The Schengen agreement is one of four cornerstones of the European Union’s ‘Single Market’ system, but with the unprecedented migrant crisis flooding the region and fractures amongst member nations already spreading, will the pressure fragment one of the world’s most valuable markets?
Since the earliest days of the European experiment, the Treaty of Rome promoted the concept of free movement of goods, capital, services and people as the four freedoms central to the success of the union.
In 1985, government leaders from seven EU countries met in the small village of Schengen, Luxembourg to sign an agreement that would officially, if gradually, abolish checks at common borders. This agreement was independent of the European Union itself, but has since been codified in EU rules.
This was followed in 1987 by the EU’s Single European Act, which called for the gradual establishment of a single European market by 1992. Implementing the ‘Single Market’ required the elimination of the many barriers to the movement of capital, monumental legislative work to reconcile members’ economic policies, including the adoption of hundreds of directives and regulations.
In its current form, the Single Market consists of 28 countries with a population of over 500 million. As of 2013, the single internal EU market sported €2.8 trillion of cross-border commerce.
The freedom of EU citizens to cross member nations’ borders to live and work, brought about by the Schengen agreement, is critical for the EU economies, as it makes it easier for talent and jobs to connect. This results in a more efficient allocation of human capital and progressively more integration and specialization of workforces and regional economies, respectively.
However, the building pressures from the ongoing migrant crisis in Europe are threatening to unravel Schengen agreement, and possibly affect the synergies that exist in the larger Single Market. That’s because certain rules in the agreement dealing with asylum seeking immigrants from outside the EU, such as the Dublin Regulation, are not consistent with the immigration stances of member countries such as Germany and Sweden.
Under Dublin, asylum seekers are fingerprinted and have to apply for asylum in the first EU nation they enter. If they travel further into union territory and are detained in another Schengen member, the latter country is obligated to deport the immigrant to the first country of entry.
The abandoning of Dublin regulations became the first fracture in the Schengen agreement. Germany and Sweden incentivized asylum seekers to their countries with open-door immigration policies, even as pressure built along the preferred route for the migrants in Schengen countries such as Greece, Italy and Hungary.
Hungary was so overwhelmed with asylum seekers earlier this year that it announced in June it would no longer accept returns of migrants that had crossed into other EU countries.
In August, Germany confirmed the breakdown of Dublin regulations when it suspended them altogether for Syrian applicants. This facilitated eastern European policies of ushering migrants through and out of their territories towards Germany and Sweden as quickly as possible.
The essential nullification of Dublin rules combined with inviting open-door policies advertised by Germany and Sweden helped to support ever increasing numbers of migrants traversing across Europe until it became too much to bear. Hungary has been the most aggressive in moving to seal their borders, constructing fences on their borders with Serbia and Croatia in a span of weeks.
Hungarian authorities point to its responsibility to the rest of the EU, being an external border state as justification under Schengen for the resolute measures to secure its borders.
In a domino effect, the diverted flow of migrants has subsequently pressured Croatia, Slovenia, and Austria to construct fences in order to stop or better manage entry to their countries. Even destination nations Germany and Sweden are now tightening policies amid definite signs of strain.
The recent horrific radical Islamic terror attack in Paris, credited to ISIS and purportedly executed in part by a recent Syrian migrant that entered the EU via Greece only last month, has catalyzed the tightening as France completely closed its border in a state of emergency.
The free movement of people throughout the Schengen area, one of the four freedoms underpinning the EU in the Treaty of Rome, has quickly deteriorated. In fact, Luxembourg’s foreign minister, Jean Asselborn, thinks the EU’s greatest achievement, Schengen, is all but dead.
These developments further expose the remaining three freedoms that define the EU to the risks of border closures and rising political tensions. For example, during a confrontation in September, Serbia banned Croatian goods and cargo from entering their country and Serbian companies threatened lawsuits against Croatia (an EU member) to recover economic losses after a closure of their border that caused a backlog of migrants to build up in Serbia.
Similar threats and spats emerging between the likes of Slovenia and Austria indicate a trend in which the €2.8 trillion EU single internal market is at increasing risk of insulating political reactions that erect barriers to intra-EU trade and weigh on already sluggish European economic growth.
Over and above that, Austria has also threatened to foil the United Kingdom’s current renegotiations with the EU for refusing to take part in a distribution and quota system for refugees. Those renegotiations themselves threaten many central tenets of the EU as they touch on issues of economic governance, currency, immigration and sovereignty.
Considering just how quick and extensive the political and social rate of change has been over the past few months as a result of this crisis and the projected continuation of what has become the biggest migration since WWII, formerly unfeasible scenarios must now be considered feasible, if not plausible.
Investors must consider what the possible sequestering of Europe could entail for the economies of scale, access to consumer markets and friendly legal framework that has so benefited the region economically. The advent of the migrant crisis and all its perceived and realized dangers have set into motion a chain of actions and reactions that are leading to a state of entropy in the EU.
The dissolution of the Schengen agreement may have been the first of the four freedoms to unwind, but growing political pressures risk erosion of the remaining EU freedoms that could result in contracting trade, weakening currency, protectionism and brinkmanship.
Going forward, national elections and political statements deserve the utmost scrutiny to determine just how disrupting the crisis will be economically. Additionally, investors should remember the speed and volatility with which today’s capital markets can react to suddenly new understandings of future risk.