I don't know too much about this, but they do have a magnetic organ which I believe is just above the base of the beak. There's also strong evidence that they can calculate things based upon the position of the sun.
I guess this question is related, so I can understand why birds would migrate south, but then why do they have to migrate back up north again? What is not down south in the European Summer that is there in the European winter in other words?
Primary productivity in more Northern latitudes during summer is very high compared to the tropics - ie., more bugs, fish, and seeds for baby birds. Photosynthesis increases so much that there is a dip in atmospheric [itex]CO_2[/tex] during the summer months.
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