Every six months, the European Union asks its citizens about their worries, hopes, fears and dreams in the Eurobarometer survey.
Citizens of every member state now identify tackling immigration as one of their top two concerns for the EU, and respondents in 20 out of 28 countries see immigration as “more of a problem than an opportunity”.
The consequences for financial markets are tied to the potential political fractures associated with immigration. Populist movements across the continent have exploited the perceived economic, social, and cultural threats posed by immigration to win votes.
The UK, of course, has not been immune from this rhetoric, with concerns over immigration fuelling the Brexit vote. And according to figures published by the Office for National Statistics today, the number of EU migrants coming to the UK fell to a five-year low in 2017.
Populist movements typically combine worries about immigration with antipathy (or outright opposition) towards the institutions of the EU.
A similar tipping point has now been reached in Italy, where the new government has placed tackling immigration at the heart of an anti-European agenda.
Repricing the political risk premium in the EU could have a profound impact on financial markets, because they factor in a challenge to the prevailing institutional architecture.
Does the EU have an immigration problem?
Despite immigrations prevalence as a political issue, the proportion of the population born overseas (that is, first generation migrants) is actually quite low in Europe relative to other parts of the world.
For example, international migrants make up 14 per cent of the US population, compared to between seven and 11 per cent in Europe, depending on how you consider intra-EU migrants.
However, Europeans consistently report higher concerns about immigration than Americans. In a recent international survey, 35 per cent of Americans described immigration as having a “very or fairly positive” impact on their country. Just 16 per cent of Europeans had a similarly positive attitude, which makes Europe look like a relatively closed society.
What's the source of the European angst?
Across the EU, the data suggest that concern is focused on the influx of asylum-seekers and refugees, rather than the growth of international immigration itself.
Yet, asylum-seekers and refugees make up a small fraction of the number of immigrants.
In 2017, there were an estimated 56 million international migrants in the EU, including 35 million from outside of the EU. In contrast, there were just under three million asylum-seekers and refugees.
It's clear that the number of refugees and asylum-seekers as a share of the national population is a statistically significant driver of the anti-immigrant sentiment across the EU.
So in those countries that are untouched by the refugee crisis (the Baltics, Spain and Portugal), few people see immigration as a particular concern for their country. Whereas those countries at the centre of the crisis (Germany, Italy, Hungary, and Austria), it is seen as an important public priority.
What is driving the refugee flows?
The clearest immediate cause of the refugee flow into Europe is the Syrian civil war.
The United Nations High Commissioner for Refugees estimates that over five million people have fled the country since the war began in 2011. Most of those have sought asylum in neighbouring countries (Turkey, Lebanon, Jordan and Iraq), but around one million have gone to the EU.
However, Syrians account for less than 25 percent of EU asylum-seekers over the last five years with an equal number coming from across Africa. A further 25 per cent come from elsewhere in the Middle East, Afghanistan or Pakistan.
Many are feeing conflict and persecution at home, while some are economic migrants seeking better employment and income prospects overseas.
What are the prospects going forward?
Efforts to control the flow of migrants in recent years have focused on building literal and administrative walls around Europe.
The efforts to battle the impact of demographic pressures are likely to intensify over the years ahead. Over the next thirty years, the population of the EU is set to stagnate at around 500 million. In contrast, the under-35 population of Africa, the Middle East, Afghanistan and Pakistan is likely to grow by over 60 per cent.
As such, it's clear that migration flows into Europe are likely to be on a structurally rising trend over the next couple of decades.
The refugee crisis has accelerated the drift towards populist politics in large parts of Europe.
Populist parties across Europe now attract almost a quarter of the overall vote, up from less than 10 per cent in 2000.
National Front in France and Alternative für Deutschland in Germany have risen from relative electoral obscurity using the lightening rod of immigration to rally supporters to their cause.
In Italy, the recently formed government coalition between the Northern League and the Five Star Movement has used fears about 500,000 “irregular” immigrants at the centrepiece of a campaign to challenge EU norms on policy across almost all fronts.
In Germany, the seventy-year-old alliance between the Christian Democratic Union and the Christian Social Union has been under considerable stress due to differences of opinion over how to handle the flow of refugees.
The investment risk
Europes native-born population is steadily shrinking.
If governments wish to maintain their economic clout, immigration is likely to be part of the solution. Without it, public spending will have to shrink, as the tax base contracts over time , while servicing previously accumulated debt will become increasingly difficult.
However, immigration is politically fraught.
It is unpopular across most of the continent, and a source of growing friction between countries within the common travel area.
In the decades ahead, the population explosion on Europes borders implies the flow of economic migrants is unlikely to slow down.
Investors need to be aware that the countries at the centre of the refugee crisis and that receive the greatest number of international migrants are most at risk from populist leadership. As we have recently seen in Italy, market complacency to political risk can have drastic consequences for investors capital.
That risk has now been crystallised in the price of Italian assets. Italian equities have fallen by around 10 per cent since the formation of the new populist government, by the time of writing Italian government bonds are trading at a significant discount to any other investment grade-rated sovereign.
The same cannot be said of other populist-led countries in eastern Europe. There is no evidence yet of a political risk premium in Czech, Polish or Hungarian assets, despite the confrontational approach towards European institutions and norms.
Assets in those countries look vulnerable to any further escalation in tensions, exacerbated by the inevitable fight over immigration in the years ahead.
If refugee flows stay high (or even intensify), the prospect of disruptive political clashes between member states and the EU remains ever-present.