In its recent report ‘Europe stretched to the limit,’ the Economist Intelligence Unit has declared that the EU migration crisis is now a ‘graver risk to Europe than the financial and economic crisis that preceded it’. The United Nations Refugee Agency (UNHCR) has stated that more than 1.25m refugees entered Europe in 2015 vs. 219,000 in 2014. The majority of these refugees have entered Europe by sea, which also caused thousands of deaths.
The EU has reacted to the crisis by entering into a controversial deal with Turkey. This deal allows the EU to return asylum seekers whose application is rejected or who fail to apply for asylum. This includes asylum seekers who have already applied for asylum in a country deemed by the EU to be ‘safe’ such as Turkey. If the returned asylum seeker is Syrian, then for every person returned (up to a maximum of 72,000) the EU will allow one Syrian refugee currently in a Turkish refugee camp and who has not previously attempted to enter the EU to settle in the EU. Non-Syrian refugees, largely those from Afghanistan and Pakistan, can be returned without the need for an offsetting settlement. Turkey will receive $3.3bn in aid to support refugees in Turkey and to improve humanitarian conditions in camps on the border with Syria. The most controversial aspect, though, is that Turkish nationals will be allowed visa free travel within the EU, potentially from June 2016. In return, Turkey is expected to make every possible effort to stop the flow of refugees into Europe via sea routes into Greece. The deal has been condemned by Amnesty International who believes that it is in breach of the UN refugee convention and this has delayed the implementation and forced Turkey to increase legal protection for non-Syrian refugees.
Different countries have reacted to the crisis in different ways, with Germany and Sweden standing out as most welcoming with German Chancellor Angela Merkel declaring that Germany has an ‘open door’ to refugees. The UK on the other hand has taken a much stricter line, agreeing to take only a limited number of refugees on a five year plan, targeting those currently living in camps rather than those that make it to the UK by themselves.
2015 Refugees: Intake by EU Country
Source: UN Refugee Agency (UNHCR)
The other issue clouding the political backdrop is that although the majority of refugees are from Syria, many are not. A large number are from Afghanistan and Iraq, but there are also large numbers of refugees leaving Serbia and Albania, still displaced from the Balkan conflict and using the refugee crisis to attempt to create a better life in wealthier countries. Pakistan has 1.2m people displaced by insurgencies into the northwest of the country, whilst Eritrea has lifelong military conscription with those dissenting against the government imprisoned without trial. These represent another two sources of refugees.
2015 Refugees: Intake to EU by Origin Country
Source: UN Refugee Agency (UNHCR)
With such large numbers of refugees moving into Europe, political tensions are increasing, both within affected countries and between countries in the region.
Significant European Stress Points:
Some of the most iconic images of the refugee crisis have centred on Greece, including the tragedy of Aylan Kurdi, the three year old Syrian child whose body washed up on a Greek beach in late 2015. Other pictures have focused on huge mountains of life jackets and large numbers of refugees living in poverty amidst tourists on Greek islands. This has led to a perception that Greece is one of the worst affected countries in Europe, but actually the impact has been lower than feared. Although the UN estimate that around 850,000 refugees landed in Greece in 2015, few stayed and most simply used Greece as a gateway on their way to other countries such as Germany. Greece has struggled to deal with the financial costs, but estimates of such at around €600m show that the impact has been reasonably contained. Another positive is that despite initial concerns it appears to have had little impact on the Greek tourism industry with travel receipts rising by 5.5% in 2015 to €14.1bn. Fortunately for Greece, other factors such as terrorist attacks in Tunisia and the conflict between Russia and Turkey have helped to divert tourism towards it.
A key test for Greece will be elections, which could come as soon as June if a deal on Greek debt is agreed at the Eurogroup meeting on May 24th. These elections will show if far right groups have been strengthened by the crisis.
Italy / Austria
The main source of refugees into Italy is from Libya with smugglers bringing people in rubber dinghies, and so far in 2016 around 29,000 refugees have entered Italy from this route. The Italian authorities are proposing deporting refugees back to Libya but it is extremely unclear how this would work given that Libya currently has three governments each of which believes it should be in control of the country (and with ISIS controlling a part of the country as well). Tensions between Italy and Austria have started to rise following Austria reintroducing border controls at the Brenner Pass in the Alps on the Italian border to prevent it from becoming a route for refugees to pass from Italy into Austria. Italian Prime Minister Matteo Renzi has branded the plans as dangerous, stating that they ‘wake the ghosts of the past’ in reference to Austria wanting to post troops to man the controls. Austria is itself facing a domestic backlash with Norbert Hofer, a controversial candidate from the right wing Freedom Party highly likely to win the countries Presidential election next month in a move seen as a protest vote against immigration. Austria received 90,000 asylum seekers in 2015 and has now announced that it will put a cap of 37,500 on 2016 applications.
The far right party Alternative fur Deutschland (AFD) have recently declared that Islam is incompatible with the German constitution and have published an anti-Islam manifesto which proposes a ban on minarets, calls to prayer and burkas within Germany. Polls suggest that the AFD are now supported by 10-15% of voters despite being a party started only three years ago. Tensions between the party and the country’s four million Muslim population have grown, with the head of the Central Council of Muslims stating that the party is the new Nazi party with Muslims taking the place of Jews. The leader of the country’s Central Council of Jews has, in turn, called for a cap on Muslim immigration. In an effort to promote integration, Germany has announced a package of new measures which will require migrants and refugees to attend language and culture classes or face cuts to benefits. Merkel has also suspended a law that required employers to give priority to German or EU workers over asylum seekers for three years, to allow asylum seekers better access to labour markets.
The European Commission is proposing to revise the Dublin agreement, which lays out regulations on asylum seekers to attempt to shift the burden of accepting refugees more broadly through the EU and away from the countries currently most impacted such as Greece. The current plan appears to be to shift towards an automatic system which would allocate refugees across Europe on a quota basis with fines of up to 250,000 Euros per refugee to any country that refuses. The countries most likely to refuse to accept refugees via this automatic allocation will be Hungary and Poland. Hungary declared a state of emergency earlier in 2016 and deployed troops to reinforce its borders and prevent refugees from travelling along the ‘Balkan route’ towards Germany. The Hungarian government has condemned the proposal to fine countries, calling it ‘blackmail’ and will hold a referendum in September or October on whether to accept the quota system, and has threatened to veto the proposal if necessary.
Although the UK has been insulated from the refugee crisis by the government’s hard-line position, the refugee crisis is playing an important role in the debate on EU referendum. The deal with Turkey, which includes the move to allow Turkish citizens to have visa free access to the Schengen area, is controversial in the UK despite the fact that the UK is not part of the Schengen system. One of the leading BREXIT campaigners has stated that Turkey is ‘on the EU ballot paper’ with a warning that once Turkey joins the EU, it will lead to even greater uncontrolled migration.
Sweden took in 160,000 asylum seekers in 2015, making it one of the EU states that took the largest number in proportion to its population. It has recently revised down their estimate for the number of refugees it will accept in 2016 from 100,000 to 60,000 on the decline in the number of refugees reaching Greece from Turkey. Sweden has been rocked by claims of migrant sex assaults being covered up by police and by warnings for women to not be alone in various areas.
The influx of refugees and related problems has caused a political backlash in Sweden. There has been a surge in support for the right wing anti-immigrant party the Sweden Democrats who are now polling at between 15-20%. With tensions rising, there has been growing pressure on the Green Party which is seen as leading the policy of allowing such large numbers of refugees. Housing Minister Mehmet Kaplan was forced to resign after historical comments were revealed in which he compared Israel’s treatment of Palestine to the Nazi treatment of Jews and opinion polls show the party’s popularity at a ten-year low. This has led to a leadership challenge within the Green Party and its leader, Asa Romson, has been forced to resign her position as Deputy Prime Minister. If the Green Party withdraws from the coalition, it could trigger a snap election and current polls suggest that the centre right bloc of parties would win power, which could see a reverse of the country’s liberal position.
The question now is whether the deal made with Turkey is sufficient and marks a peak in the refugee crisis or whether we will see continued deterioration in 2016. So far in Q1 the situation has continued to deteriorate with the UNHCR stating that 265,944 refugees entered the EU vs. 190,762 in Q1 2015. Worryingly for the EU, it is now taking the majority of refugees globally, at 77%, versus 56% in 2015. Given its importance, we shall continue to report on this issue and the ramifications for the political stability of Europe.
Source: UN Refugee Agency (UNHCR)
We are sceptical that the EU deal with Turkey will be sustained. The EU attached 72 conditions to the deal including measures to prevent corruption and requirements to bring terrorist legislation in line with European standards. The change to terrorist legislation was designed to stop Turkey from jailing journalists and people who disagreed with President Erdogan and it thus seems unlikely that Turkey will actually shift fully on this position. It’s also questionable how desirable it is for the EU to actually grant Turkish citizens visa free travel within Europe. There are up to 500,000 Kurds who have been displaced due to clashes between the Turkish Army and the PKK and there is already an established Kurdish community in parts of Europe. Granting visa free travel could thus simply create a new influx to the EU.
Until the UK referendum vote, Europe will want to minimise the impact of refugees on the headlines and this will keep the deal in place until later in the year.
If the UK votes to exit the EU then there would likely be greater pressure on the EU to incentivise Turkey to maintain its blockade. Further financial incentives could be one way to keep the deal on-going whilst pushing back the point where visa free travel is allowed. The risks of a new wave of refugees as Europe attempts to deal with the financial volatility that a UK exit could cause are not to be underestimated. Credit rating agency Moody’s has stated that the damage done by the migrant crisis is so severe that a further shock sparked by for example BREXIT could cause the collapse of the whole European Union. Although we believe that the EU is more resilient than many investors would believe, the cultural and political pressures that are evolving are a dangerous force.