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Special Report - Schengen and the European Migrant Crisis

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Europe is facing its worst refugee crisis since the Second World War, forcing many countries to re-establish border controls previously abolished under the 1995 Schengen Agreement. As a result, businesses that rely on unfettered access to European Union (EU) markets are incurring mounting costs due to additional checks and delays at the continent’s frontiers with no immediate sign of abating.

More than a million migrants crossed the Mediterranean Sea in 2015, with an additional 34,000 travelling via Turkey, Albania and other land-based routes. The trend is set to continue this year. Latest available figures from the United Nations High Commission for Refugees (UNHCR) indicate at least 130,000 people had reached Greece’s shores by the first half of March 2016, already exceeding the number of sea arrivals in the first five months of 2015. Most analysts predict this number will continue to rise as the weather improves and the maritime crossing becomes relatively safer.

Once ashore, the majority are making their ways towards a handful of Western European countries. Until Tuesday 8 March, when new border restrictions were implemented, this predominantly involved transiting through the Western Balkans. Figures published on 4 March by Eurostat, the statistical office of the European Union, reveal the largest proportion head to Germany (35.2%), followed by Hungary (13.9%), Sweden (12.4%), Austria (6.8%), Italy (6.6%) and France (5.6%), among others.

Straining Schengen

The influx of migrants is exerting pressure on border authorities throughout Europe, both in the 26-member Schengen zone and its periphery. Hungary and Bulgaria have recently erected fences to stymie the migration route, creating bottlenecks at key transit points in the southeast - notably on the Greece-Macedonia border.

Most countries in mainland Europe have now either reintroduced or reinforced checks on their frontiers, including those that had previously abolished controls under Schengen. Austria, Denmark, France, Germany, Norway and Sweden have all temporarily suspended the legislation, impeding free movement within the continent.

Evidently, what hinders migrants’ ability to cross Europe’s internal borders also impacts land-based intra-EU travel and freight. According to data published by The Economist, 1.3 billion transits are made across the EU’s internal borders every year, including 57 million trucks carrying £2.2 trillion worth of goods. If the Schengen system collapses permanently, the European Commission estimates the immediate direct costs for the EU economy would amount to between £4 billion and £14 billion annually.

Road haulage companies are likely to be worst affected, incurring additional direct costs of between £1.3bn and £5.8bn per year; alongside businesses where transport is a higher proportion of total expenditure, or those that generally operate on tight profit margins.

Companies that transport agricultural produce and chemicals will all be particularly hard-hit. As will the automotive industry, due to its reliance on just-in-time business models and low inventories that necessitate prompt and timely deliveries of components and raw materials.

Speaking to a Reuters journalist at the Geneva Motor Show earlier this month, the CEOs of Opel, Ford Europe and Daimler explained that just-in-time manufacturing is the “basis for efficiency of production in Europe” and warned that their factories “depend on the unhindered transport of goods and components from factories in Germany Spain, Poland, the UK and Italy”.

Indeed, if increased costs continue to be incurred due to delays at border crossings, the European Commission cautions it could ‘hurt the efficient development of EU value chains and the competitiveness of the EU as a whole’.

Restoring Schengen

The vast majority of migrants and asylum seekers hail from war-torn countries such as Syria, Afghanistan and Iraq, according to the UNHCR. As the economic and security situation in each of those countries worsens, migrant flows from these destabilised zones are expected to continue.

To address this crisis and its impact on the EU’s territorial integrity, political identity and economic cohesion, the European Commission released its Roadmap to Restore Schengen on 4 March, detailing a number of necessary steps to ‘return order to the management of the EU’s external and internal borders’. The document includes an ambitious plan to create a European Border and Coast Guard as well as more feasible steps to help the Greek authorities manage the 44,000 (and rising) number of refugees currently stranded in the country following the closure of the Balkan route.

Additionally, the EU agreed a controversial deal with Turkey on Friday 18 March, which it claimed, sends a “strong message that the days of irregular migration to Europe are over”. From Sunday 20 March, anyone illegally crossing the Aegean Sea will be returned to Turkey in exchange for £4.6 billion in aid, accelerated EU-accession talks, visa-free travel for Turkish citizens in the Schengen Zone from June, and the one-for-one granting of asylum for Turkey-based refugees for every one returned from Greece, up to a total of 72,000 people.

There are concerns about the successful implementation of the agreement. Greece lacks the financial and administrative resources to effectively enforce the deal, without more support from the EU than is currently forthcoming. An estimated 4,000 extra staff are required to process new arrivals; so far Germany and France have pledged ‘at least 600’.

Furthermore, analysts warn the new system will likely result in a ‘balloon effect’, whereby the problem is simply re-routed elsewhere in reaction to the new restrictions. Guntram Wolff, director of Brussels-based economic think tank Bruegel, quoted in The New York Times said, “The bigger headache will be when the smugglers start re-routing migrants to Italy through Libya because you’ve got a failed state there so no real government to make a deal with.”

Future Prospects

At present, the current indicators show that the refugee crisis is likely to protract for the long term. Conflict zones in the Middle East, North Africa and Afghanistan, in particular, have created unabated migrant flows into Europe. State governments and multilaterals are addressing the crisis, but measures are reactive, ad hoc and seemingly disjointed. These are events-driven measures that are short-term, posing unanticipated business risks.

For firms involved and reliant on intra-EU trade and logistics, this will likely mean additional checks, delays and disruption at land border crossings and ports of entry in the short to medium term. Or switching to more immediately costly airfreight operations to ensure business continuity and minimise the overall financial impact of the disruption.