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The EU Constitutional Treaty
Another Nail in the EU’s Economic Coffin
The Salisbury Review — Winter 2004
Ruth Lea
Director of the Centre for Policy Studies

There is no doubt at all that the EU Constitutional Treaty marks another huge step towards a United States of Europe. Treaty by Treaty, the dream of the EU's founding fathers of European political union is being realised. Moreover, continental politicians are perfectly clear in their own minds and quite explicit as to the goal they are seeking to achieve. Romani Prodi, for example, said in 1999: 'The single market was the theme of the Eighties; the single currency was the theme of the Nineties; we must now face the difficult task of moving towards a single economy, a single political unity.' Only our politicians have sought to deny the impetus of the European Project and only a politician as dissembling as Keith Vaz could claim that the Charter of Fundamental Rights (Part II of the Constitutional Treaty) would 'have no more legal standing than the Beano.

The EU economy is, of course, not a single economy at all — but still a collection of national economies. And this is despite the euro. Indeed, with its inability to deliver the appropriate interest rates for the individual Eurozone economies, the euro has probably increased divergences rather than decreased them. Within the EU, some countries have grown well (for example, Ireland, Finland and Spain) and the ten new accession states are showing above average growth (though it is worth noting that their total GDP accounts for just 4% of total EU GDP, about the size of the Dutch economy). And the UK, even though it is being 'Europeanised' by higher taxes and heavier regulations, has performed quite well — though how long this can persist is doubtful. But the three largest Eurozone economies, Germany, France and Italy, are all under-performing. Their recent growth rates have been sluggish and their unemployment rates are high. Between them, they represent around 70% of the Eurozone's total GDP.

Meanwhile the rest of the world does not sleep. China has established itself as the 'workshop of the world', more British firms are looking to outsource to India in order to maintain competitiveness, and the US, for all its economic imbalances, continues to show the energy and dynamism to grow. We are living at a time when the "tectonic plates' of the global economy are shifting, with India and China re-establishing themselves as major economic players. It is increasingly clear that China's economic rise will be as significant as the arrival of the US on the global scene in the 19th century. Some may complain as jobs are 'exported' to these emerging colossi but, whether we complain or not, this seismic shift is occurring and we cannot ignore it.

But the EU, with its heavy regulations, increasingly fails to adapt to this new age. The European Social Market Model, with its high taxes and heavy regulation, is uncompetitive, old-fashioned and discredited. It may have had economic relevance in the second half of the 20th century, but it is irrelevant today. The implications for the EU are clear. Denis MacShane, Minister for Europe, helpfully informed Le Figaro Magazine last year: 'Today the European [EU 15] economy produces 20% less than the US economy... according to economists at the Foreign Office. By 2010 the European economy will produce 40% less than the US economy.' And the prestigious French think tank, Institut Français des Relations Internationales (IFRI) has concluded that, unless the EU changes its policies, it will totally fail to rival the US and will soon enter a downward spiral of relative economic decline. IFRI's report World Trade in the 21st century concluded that: 'The enlargement of the EU won't suffice to guarantee parity with the US. The EU will weigh less heavily on the process of globalisation and a slow but inexorable movement on to "history's exit ramp" is foreseeable.'

There is much loose talk about the EU's response to the economic challenges ahead. I have lost count of the number of times I have read that, reflecting enlargement or the decline in French influence or various Dutch 'deregulatory' initiatives, the EU is adopting more competitive policies and 'going Britain's way'. There is little hard evidence for this and a quick perusal of the Constitutional Treaty shows just how the EU remains wedded to its old ways. The Treaty contains not so much as a whiff of a change in direction. The Treaty is old-fashioned 'Social Market Modellism' writ large, combined with a dose of the trendy Environmentalism. Putting aside the enormous political significance of the Treaty, it is an appallingly complacent document, which comprehensively fails to address the EU's economic problems. It is another nail in the EU economy's coffin.

The Treaty explicitly enshrines the Social Market Model. Article 1-3, 'The Union's objectives', states as its third objective: 'The Union shall work for the sustainable development of Europe based on balance of economic growth and price stability, a highly competitive social market economy (sic), aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.' The reference to 'the highly competitive' nature of the social market economy is some bizarre 'Third Way' notion, EU-style. It is meaningless, as there is no indication as to how such a blessed state can be achieved. More concretely, the Charter of Fundamental Rights, of afore-mentioned Beano-fame, will deliver the 'high level of protection'.
The Charter's provisions that deal with the labour market are extensive and vague; they include:

• Workers' right to information and consultation within the undertaking.
• That workers, trade unions and big business will have 'the right to negotiate and conclude collective agreements at the appropriate levels and, in the cases of conflicts of interest, to take collective action to defend their interests, including strike action'.
• 'Pair and just' working conditions (covering health and safety, restrictions on hours worked etc).
These rights have the potential to be expanded to an almost unlimited extent, given an activist European Court of Justice (ECJ). For instance, providing 'fair and just' working conditions that 'protect dignity' would allow 'activist' courts to impose almost any amount of obligations on employers.

We are not alone in our concerns about the economic consequences of the Constitution, in general, and the Charter, in particular. Georges de Menil (Professor of Economics, Ecole des Hautes Etudes en Sciences Sociales) has written:
The European Constitution has profound implications for Europe's economy and for the euro.. .Part 11 of the Constitution presents a serious step backwards for competitiveness and flexibility. It creates a bill of social rights, enforceable by the ECJ. Article 34, for instance, recognises an entitlement to a cornucopia of social benefits, without regard to cost, in a long list of circumstances including old age and loss of employment. The drafters of the constitution contend that enforcement of these social rights will be restricted to actions resulting from EU law. But that is cold comfort. In time, the reach of those laws will inevitably expand and reforming the welfare state will become a much more arduous task.

There are many other aspects of the Constitutional Treaty that have economic and business implications. There will, for example, be a new competence to promote and coordinate the economic and employment policies of the member states, whether in the euro or not. This is, potentially, of huge significance and would surely cover the overall level of taxation, interest rates and public expenditure, as well as pensions policy and employment policies. This competence could lead to some very damaging policies for the UK. The EU has an ageing and shrinking population, which has major implications for pensions. If economic coordination accelerates, these problems will increasingly be subject to common action, under the requirements of solidarity and burden-sharing in the Constitution. And this could lead to British taxpayers ultimately supporting pensioners in EU states that have worse demographics and higher unfunded pension liabilities than in the UK.

Other extensions to EU powers in the economic and business field include possible Qualified Majority Voting for company taxation specifically relating to tax fraud and tax evasion. (Though it should be noted that tax harmonisation through the ECJ route is probably more significant.) There is also a completely new energy competence, which is a so-called 'shared competence' between the EU and the member states. But it is a strange sort of sharing. Member states will only be able to legislate where the Union chooses not to. There were some people who originally welcomed the notion of a Constitution for the EU because it would 'clearly define the EU's powers'. Unfortunately, this Treaty does no such thing, as it has been deliberately engineered as an 'enabling' Constitution, which gives the EU the option of accruing further powers at the expense of member states. Therefore, the Constitutional Treaty does not set limits to Union power. And past history clearly shows that if the EU has powers it uses them.

The Referendum
Assuming the referendum on the Treaty occurs, there would be broadly four options for the UK. The first two relate to a UK 'yes' vote:
The first is that the UK electorate votes 'yes to the Constitution' in the referendum and the Constitution goes ahead. I believe that there is a fair chance (say 25%) that this will happen. It is vital that those of us who wish to stop the Treaty being enforced in the UK are not complacent.
The second is that the UK electorate votes 'yes' and, for some extraordinary reason, the Constitution falls. I assign a negligible probability to this scenario.
The third outcome is that we say 'no' but the overwhelming majority of EU countries wish to push ahead with the Constitution. I think this is the most likely outcome (say 60%). Under these circumstances, the UK would be in a strong negotiating position as it could stop the Treaty going ahead — every EU member has to agree to the Treaty before it can be enforced. (And let us remind ourselves that there is no mechanism for expelling any member state from the EU.)
It is sometimes claimed that a 'no' vote in any one country would mean that the Treaty would necessarily be 'dead in the water'. I do not believe this. The Treaty's final text, approved by the European Council on 18 June 2004, includes a 'ratification clause', which is included in Article IV-443:
If, two years after the signature of the treaty amending this Treaty, four-fifths of the member states have ratified it and one or more member states have encountered difficulties in proceeding with ratification, the matter shall be referred to the European Council.

I accept that this clause is only strictly binding if the Treaty had already been enforced, but its political significance should not be underestimated. It is a strong, powerful statement of political intent. It should not be ignored. It implies that, if there were 'refuseniks', there would be scope for negotiation for the Treaty to proceed for those (at least four-fifths) who wished to go ahead. At this point the UK should make it clear that it would be content for the majority to push ahead with political integration, indeed wishing them well, but negotiate a tough set of opt-outs from the Treaty and seek repatriation of powers. The UK should negotiate for a 'Common Market' type of EU membership, rejecting the political union as laid out in the Treaty.

The final option is that we say 'no' and the Constitution falls. This is a possibility (say 15%). At this point many options would open up, with the desire of a core 'pioneer group' wishing to push ahead with political integration as a strong contender. There would then have to be some very fundamental and positive negotiations with the 'non-pioneer group', including the UK, in order for the 'pioneer group' to go ahead. The UK would again have considerable negotiating leverage and, as above, should push for a Common Market style of membership.

It could well be that, with the accession of the ten new countries, the chances of a tight inner group (centring on the Franco-German relationship) and a looser outer circle (including many of the new EU countries) have increased. And there is another factor. The UK has never been a happy core member of the EU — much to the irritation of the core members. A 'no' vote with a tight inner circle and a looser outer circle (including the UK) could well be the most satisfactory outcome for all concerned.

Sometimes British commentators suggest that the EU should develop along very different lines from Continental-style political integration. They suggest that there should be a looser 'Anglo-Saxon-style EU of nation states'. And they suggest that this may be an option for the EU if the Constitutional Treaty falls. But the probability that the majority of EU member states (including the still very powerful Franco-German axis) would accept this option is negligible. It is, in other words, a complete non-starter.

Ruth Lea is Director of the Centre for Policy Studies