Will QE Save Europe from Its Middle Eastern Crisis?
Germany is gearing up for Oktoberfest, the annual beer festival that brings almost two million people and over $1 billion to Bavaria. The carnival atmosphere is mostly jovial, but does have the occasional fistfight. There’s more than a bit of puking at train stations as revelers make their way home each evening.
This year there will be something new nearby – a refugee camp.
You’ve no doubt heard of the hundreds of thousands of migrants fleeing the Middle East into more peaceful Europe.
Over 200,000 immigrants and refugees reached Germany in the first half of this year, which matches the total for all of 2014. Government officials expect the number to reach 800,000 by year end, far outpacing the previous postwar record of roughly 500,000 immigrants who landed in Germany in 1992.
At first blush this might seem like a perfect match.
Germany has a low unemployment rate at 4.7% and over half a million unfilled jobs. It has an aging population and an underfunded pension system. Adding young families and singles to the economy could provide some much-needed manpower as well as a tax base for years to come.
But there’s a long road from here to economic Nirvana.
Skilled migrants still need to learn the language and establish living quarters. Before that, border officials must document each person, whether refugee, immigrant, or ineligible. And each must be slotted for social services, employment, and education. It’s a massive undertaking.
At least at the end of it all these people will be free of persecution and become contributing members of society.
But we’re just talking about the skilled migrants. What happens to all of the unskilled people who are also fleeing persecution, or simply looking for a better life?
Without basic elementary education, much less vocational or professional training, and no knowledge of the language, these people face a much less certain path.
The good news is that Germany is a rich country with a history of welcoming and assimilating immigrants. For those that choose to stay once their homeland stabilizes (that’s a different question), life in Germany should be fairly comfortable.
However, Germany is the outlier. The rest of Western Europe is not as rich, economically strong, or welcoming, and yet they, too, are facing a flood of people.
The unemployment rate in France, the second largest country in the euro zone, is 10.4%.
The rate in Portugal is 12.1%, while Spanish unemployment clocks in at 22.2%.
Then there are the two main points of entry for immigrants: Italy, where unemployment is 12.0%, and Greece, which has the highest unemployment rate in the region at 25%.
Except for France, all of these countries have aging populations, so the new influx of migrants might be an economic boon. But none of these countries are in a position to employ – much less house and provide services for – hundreds of thousands of immigrants.
And yet, as Germany reaches the maximum number it can take, that is exactly what will be asked of them.
In previous episodes of mass migration, host countries dealt with the influx by scaling up social services to meet demand. This takes a toll on government funds, typically requiring an expansion of government debt.
Eventually, more debt – without a corresponding rise in economic growth or productivity – leads to rising inflation. While Europeans might welcome inflation, it’s unlikely that they want to see their governments incur more liabilities.
Given the structure of the system, it would be difficult for the European Union to issue bonds to fund the relief efforts.
But there is a way for it to help.
Under its $65 billion-per-month quantitative easing program, the European Central Bank (ECB) currently purchases government bonds from each member country. The problem is that the ECB is running out of things to buy.
So, to alleviate a portion of the costs to fund the relief efforts, the ECB could purchase new government bonds from participating countries. The nations could issue these bonds at below market interest rates (if any interest at all), with exceptionally long maturities, and all the proceeds would be earmarked for services related to immigration.
The program would not solve many of the issues that arrive with mass immigration, such as language barriers, cultural clashes, and educational gaps. It would, however, at least assist many nations in providing the basic services required for humane treatment.
In a period of exceptionally low interest rates and high unemployment in all but a few countries, it could be the best short-term fix. Who knows? With a lump of extra spending on food, housing, and education, it just might spur some much-needed economic activity to boot!