The refugee crisis is now the biggest test of whether Europe works

Europe’s doors are closing on the Syrian migrants moving across the Mediterranean.

It’s happening in Hungary, where the border with Serbia is effectively being militarised, and in Germany, which has reinstated some temporary controls with Austria.

Research released on Tuesday by Moritz Kraemer at credit ratings agency Standard & Poor’s says that the way the politics of the crisis develops is “the biggest uncertainty for EU sovereign ratings.”

The eurozone has more reason than many advanced countries to worry about its credit ratings — during the euro crisis, ratings were slashed as markets began to question whether countries on Europe’s periphery could stay using the single currency.

And the handling of the hundreds of thousands of refugees streaming into southern Europe now tells us a lot about whether the bloc is up to the task of holding itself together.

Here’s what the note says:

An acrimonious fracas over the distribution of refugees across nation states has the potential to sour the collaborative mood among EU member states. The consequences of such a scenario are difficult to predict, but it is possible to imagine scenarios that make the approval of future financial support packages politically more difficult. For example, such political willingness to provide support for a eurozone member state may suffer if it is perceived as having dragged its feet on the road to a common EU solution to the refugee problem, aiming for a free ride instead.

In short, it’s not the refugee crisis itself that’s a problem for the eurozone’s stability, at least as far as fiscal issues are concerned.

The report kills two birds with one stone: First, it dismisses the optimistic idea that refugees will offer some sort of demographic boost to the eurozone, noting that even if far more Syrians came to the monetary bloc, they wouldn’t be able to reverse the long-term trend of declining working-age population.

Second, for the same reason, the numbers involved simply aren’t enough to put a massive strain on eurozone budgets and put their credit ratings at risk. It’s just not a large enough factor.

But the question of how Europe deals with the crisis is an important factor for its future fiscal security. If the countries can compromise and find some sort of common stance, with increased co-operation, it’s a positive sign for future fiscal crises. It also generates goodwill, something that was so obviously lacking in this year’s negotiations with the Greek government.

And if they can’t find a common stance it generates grievances instead. Another illustration that European countries don’t share enough common ground or solidarity to create a pan-European policy on refugees is understandably not a good sign for a pan-European policy on anything else.

The signs of a positive outcome are not looking good. An emergency summit of interior ministers held in Brussels suggested there isn’t enough consensus to have mandatory resettlement quotas.

What’s more, S&P noted a longer-running worry that the refugee crisis could strengthen far-right populists in Europe, putting increased pressure on existing governments:

Such a development might shift the focus of incumbent governments toward containing the populist surge, and move it away from pushing ahead with budgetary and structural reforms. However, fiscal sustainability and a more dynamic growth potential underpin all sovereign ratings. Slowing down or even backtracking on policies conducive to achieving those dual goals could over time increase downward pressure on sovereign ratings.

The message is clear — refugees will be neither a massive boom nor a massive drag on Europe’s economies. But the way governments handle them, and how much they fight over it, will tell us whether they’re ready to face another real financial crisis.

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