Named after the town in Luxembourg where the agreement was signed, the Schengen Agreement allows for the dissolution of internal borders and implementation of passport-free movement within its member nations. After taking effect in 1995, the Schengen Area is currently comprised of 26 European nations of which 22 are also members of the European Union. The four non-EU members are Iceland, Norway, Switzerland, and Liechtenstein, while the only six EU members outside the Schengen zone are Bulgaria, Croatia, Cyprus, Ireland, Romania, and the United Kingdom. Since its implementation, the Schengen agreement has eased the flow of both goods and services across the area providing a major economic benefit to member economies with people making 1.3 billion crossings of the European Union’s internal borders annually, along with the crossing of 57 million trucks carrying approximately $3.7 trillion of goods. Naturally, this opening of borders has been instrumental in the growth of many industries across the Schengen zone, specifically tourism and transportation. However, after the recent terrorist attacks in France and Belgium, the Schengen Agreement, and all its associated economic benefits, could be in jeopardy.
In the wake of the recent tragedies in Brussels and Paris, along with the ongoing migrant crisis, many nations in the Schengen Zone, including Austria, Denmark, France, Germany, Norway, and Sweden, have opted to implement temporary border controls. If these controls become more permanent they will not only cause irritation and delays to travelers but could also have significant negative ramifications on the economy. The French government has estimated that their short term border checks would cost the nation anywhere between €1 billion and €2 billion a year.
The reimplementation of border controls within the Schengen would have the greatest impact on exporters as over one-third of road-freight traffic within the Schengen area crosses some international border. Border checks are already causing significant backups at newly controlled borders with some freight trucks having to wait upwards of three hours to cross borders which were completely open mere months ago. These backups are particularly costly not only from a fuel standpoint, but because the backups count as hours behind the wheel for drivers who must adhere to strict EU regulations on the maximum number of hours they can spend behind the wheel without stopping to rest. The German association of shippers estimated the direct costs of these backups at €3 billion a year across the EU, assuming a one hour delay for every freight truck. More broadly, when considering the indirect costs of border controls and the associated backups, the German chamber of commerce estimates extra costs of €10 billion annually to Germany alone.
The worst case scenario for this situation would be dissolution of the Schengen Agreement altogether. This is something that the French government stated would equate to a 3% tax on trade within the area which could reduce output by 0.8% or €110 billion over the next decade. However, according to Bruegel, a Brussels-based think tank, the worst impact of this dissolution would not be the direct trade costs, but the signal of the reversal of European integration.