There has been a lot of discussion in the press about the consequences of the rejection of the EU constitution in referenda in both France and the Netherlands. The British establishment is hoping that this issue will now be kicked out for good so that Tony Blair will not have to hold a referendum that is bound to be rejected. But in Europe, matters are never that straightforward. The will of the people is only respected if it gives the right answer.
This breathtaking arrogance that views democracy as some sort of disease is best illustrated by comments from Jean-Claude Juncker, Luxembourg’s Prime Minister and current president of the European Council. Before the votes he declared that France and the Netherlands should re-run their referenda, if necessary, in order to obtain the ‘right answer’.
When it comes to European referenda, citizens have two choices: ‘Yes’ and ‘Vote again’
Europe’s track record in moving forward regardless of the popular will is second to none. Time and time again the European elite has overcome setbacks. The Single European Act was drawn up in 1985 to pave the way for the single market, but the Danish parliament rejected it in January 1986 against the wishes of the government. So it called a referendum the following month and the Danish people voted in favour of the Act. This was the ‘right answer’, so Brussels saw no need to rerun this particular plebiscite.
Then on 2 June 1992, the Danish people voted by 50.7% to 49.3% against ratifying the Maastricht Treaty, which, amongst other things, included the blueprint for European Monetary Union. This was truly a shock result. Just two days before the referendum, 60% of those committed said that they would support the treaty. The last minute swing against the government was a protest against 12% unemployment; other voters were unnerved by Jacques Delors’s mention of a Franco-German army.
The feeling of déjà vu was compounded by the fact, just as now that the UK took over the rotating EU presidency in July 1992. The Major administration spent six months trying to rescue Maastricht. At the Edinburgh summit in December 1992, Denmark’s European partners agreed a set of concessions that gave the Danes the right to not participate in monetary union or a joint defence policy.
But Denmark’s European partners also made it abundantly clear that a second ‘no’ verdict would have grave consequences for Denmark’s position in the European Community, at it was known then. The carrot and stick approach worked and the Danes comfortably ratified the treaty in a second referendum in May 1993.
Then in June 2001, the Irish people rejected the Nice Treaty, which provided the platform for expanding the EU from 15 to 25 members, by 54% to 46%. Once again this was the ‘wrong answer’. So after a ‘national debate’, a massive government campaign, the Irish duly produced the ‘right result’ by 63% to 37% in a second referendum in October 2002.
Calling the politicians’ bluff
Moreover, the pattern of these referenda and those last week are strikingly similar. In urging the people to ratify a treaty the electorate are told that the sky will fall in if it is rejected. For example, Mr Chirac claimed that France would "cease to exist politically" and Gerrit Zalm, the Dutch Finance Minister, said the "lights would go out". But the people called their bluff with the French rejecting the EU constitution by 55% to 45% and the Dutch by 62% to 38%.
So where do we go from here? If you look at Europe’s track record, the most probable and depressing scenario will be to sneak the EU constitution in through the back door. Ten members have already ratified it and the process can somehow be kept alive by other states continuing to ratify.
This will buy time for the French to dilute some of the economic liberalising measures, such as the services directive, and present an amended constitution for a second vote. This is the worst outcome for the people and economies of Europe. Whether Blair can forge a different outcome will be his defining moment as British Prime Minister.
The main concern for the financial markets is that last week’s events will act as a brake on economic reform. French politicians have taken the vote as a rejection of the ‘Anglo- Saxon’ model and are likely to fight even harder to block much needed measures like the services directive. This will deepen investor gloom about Europe’s economic prospects. Italy is in recession, and unemployment in both France and Germany remains above 10%.
The next test for Europe will be the German elections in September. In theory, if Schroder’s Social Democrats are defeated by Merkel’s Christian Democrats, this should be welcomed by investors. But Schroder’s government is unpopular because of its attempts to implement a reform programme. If the opposition party gets elected on a promise not to carry out such reforms, then Germany and Europe really are in trouble.
Hostility towards the euro growing
Europe is in danger of being sucked into a death spiral in which economic stagnation makes governments unpopular, and that unpopularity weakens the mandate to carry out reforms. As a result the continent will fall further behind the challenges of a low-cost Asia and a dynamic America. The early manifestation of investor unease has been the fall in the euro to an eight-month low against the dollar.
Much of Europe’s problems stem from the European Monetary Union. The remit of the European Central Bank is primarily to deliver low inflation. If this has been achieved at the cost of economic growth, it is not its principal concern.
Meanwhile, the failure of governments to implement economic reform is linked to the background of economic stagnation. It is much easier to carry out reforms when an economy is booming. When an economy is stagnating, reform is equated with job losses. Some European countries, such as Ireland and Finland, are locked into a virtuous circle of brisk economic growth and constructive economic reform, while others, such as Italy, are mired in recession and outdated economic practices.
We want our currencies back!
For the very first time the future of the single currency is being questioned. Roberto Maroni, Italy’s Welfare Minister, said that the European Central Bank was not capable of dealing with the slowdown in economic growth, loss of competitiveness and the employment crisis. He said the country should hold a referendum to bring back the lira and pointed to Britain as an example of a growing economy that had maintained its own currency.
Italy’s economic predicament is extremely serious. Public debt is 105% of GDP and rising. Sooner or later the markets will demand an ever-increasing premium to lend to Italy. Higher debt interest payments will only make the public deficit worse.
Italy has used its membership of the single currency as a substitute for adequate governance from Rome. The Maastricht criteria for entry into the euro, drawn up in 1992, were designed to exclude the likes of Italy. But they were not strictly adhered to and Italy’s waiver was a mistake. When politics override sound economics the whole project suffers. It is not just Italy that has misgivings about the euro. Last week’s report that Germany’s Finance Minister, Hans Eichel, had attended a meeting to discuss the break up of the euro was swiftly denied, but has not killed the idea of a break up.
Moreover, the more economic stagnation prevails in Europe, the more hostility towards the euro will grow. At some time in the future it is not inconceivable to imagine a German political party committed to restoring the Deutschemark being swept to power. Polls show that 56% of Germans want a return to the mark. This majority will surely rise.
The disintegration of the euro is still a long shot because the costs of a distressed member exiting, in the form of higher interest payments, are prohibitive. But the best result of this soul searching about the euro is that it will be more difficult than ever to convince the British people of the merits of abolishing the pound. It may even dawn on Tony Blair that his enthusiasm for the euro was misplaced, although he’d never admit it. But the bottom line is that a major threat to our prosperity is in retreat.
Brian Durrant is the Investment Director of The Fleet Street Letter.
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