Schengen collapse will wipe €28bn from Europe's economies

Schengen sign
Analysts at Morgan Stanley say death of open borders will damage EU more than a Brexit

Europe could see €28bn wiped off the value of its economies as it faces the imminent collapse of the Schengen system of open borders, according to a leading investment bank. 

Up to 0.2pc of the European Union's GDP could be erased as a result of the spiralling costs of cross-border travel and disruption to internal trade that would return in a post-Schengen Europe, Morgan Stanley warned.

The bank's analysts estimate a 5pc surge in the cost of cross-border travel, while trade flows between countries could fall by up to 20pc as border checks and waiting times are reintroduced to Europe.  

Unlike the process of negotiating an EU exit for Britain, Morgan Stanley said a chaotic dismantling of the 30-year old passport-free zone would plunge the EU into political turmoil. 

"Contrary to the Brexit process, which would follow an orderly legal procedure if implemented, the risk surrounding a suspension of Schengen is that it could lead to disorderly political developments related to border controls, which in turn could cause a material hit to private-sector confidence", said Elga Bartsch, at Morgan Stanley. 

"This uncertainty would likely lead to a material decline in investment spending, especially if the suspension of Schengen coincided with an exit of the UK.

Morgan Stanley chart
The sectors most at risk from a collapse in the Schengen zone

 

Morgan Stanley's forecast is more than twice the economic costs estimated by the European Commission, which stands at 0.1pc of EU GDP. Separate analysis from a think-tank linked to the French government estimated that €110bn would be wiped off the EU over a decade. 

The prospect of a full-blown dismantling of the passport-free zone - where people and trade can move without restriction between 26 countries - is looking increasingly likely as Brussels buckles under the pressure of an unprecedented influx of refugees. 

EU ministers will gather later this month to decide on whether impose a two-year suspension of the Schengen agreement - a decision that would "mark the first reversal of European integration" in more than three decades, according to Morgan Stanley. 

Schengen map

 

Goods worth €2.8 trillion travel within the Schengen area every year, while 1.7 million EU citizens commute across borders, earning their salaries in different European countries. 

But an unprecedented wave of refugees and migrants has seen temporary border checks return to France, Germany, Austria, Sweden, Denmark, and Slovenia - threatening the functioning of the single market. 

A rollback of Schengen would also discourage long-term investment in a fragmented continent and reduce Europe's resilience to economic shocks, said the 16-page report. 

Europe's small, open economies would be the biggest casualties, with Hungary emerging as the most vulnerable to the reversal of free movement on the continent.  

Hungary's foreign minister has called on the EU to preserve the Schengen area at all costs to prevent a catastrophic decline in the continent's economic fortunes. 

The likes of Estonia, Croatia and Luxembourg would also be disproportionately hit from a fragmentation of the single market. 

But "larger and hence more closed economies such as France, Germany, and Italy would be less impacted" said the report.

License this content