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C. Bastasin: German Migrants, a Shock for the Euro-Area

image-09/10/2015 - 17:28At the beginning of September, German chancellor Angela Merkel took everybody by surprise, announcing that Berlin would open the country's borders to all Syrian refugees. German vice-chancellor Sigmar Gabriel, leader of  Merkel's coalition partner SPD, added that Germany is ready to host 500 thousand immigrants each year, for the years to come. Beyond its highly relevant ethical and political implications, the scope of the new migration policy in Germany is also bound to transform the economic landscape of the euro-area.

Millions of new workers represent a significant change in the labor force of a country that is commonly described as the European power engine. Given the relatively young age composition of the migrant population, the wave of newcomers will also change the demographic profile of the host country and the sustainability of its pension system. Overall, the new flow of workers represent a significant supply shock that may affect the German external position. In this regard, it may have a direct impact on the level of activity and on the competitive positions of other countries in the euro-area vis-a-vis Germany. In particular, the supply shock may affect both the size and trend of the German current account surplus. For the euro-area, which is just emerging from a disruptive crisis, coping with the new challenge offered by migrants in Germany may become an existential task.

In general terms, an increase in the labor force should accelerate domestic growth and decrease the marginal cost of labor. The two effects represent countervailing forces as far as the German external position is concerned. On one hand, stronger domestic demand should also increase German imports from euro-area partners and reduce the German surplus; on the other hand, lower labor costs could increase the competitive position of German firmsand improve the country's trade balance. In fact, it is possible that the impact of a larger German labor force on the relative external position of euro countries may be dwarfed by the indirect effect of migration on the German pension system. 

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