Are Refugees a Fiscal Burden for Europe? Evidence from a Panel VAR Analysis

The continuing influx of refugees in Europe has sparked a debate about the consequences of this shock on public finances. This paper uses quarterly data for a sample of 26 European countries over the period 2001-2012 to investigate the impact of refugee inflow on public spending. We use a Panel Vector Autoregression (PVAR) model to isolate the impact of refugee shocks. Our study leads to the following results: (1) the refugee shock induces an increase of government spending in the very short run. However, refugee shock explains only 2.05% of the change in government spending. (2) Though not significant, the impact of refugees on government spending is higher in countries which are members of the Euro zone. (3) The empirical analysis also shows that the response of government spending to refugee shock is on average higher in countries which have adopted labour market reforms. Finally, the results of this study show that government spending are more sensitive to common shocks than idiosyncratic shocks