Germany Holds the Key to Schengen

The refugee crisis, which for the past few months has dominated the political agenda in Europe on an almost daily basis, is increasingly throwing into question one of the greatest perks European integration has brought over the past decades: the principle of free movement of persons and goods. The idea of a permanent restoration of border controls as a way of stopping the influx of migrants has become as common and popular as their abolition was just a few years ago. Suffice it to recall the ceremony surrounding the four Central European countries’ joining the Schengen area in early 2007.

Nowadays, however, exactly the opposite trend has been growing even though many studies show that the restoration of border controls would have a dramatic impact on the economy of EU member states. As a rule of thumb the larger a country is and the more centrally it is located within the Union, the greater the impact the ending of the free movement of goods would have on it. Germany is a case in point, not just due to its location but also because of its role as the European Union’s largest economy, which quite naturally makes it the largest hub for the movement of goods and services as well as people.

Earlier this year a Bertelsmann Foundation study set out to calculate the potential economic repercussions the ending of the Schengen agreement might have for Germany and other European countries. The study showed that, should the current free border regime really come to an end, Germany would incur additional costs of at least 77 billion euros by 2025. A pessimistic scenario goes even further, estimating the potential losses at as much as 235 billion euros.

At the same time, the German government has pointed out that even the existing temporary border checks have already had a negative impact on the economy. “Long waiting times at borders can affect individual links in the supply chain,” claims an analysis prepared by the ministry of economics. One of the most striking examples are the border crossings between Germany and Denmark, where the Danish Cepos Institute has estimated the annual cost of restoring controls earlier this year at 90 million euros.

Should border checks be imposed permanently, this would have a very concrete impact on companies operating on the German market, given that they would most probably have to increase their storage capacities since they would no longer be in a position to guarantee just-in- time delivery, which is crucial for some key sectors of the country’s economy, such as the car industry. Major car companies routinely produce engines, transmission boxes, or other key components in subsidiaries based in Central and Eastern Europe, which means that these have to be delivered to their final production site as fast as possible and at the least possible cost. The system also enables the subsidiaries to respond flexibly to the producers’ changing demands and requirements.

Most importantly, permanent border controls within the present-day Schengen area would have a massive impact on road traffic density and flow. The permanent, kilometer-long queues that would form at motorway border crossings would far exceed anything the carriers were accustomed to before Schengen. An example is the Brenner Pass motorway between Austria and Italy, a key route connecting the north with the south, where the density of cargo traffic is now two to three times greater than before Austria joined the open border area in 1996. The implications for the current situation are not hard to imagine.

18 million lorries a year currently traverse German roads. Some 1.7 million Europeans currently work outside the country of their residence. 200 million journeys annually take place within the European Union, with 57 million border crossings a year linked to goods shipments, according to the European Commission President Jean-Claude Juncker.

The Bruegel Research Institute has concluded that restoring border controls would have even more radical long-term consequences. The Brussels think tank claims that its impact would be tantamount to introducing a 3 percent special tax or surcharge on reciprocal trade within the Schengen area, thus reducing reciprocal trade by one fifth. In GDP terms this would result in a reduction of up to 0.8 percent in the Schengen area countries, i.e. over 100 billion euros in total.

We may believe the veracity of these figures but, of course, we may also question their dramatic nature. It is an indisputable fact that internal trade within Europe predates the Schengen system and that not all EU members states take part in it. In other words, some parties participate in the common market even without the abolition of border controls. This follows the same logic as the claim that the trade exchange within the EU also performed quite well for many years without the common currency. However, its introduction brought about an unprecedented dynamism, and the euro has enhanced the integration of European countries’ economies. The internal market, Schengen, and the euro are therefore intercommunicating vessels, and their interaction further enhances their impact.

That is why it is hardly surprising that it is the representatives of the European Commission, the main guardian of the level of integration achieved so far, who have reacted most skeptically to the imposition of partial border controls within the system.

“Without Schengen, without the free movement of workers, without the freedom of European citizens to travel, the euro makes no sense,” said European Commission President Jean-Claude Juncker earlier this year. He went on to warn that, taken to the extreme, the end of the system might result in growing unemployment and amplify protectionist tendencies. Furthermore, Juncker believes that it would no longer be possible to “simply” restore the original form of the internal market from the period before the common currency, when border checks were still operated among most member countries. Over the past few weeks, Juncker’s sentiments have been repeatedly echoed by Eurogroup President Jeroen Dijsselbloem and German Chancellor Angela Merkel.

Of these three politicians, it is probably the head of the German government who is under the greatest pressure when it comes to preserving the current system of the free movement of people. For it is in her country (which has benefited from the system more than any other) that the demand for closing the borders, and thus also for the end of the Schengen system, has reached an unprecedented level.

Skepticism about the principle of the free movement of people is increasingly combined with skepticism about free trade as such and whether Germany is gaining any benefit from it. This is illustrated by the growing success of Alternative for Germany (AfD), a new political movement, which has clocked some spectacular successes in local politics in the past few weeks. In mid-March its support in elections for three German state parliaments reached double figures. And the latest opinion polls show that its nationwide support has also grown so rapidly that it is likely to come third in the national parliamentary election, right on the heels of the two ruling parties, the Christian Democrats (CDU) and Social Democrats (SPD).

AfD’s internal structure is still rather heterogeneous and it has yet to articulate a long-term political program. So far, it has rather been attracting the protest vote both from the left and the right. Nevertheless, apart from its rejection of the refugee influx, on which all of its supporters agree, one of the political issues they have raised repeatedly is the view that free trade benefits only major multinational (or US) companies, while small and medium-size firms have not got very much out of it. Taken to the extreme, from the AfD point of view it would do no great harm if the Schengen system were abolished and permanent border checks were re-imposed at Germany’s borders.

Within mainstream AfD thinking the entire free market philosophy is against German interests. This is why the Alternative for Germany also rejects Germany’s participation in the Transatlantic Trade Agreement (TTIP), regarding it as something imposed on their country by the Americans. The AfD argues that the agreement will give an inordinate amount of power to multinationals, who will be able to sue national governments, thereby not only imposing unfavorable conditions on them but also depriving them of a key attribute of national sovereignty.

By contrast, the AfD believes that Germany ought to strive to regain control over its own trade policy or be allowed to choose from several options the one that best reflects Germany’s current needs and interests. And currently the only interest, in their view, is to end the EU sanctions against Russia, which the party believes have damaged small and medium-size German companies.

This brings us back to the current context: Not only does Chancellor Merkel back open borders, she is also a supporter of the trade agreement with the US and of maintaining sanctions against Russia. This has given Euroskeptics further grounds for dissatisfaction with Merkel’s policies.

And so the future of the Schengen system, and thus also of the free movement of people within the European Union, will depend on the position adopted by Germany and its government. If the long-awaited resolution of the refugee crisis comes into effect and the number of refugees will indeed begin to “go down tangibly,” as the chancellor has said, there is a chance that the system will survive. In that case the lifting of the temporarily imposed border controls is merely a question of time, since the majority of Germans still prefer open borders to the restoration of former checks. If, however, it proves impossible to lessen the influx of refugees into Europe and Germany in particular, there will be nothing easier for a party of AfD’s ilk than to start campaigning against another symbol (in addition to the common currency and free exchange of goods and services) of the European integration process, the principle of open borders.