How Does Schengen Affect the World?

READ THE FULL STUDY HERE: DEPARTURE FROM THE SCHENGEN AGREEMENT

Last week we covered our new study on the macroeconomic effects of a permanent departure from the Schengen Agreement. In the study, we presented the results for selected countries only. In this post, we offer the economic growth losses for all 42 contries covered by the macroeconomic model used.

What is meant by GDP losses?

After publishing the study, we had some questions concerning the different numbers presented in the study. Let us explain the GDP losses calculated with the example of Germany:

• In 2015, Germany’s real GDP (constant prices, the base year is 2010) reached €2,769.4 billion. In the reference scenario without any border controls, German GDP will grow to €3,169.6 billion by 2025. This equals an increase by 14.4 percent between 2015 and 2025.
• In case of a one percent price increase in cross-border trade due to a departure from the Schengen Agreement (scenario 1), Germany’s real GDP is supposed to attain €2,820.0 billion in 2016. Without these border controls, the calculated value of real GDP is €2,822.2 billion. Hence the loss of GDP in 2016 is €2.2 billion. In 2017, GDP loss in Germany is €4.9 billion (€2,865.4 billion versus €2,860.4 billion). In 2018, we have a GDP which is €6.7 billion lower due the reintroduction of border controls and so on. Finally, in 2025, the difference between real GDP in case of no border controls (€3,169.6 billion) and in case of a departure from Schengen (€3,160.8 billion) equals €8.7 billion.
• If we add up these annual differences for the years 2016 to 2025, we reach a cumulative loss of GDP in Germany which sums up to €77.2 billion. This cumulative loss is calculated for all 42 countries in our macroeconomic model (see table 1).
• In case of a reintroduction of permanent border controls, real GDP in Germany is calculated to reach €3,160.8 billion in 2025. Compared to the initial GDP in 2015, GDP growth then equals 14.1 percent. As mentioned earlier, without these border controls, GDP growth in Germany would equal 14.4 percent. Hence the suspension of the Schengen Agreement reduces Germany’s growth rate between 2015 and 2025 on average by 0.03 percentage points per year.

(Scenario 1: Assumed import price rise of 1%, Scenario 2: Assumed import price rise of 3%)

Why do countries outside the Schwengen area suffer from the reintroduction of border controls?

Table 1 demonstrates that even countries which are no members of the Schengen area suffer from a departure of this agreement. There are two main reasons for this:

1. Due to global value chains and economic interconnectedness, countries outside the Schengen area produce their goods by using preliminaries from Europe. If the prices for these prelimininaries rise due to border controls, costs of production increase in the countries outside the Schengen area. Therefore their international competitiveness is reduced and hence exports are lowered. Moreover higher prices reduce consumer demand. With lower exports and lower consumption, these countries experience lower economic growth.
2. If economic growth is lower in Europe due to a departure from the Schengen Agreement, demand for goods and services in Europe is lower. Hence companies outside of Europe export fewer goods to Europe. Again, due to lower exports, economic growth declines.

Why are the losses in the UK that large?

At first glance, the large GDP losses for the United Kingdom come as a surprise, because the United Kingdom is no member of the Schengen Agreement. There are, however, three good reasons for this result:

1. The British economy is highly integrated into European value chains. Hence the United Kingdom suffers from higher import prices from Europe – even though it is not a member of Schengen.
2. In the reference scenario, economic growth of the British economy depends strongly on exports. These exports are negatively affected by rising import prices within Europe. With fewer exports the British economy grows at a lower rate.
3. At the moment, the United Kingdom has an extremely high level of capacity utilisation. Therefore the British economy has more difficulties coping with higher prices. Hence higher prices have a relatively strong growth-dampening effect – stronger than for example in Germany.