In flight.

Photographer: Eric Thayer/Getty Images

Revisiting the Economics of Europe's Refugee Tragedy

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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On Aug. 4, I argued that, viewed through the lens of supply and demand, the surge of refugees into Europe was a tragedy that wouldn’t "go away anytime soon, and for a simple depressing reason: The economics of this tragic situation call for a comprehensive collaborative solution, but the best the political system is able to come up with is a piecemeal, weakly coordinated approach."

This diagnosis was confirmed over the past five weeks, as several European nations pursued narrow national responses. While some of these were admirable -- including Germany's decision to open its borders, embrace the refugees and approve funds to support their orderly and productive resettlement -- other nations' reactions were scattershot, or repressive and heartless. Now, the continent's political leadership is seeking a more unified strategy, centered on mandatory quotas, that aims to spread the burden among member countries.

QuickTake Political Asylum

On paper, this is a valid response to an imbalance between supply and demand that has been amplified by the initial coordination failures and that cannot be solved through either national policy responses or by relying on the market's normal equilibrating mechanism.

This new strategy, however, will prove challenging to put into effect and, more fundamentally, won't address the underlying causes of the refugee influx, unless it is supplemented with several other policies. Moreover, in the absence of a more comprehensive solution, the crisis also could become another test of Europe's commitment to its common values, which has yet to recover fully from the damage inflicted by Greece's economic and debt meltdown. Already there are proposals to scale back passport-free travel within the “Schengen Zone,” a European achievement that was deemed irreversible not so long ago.

In simple economic terms, the proposed mandatory quota system can be viewed as an attempt to seek greater balance by forcing the creation of supply in response to excess demand. If these steps are bolstered by resources to support and develop the human capital of the refugees -- which is what Germany says it is committed to do at the national level -- there is the potential to productively expand Europe's labor force, which will be confronted by significant aging and other demographic challenges.

But these moves, however attractive, won't be easy to implement.

On the supply side, some countries -- such as the Czech Republic and Slovakia -- are strongly opposed to a mandatory quota system. Other nations are likely to join them. That rejection would make it very hard for European officials to secure the national political support the measures need to succeed, even if Germany, the region's powerhouse, strongly backs the plan.

The challenge on the supply side comes from the refugees themselves. After dangerous journeys from their homelands, and having endured significant hardship, some of the migrants are likely to demand a say in where they will be resettled. Their choice of destination will be based on their perception of the host country's social and financial environment. And they will demand to be sent to places where they believe they can more easily form connections (with family, friends or established national immigrant communities).

This is already the case with some refugees in in Denmark who are seeking to get to Germany or Sweden; and in Greece and Hungary, where many refugees are resisting being registered, a step that would preclude travel to Western European countries. European leaders would be justified in arguing that "beggars cannot be choosers," but accommodating the refugees' requests could help ease the longer-term integration of the new arrivals.

At best, the quota system will provide much-needed, but short-term, relief for a humanitarian tragedy. But a sustainable solution also must include measures that reduce the supply of refugees by improving the unbearable conditions in the lands they are fleeing. And, on the demand side, it would involve the wider acceptance throughout Europe of Germany's recognition that an admirable humanitarian response also can bring longer-term gains for the host economies.

Most of Europe remains far from agreement on such durable solutions for either side of the equation.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net