Europe’s unfolding refugee crisis: the War in Ukraine and its Fiscal Impacts
Introduction
One of my senior colleagues, Philipp Ostermeier, organized a mission to Zahóny, Hungary a few weeks into the war in Ukraine, bringing supplies to assist the Ukrainian refugee relief efforts. I joined him for a few days to help, and better understand how we could best support the Order of the Maltese Cross Association, a Non-Government Organization (NGO) set up on the border to receive and transit refugees. It was one of the more moving couple of days I have experienced, showing the better side of humanity as we witnessed incredible efforts by volunteers and donors doing all they can in trying circumstances.
Moreover, we learned that the Order of the Maltese Cross Association could benefit from professionalized transportation so we financed buses for 90 days to shuttle refugees – mostly women and children -- safely to Austria, Czech, and Poland. From the border, they would be met by intermediate organizations which would help to integrate them longer-term into their host countries.
What I experienced in Zahóny not only inspired us to do more, but got us thinking about the humanitarian funding, government aid, and additional support needed to integrate refugees into regional economies. I want to share what we have learned so far from our findings.
The Ukraine refugee situation
The refugee crisis resulting from the war in Ukraine has been cited as the biggest humanitarian crisis witnessed in Europe since the Second World War. The United Nations High Commissioner for Refugees (UNHCR) estimates that nearly 5 million people fled Ukraine as of early April, with the EU estimating as many as seven million people could seek refugee status – more than the 6.8 million Syrian refugees that found their way to Europe in 2015.
In addition, over seven million people are internally displaced in Ukraine, and a further 13 million are thought to be stranded in their current locations because of the ongoing fighting. The final number of refugees will depend on how long the conflict lasts and how the country’s economy settles down after the war, with the current situation remaining highly fluid.
The fiscal impact
Large-scale emigration is likely to present substantial challenges for the largest host countries as they work to integrate millions of refugees into society. There are several estimates of the initial fiscal costs of this influx for European Union countries.
Economists from think tank Bruegel estimated a total cost to EU nations of €43 billion in the first year alone, based on a scenario of 6.3 million refugees, with 5.7 million of those entering the EU, and an average yearly cost of €15,000 per person.
In another prediction, the overall costs of hosting Ukrainians in EU countries could reach as much as €49 billion. This takes into consideration the Center for Global Development (CGD)’s estimated cost per refugee of €7,000 and the potential seven million refugees cited by the EU.
A study by the National Institute of Economic and Social Research predicted that public spending could increase by 1% of GDP in countries neighbouring Ukraine and by the equivalent of 0.5% of GDP elsewhere in Europe.
The expense of integrating millions of refugees, with consequent impact on housing, education, and health care systems will continue to add to the higher levels of public spending incurred by European nations dealing with the Covid-19 pandemic over the past two years. Moreover, the fiscal impact also comes as these economies grapple with inflationary pressures, a supply chain crunch, and other headwinds that are already threatening to derail the post-pandemic recovery.
European support so far
The financial support needed is substantial, but not insurmountable if governments, NGOs, and the private sector come together to provide the estimated +€40 billion needed this year.
The EU has already moved to provide nearly half of the estimated requirement. First, the EU announced €500 million in humanitarian aid for Ukraine, out of which €85 million has been allocated to Ukraine and €5 million to Moldova. There is also €420 million for countries hosting Ukrainian refugees as part of the Cohesion Action for Refugees in Europe (CARE) plan.
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Further €17 billion are expected to be released from other EU funds including the 2014-2020 cohesion funding and the 2022 tranche of React-EU, an EU public investment program.
Other support comes from the board of the European Investment Bank (EIB) which approved €668 million in immediate financial support for Ukraine.
Campaigns set up by the UNHCR such as the Ukraine Flash Appeal for €1.05 billion to support six million people within Ukraine and the Regional Refugee Response Plan (RRP) for €506 million to support four million Ukrainian refugees in neighbouring countries over the next few months are currently receiving pledges and continue to track up towards their targets.
So far, the biggest government donor is the US with approximately $6.7 billion. Other governments continue to donate significant sums across the globe. Large charitable organisations such as the DEC Ukraine Humanitarian Appeal have raised nearly £300 million in a month while many corporations are donating millions in support of Ukrainian refugees.
What’s next?
This refugee emergency differs from previous crises, not only in scale but also in nature. In contrast to the Syrian refugees who were mostly young men, a larger share of Ukrainian refugees are women and children, or the elderly, and they are not being placed in refugee camps. As a result, there will be more need for educational support for children and healthcare for the elderly.
Due to the geographical proximity of Ukraine and the fact that families have been split (as men were required to remain in the country), it is expected that many refugees will want to return after the war. Some reports suggest that 500,000 refugees have already returned from Poland to Ukraine and that for every two refugees crossing into Poland, one is returning to Ukraine. This may suggest a growing assumption of the Ukrainian people that the war could last years, as well as a willingness to live with a measure of danger rather than live as a refugee in another country.
Another key difference from past immigration situations is that Ukrainian adults are allowed to find work immediately if they choose to, this is due to the temporary protection status granted by the EU.
A quicker incorporation of refugees into the workforce may facilitate their integration into the labour market and the wider society, with effects on tax contribution within their chosen host countries potentially happening sooner rather than later. While it would be premature at this stage to estimate how quickly Ukrainian refugees could become net contributors, prior research has found the fiscal impact of refugees is zero or even positive over the course of a decade as they find jobs and add to tax revenues.
Whilst resettling millions of refugees into regional economies, one important factor will be managing inflation and the overall cost-of-living crisis currently unfolding in Europe. Vulnerable populations find it hardest to bear the rising costs of food and fuel. This new fiscal challenge comes at a difficult time for EU governments which are already dealing with the fallout of the pandemic in public budgets and have limited scope to increase spending.
The option to increase interest rates may well gather momentum as governments look to counter inflation while funding aid efforts abroad and supporting refugees at home. This would mean that the low-interest rates across Western Europe, already set to rise to compensate for inflation, may need to rise more quickly.
There are no simple solutions to the current crisis. However, as the last two years have demonstrated, working together to support those in need is something we can do well, and keeping that momentum at both the individual, corporate and government level over the next few years must remain a priority.
Sources:
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Thanks for this analysis on fiscal impact of refugee crisis. So valuable for assessing how philanthropy and private sector can make a difference.
Antonio Alvarez III thank you for sharing this information and kudos to you all for directly helping out. This is not just European crisis, but really a world crisis as the impacts of this war will be felt far and wide. Fortunately, so many countries outside of the European Union are also helping and we are praying for a peaceful solution to this unprovoked war. #ukrainecrisis #financialimpact #slavaukraine