Why Merkel’s immigration deal isn’t as good as it seems

German Chancellor Angela Merkel struck a last-minute immigration deal to hold her government together. However, the agreement could mean bad news for both Germany’s leader and the European Union in the long run, according to a recent Eurasia Group research note.

Merkel and her interior minister Horst Seehofer of the Christian Social Union, one of Merkel’s coalition parties, reached an agreement on late Monday that kept him from resigning, the coalition from falling and Germany from going back to the polls. At least for now. Seehofer had previously been an outspoken critic of Merkel’s handling of the European immigration influx.

Part of Monday’s deal was to establish “transit centers” close to Germany’s border with Austria, which will deal with refugees whose asylum status is in question. But the pact outlined by Merkel and Seehofer could lead to Austria strengthening its own borders, starting a domino effect in the supposedly border-free Schengen area of Europe.

The Schengen zone comprises 26 nations, including Austria, Belgium, Czech Republic, and Denmark, that have largely abolished border controls. Some of its members have already reintroduced border controls and the recent Merkel agreement could result in a more decisive disintegration of the Schengen area, experts have speculated.

“Merkel’s hasty concessions pose risks to the Schengen zone which she has tried to avoid for three years,” said Eurasia Group analysts, including Charles Lichfield, Federico Santi and Mujtaba Rahman. The border-free zone is considered a key element of the European project.

The loss of the border-free Schengen, and a reinstitution of borders in the region established in 1985, could be seen as a victory for populist politicians who have called for tighter migrant controls. The Schengen zone came into focus in 2015 as thousands of migrants fleeing the Middle East, Asia and Africa seeking refuge in Northern Europe pit EU leaders against one another.

The Social Democrats, Merkel’s other coalition partner, have been vehemently against transit centers, and forcing the center-left party to agree to them would likely weaken the governing coalition. At last week’s EU summit, Italy’s government also made it clear it was “very unlikely to sign a bilateral deal facilitating the return of migrants under its responsibility,” the analysts said.

For now, Merkel seems to be on steady footing at home, but the recent developments may give her critics more ammunition that “the legacy of the migration crisis makes her a liability for the CDU and for Germany’s clout in Europe.”

Merkel has been characterized as the defender of the EU and moderate governing at home and abroad.

“Given that Merkel made significant concessions which she could have made earlier, it certainly seems she didn’t have a choice,” wrote the Eurasia Group analysts.

On top of that, the mere fact that Seehofer is sticking around as interior minister “confirms that [Merkel’s] grip on power is waning; the CSU will challenge her on eurozone reform over the next few months, and her relationship with the SPD will continue to deteriorate,” according to the authors of the Eurasia report.

Prolonged and intensifying uncertainty about the future of Germany and the EU, will likely weigh on European assets, including the euro

EURUSD, +0.0772%

which was last up 0.2% at $1.1658, as well as German stocks

DAX, +0.31%

which ended the session higher on Tuesday.

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