Business ponders ‘horrific’ cost of end to borderless Europe

European business is increasingly concerned about the potential collapse of the region's 26-nation border-free zone under the pressure of a huge influx of migrants, with companies from automakers to logistics firms warning of serious losses.

Some use words such as “horrific” and “devastating” to describe the prospect of an end to the 30-year-old Schengen accord, seen one of the essential linchpins of post-World War II peace and prosperity in Europe.

Schengen has already been temporarily suspended by seven countries to keep migrants from crossing their borders, and fears are rising of an European-wide reversal towards costly and delaying frontier checks.

Now stretching from Greece in the south to Iceland in the north and encompassing more that 400 million people, the Schengen area has offered border-free commercial and personal movement since an initial 10-nation pact in 1985.

It has been widely considered one of the European Union's most successful, wealth-creating projects, stretching to several non-EU countries and excluding just Britain and Ireland in Western Europe.

One of the benefits of Schengen to manufacturers has been to allow them to work with very low stocks of components, relying on the fact they can be delivered on time as demand rises.

But the frontier-free zone is now on the brink of seizing up, driven to the edge by the crisis that saw more than 1 million refugees and migrants enter the EU last year, many fleeing wars in the Middle East.

Politicians have long warned about the danger.

German Chancellor Angela Merkel said on Tuesday that the EU must come to an agreement very soon, possibly at a March 7 summit, on how to deal with the crisis in order to get Schengen back up and running properly.

Business, however, is worrying that it won't happen.

“A breakdown of Schengen would be horrific for us,” carmaker Opel's chief executive, Karl-Thomas Neumann, told reporters on Tuesday, noting Opel depends on the reliable transport of goods and components from Germany, Spain, Poland, Britain and Italy.

“We have huge logistics operations in southern Europe; any disruption would have an immediate impact on the bottom line.”

Airports association ACI Europe, meanwhile, warned that a Schengen collapse would create major congestion and cost larger airports hundreds of millions of euros to redesign terminals.

“The impact would be quite devastating,” Olivier Jankovec, the association's director general, said, though adding that he did not believe this would transpire.

Other businesses – including delivery specialists DHL Express, UPS and TNT – played down the impact of Schengen unravelling, saying that they had ways of mitigating it.

But DHL cautioned: “Border controls would lengthen delivery times to most target countries. Parallel with this, fuel and wage costs for a given route would probably increase and new administrative costs could also arise.”

The nature and scope of a Schengen closure makes estimates of the macro-economic impact hard to gauge – ranging from an immediate slowdown of commerce to knock-on effects on sectors such as tourism.

One study released by the European Commission, however, sought to assess the impact of just a small slowdown caused by border controls on roughly 57 million road transport journeys a year.

“Assuming that each of these crosses one border and has an additional waiting time of one hour. This could easily add up to a total cost of around 3 billion euros per year,” it said, citing an estimate by DG Move, the EU directorate-general for mobility and transport.

That is small in the context of a 13.9 trillion euro ($15.06 trillion) EU economy. But the impact could be far greater, especially if a shutdown was long lasting.

A study conducted for Bertelsmann Stiftung found that losses in overall EU growth as a result of reinstating border controls could reach 470 billion euros for the years 2016 to 2025.

Another study, from France, suggested that over time, “widespread border controls would decrease trade between Schengen countries by 10 percent to 20 percent.”

In the same vein, Morgan Stanley estimates that the overall loss of to GDP growth resulting simply from a 5 percent rise in transport costs would amount to 0.2 percent.

“A suspension of Schengen would undermine the functioning of the single market, hurting cross-border trade, transport and tourism,” Morgan Stanley said.

[Reuters]