Migrants and growth

Migrant crisis buys Germany unexpected growth

Angela Merkel's decision to welcome around one million war refugees in 2015 has created momentous political and logistical challenges. But the policy comes with an unexpected positive economic side effect: Berlin is ditching its excessive focus on fiscal austerity. The additional government spending prompted by inward migration will add up to euro 31 billion over 2016 and 2017, the Berlin-based German Institute for Economic Research (DIW) estimates.

Additional refugee shelters must be built, migrants fed and German language lessons taught. Moreover, the government is hiring extra staff for the migration authority and the border police. As Berlin doesn't plan to cut other expenditures or hike taxes, the extra outlays will be effectively an economic stimulus programme. In terms of size, it will be equivalent to two-thirds of Berlin's emergency spending package during the 2009 recession. The budget surplus, which rose to 0.8 per cent of gross domestic product (GDP) in 2015, will be cut in half, DIW expects.
 
The migrant-related spending should add a quarter of a percentage point to annual GDP in 2016 and 2017, resulting in overall growth of 1.7 per cent this year and 1.9 per cent next, according to a Breakingviews calculation based on Bundesbank estimates. According to Deutsche Bank, Germany will be the fastest-growing euro zone country in the coming year, after Ireland and Spain.

Germany's economic growth already looked relatively strong, thanks to domestic forces. A brimming labour market has pushed employment to record levels. Real wages are rising, while the tax burden and the savings ratio are both decreasing. Consumer spending in 2015 grew at the fastest rate in 15 years and is expected to accelerate further. Meanwhile, net trade will generate little if any GDP growth in 2016, suggesting Germany's unhealthy dependence on export-driven growth has become a matter of the past. That's good news for the entire euro area.

There may be political reasons to spend. A healthy rate of economic growth and low unemployment are vote winners, and Chancellor Merkel faces the polls in 2017. But there is equal pressure to spend wisely. The challenge that will decide the success of the country's next leader isn't merely finding room for migrants, but properly integrating them into society and the economy.