Germany currently faces a big societal challenge in dealing with an enormous influx of refugees. The infrastructure – from administrative capacities to housing and education – is undergoing an involuntary stress test.
Economically speaking, the country would benefit in the long term from accommodating and preparing the refugees - mainly the youths - for the job market. Although this calls for significant public expenditure, the German government has a financial surplus and can so far afford it.
More than one million refugees were registered in Germany in 2015 alone. This is a significant surge compared with previous years, when there were only a little more than 120,000 asylum seekers in Germany, which at that time already posed a huge challenge for the German economy and society.
The public administration struggled to handle the situation appropriately as it attempted to balance legal requirements, such as proper registration, with urgent humanitarian relief, such as shelter, first aid or food. At present, local and other authorities are dealing with even more substantial costs deriving from housing and supplies.
These costs run up to €1,000 per person per month. Costs for language and integration courses are also considerable. In 2015, the courses cost €1 billion and are expected to quintuple in 2016 and 2017. From an economic standpoint, this is actually good news - the public budget expenditure for the admission and integration of refugees create a cyclical upturn in the short term.
The state has allocated more than €20 billion above and beyond the planned budget. The fiscal stimulus has generated additional demand and has affected the sustainability of public finances, while boosting economic growth in 2016 by 0.3 percent. The additional funds are effective for several reasons, starting with the impact on real estate and education.
In 2017, the funding for social housing was increased by €800 million and the necessary German language and integration classes in schools will add more teachers and other staff.
Nearly one-fifth of Germany’s GDP growth over this year is related to government spending for refugees. Refugees contribute to higher domestic consumption rates as they enter the job market.
Of course there are risks and liabilities too, not least of which is the over-burdening of social systems.
Most of the newly arrived are unskilled and uneducated workers. The Cologne Institute for Economic Research estimates that in addition to this year’s €22 billion, the government will spend approximately €28 billion in 2017 for accommodation and integration – assuming that another 800,000 refugees arrive in 2016 and 500,000 in 2017.
It is important to recuperate these expenses sooner rather than later. But this depends on the amount of time needed to integrate refugees into the German labour market and the tax revenues they provide once they are gainfully employed.
The success rate will primarily be determined by language knowledge and the qualifications of potential workers. German companies and business play a decisive role by providing paths into the labour market, which include internships and training programmes.
There is a high demand for workers in manufacturing as well as in healthcare and nursing. Statistics show that historically many migrants have found jobs in the medical sector. Today, about 15 percent of the general practitioners for example in Germany are foreigners.
A survey by IW Consult among 900 German companies showed that 11% of the respondents, who at present do not employ refugees are willing to do so in the future. Among those already employing refugees, almost every other company will continue to do so in the future. This indicates that they had positive experiences with the integration process. But it will take some time for most refugees to get a regular job.
Not every refugee or asylum seeker will remain in Germany in the long term. Nevertheless, it is clear that with the current immigration, the share of the population of working age increases substantially.
This could not have come at a better time. Economists and demographers have been sounding the alarm bells for years, warning of a critical shortage of skilled workers for the German labour market due to demographic change and an ageing society.
Forecasts show that by 2050 there will be two senior citizens for every teenager in Germany. Social security systems would be hugely affected. Refugee immigration will not reverse this trend but at least slow it down.
The refugee situation is a stress test, not only for German society but also for its economy. However, the country has accrued a financial surplus in recent years.
Investing in the right infrastructure and managing integration properly will ultimately not only benefit refugees but can, in the long term, yield positive effects for the German labour market and the economy as a whole.
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