Clemens Fuest, a globally recognized economist and president of the Mannheim Center for European Economic Research (ZEW), has been vocal about the negative economic indication of the recent migrant crisis. Although Fuest discredits the concern of migrant workers taking away German natives' jobs, he has echoed the concern of many economists concerning the fiscal strain on the German national budget. In short, the majority of migrants arriving in Germany are unskilled workers with low incomes, who cannot contribute to the welfare state in the form of taxes.

Economic models are useful in assessing the economic impact of refugees, but overlook the social dimension of the refugee crisis. The Cologne attacks have sparked anti-refugee sentiment among German citizens, as well as lawmakers and politicians. Germany's resolute stance on welcoming refugees is being challenged by the rise of populism and could prove detrimental to the effective inclusion of refugees into German society. Ambivalence among politicians is also evident as there have been multiple reports of defections in the ruling coalition over the refugee crisis.

Germany's long-held national ideology of Willkommenskultur — a welcoming culture — is being shaken by the grievances of German citizens and politicians, making the arguments of the optimists less convincing. Anti-refugee sentiment is on the rise following the Cologne attacks, and is likely to hamper the inclusion of refugees into the German workforce and society. Whether Germany can take on this kind of European leadership will ultimately depend on whether its integration policies can alleviate the damaging fiscal impact the refugees may have on the German economy.

Ryan McClure

Ryan is a 4th year studying Political Science and Economics at the University of British Columbia.

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