In response to the massive influx of migrants and the Paris terrorist attacks, several EU countries have put the European Union’s “freedom of movement” at risk by reinstating border controls. This week, the interior ministers of several EU countries proposed a change to the Schengen Agreement – which preserves the freedom of movement for goods and people – that would extend an allowance for emergency border controls from six months to two years. The agreement is far from law, but represents a strong signpost of one of FSG’s key Events to Watch in 2016. It is time for companies with operations in Western Europe to contingency plan for this disruptive policy shifts.

It will take time before any proposed measure would become reality. At least 16 interior ministers have expressed interest in extending the suspension of free movement of people and goods. Such a result is not surprising as France, Germany, Austria, and Sweden already have border controls in place. However, for any proposal to become law, the European Parliament would need to approve it. Whereas interior ministers represent their nation’s best interest, the European Parliament should represent what is best for Europe as whole.

Although the EU as a unit has not changed the Schengen Agreement, the political justification and security motive for doing so is both strong and timely for many countries:

• Being tough on borders would disrupt the far right: Schengen is one of the most symbolic achievements of the European project, but it is also one of the easiest targets for xenophobic far-right parties, which are on the rise in much of Europe. Reinstating border controls would pull the mat out from under the far-right’s feet – significantly before 2017 elections in both Germany and France
• ​Allowing national border controls would buy time for the EU’s external border construction: Much of the Schengen debate has centered on the EU’s external border control service called Frontex. As migrant numbers have surged, Greece in particular has been slow to fully participate in Frontex because its mandate is both very broad and very poorly funded, which threatens higher border spending to be left with the already crisis-ridden country. A temporary slip in Schengen could be a mechanism for focusing on this external border not only for security’s sake, but to ensure that the final result includes all of the EU and not simply a group of core Northern states
• Legitimizing border controls helps leaders to avoid a bad reputation: Countries like France and Germany, who have already reinstated some additional border controls, will be out of compliance with Schengen agreements in only four more months. Allowing for a pan-EU rule would lend some legitimacy to these otherwise potentially illegal arrangements.

The dismantling of Schengen would not happen overnight. However, real political motives and their rapid pace of development drive FSG’s view that supply chain disruptions and increasing transaction costs in the EU will disrupt business planning now. While we do not expect an immediate halt to commerce by any means, we are urging our clients to consider longer lines at borders for travelers and distributors, and increasing uncertainty around shipments timing.

Executives can take steps to make their businesses more resilient to impending change. Namely, companies should draw up contingency plans now. While we are still far from a border disintegration, FSG has designed its Events to Watch report around the disruptive events that you can and should plan for. Use these tools and our analysts to prepare your business for likely changes. Some next steps include:

• Consider the vulnerability of your supply chain and margins to increases in transportation timelines and in border scrutiny
• Monitor closely whether you will need additional permissions for freight or for drivers
• Confer with key accounts and distributors. Same-day shipment may not be a reasonable promise across some borders in the next few months. Provide valuable customer service by allowing related suppliers and customers to adjust
• Assess the impact of longer lead times on both inputs and shipments on your customers and key liquidity and operations ratios
• Monitor the next signpost for this event. On Dec. 15, the European Commission is due to release a detailed response on how to improve external border controls and preserve freedom of movement.

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