Sunday, 29 May 2005

Blessing in Disguise

The Malta Independent on Sunday 


If opinion polls matter, it is likely that the French will today vote against the adoption of the EU Constitution authored by the Giscard d`Estaing convention, and the Dutch will follow suit during the course of next week.

For many who have worked hard to give the enlarged EU a workable set of rules that balance the sovereignty of the individual member countries against the need to transfer power to a central point that co-ordinates Community-wide policies, this would be a slap in the face.

Not that we have not been through such experiences before.` The Irish and the Danes had said no in referenda to approve similar Treaty changes. However, the issue was subsequently resolved following second attempt referenda that where promoted by strong PR campaigns.` The Irish and the Danes were persuaded to vote yes not to appear as the spoilers of the process of European enlargement and integration.

It might not be that easy with the French if they vote no today. It will be almost impossible if the Dutch electorate also thumbs down the EU constitution as this will probably block any possibility of such Treaty being adopted by the UK electorate if their referendum is held as planned during the course of next year.

The consequences of such a vote would be that the EU will have to continue to function on the basis of the messy and complicated Nice Treaty which is unsuitable for an enlarged EU of 27 countries and which offers practically no scope to consider further enlargement to embrace Turkey and other Balkan states into the EU within the next decade.

Many tend to view refusal of the Constitutional Treaty as leading to a process unravelling the EU project.` If the new rules are unacceptable and the old rules are unworkable then the system will disintegrate. I am not that pessimistic.` Indeed I think it could be a blessing in disguise.

It could bring a dose of realism to the minds of the bureaucrats that are attempting to force EU integration over people`s heads and make them to realise that in such matters leaders cannot run much faster than the people they are leading without creating a dangerous disconnection that will explode on the altar of the ballot box.

A no vote to the Constitutional Treaty should not mean that the Nice Treaty will have to stay on as a permanent fixture. Clearly that is unworkable. It means however that bureaucrats and leaders will have to re-design the EU project more flexibly than the original plans, leaving integration to grow organically from a looser type of arrangement that co-ordinates the policies of member states through some variable geometrical model.

In essence such variable geometry model was available for some and was being denied to others.` What sense does it make to give the UK, Denmark and Sweden a permanent opt-out of the Euro system, but then impose it on all the rest, new members included`

What sense does it make to force 22 countries to make full disclosure of investment income paid to persons residing in other member states and then exempt 3 older members, including 2 founder members, from such disclosure and instead adopt a withholding tax model.

If flexibility is needed by some it should be made available to all allowing the process of integration to grow organically as members who are comfortable with deeper integration forge ahead and attract others with their successes, if such integration proves successful.

Re-design of a new treaty for the EU would have to focus mostly on strengthening the mechanics of the single market and the four basic freedoms underpinning such single market, make a long term commitment for the eventual integration of monetary and fiscal policies to adopt a common single currency for the whole EU, but allowing for flexibility for participation or opt-out in all other areas, foreign and defence policies included.

The immediate impact of a French refusal of today`s referendum will probably be felt in the foreign exchange market where the Euro could suffer loss of value caused by the crisis of confidence regarding its sustainability as a community-wide single currency. Given that the Euro is well above its 1999 launching value against the US Dollar and Japanese Yen, and considering that the Euro has hardened by more than 50% against the US dollar since the bottom level reached in October 2002, the fall in value of the Euro in the foreign exchange market resulting from the French refusal of the Constitutional Treaty could be a blessing in disguise. Given the fragile growth experienced by the EU economy in the context of the healthy growth of the US economy and the surge in economic fortunes of China and other Asian tigers, the strength of the Euro is the biggest impediment to benefiting from export growth by European economies.

As had happened when the British Pound had to abandon the ERM 1 mechanism in September 1992 what initially was considered as Black Wednesday was in` the fullness of time re-branded as White Wednesday.` The British economy started growing again as it benefited from export growth caused by a more competitive rate of exchange and from lower interest as the need to raise interest rates to defend unrealistic exchange rate regimes was rendered unnecessary.

Could it be that refusal of the French in today`s referendum on the EU constitution, rather than be a negative drag on the EU economy, turn out to be the most important single event that re-prices European products on global markets more competitively thus opening the way for sustained export-led growth for the Euro economies. Could it be that today we will have a blessing in disguise`

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