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Business

EU border controls: Controversy over costs

How badly would a re-introduction of border controls between European countries harm the economy? Lively controversy has arisen over this question, with different analysts providing dramatically different estimates.

The roughly 400 million citizens of the 26 European countries within the "Schengen zone" have for years now been able to cross borders freely, as if they were one country. Border controls were dismantled years ago. The only sign that one had left Germany for the Czech or French countryside was a change in the street signage. But now, the massive refugee flow into Europe is leading many countries to re-introduce border controls. Germany introduced limited, temporary border checks in November. For now, they're set to expire in May. That may yet change.

There's no disagreement over the suggestion that re-introducing border controls generates economic costs. Congestion at the border, with lines of trucks waiting to be checked before they're allowed across, causes friction in goods transport. Wares arrive late at their destinations, companies have to maintain bigger inventories in warehouses to make sure they don't run out of stock; commuters take longer to get to work across borders; tourists decide not to go for a day-trip across the border.

Wide span of estimates

Estimates of how big the cost of re-introducing border controls would be, however, span a very wide range. One analyst says perhaps ten billion euros a year, another arrived at a total cost of 235 billion euros over several years.

Border control at Austrian-German border

Border control spot-check at Austrian-German border

On Friday (March 4), in advance of the special summit meeting of EU government leaders, the EU Commission warned of "significant economic costs" in the amount of five to 18 billion euros annually. The Commission's estimate tallied costs for goods trade, commuting and tourism.

In January, DIHK, the umbrella organisation for Germany's 80 Chambers of Commerce, had provided a much higher estimate of the costs that would result from congestion, delays, additional bureaucracy, and rising storage costs. The costs for the German economy alone, DIHK said, could "quickly add up to tens of billions of euros per year."

Billions or tens of billions?

Bertelsmann Foundation submitted an estimate in late February that was still higher: the damage to the German economy alone could prove to be between 77 and 235 billion euros within the next ten years, taking into account goods trade costs alone, not tourism or commuting.

For the EU as a whole (not including Luxembourg, Malta, Cyprus or Croatia), the study's authors estimated a reduction in GDP that could reach as high as 143 billion euros per year. That estimate was based on an assumption that import prices within the Schengen zone could rise by three percent as a result of the re-introduction of border controls.

A study by France Stratégie, an agency that reports to the French prime minister, has estimated a rise of around three percent in the price of imported goods. In the long term, so they estimate, trade between countries in the Schengen zone could decline by more than ten percent compared to trend. That would reduce the EU's collective GDP by about 0.8 percent, which works out to about 110 billion euros a year.

Even the financial flows within the EU could be slowed, according to the French report, although the impact was "very difficult to estimate."

Slovenia building a fence along the Croatian border, November 2015

Slovenia building a fence along the Croatian border, November 2015

Assumptions determine results

Every statistical projection depends heavily on the assumptions underlying it. That makes it hard to compare the different estimates generated. An example from the Bertelsmann Foundation study assumes that "border controls are re-introduced at all inner-European borders," even though right now, it's primarily controls along the Balkan route that are under discussion.

Once they've programmed some assumptions into their economic model, the analysts test different scenarios - for example, a rise in prices of imported goods of about three percent - by running their software model to simulate the economic impact. The economic models they use to generate these estimates can only be considered as valid as their underlying theoretical assumptions.

The Bertelsmann study contains only seven literature references, five of which refer to economic studies. The oldest is from 1988. Three more were written in the 1990s - a time when the EU was considerably smaller, and the euro did not exist. Only one study is from 2016 - and it was generated by France Stratégie, which arrived at completely different figures in its own estimate of the impacts of renewed border controls.

Risk

The conclusion is that we cannot come to any certain conclusions. We don't know how much re-establishment of border controls will cost. Presumably that's why the France Stratégie report ends with the boilerplate warning that border controls present a "risk to the future of the European project."

EU Commission President Jean-Claude Juncker made the same point in more vivid language a couple of months ago: "Whoever kills Schengen will effectively have carried the single market to its grave."