Germany’s interior minister announced Sunday that the country would temporarily close its border with Austria. The aim of this measure was to “limit the current inflows to Germany and to return to orderly procedures when people enter the country” at a time when mass migration far exceeds anything seen since the end of WWII. News coverage of Europe’s ongoing migrant crisis may, if anything, understate the magnitude of the event.

The crisis is not only a human tragedy, it is also a monumental practical challenge for Europe, and while strong, positive policy steps could help to lessen the scope of the threat, migration will remain a key challenge for the EU in the coming decade. In this post, I’d like to address the nuanced question of the practical short- and long-term consequences this migration crisis will have on European economics and business.

Why has the refugee crisis accelerated?

The EU estimates that in the first half of 2015 over 350,000 migrants reached Europe —25 percent more than in all of 2014. Germany alone expects that approximately 800,000 migrants will reach the country in 2015, representing a substantial strain on resources. Unrest in the Middle East and Africa is nothing new, and Syria’s civil war began in 2011, but this sudden increase of movement and attention is the result of deteriorating conditions in Lebanon. Refugee agencies have run out of funds for food and shelter, and fed-up refugees have started to move on. The primary routes into Europe cross the Mediterranean into Italy or Greece and go by land through the Balkans and Hungary.

While recognized refugees are legally protected under the 1951 UN Convention, the influx of people to Europe includes not only those seeking refugee status from violence in Syria, Afghanistan and Eritrea, but it also includes economic migrants from the Balkan states and elsewhere. Herein lies the challenges for Europe’s response: a regard for international law and a conscience for helping those pushed from their homes combat a very real fear of domestic political and economic disturbance, as well as a threat to security.

Immediate considerations for executives in Europe

As political and economic responses to the ongoing migrant crisis unfold in Europe, FSG recommends that executives consider the following actions:

• Evaluate your production chain for vulnerability to supply delays in the short and medium term: The Schengen agreement – a landmark policy of many but not all European Union countries, promoting the free movement of people and goods – does allow for temporary suspensions of free movement, such as the 12-hour suspension of trains from Austria to Germany. However, disruptions are becoming more common. International trains have frequently been delayed by policy, and border checkpoints are increasingly common even on major highways. While the occasional slowdown of migrant trains may not impact executive travel, accumulated delays for truck stoppages along borders could prove very costly for inventory management and production.
• Monitor political processes across Western Europe and CEE: Regardless of official policies towards migrants and refugees, immigration has been a highly polarizing subject throughout the financial crisis. In fact, FSG is monitoring a shift towards populism world-wide, which in some cases includes anti-immigrant views, as lower economic growth and commodities prices take hold for a second year in many countries. As European countries struggle to sustain economic recoveries, the burden on state resources and perceived threat to particularly low-income workers is likely to exacerbate political tensions. In countries such as Hungary, pandering to extremist or even radical nationalist parties such as Jobbik could shape political and economic outcomes in upcoming years. The United Kingdom is also at risk, as it votes by 2017 on whether to remain a part of the European Union. FSG clients can use our Monthly Market Monitors to understand changes to the political landscape as they occur.
• Anticipate changes in government spending profiles: Strict EU rules on budget deficits mean that policies for handling migrants in European countries will likely be met with cuts from other discretionary budget spending. Companies should communicate with government partners to evaluate the stability of short-term funding on ongoing public projects and adjust their outreach accordingly.
• Review the opportunity to engage with refugee relief efforts: Consider donating supplies, organizing volunteers or promoting refugee hiring policies to enhance the company’s reputation and build worker relationships while the issue is still central. Create refugee retraining and apprenticeship programs or take advantage of existing programs funded by the state that may increase workforce skill and build company image.
• Evaluate how downward pressure on wages will impact your costs and demand for your products: It is likely to take some time before official refugees are processed and considered in formal employment figures. As a result, FSG does not expect a meaningful increase in official unemployment as a result of the migrant crisis. However, the surge in availability of labor could put downward pressure on wages. While this may reduce costs, it could also mitigate any improvements in consumption otherwise anticipated when population size increases.
• Prepare for low interest rates for longer: Companies can also expect lower interest rates for a longer period of time, as weak wage growth could put downward pressure on the overall price level in the economy, encouraging the ECB to maintain a steady stimulus via low interest rates.

Longer term considerations and practical consequences for Europe

Europe’s response to this crisis has proven to be disjointed, divisive and insufficient. Responses have ranged from welcoming to antagonistic, while cooperation at the EU level has, so far, been limited. At the same time, individuals across the region have largely proven to be concerned and compassionate, even when their governments have dithered. While the response to and implications of the ongoing migrant crisis in Europe are likely to vary by country, FSG has identified a few key considerations and consequences that will shape the European political economic landscape in upcoming years.

1. The crisis will only get worse

The EU’s response to the crisis fails to address the current degree of the challenge, and the risk to Europe is actually more substantial than most acknowledge. Over 7.5 million Syrians are internally displaced and over 4 million are refugees abroad in Lebanon, Turkey and Jordan, where they live in squalid conditions that encourage their departure to Europe. Conflict with ISIS leaves conditions in Iraq and Afghanistan likely to deteriorate even further. If and when refugees are resettled, it will add a pull factor on overall migrant volumes because many will tell friends, bring families, and spread the word of opportunity in Western Europe. Volumes are likely to only increase in the coming years. More acutely, as migrants hurry to reach Europe before the onset of winter, the urgency of finding shelter will increase. Few leave Lebanon with adequate clothing and it’s likely that many will miscalculate the changing season. Immediate challenges will intensify as the weather grows colder.

2. Resettlement without integration means instability

The question of which countries will accept refugees is probably less important than the question of integration. Refugee populations will require language tutoring, vocational training, and social support in order to productively enter the workforce, and their children will need substantial remedial and basic education. These costs are necessarily passed on to host nations, and even the most welcoming populations may grow increasingly bitter. As mentioned above, right wing parties have long been on the rise across Europe, and refugee resettlement costs will add fire to the flames. As a short-term resettlement issue becomes a longer-term issue of job security and training, companies should expect increased domestic political conflict as politicians are forced to address nationalist concerns and intensifying disagreement on EU immigration policies generally.

3. Europe’s free movement of people and goods is threatened

Countries’ responses to date represent a monumental challenge to the Schengen Agreement, which governs the fundamental EU principle of free movement. The establishment of border fences and checkpoints affects travel and trade, increases uncertainty, and weakens the very idea of European unity painstakingly built over years of cooperation. Worse, legal and physical barriers will only grow more common as refugees granted asylum in poorer EU countries seek to relocate to those that offer better benefits or stronger economies. Effective European integration is critical for the continents’ future growth and stability prospects, and restricting movement is a giant step in the wrong direction.

4. Demographics in Europe support more migration

Many EU countries are experiencing population decline, and an influx of young, motivated, and skilled workers could present a demographic dividend. While it’s unclear exactly what proportion of migrants come from skilled backgrounds, the high cost of coming to Europe and anecdotal evidence from Sweden suggests that many of these asylum-seekers are economically valuable. If they can be quickly and thoroughly integrated into society, migrants and their children will build and strengthen Europe’s next generations. Particularly for Germany, a population boost is extremely important for medium- and long-term growth and stability.

Signposts to watch

FSG recommends that companies monitor the following signals of a changing political or economic landscape as a result of the crisis:

• Border checks: An increase in border checks for trains and trucks across Europe would signal an immediate increase in logistics costs for companies, as well as a longer term risk for the free movement of people in Europe, stalling business investment and limiting export performance particularly for eurozone countries.
• Concrete steps towards real integration of refugees within host countries: Early support would offer the greatest dividends economically, socially and politically, limiting the risk of Islamic radicalization, crime and poverty among new migrants.
• Definitive political shifts: The news media are likely to cover stories of mistreatment and fear in host European countries. However disheartening, it is the tangible political outcomes – pandering to extremist or anti-immigrant parties, closing of borders, changing of political leadership – that will signal a likely deterioration of political stability and business predictability in any European country.

For more insights like these, follow Lauren on Twitter @LaurenElGoodwin.