External Action

Europe's migrant crisis will present big market risks in 2016

Mujtaba Rahman / Jan 2016

Migrants in Hungary on their way to the Austrian border. Photo: Wikimedia Commons

Even as Europe's migrant crisis has dominated news headlines in 2015, the capital markets seem to have taken little notice of the humanitarian crisis unfolding in Europe.

The human suffering has pulled on the heartstrings of some investors. But the global investment community's working assumption is that the hundreds of thousands of refugees banging on the gates of the EU is not "market relevant." It will not, they seem to believe, have any material market impact.

This is a dangerous miscalculation. Europe's migrant crisis has the potential to be far more politically explosive and economically disruptive than a Greek exit from the eurozone could have been. As the crisis continues to escalate in 2016 - which it will, particularly given the sheer scale of the influx will become much larger than EU leaders' current plans acknowledge - the risks for financial markets and corporates will grow, on a number of fronts.

Most importantly, this crisis will strengthen radical nationalist parties and governments, and weaken moderate ones. Hungarian Prime Minister Viktor Orban's anti-immigration stance has allowed him to reverse his slide of his conservative Fidesz party by distracting voters from the faltering economy and government corruption. The next wave of populism is likely in large parts of Scandinavia, Poland, Spain and Italy. And this does not even include more obvious cases such as the UK and Greece.

The strengthening of nationalists will have a direct knock-on effect on the most important economic challenges currently facing Europe: it will make it harder to reform the architecture of the Euro. As EU leaders expend more political capital on migrants, and the support for right wing nationalism grows, pursuing further European integration that further erodes EU citizens' notions of sovereignty will become ever harder. Essential reforms like establishing mutualised deposit insurance and an EU unemployment fund over the next year or two was already going to be difficult. This crisis could make it impossible.

EU unity over Russia will also suffer. The majority of Central and Eastern European states have long argued that sanctions on Russia should be maintained until the Kremlin is in compliance with the Minsk agreement. To support their position, these states have invoked arguments of European unity, solidarity, and shared values. Opposing and dragging their feet on a European solution to the refugee crisis now exposes a form of hypocrisy which will not be missed by states who want to wind down Russian sanctions but have been pushing for a deal on refugees (such as Greece, Italy and France). The Paris attacks will only complicate matters, as core Europe is now forced to work with Russia over the stabilisation of Syria, a geo-political imperative if refugee numbers are to be reduced. The implication: EU sector sanctions on Russia will probably be eased at the time of their next review, regardless of whether Russia is fulfilling its obligations under Minsk. This will prompt more EU disunity and could potentially carry broader geopolitical instability, too.

The migrant crisis could also increase the risk of BREXIT. It is now clear that British Prime Minister David Cameron's renegotiation of the UK's relationship with Brussels is not going to achieve much, especially in the area of welfare and migration, where Cameron was hoping to limit EU nationals access to in-work benefits for 4 years. In addition, the migrant crisis further reinforces the perception in the UK that the EU is a club that is failing. Failing over currency, and now over migrants, borders and terrorism. Both of these facts -- a weak renegotiation, and a failing club -- will make continued membership a harder sell and increase the odds of BREXIT.

Finally, the crisis has given EU governments an excuse to delay fiscal and economic reform and threatened the EU's single most important success story, its large internal market. Countries have submitted exaggerated estimates of the fiscal impact of absorbing refugees. But even in the most costly scenarios, such as in Hungary, spending on the crisis has only been in the order of 0.08% of GDP. Still, to facilitate an immediate deal over refugee relocation, the European Commission is relaxing EU states' fiscal targets across the board. And as states cite capacity problems to deal with the large refugee influx, combined with fears of terrorism, a number of countries have instituted border controls and introduced unofficial "stop and search" policies on their borders. These practices have effectively undermined the European common market, founded as it is on the principle of the free movement of goods and people, and increased the uncertainty and costs of doing business in Europe.

Global investors are right to recognise the humanitarian impact of Europe's current crisis. But they would be wise to awaken to the broader 2016 market risks it will present as well.

Mujtaba Rahman

Mujtaba Rahman

January 2016

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