Schengen and the European Migration Crisis

The Schengen Area. The Agreement signed on 14 June 1985 on a boat on the Moselle near the small town of Schengen (Luxembourg), by five of the ten states that formed the European Community at that time, effectively abolished passport controls and any other border control among the signatories thus treating the area as a single country. The Agreement was supplemented by the Schengen Convention of 1990, establishing a common visa policy. Initially the Schengen Area was separate from EU structures, as at that time the initiative lacked general consensus, but its rules and procedures were incorporated into European Union law by the Amsterdam Treaty of 1997, coming into effect in 1999. The five initial signatories (the three Benelux countries, France and Germany), were gradually followed by another 17, thus encompassing all EU member states except Ireland and the UK that opted out, and four others – Bulgaria, Croatia, Cyprus and Romania – who wish to join and are obliged to join eventually but are not yet deemed to be ready. All four EFTA member states – Iceland, Liechtenstein, Norway and Switzerland – are also associated members of the Schengen Area although they are not members of the EU. In addition, three European microstates – Monaco, San Marino and the Vatican City – are considered de facto participants. Today the Schengen Area has a population of over 400 million people.

Net gains. The creation of the Schengen Area was - in principle – an excellent decision. The effective elimination of internal borders within the Area generated considerable savings in terms of travel time and convenience for passengers, expenditure on custom officials and equipment, higher speed and lower cost of commodity transport. A recent study by Germany's Bertelsmann Foundation estimates the cost of the possible breakdown of the Schengen area at between €470bn and €1.4 trillion over the next decade, (roughly 10% of the 28-members EU bloc GDP) due to an increase in import prices of between 1% and 3%. Germany would lose between €77bn and €235bn and France between €85.5bn and €244bn under the two scenarios. The breakdown of the Schengen Area would also inflict a heavy burden on other countries, with a combined loss for the United States and China over the next decade estimated by the same study at between €91bn and €280bn. The European Commission estimated that the permanent reintroduction of border controls would cost between €5bn and €18bn a year because of lower tourism and transport delays. These estimates perhaps may be slightly exaggerated, but there can be no doubt that in the current, long and severe depression of the European economy, the impact of a Schengen breakdown, even if partial, would worsen significantly the growth prospects of the Union, with global reverberations.

Migrations. In the half-century 1960-2010 the ratio of the population working in countries different from that of their birth over the world population (corrected for the displacements which occurred at the end of World War II in 1945) was relatively stable around 3%, though with a clear tendency to accelerate that was much more marked for South-North migrations (see the figure below, where the value of that ratio in 1960 is taken as equal to 1).  

Source: Docquier, Frédéric and Joel Machado (2015), “Revenu, Population et Flux Migratoires au 21ème siècle: Un défi sociétal pour l’Europe” in Studia Oeconomica Posnaniensia, October 2014.

In subsequent years the acceleration continued. In 2015 migrants entering Europe mostly from the Middle East and Africa turned into a veritable flood – the largest flows to take place since 1945 – that put the Schengen arrangements to a most severe test: EU states received 1.3 million asylum applications, especially from Syria. On 24 August 2015 Angela Merkel announced that all Syrian asylum-seekers were welcome to remain in Germany regardless of which EU country they had first entered. She adopted this “open door” policy unilaterally, without EU agreement, after consultation solely with the Austrian Chancellor Werner Faymann; subsequently there were signs of intended policy reversal but tightening up was only slight (for instance preventing relatives joining migrants for at least a year) thus provoking an intensification of the inflow because of the migrants’ expectation of harder times; a recent poll found that 81% of the German population thought that the government had lost control over migration policy. The Bertelsmann Stiftung estimates that by mid-February 2016 an even larger number of Syrians alone had found their way into Jordan (640,000), Lebanon (over 1 million) and Turkey (2.6 million); Pakistan and Iran have taken several hundred thousand migrants from Afghanistan and Iraq respectively. In 2015 migrants crossing the sea from Turkey to Greece increased 20 times with respect to 2014. Last November the EU granted €3bn to Turkey as an inducement to hold migrants there at least temporarily, but three months later 2,000 migrants still cross daily into Europe: in order to take back non-Syrians the Turks are negotiating for more aid and other benefits such as visa-free travel to Europe, which in turn would generate a significant inflow of Turkish Kurd asylum seekers into Europe. Arrivals in Italy decreased slightly in the same period, from 170,000 to 154,000, which still represent a very large intake. For an up to date survey see Breugel, 12 February, and The Economist, interactive graphics, 6 February.

In May 2015 Branko Milanovic wrote a post in Social Europe, “Five reasons why migration into Europe is a problem with no solution”: 1) deep-seated and permanent factors such as political chaos in the Middle East and extraordinarily huge and increasing income gaps between Europe and Africa, with sub-Saharan population poised to increase almost by six times by 2100; 2) lack of an immigration tradition in Europe; 3) European political blunders due to a combination of incompetence and arrogance, such as overthrowing Gaddafi, the ultimatum to the previous Ukrainian government, and the handling of the Greek crisis; 4) the increasing influence of right-wing, populist anti-immigration parties in several European countries, even when they are not in government; 5) the total lack of strategies, policies and ideas at the European level, while the crisis calls for a multilateral solution involving co-ordination among member-states and with African countries and the European recognition that an influx from Africa is dictated by demographic and economic gaps: “Unfortunately, neither of these two conditions is close to being satisfied. So the problem, among permanent political improvisation, will continue to worsen” – he wrote prophetically. (In a post in the same series last January Branko stressed the economic positives and negatives of migrations; see also his forthcoming book Global Inequality - A New Approach for the Age of Globalization, Belknap Press).

The Schengen Area rules include provisions for temporary border controls to be re-established in case of urgency, for up to 2 and 6 months, and for outright suspension for up to 2 years in the case of threats to public order. Since the 2015 summer temporary measures have been already implemented unilaterally by several countries. Hungary closed its borders with Serbia, Romania and Croatia, allowing its army to use rubber bullets, tear gas and barbed wire against migrants. In November Slovenia started building its own fence along the Croatian border; its Parliament recently approved the deployment of the country’s army to manage the migrants’ flow at its borders. An increasing numbers of migrants have been cutting through these barriers to enter the EU.

Warren Richardson, Hope for a New Life. A man slides a child under barbed wire at the border between Serbia and Hungary at Röszke, Hungary, 28 August 2015. (World Press Photo)

Sergey Ponomarev, Russia, The New York Times, The European migration crisis: Refugees arrive by boat near the village of Skala on the Lesbos Island, Greece, 16 November 2015 (World Press Photo)

The closing of Sche­­ngen internal borders has accelerated since the beginning of 2016. In Denmark the government extended passport checks on the German border for the third time, with Sweden keeping similar checks for travellers arriving from Denmark. France is in the process of closing down the so-called “Jungle” migrant camp at Calais, whose estimated 5,500 residents were waiting to smuggle themselves to the UK on ferries, or through the Chunnel in trucks, trains or even on foot; the closure was violently resisted. Belgium reintroduced border controls on its frontier with France, hiring 290 extra-police officers to try and stop the Calais migrants from moving to its coastline. Austria has built a wall at its frontier with Slovenia; in under two months in 2016 it received 101,000 migrants compared with 4,000 in the same period last year, and has introduced a cap of 80 asylum applications per day.  Borders have been tightened between the Republic of Macedonia and Greece, allowing Syrians and Iraqis through but barring Afghans, who then were banned also by Croatia. Towards the end of February over 22,000 migrants were stranded in Greece and were expected by the Greek Migration Minister and Vice-premier to treble by the end of March; the UN estimates their number to be increasing even faster, at the rate of 3,600 per day. The Greek border with Macedonia has been nearly sealed off, threatening to turn Greece into a giant refugee camp – a “warehouse of souls” (Tsipras). 

The EU is planning to provide Greece with €700mn over 3 years (of which 300mn in 2016 for emergency assistance to migrants); reasonable proposals to trade off migrant assistance for Greek debt cancellation have been rejected as a moral hazard risk. On 24 February in Vienna ten eastern European countries – with the much resented exclusion of Germany, Greece and Italy – agreed on tightening up their own border controls with a view to stop the Western Balkan route into Europe, which of course will shift the flow back to the Mediterranean route into Italy. On 29 February at the Macedonian-Greek border “crowds of migrants were beaten back from storming a fence with a salvo of tear gas” (FT, 1 March). The current migration assault is even more serious than the Euro crisis, as Angela Merkel recently acknowledged.

Last November Jean Asselborn, Luxembourg’s Foreign Minister, declared that Europeans had “only a few months” to save the Schengen system. On 21 February Thomas de Maizière, Germany's Interior Minister, stated that EU member states must agree a common approach to tackle migrations ­“within two weeks” if they wanted to avoid the system’s complete collapse. On 4 March the European Commission unveiled a plan, Back to Schengen, “to lift all remaining border controls by December 2016, so as to return to a normally functioning Schengen Area before the end of the year”. The options considered involve sharing out asylum seekers across the EU on a quota basis regardless of where they first arrived, either as a general procedure or only if a country is overwhelmed by a sudden influx. The IX Report on European Security reveals that a poll conducted in early 2016 among 1000 respondents each in Italy, Spain, France and Germany gives a majority of over 75% in favour of the reintroduction of border controls either unconditionally (56% in Italy) or in special circumstances (Repubblica, 7 March).

The Schengen crisis should not take anybody by surprise. The writing has been on the wall for a long time. The introduction of the Euro as a common currency had equally been an excellent idea, which however failed because it was premature before political, fiscal and banking integration; incomplete due to the ECB lacking powers as Lender of Last Resort to the EU and the member states; and because the Eurozone was subject to increasing divergence in the member states’ fundamentals. The Euro crisis was also made worse by austerity policies perversely enforced by the German-led European authorities. Precisely the same kind of criticisms apply to free internal travel within the Schengen Area: premature, incomplete and made worse by country divergence and recessionary austerity. On the impact of austerity on migrations and convergence see Michelle Baddeley, "Convergence, Divergence and Migration in an Age of Austerity", Seminar paper, Cambridge 2016:

“…(T)he ability for host societies and economies to adapt will be constrained by limits on government spending. Infrastructure investment is needed in the very short‐term, including emergency infrastructure to support the immediate consequences of migration e.g. within refugee and migrant camps. Infrastructure investment will also be essential in the medium to long term to ensure that growing migrant populations have proper access to social infrastructure including housing, schools, hospitals and other medical services. Without this investment, the prospects for growing inequality, deprivation and socio-political unrest are likely to be severe – exacerbating divergences at many levels: between the global South and North, between Northern and Southern parts of the EU, and within countries depending on how different regions’ populations are affected by migration and/or how much access they have to public finance for infrastructure investment.”

Three considerations are in order:

1.Free internal travel requires strong external controls. Just like a Free Trade Area requires a common external tariff barrier, free internal travel obviously requires a common external border, with a common Coast Guard, border guards and if necessary a common Army, all provided and paid for centrally. The Schengen external borders, on the contrary, are delegated to national, fragmented, uneven and inadequate controls (in spite of the rudimentary Frontex agency and the recent intervention of NATO ships patrolling the Aegean Sea). Moreover existing controls do not include brutal repression, and this humanitarian restraint is more labour-intensive. Shooting trespassers on sight, as East German guards protecting GDR borders used to do with attempted exits, is not yet reached but arrest and imprisonment in Hungary (and the extra-Schengen UK) have been, as well as the use of tear gas and rubber bullets elsewhere.

Schengen external borders are a sieve that allows through indiscriminately legitimate refugees, escaping directly from persecution and war, and economic migrants, i.e. those refugees who had already reached a safe country, or other migrants who are simply seeking to improve their standard of living. The difference between refugees and economic migrants (both classed here as migrants) is elusive, as even refugees will tend to move towards countries with higher employment opportunities and/or income, thus abandoning their “first safe country” status. This difference is fundamental: refugees are protected by UN regulation on reaching their first safe haven, the others are still subject to national endorsement and control. And even if a policy of completely open doors was adopted towards economic migrants, the speed of the migratory inflow would still have to be subject to national control. In fact the capacity to absorb immigrants into any given territory is limited at any time by short term available resources, by the country’s capacity to integrate immigrants and, as well, by their own willingness and preparedness to be integrated.

Whether or not immigration brings net benefits to the host country is a controversial matter. On balance it probably does in the long term, but the case of very fast, concentrated mass migration should be considered in its own terms. The possibility cannot be neglected of a mixed distributional impact on workers and firms through greater competition in labour markets, both in the short and long term; of significant additional investment cost in new infrastructures, and - at least in the short term - welfare costs, making immigration a public investment competing with alternative forms of public expenditure. Immigration brings possible cultural enrichment but also possible cultural impoverishment, as well as potential cultural, political, ethnic and religious conflict – even leaving aside the possibility, not entirely implausible, of migration being a vehicle of health contagion and terrorist infiltration. These drawbacks have to be set against the benefit of rejuvenation of an ageing host population, which is associated with mass immigration.

Whatever the true net costs and benefits of immigration, the increasing electoral success of right-wing, populist, anti-immigration parties in most of the developed world signals unambiguously the widespread perception – right or wrong – that the current level and/or rate of immigration are excessive: from Matteo Salvini’s Lega to Nigel Farage’s UKIP, from Jimmie Åkesson’s Swedish Democrats to Geert Wilders’ Party for Freedom, from the German Alternative für Deutschland to Viktor Orbán’s Fidesz or Jaroslaw Kaczynski’s PiS, Heinz-Christian Strache’s FPO, Milos Freeman’s Civil Rights Party, Marine Le Pen’s Front National, the Finnish and Norwegian anti-immigration parties, as well as shifts in more standard political parties (see the anti-immigration stance of Boris Johnson, mayor of London and David Cameron’s probable successor). In the US the latest polls show that immigration is fourth or lower on public concerns: the anti-immigration vote is overwhelmed by the economy, anti-Elite feelings and security issues, although Donald Trump’s large-scale wall-building and deportation plans may have something to do with his unexpectedly strong bid for the US Presidency.

When existing external borders are not in a position to identify and register all migrants, to distinguish between refugees reaching their first safe haven (which the 1990 Dublin Convention rules, stricter than the UN rules, regard as the first EU country) and all other migrants, it is unavoidable that each Schengen member state will need to reintroduce effective border controls, including visas and passport checks.

The identification of immigrants has been likened to the marking of prisoners in Nazi concentration camps, but the comparison is improper, even if identification required the use of force. Identification is essential to verify both the right to residence and entitlement to benefits.

The almost 4,000 migrants that drowned trying to cross the Mediterranean Sea, the high monetary cost (steeply rising with the spreading of border controls and obstacles) and exposure to violence and other personal risks of migration make the desperate predicament of economic migrants – running away from famine, destitution, drought, environmental and cultural disasters – very close to that of refugees running away from persecution and war. But the difference is still there: refugees have a sacrosanct right to asylum sanctioned by the United Nations, while all others by migrating place themselves at the mercy of their countries of arrival: economic migrants can be refused entry or be repatriated.

Both rejection and forced repatriation are unpleasant and brutal, but an indiscriminate open doors policy would amount to the pretense that the world in which we live, dominated by private property and territory-based democracy, is instead a non-existing utopia of global democracy and universal communism, though limited to the collectivization of social capital. No wonder such a contradictory utopia was never proposed or theorized by anyone. In the world as we know it international solidarity is necessarily a discretionary concession by those who can afford generosity, which can only be exercised collectively if backed by a majority; it is not an automatic right of those who need international solidarity. 

Moreover a policy of indiscriminate open doors to all immigrants, while reducing international inequality across countries will increase internal inequality within countries because of the greater competition in the labour market in the host countries and the impoverishment of the emitting countries, thus leading to a possible and perhaps probable greater global inequality. (The case for repatriation is developed conclusively by Alberto Chilosi, “On the economics and politics of unrestricted immigration”, The Political Quarterly, 73-4, pp. 431–435, October 2002).

All immigrants, whether or not they can be classed as refugees, should be protected from the risks of their journey, in spite of such risks being to some extent the result of their own actions, just as cancer patients are entitled to treatment even if they are smokers (though some may disagree). Preferably the cost of protecting them should be a charge on all Schengen countries, as it is now for the EU Frontex operations, but even if such cost was born by a single country’s taxpayers as in the case of Italy’s Mare Nostrum scheme it would still be desirable.

The trouble is that repatriation is costly, and should be financed by the Schengen countries as it is part of the cost of abolishing internal borders; it requires the agreement of the country of origin or of the first safe country reached, which may be unknown or might no longer exist or might not honour such an agreement (e.g. Pakistan). Moreover it is doubtful whether “pushbacks”, whereby asylum seekers are returned to a country without their application having had a fair hearing, are consistent with both the Geneva Conventions and the EU asylum code. But the fact that repatriation will not always be possible is no reason for not attempting it at least in some cases, if nothing else pour encourager les autres.  Refugees are in a different position because with the settlement of conflict in their own countries they should return home.

On 27 January Sweden – that last year received 163,000 asylum applications, the highest number per capita in Europe – announced a plan to repatriate 80,000 migrants (subsequently reduced to 60,000 then left undetermined) “over  many years”, using aircraft chartered for the purpose, but the plan is still on paper. In the same week 308 economic migrants were sent back by bus from Greece to Turkey; however Turkey will not accept more unless Europe takes more Syrians off their hands – a vicious circle. Rejection looks like a more viable option: in his current visit of the Western Balkans ahead of the EU-Turkey summit Donald Tusk, on 2 March in Zagreb, said that “Member states should refuse entry to third-country nationals who do not meet the necessary conditions or who, although they were able to do so earlier, did not apply for asylum.” (European Council communique’ 3 March). However, the concentration of rejected economic migrants in border camps is bound to create other problems, while the prospect of future rejections can only speed up current migration flows.

2.Free internal travel requires the convergence of living standards within the area (including welfare provisions). Not unnaturally foot-lose migrants who do not have stronger ties (of language, religion, relatives, friends) to a particular country will tend to choose their ultimate destination on the basis of their perception of maximum improvement in their living standard resulting from migration. Employment prospects are likely to be paramount, indeed traditional migration theory (exemplified by the Harris-Todaro model, AER 1970, 60-1) relates the incentive to migrate to wage differences between the home and destination countries weighed by their respective probability of employment (taken as 1 minus the unemployment rate), to which of course one should add the net improvement in welfare benefits. Potential immigrants may well tend to overestimate their perceived income improvement prospects, as they seem to imagine themselves and their children gainfully employed at top salaries; this is one of the factors encouraging migrations beyond reason. When expected income gains diverge across potential destinations, the more attractive countries naturally will tend to be disproportionately vulnerable to migratory inflows. Hence the incentive for destination countries to raise national barriers, and/or discriminate in welfare benefits against immigrants, or dismantle the welfare state tout court for both nationals and immigrants. Even James Meade – a liberal and enlightened economist who proposed a generous generalised basic income – in order to prevent opportunistic immigration recommended that immigrants should be treated by the principle of reciprocity, i.e. enjoy the same benefits, if any, that our nationals might be granted in the migrants’ country of origin. (It has been objected that such a rule might be applied to countries of the same level of development, such as North-North and perhaps South-South, but not to South-North migrations).

The UK is a case in point. Relatively generous benefits granted to immigrants from other EU countries, including social housing, national health entitlements and payments to relatives resident abroad, have led to Cameron attempting to negotiate “emergency brakes” with the EU, subjecting benefits to time restrictions (excluding immigrants for the first four years residence), or to resident family members (possibly restricting family re-joining). Cameron succeeded in negotiating with the EU these kinds of restrictions only for future and not for existing immigrants, which therefore strengthened the conservative government resolve to reduce welfare benefits all round. Meanwhile non-European immigrants to the UK are subjected to a minimum income to be reached within the first 5 years of residence (which has just been raised from £21,000 to £35,000 from next April), under penalty of expulsion after one additional year. New rules will make UK landlords responsible for checking the documents of their tenants, making it harder to find accommodation not only for unauthorized immigrants but also for the 60% UK citizens who do not possess a passport.

3.Any attempt at a fair re-distribution of immigrants among countries requires the re-establishment of national borders. Last July EU Interior Ministers - outvoting Romania, Hungary, the Czech and Slovak republics strongly opposed to the scheme - imposed a plan to relocate 40,000 migrants (24,000 from Italy and 16,000 from Greece) across the EU. In September an additional 120,000 relocations (16,600 from Italy, 54,400 from Greece and 54,000 from Hungary) were added, raising the total to 160,000 in two years, of which 54,000 were postponed to the following year (FT, 25 September 2015). Viktor Orbán, Hungary’s prime minister, announced a referendum on whether the country should be forced to resettle refugees, on the ground that “Introducing resettlement quotas for migrants without the support of the people is an abuse of power”; he is unlikely to lose that referendum. On 28 February Pope Francis advocated “an equitable re-distribution of the burden of migrants” (thus accepting that immigration is a burden).  However, such kind of a re-location is futile, not to say idiotic, for under Schengen completely free and unrestricted internal travel any immigrant re-located to a country other than his/her preferred destination can at any time, and eventually will, just go there. Indeed we could argue that even the relocation of migrants within a given country might have to be subjected, in order to be done efficiently, to the introduction of internal passports and controls of the kind prevailing in the Soviet Union until 1991, in order to stop immigrants from settling in the capital city and in other metropolitan areas that are already overcrowded and congested and to divert them instead to less developed areas with an abundance of cheap underutilised housing and land.

On 29 February Angela Merkel said it loud and clear: “Migrants may not pick and choose where they are to be settled” (Daily Telegraph, 1 March). She referred to their choice of country, but Germany is indeed unusual in imposing constraints on where migrants can live, both in order to prevent the formation of ghettos in big cities and to direct immigrant flows to the underpopulated regions of the former GDR where there is plentiful social housing and a shortage of young workers. Such a policy had been introduced in the 1990s at the time of a large influx of ethnic Germans from the former Soviet Union and Romania. Immigrants have their welfare benefits cut if they move away from their assigned locations. In the UK immigrants who claim social housing and some other benefits are offered it only in the northern rust belt towns.

This kind of restrictions seem necessary to the smoother absorption of immigrants, but paradoxically the European Court of Justice, ruling on a complaint by two Syrians about their German residence requirements, at the end of February 2016 decided that EU rules “preclude” them even if they are aimed at “achieving an appropriate distribution of the burden connected with the benefits”, though it also said that people granted subsidiary protection could be subject to a residence condition “for the purpose of promoting their integration”. Nevertheless German ministers are preparing a law which would expand the existing residence restrictions to refugees whose asylum requests have been approved, in spite of objections from refugee associations (FT, 1 March).

Disintegration?  At present the EU is being subjected to four centrifugal forces (see Munchau, FT 28 February. and Javier Lopez, “Europe in Multiple Organ Failure”): a North-South divide over border controls; another North-South divide about austerity and the Euro; an East-West divide over migrant re-location; and the uncertain implications of Brexit with possible contagion effects on other member states.

It is difficult to disagree with Oxford political scientist Jan Zielonka (Is the EU doomed? Global Futures, Polity Press, London, 2014) when he argues that “Sadly… at present the EU does not facilitate integration, but impedes it”… “The European Union was widely regarded as the most successful modern integration project, but it has turned into an embarrassment”… “No wonder so many citizens lost trust in the EU, and that the process of disintegration is gathering pace.” But Zielonka’s expectation that “A weakening of the EU and its member states will strengthen other political actors such as cities, regions and non-governmental organizations (NGOs)” is utterly unconvincing: the solution or even the alleviation of both the Euro crisis and the migration crisis cannot rely on a network of de-centralised power centres but will require a deep degree of centralised initiative and commitment to greater integration. See “A Plan for Europe’s Refugees”, The Economist 6 February:

“Creating a well-regulated system requires three steps. The first is to curb the “push factors” that encourage people to risk the crossing, by beefing up aid to refugees, particularly to the victims of the civil wars in Syria and Iraq, including the huge number who have fled to neighbouring countries such as Turkey, Jordan and Lebanon. The second is to review asylum claims while refugees are still in centres in the Middle East or in the “hotspots” (mainly in Greece and Italy), where they go when they first arrive in the EU. The third element is to insist that asylum-seekers stay put until their applications are processed, rather than jumping on a train to Germany.” Unfortunately, “All these steps are fraught with difficulty.”

Prospects might become clearer soon, after the next EU-Turkey summit (7-8 March), the German regional elections (13 March) regarded as a test of Merkel’s immigration policies, and the EU Summit on migration (18-19 March).

There seems to be, however, a constitutional conflict between European and international rules about treaties, revealed by the recent agreement reached by the UK and all the other member states about the special terms negotiated by Cameron for the UK. That Agreement is said to have been deposited within the UN and is therefore subject to the jurisdiction of the International Court of Justice, which operates on rules different from those of the European Court of Justice competent to enforce the European Treaties. Downing Street has claimed that the EU-UK agreement is legally binding and enforceable, but it is not clear whether any country who did not like it might seek to challenge it in the International Court of Justice. A constitutional crisis of this kind is the last thing that Europe needs today.

Note: I thank Carmen de la Camara, Marilena Giannetti, Tonino Lettieri, Ruggero Paladini and Fabio Sdogati for useful comments on an earlier draft of this post. However they should not be held responsible for any errors or omissions, nor deemed necessarily to agree with any of the propositions put forward here.

UPDATE

The EU-Turkey summit of 7-8 March led to a draft deal whereby Turkey would take back immigrants coming from Greece unless they successfully applied for asylum there, while the EU would take in one Syrian refugee for every immigrant sent back. In exchange Turkey would receive €6bn aid instead of the €3bn already committed but not yet disbursed, accelerate its progress towards EU accession and obtain visa-free travel to the Schengen Area for its 75mn citizens.

In the three German regional elections of 13 March Ms Merkel’s CDU Party retained the possibility of forming coalition governments but lost ground heavily, while her PSD coalition Party that had backed her immigration policies performed even worse. The xenophobic right-wing AfD gained record support.

On 18 March after ten days negotiations the EU and Turkey reached a compromise deal that commanded unanimous support, effective from 20 March. Greece obtained 4000 new personnel to process asylum applications. There would be no collective pushbacks, but starting on 4 April Turkey (that received 2.7 million migrants to date) would take back applicants who did not qualify for asylum in Greece, while the EU would take from Turkey “one for one” as many Syrians up to a ceiling of 72,000. In exchange Turkey would receive €6bn instead of the anticipated €3bn, of which 3bn up front and 3bn at the end of the year; the process of EU accession would be tentatively reopened and EU visa-free travel for Turkish citizens would be granted from next June.

The Greek government’s migration spokesman Giorgos Kyritsis declared that implementation of the deal would require more than 24 hours; Turkey will not take back migrants before 4 April anyway. The 4,000 officials, translators, judges and security guards promised by the EU still have to arrive; eight ships with a capacity of 300-400 passengers each need to be provided by Frontex, together with 30 buses. Thousands of migrants (mostly Syrian, but also Iraqis and Afghans) have continued to arrive in Greece in spite of the agreement. Greece is still relocating migrants from its islands to temporary refugee camps on the mainland. From 4 April a number of failed asylum-seekers (750 in the first week, mostly North Africans, Afghans and Pakistanis) from Greek detention centres will board a vessel chartered by Frontex and be taken to Turkey. In return Germany will take an equivalent number from Turkish refugee camps. These deportations might be illegal and have sparked violent protests but will accelerate in April.

There were still strong objections from humanitarian groups, on the ground that the deal violated international law on the treatment of refugees; Turkey is expected to conform its regulations to international standards, but refused to accept a formal commitment to that effect. European reaction has ranged from welcoming “closed borders” to condemning the “shameful deal”. Wolfgang Munchau, FT 21 March: “The deal with Turkey is as sordid as anything I have seen in modern European politics… The EU not only sold its soul that day, it actually negotiated a pretty lousy deal.”  On 22 March the UN refugee agency announced the suspension of its involvement at all closed centres on the Greek islands, on the ground that so-called “hotspots” for the reception and registration of migrants had turned into “detention facilities” in violation of UN regulations. On 23 March Médecins Sans Frontières and the International Rescue Committee also scaled back their activities in the Greek centres. Following terrorist attacks in Brussels Poland now declared that it can now no longer honour the previous government’s commitment to take a quota of 7,000 refugees out of the 120.000 to be resettled across the EU. In the week following the EU-Turkey deal migration inflows to Greece were reduced drastically, though this might be due to adverse whether conditions in the Aegean.

In the last seven months, Hungary’s courts have held 2,189 trials for border crimes (including on 18 March a blind woman and a man confined to a wheelchair accused of interfering with Hungarian borders last November, FT 22 March) leading to an exceptionally high rate of convictions of 99 per cent. Hungarian judges have chosen expulsions and long entry bans from Schengen countries over prison sentences. On 22 March Frontex was reported saying that it was trying to recruit 150 policemen and 50 officials to be deployed on Greek borders, i.e. it had not succeeded yet.

The Greek-Macedonian border will remain closed, blocking the Balkan route to Northern Europe, leaving tens of thousands migrants stranded in Greece for some time, including Syrians who thought they had been invited by Angela Merkel to come and stay in Germany. It is not clear how the 72,000 asylum seekers would be distributed among member states; once that ceiling is reached the arrangement will be "reviewed", though Central-Eastern EU members are committed to stop at that ceiling. 

The closure of the Balkan route will induce desperate migrants and their smugglers to switch to different and more dangerous routes to Europe, via the Black Sea through Ukraine, via Albania and the Adriatic to Italy, via the South Mediterranean to Italy and Spain (the last two routes having continued to be used especially from Lybia; in the first three months of 2016 immigrants arriving in Italy from the Mediterranean route have doubled). France, Switzerland and Slovenia would then be bound to reintroduce border controls, thus cutting off Italy and possibly Spain from the Schengen area; Austria is already closing the Italian border at Brennero. Liberalisation of travel for Turks would lead to an additional inflow of Turkish Kurds. According to a German think-tank refugee flows this year will amount to an estimated range of 1.8m-6.4m (the higher figure being a worst-case scenario including large numbers from Northern Africa).

Incidentally, on the costs and benefits of mass immigration with special reference to the UK, see R.E. Rowthorn’s excellent Report, 2015.

Greece: Enough is Enough

In Alexis Tsipras’ shoes I would apply immediately for Greece to leave the EU, as envisaged by Art. 50 of the TEU (Consolidated Version of the Treaty on European Union, Official Journal of the European Union, C 115/15, 9/5/2008).

Since Greece’s 2010 crisis the Troika (sorry, the “international institutions”) have sunk about €245bn into its rescue, i.e. more than would have been sufficient at that time to pay off the entire Greek debt. It is well known that these funds did not benefit the Greeks but went almost entirely to save French, Swiss and German banks from their exposure to Greek government bonds. And in the FT or 21 April Martin Wolf debunks Greek “mythology” including the myth that “Greece has done nothing”: 

“Greece has undergone a huge adjustment of its fiscal and external positions. Between 2009 and 2014, the primary fiscal balance (before interest) tightened by 12 per cent of gross domestic product, the structural fiscal deficit by 20 per cent of GDP and the current account balance by 12 per cent of GDP.”

“Between the first quarter of 2008 and the last of 2013, real spending in the Greek economy fell by 35 per cent and GDP by 27 per cent, while unemployment peaked at 28 per cent of the labour force. These are huge adjustments. Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources.”

The cost of such adjustments to the Greek people were immense. Unemployment reached 28% (48% for youth unemployment), the dismantling of collective bargaining lowered real hourly wages by 25% by 2014. The minimum wage fell to its level of the 1970s. The minimum pension fell below the poverty threshold. As many as 35.7% of the population and 44.1% of children aged 11 to 15 are now at risk of poverty or social exclusion. And Gechert and Rannenberg (of the German Hans Böckler Foundation) show that without austerity the Greek economy would only have stagnated, avoiding the deep recession, while tax increases without spending cuts would have been much more effective in lowering the Debt/GDP ratio.

Another myth debunked by Martin Wolf is that Greece will pay its debt in full. As a a result of fiscal consolidation and the bailout its debt has gone from about 120% of GDP in 2010 to over 177% today. Thus Greece needs either further debt relief or, in order to continue to service the debt, it needs the €7.2bn bail-out funds due last year that were not disbursed on the ground of alleged delays in Greek implementation of “structural reforms” agreed in the Memorandum of Understanding negotiated by the previous right-wing government with the “institutions”.

After the 25 January elections the new government, democratically elected on a specific anti-austerity campaign, and reported by post-election polls to consistently command the support of 80% of the population, an agreement with the “institutions” was reached in principle on 20 February for the release of the €7.2bn on condition of somewhat different but yet unspecified structural reforms. However there have been continuous wrangles about whether or not the Greek reform proposals were or were not sufficient to warrant the release of the residual bail-out funds.

Up to now Greece has paid punctually interest and debt instalments as they became due, such as $450mn owed the IMF on 9 April and a batch of Treasury Bonds that also fell due. But the IMF is still owed €203mn on 1 May and €770mn on 12 May, plus €1.6bn in June, while some of the debt with the ECB is also due for repayment. The Greek government has scraped the bottom of the barrel by requisitioning the liquid balances of state enterprises and local authorities. It has announced that it is not in a position to make these payments, unless it stops payment of pensions and public sector wages and salaries.  Without access to these €7.2bn Greece is likely to default on its payments to the IMF and the ECB.

On 15 April the FT reported that Greek officials had approached the IMF informally proposing to delay the repayment of loans due in May but were told that no rescheduling was possible; indeed they were persuaded not to make that request officially, presumably to avoid an open refusal.

At the same time Germany’s finance minister Wolfgang Schäuble was reported in an interview to have virtually ruled out that at the Eurogroup meeting in Riga on 24 April a deal might release bailout funds to Athens. "You can't pour hundreds of billions... into a bottomless pit."

However Die Zeit reported that Ms Merkel now might support emergency measures that would give Greece continued access to ECB Emergency Financial Assistance even in case of default. The possibility of a Greek default not being followed by Grexit is being discussed more and more widely (see for instance Wolfgang Munchau and Martin Wolf in the FT).  It might be possible, perhaps, but would still be very messy, and if there is sufficient goodwill to make it possible it would be much more effective to disburse the wretched €7.2bn.

The Financial Times on line of 18 April (Breaking News, 6.57 pm) reports that ECB president Mario Draghi told the IMF spring meeting the euro area was better equipped than it had been in the past (in 2010, 2011 and 2012) to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.

On 21 April BloombergBusiness reported that “The European Central Bank is studying measures to rein in Emergency Liquidity Assistance to Greek banks, as resistance to further aiding the country’s stricken lenders grows in the Governing Council”. The writing is on the wall.

Grexit costs would be very serious not only for Greece but for the entire Eurozone and beyond, but unilateral withdrawal from the whole of the European Union rather than simply the Eurozone would make more sense. An application to withdraw would only take effect two years later, leaving ample time for a possible change of mind and for re-negotiations, but might be an effective and quick way of sobering up Mr Schäuble and the other Troika hawks that have been bullying Greece, pushing it towards default regardless of consequences. Greece might as well take back the initiative, not least to avoid an internal government crisis.

What is particularly deplorable is the IMF duplicity and bad faith: in Greece and everywhere else on a global scale they have been calling relentlessly for fiscal consolidation and structural reforms (a euphemism for enterprise freedom to dismiss employees and for the systematic destruction of the welfare state) but at the same time they have played a leading role in discrediting consolidation and "reforms" as policy instruments to fight a recession.

The IMF World Economic Outlook of October 2012 (Box 3.1 untypically signed by Chief Economist Olivier J. Blanchard and Senior Economist David Leigh, presumably to suggest that their views are personal and not official) raised previous estimates of fiscal multipliers for several reasons. First, the ineffectiveness of countervailing monetary expansion close to the zero floor of the interest rate'; second, lack of opportunities for exchange rate devaluation especially in the Euroarea; third, the existence of  a large gap between potential and actual income (for fiscal multipliers are higher in a downturn than in a boom) and finally, the simultaneous consolidation across many countries.  Such revision of estimated multipliers implied an upwards revision of the costs of consolidation, to the point of theorizing that tax increases and especially expenditure cuts would actually raise, instead of lowering, the ratio between Debt and GDP, thus setting up a vicious circle. This of course is what happened punctually in Greece and in other highly indebted economies – like Italy – as a result of fiscal consolidations.

Further the IMF World Economic Outlook 2015 (Ch. 3, Box 3.5 on The Effects of Structural Reforms on Total Factor Productivity, pp.104-107) issued on 14 April candidly recognizes, on the basis of available econometric evidence, that total factor productivity can be increased by using more skilled labour and ICT, by investing more in research and development and by lowering the level of regulation in product markets. In contrast, the IMF does not find any statistically significant effects on total factor productivity that result from lowering labour market regulation (See also Ronald Janssen Social Europe).

Such schizophrenic duplicity on the part of the IMF has not even incompetence as a conceivable justification. A Greek unilateral withdrawal from the European Union would sober up lots of people in Washington as well as in Brussels, Frankfurt and Berlin. Go for it Alexis and Yanis on behalf of all of us, not just on behalf of Greece. 

UPDATE (13 May)

Last Monday (11 May) Greece paid the $750mn owed to the IMF, one day before the deadline, ending days of uncertainty over funds availability and whether payment might be withheld in order to put pressure on creditors. 

Where did the money come from? The FT reminds us that “The Greek government ordered hundreds of state entities — among them hospitals, universities and local authorities — to deposit their cash reserves with the central bank. But many such entities, including an overwhelming majority of municipalities, have declined to comply”.

An unmissable piece of news, which appears to have gone largely unreported in the financial press: TSIPRAS TO FIRE [FIRED] BANK OF GREECE BOSS FOR UNDERMINING SYRIZA POSITION: “Bank of Greece Governor Yannis Stournaras will be quitting his post today (last Sunday). Alexis Tsipras will ask for his resignation in the light of documentary proof that the former New Democracy Finance Minister personally gave specific briefs to a top journalist about “putting the most negative spin possible on the news” about Greek finances.

Yannis Stournaras was Greek Minister of Finance from 5 July 2012 until he moved to the BoG last year. As a senior consultant to the Bank he was personally involved in the entry of Greece into the euro. As a senior Governor he sits on the Board of the IMF, a position that places him in a serious conflict of interest with the Greek government.  “Meanwhile, the forensic investigation into debt overstatement in 2010 and how much Greek debt can be objectively defined as ‘odious’ continues”. 

GREXIT

Si vis pacem, para bellum – If you want peace, prepare for war, said Vegetius in the 5^th-6^th century b.C.  Just as then, and by the same token, Si vis euro, para exitum: if you want to keep the euro, prepare for exit.

In 2012 Willem H. Buiter and Ebrahim Rahban, respectively chief economist and global economist of Citygroup, writing in the Market Insight section of the Financial Times (Greece far from safe even after debt swap, 13 February), coined the word Grexit – a euphonic synthetic neo-logism for Greek exit from the Eurozone.  They wrote then:

“There is some good news. Plentiful ECB liquidity has pushed back the risk of disorderly default of systemically important euro area banks and, combined with financial repression in euro periphery nations, has eliminated the near-term risk of a disorderly default by a systemically important sovereign. The external damage caused by a Greek euro area exit (or ‘Grexit’, as we call it) could, given appropriate policy response from the ECB and euro area creditor countries, be limited and need not trigger waves of “exit fear contagion” to other fiscally weak peripheral countries. The second LTRO on February 29 may buy more time but until the fundamental drivers of the euro area sovereign debt and banking crises are addressed, volatility will remain a constant companion and recovery and growth absent friends”

Since the unexpected victory of Alexis Tsipras and his Syriza Party, elected on 25 January 2015 on a programme rejecting European austerity and its embodiment the Memorandum imposed by the Troika (EC, ECB and IMF) on the Samaras government, references to Grexit have become increasingly frequent, including its variation Grexident (Wolfgang Schauble) to indicate the possibility of Greek “accidental” exit, in spite of neither the Greek government nor European authorities (perhaps not including Schauble) actually wanting to provoke that event.

Three observations are in order.

1) There are serious legal problems involved in Grexit. 

For a start, there is no legal provision in the Treaties for an EMU member state to withdraw from or be compelled to leave the Eurozone. The decision to introduce the euro is “irrevocable” (Art. 140 TFEU).  The same was true for the EU as well. Article 50 TEU, however, grants EU member states the right to withdraw from the European Union. It is inconceivable, though it has not been explitly stated, that a country could leave the EU and still maintain all the rights reserved to EMU members. Conversely, membership of the EMU is part of the obligations of membership, the so-called acquis communautaire, unless a derogation had been successfully negotiated in 1992 at the time of signing the Maastricht Treaty.  Therefore a State that left EMU or, by some unspecified measure, was no longer a member of EMU would have to leave the EU as unable to fulfil its membership requirements.  And even if a country was allowed such a derogation ex-post, thus maintaining EU membership, it would still be subject to the fiscal straightjacket of the so-called Growth and Stability Pact and the Fiscal Compact, i.e. the exit from EMU would not restore a country’s fiscal sovereignty.  Unilateral exit from the EU would take effect only two years after its declaration, but we must presume that exit from the EU of an EMU member would involve its immediate exit from the Monetary Union.  The immediate implementation of capital controls and ceilings on cash withdrawals from banks, in order to avoid capital flight and bank runs, would certainly follow. That the Council, the European Parliament and the relevant Greek institutions would have to be consulted beforehand would also and detrimentally make secrecy impossible.

2) Grexit would involve the problems of managing the new currency. 

The rate of conversion of the old into the new currency would have to be identical, at least to start with, with the rate of conversion of euro prices and wages into the new currency. Without loss of generality therefore at time 0 the new currency could be initially issued at par with the euro.  Immediately afterwards, however, the exchange rate between the old euro and the new currency, let us call it the drachma, would necessarily have to be floating, fully determined by the market. At any managed exchange rate different from the market rate Gresham's Law would operate: “Bad money [i.e. the currency overvalued with respect to the market rate] drives out good [the undervalued currency]”. One of the oldest economic discoveries, anticipated in 1519 by Copernicus, even earlier by Nicole Oresme in the fourteenth century, the law was first stated clearly by Aristophanes in his play The Frogs, around the end of the fifth century b.C.

The new currency would have to be devalued, very soon after issue, for the exiting country to obtain the benefits of greater international competitiveness and devaluation of debt payable in that currency.  (Wolfgang Munchau expects the new currency to continue to circulate at par with the euro voluntarily on a significant scale, but this is unrealistic). However the currency to be used for discharging earlier obligations cannot be chosen at will; it is determined by the law of the country where the transaction has taken place.  Thus, for instance, much and probably most of the outstanding import and export orders, as well as past unpaid tax, and the servicing of already existing debt will have to continue to take place in euro, under penalty of default; overall, something like 30% of debt and almost all of derivatives trade. Target 2 large balances – a purely technical construct while the euro lasts – would become real and would have to be settled or canceled, coming to a head.  And furthermore “Dual currencies are always a bad idea” (this Blog, 10 February 2010).  

Euro denominated obligations contracted under the law of a non-Eurozone country like Britain will have to be discharged by converting the new currency into euros at the market exchange rate.  Thus the introduction of the new currency would not avoid default, it would simply be the form that a default would take.  As well, a default would involve the inability to access international financial markets for the next 10 or 15 years and/or a much higher cost of finance.

The devaluation of the new currency would necessarily involve an acceleration in inflation with respect to euro inflation, and therefore an increase in the interest rate with respect to euro rates, and especially a higher spread with respect to German Bunds. The impact of the new currency on external accounts, income and employment, will depend both on its subsequent impact (“pass-through”) on the path of wages and prices inflation, and on trade elasticities of both demand and supply; in principle perverse effects cannot be ruled out.  In the end the success of a euro exit would depend on the flexibility of real wages and prices, as well as on the country’s ability to implement productivity-enhancing policies, which are the same conditions under which the maintenance of a common currency would work.

3) Grexit would never be accidental.

Grexit would be the result of a deliberately destructive strategy adopted by Germany and the Nordic countries (Finland, the Netherlands, France, the Baltics) aided and abetted by Spain and Portugal for fear of opposition parties ousting their governments should Syriza’s example succeed, and by Italy out of perceived self-interest.  The Greek refusal, backed by the new elected government and today reportedly supported by 80% of the Greek population, to continue with the self-defeating, ruinous austerity policies imposed from Brussels, Frankfurt, Berlin and Washington, is a completely rational and democratic choice rather than the reckless strategy in an irresponsiblee game of “chicken” of which Greece has been accused. 

The most likely course of events leading to Grexit would be: the continued denial of Greek access to any of the €7.2bn residual funds provided by the Troika’s earlier rescue package, while Troika officials slowly verify compliance with outdated conditions, impossible for a poor country to satisfy; the continued prohibition by the ECB of the Greek government raising finance through the issue of short term Treasury bills, indeed the imposition of ceilings on banks’ holdings of such bills, under the pretext that in Greek circumstances this would amount to funding the government deficit directly (a peculiar dysfunction of the ECB, seeing that the independent Bank of England and the independent Central Bank of Japan are allowed to fund government deficits all the time). 

At the end of March the Greek government is facing a bill of €1.7bn for wages and pensions; on 9 April the IMF is owed a loan repayment of €450mn, and in mid-April two Treasury bills for a total of €2.4bn also are due for repayment.  

Since the elections of 25 January Greek corporations and households have cut their tax payments drastically; a government running a primary surplus, even at the reduced rate of 1.5% of GDP, should always be able to finance current public expenditure but now the position is unclear.  The Greek government has been particularly skilled at mobilizing cash belonging to the National Health Service and state-owned corporations to  keep the government afloat. But cash withdrawals from the banks have been accelerating since the new year, both before and after the elections.  According to Barclays on Wednesday 18 March withdrawals reached a record €300mn per day, at which rate they regarded a block on deposits as unavoidable (not least because of this kind of malicious rumour).  The Greek government has admitted that without fresh funds they will not be able to meet all payments due in April: we should believe them.  Failure to repay the IMF loan instalment would not have immediate adverse implications, but would involve the loss of all IMF credits.  Failure to repay the €2.4bn Treasury bills would trigger-off cross-default clauses in other loans and precipitate a deeper crisis, including the likely loss of ECB Emergency Liquidity Assistance.  At that point a run on the banks, stricter limits on bank withdrawals, capital controls and actual default would become self-fulfilling prophecies.  In order to avoid the de-monetisation of the economy and its vast contractionary implications the government would be forced to issue a euro substitute, i.e. a new currency parallel to the Euro.

The transition to the new currency presumes that the new banknotes and coins can be produced quickly or, better, well in advance in complete secrecy. Normally this would take about six months; it has been suggested that the new currency could be introduced by stamping old euro notes as drachmas, but this would be a silly waste of good money.However a cash shortage could be initially tackled by means of the issue of small denomination Treasury notes, or by the issue of bank cheques like those that were introduced in Italy in the 1980s to deal with a shortage of coinage. At least initially, and indeed for some time, the euro and the new currency would circulate in parallel, but as long as the rate of exchange between the two was market determined this should not create problems other than some confusion and uncertainty.

It might be safest to turn our deposits into bricks and mortar, withdraw as much cash as we can as fast as we can while we still can, and hide it under the mattress to avoid negative interest rates. Actually, si vis pacem para pacem, as Pope Francis might have said, and if you want to keep the Euro get on with completing a banking Union, promote fiscal and political integration; above all Growth and Stability suicide Pact must be imaginatively re-interpreted and accompanied by a serious, large scale, European public investment effort. Together with the felicitous large reduction in oil price, overdue but welcome Quantitative Easing by the ECB and substantial euro de-valuation, this might still do the trick without the drama and trauma of Eurozone and European Union dis-integration.