A Better Plan for Refugees

The asylum policy that emerged from last month’s EU-Turkey negotiations—and that has already resulted in the deportation of hundreds of asylum seekers from Greece to Turkey—has four fundamental flaws. First, the policy is not truly European; it was negotiated with Turkey and imposed on the EU by German Chancellor Angela Merkel. Second, it is severely underfunded. Third, it is not voluntary. It imposes quotas that many member states oppose and requires refugees to take up residence in countries where they don’t want to live, while forcing others who have reached Europe to be sent back. Finally, it transforms Greece into a de facto holding pen without sufficient facilities for the number of asylum seekers already there.

All these deficiencies can be corrected. The European Commission implicitly acknowledged some of them this week when it announced a new plan to reform Europe’s asylum system. But the Commission’s proposals still rely on compulsory quotas that serve neither refugees nor member states. That will never work. European Commission Vice President Frans Timmermans is inviting an open debate. Here is my contribution.

A humanitarian catastrophe is in the making in Greece. The asylum seekers are desperate. Legitimate refugees must be offered a reasonable chance to reach their destinations in Europe. It is clear that the EU must undergo a paradigm shift. EU leaders need to embrace the idea that effectively addressing the crisis will require “surge” funding, rather than scraping together insufficient funds year after year. Spending a large amount at the outset would allow the EU to respond more effectively to some of the most dangerous consequences of the refugee crisis—including anti-immigrant sentiment in its member states that has fueled support for authoritarian political parties, and despondency among those seeking refuge in Europe who now find themselves marginalized in Middle East host countries or stuck in transit in Greece.

Most of the building blocks for an effective asylum system are available; they only need to be assembled into a comprehensive and coherent policy. Critically, refugees and the countries that contain them in the Middle East must receive enough financial support to make their lives there viable, allowing them to work and to send their children to school. That would help to keep the inflow of refugees to a level that Europe can absorb. This can be accomplished by establishing a firm and reliable target for the number of refugee arrivals: between 300,000 and 500,000 per year. This number is large enough to give refugees the assurance that many of them can eventually seek refuge in Europe, yet small enough to be accommodated by European governments even in the current unfavorable political climate.

There are established techniques for the voluntary balancing of supply and demand in other fields, such as with matching students to schools and junior doctors to hospitals. In this case, people determined to go to a particular destination would have to wait longer than those who accept the destination allotted to them. The asylum seekers could then be required to await their turn where they are currently located. This would be much cheaper and less painful than the current chaos, in which the migrants are the main victims. Those who jump the line would lose their place and have to start all over again. This should be sufficient inducement to obey the rules.

At least €30 billion ($34 billion) a year will be needed for the EU to carry out such a comprehensive plan. This includes providing Turkey and other “frontline” countries with adequate funding to maintain their very large refugee populations, creating a common EU asylum agency and security force for the EU’s external borders, addressing the humanitarian chaos in Greece, and establishing common standards across the Union for receiving and integrating refugees.

Thirty billion euros might sound like an enormous sum, but it is not when viewed in proper perspective. First, we must recognize that a failure to provide the necessary funds would cost the EU even more. There is a real threat that the refugee crisis could cause the collapse of Europe’s Schengen system of open internal borders among twenty-six European states. The Bertelsmann Foundation has estimated that abandoning Schengen would cost the EU between €47 billion ($53.5 million) and €140 billion ($160 million) in lost GDP each year; the French Commissioner for Policy Planning has estimated the losses at €100 billion ($114 billion) annually.

Moreover, there is no doubt that Europe has the financial and economic capacity to raise €30 billion a year. This amount is less than one-quarter of one percent of the EU’s combined annual GDP of €14.9 trillion, and less than one-half of one percent of total spending by its twenty-eight member governments.

It is Europe’s political capacity that is lacking, at least at the moment—its ability to make effective unified decisions about such an urgent matter. Most member states are restricted by the EU’s fiscal rules from running larger deficits and financing them by issuing new debt in the capital markets. Even though German Finance Minister Wolfgang Schäuble lifted hopes in Davos in January when he spoke of a European Marshall Plan to deal with the migration crisis, he also insisted that any spending should be financed out of revenues rather than by adding to the existing government debt.

Taking on new common European debt, backed by the joint and several guarantee of the EU’s members, would raise strong objections, particularly in Germany. Even if the debt were restricted to addressing the migration crisis, Germany and others would see it as a dangerous precedent toward creating debt backed by EU members collectively, with Germany responsible to step in if other countries fail to repay their share of the debt. Berlin has diligently avoided providing such a precedent throughout the euro crisis. That is why the question has not even been raised, let alone seriously considered. But there are other ways to raise the necessary funds using existing EU structures.

Member states could raise new tax revenue in order to fund what is needed. However, Europe does not have the political capacity to raise the necessary sums needed in time to contain the crisis. For a new tax to be perceived as fair, it would have to be imposed equitably across the EU. The proper route for such a tax increase would be for the European Commission to propose new legislation to be adopted with the unanimous support of all members. This would likely fail, since it would give every country the right to veto the tax. If a “coalition of the willing” of at least nine countries could be assembled, the Commission could opt for “enhanced cooperation,” the approach used for the proposed European financial transaction tax (FTT). If the recent experience with the FTT is any guide, this process would take months to conclude.

A more promising alternative would be to re-open the European Commission’s Multiannual Financial Framework, which establishes the EU’s broad budgetary parameters, including the maximum amounts the EU may spend in different areas. The forthcoming mid-term review of this EU budget offers an opportunity to increase the VAT contribution of member states, and designate that some of the new funds raised should go to a refugee crisis fund. This would also be difficult but offers the most realistic path forward.

It will be crucial, however, to make a large part of the funding available very quickly. Making large initial investments will help tip the economic, political, and social dynamics away from xenophobia and disaffection toward constructive outcomes that benefit refugees and countries alike. In the long run, this will reduce the total amount of money that Europe will have to spend to contain and recover from the refugee crisis. This is why I call it “surge” funding.

Where will the necessary funds come from? There is a strong case to be made for using the EU’s balance sheet itself. The EU presently enjoys a triple-A credit rating that is underused and that allows it to borrow in the capital markets on very attractive terms. And with global interest rates at near historic lows, now is a particularly favorable moment to take on such debt.

Tapping into the triple-A credit of the EU has the additional advantage of providing a much-needed economic stimulus for Europe. The amounts involved are large enough to be of macroeconomic significance, especially as they would be spent almost immediately and exercise a multiplier effect. A growing economy would make it much easier to absorb immigrants, whether they are refugees or economic migrants—a win-win initiative.

The question is: How to use the EU’s triple-A credit without arousing opposition, particularly in Germany? The first response is to recognize that the EU is already a triple-A borrower in the global bond markets, through facilities created to deal with the Eurozone crisis. Indeed, it was during the financial crisis that the EU repeatedly put its borrowing capacity on display, establishing financial instruments (such as the European Financial Stabilization Mechanism, or EFSM, and the European Stability Mechanism, or ESM) capable of borrowing tens of billions of euros on attractive terms in very short order. Once Europe’s leaders made a political decision to act, they were capable of doing so very quickly.

Some of these European financial entities, which still have considerable borrowing capacity, could be redirected to the refugee crisis. This would be far more efficient and faster than creating a new borrowing mechanism for the purpose. And such a redirection would require only a political decision—one that can be taken at short notice if the political will can be generated.

Two sources of money in particular—the EFSM and the Balance of Payments Assistance Facility—should be put to the task. These sources complement each other: the EFSM was designed for loans to euro-area members, whereas the balance of payments facility is for EU members that do not belong to the Eurozone. Both kinds of loans will be necessary for a comprehensive approach to the crisis. Both also have very similar institutional structures, and they are both backed entirely by the EU budget—and therefore do not require national guarantees or national parliamentary approval.

The combined gross borrowing capacity of the EFSM and the Balance of Payments facility is €110 billion ($125 billion), a number meant to coincide with the annual revenue ceiling of the EU budget. The amounts of each facility were set so that the EU never has more than its annual budget in debt outstanding. The Balance of Payments Assistance Facility’s €50 billion of borrowing power is almost completely unused. The EFSM has made some €46.8 billion worth of loans to Portugal and Ireland but has substantial spare capacity. They jointly have well over €60 billion of capacity, and this capacity grows each year as the loans to Portugal and Ireland are repaid.

The EFSM, the ESM, and its precursor, the EFSF, were all established in response to the euro crisis. The task back then was to provide cheap credit to countries like Ireland, Portugal, Spain, and Greece that had otherwise been frozen out of the credit markets. The expectation was that these countries would repay their loans from the EU once they had been restored to financial health.

Now the task is fundamentally different. As with the euro crisis, the refugee situation is at a critical point and requires a very quick response. But it differs from the euro crisis in that the countries to which the funds would be aimed—like Jordan, Lebanon, Turkey, and Greece—are merely on the frontlines of what must be a collective European undertaking; they are entitled to grants, rather than loans, and should not be obliged to repay the monies they receive.

If we accept this reality, how then will the surge funding get repaid? The answer is that the EU and its member states must find new sources of tax revenue, and do so in a way that spreads the repayment obligation as widely as possible. This could be done by levying special EU-wide taxes. The new tax revenue could come from a variety of sources, including the EU-wide VAT, which already provides revenue to the EU; a special tax on gasoline, as Minister Schäuble has suggested; or a new tax on travel into the EU and on visa applications, which would shift some of the burden onto non-EU citizens wishing to travel to the EU.

It was noted above that the process of levying new taxes inside the EU is one that will take a long time to complete. However, those looking after the finances of the EFSM and the Balance of Payments facility will want to know that the loans they make have a sure source of repayment. That’s why the EU must guarantee that it will find this new tax revenue by the time it is needed, even if the exact source of the new revenue has yet to be determined.

The question remains, how can the necessary political will be generated? The European Union is built on democratic principles. I believe there is a silent majority that wants to preserve the European Union even if it is currently not a well-functioning institution. The leaders will listen if this silent majority makes its voice heard.

The refugee crisis poses an existential threat to Europe. It would be irresponsible to allow the EU to disintegrate without utilizing all the resources it has at its disposal. The lack of adequate financing is the main obstacle standing in the way of successful programs in the frontline countries. Throughout history, governments have issued bonds in response to national emergencies. That is the case in Europe today. When should the triple-A credit of the EU be mobilized if not at a moment when the European Union is in mortal danger?