Hamish McRae: When performance is as negative as this, a 'no' vote could be just what the eurozone needs

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The Independent Online

The timing of the French and Dutch referendums on the European constitution - on 29 May and 1 June - has been unfortunate, as they coincide with a sharp slowing of growth in France and a recession in the Netherlands. While voters probably don't take the state of the economy explicitly into account when making political decisions, it is likely to colour their judgement in two ways.

The timing of the French and Dutch referendums on the European constitution - on 29 May and 1 June - has been unfortunate, as they coincide with a sharp slowing of growth in France and a recession in the Netherlands. While voters probably don't take the state of the economy explicitly into account when making political decisions, it is likely to colour their judgement in two ways.

First, a weakening economy is liable to make them less confident about the quality of their political leadership. Second, insofar as economic weakness makes them focus on their living standards, it also makes them more aware of the amount they pay into the EU, or receive from it.

The first-quarter GDP figures for France came out on Friday, showing just 0.2 per cent growth. This followed a downwardly revised 0.7 per cent in the previous quarter, which brought growth for last year down to 2.1 per cent - not bad by continental European standards but much slower than the UK or US. In the Netherlands, however, the economy contracted by 0.1 per cent, the second-worst performance in the eurozone after Italy.

One should not get too worked up about three months' data, but the portents for the rest of the year are discouraging. The eurozone business confidence index has fallen for five months on the trot, dipping suddenly in April. So too has the confidence index for the UK, so Europe is not alone in its misery. But we are not voting on the constitution in a week's time and have managed much faster growth than the big three eurozone nations, Germany, France and Italy.

The weakness coincides with a ramping-up of the debate about EU finances, with the British rebate suddenly in the news. The widening of EU membership has changed the arithmetic for the whole union but particularly for France, which up to now has been a net recipient of European funds. This will change, as money now has to be redirected to the new member states. On European Commission projections, with the present financial arrangements, France becomes a net contributor next year, albeit a smaller one proportionately than the UK, Germany or the Netherlands.

These projections are shown in the left-hand graph above. It is not hard to see why the Dutch and Germans are so miserable. Two of the slowest-growing countries in Europe have this big, continuous drain on their finances, a clearly anomalous situation. (These projections allow for the UK rebate - we pay in about 0.25 per cent of GDP even after that.)

On the plus side are similar anomalies. Ireland, which now has a high GDP per head and is the fastest-growing member, still gets nearly 1.5 per cent of GDP from other nations, while Spain, the fastest-growing large economy, gets almost as much.

The debate in Europe is over how the payments in and out should be changed for the next stage of EU budgetary arrangements, which run from 2007 to 2013. It is here that the UK rebate has come into question. But while this is a big issue from a European as well as a British perspective, what is happening to the contribution of France and the Netherlands will be at the top of the voters' minds there. A "no" will be a warning shot across the bureaucrats' bows on the issue of how the EU finances itself as well as how it should reform its constitutional structure. As Citibank, which drew attention to these numbers in a recent newsletter, points out, enlargement means that as far as the "old" members are concerned, there are no winners and some losers in the budget reform game.

In France, to judge by the way the debate has been framed, the "yes" lobby says it has been a victory for France, while the "no" camp claims it will lead to a more Anglo-Saxon system of economic management. But behind these concerns lies a more alarming truth: the progressive loss of competitiveness by the large European economies, including, I am afraid, the UK.

Much of the recent discussion about the Lisbon Agenda - the plan for Europe to catch up with the US in hi-tech activities by 2010 - has been framed in terms of continental Europe following the UK model. Gordon Brown regularly makes himself unpopular at Brussels meetings by lording it over his counterparts for their economic shortcomings and the need for economic reform.

Well, have a look at the right-hand graph. It comes from the IMD business school in Switzerland's World Competitiveness Yearbook. This looks at 60 countries and regions and measures 314 criteria, covering economic performance, government efficiency, business efficiency, and infrastructure. The US consistently comes at the top, with Singapore, Canada and Australia all doing well. But in Europe, while Norway, Sweden, Denmark and Switzerland all hold their positions, the UK has slipped alarmingly. In 1997 it was number 11 in the world; now it is down to 22nd. The eurozone does even worse. The average of the big five (Germany, France, Italy, Spain and the Netherlands) has fallen steadily, while the smaller eurozone countries have declined in much the same way as the UK.

So Britain may be doing all right by European standards, but not by world standards. True, this is only one survey, but maybe Mr Brown should note that under his stewardship, competitiveness has got worse, not better, and lecture more softly.

The real concern, however, is not the UK. It is that eurozone economic performance will become so bad that the eurozone will start to suffer the sort of political disruption that Britain experienced in the 1970s. You can sense the pressures, particularly in Germany and the Netherlands, but also in France. Absolute living standards are high in these countries, even if they are not rising much, so real reform may be some way off.

Standing back from these two referendums, the big issue is whether economic reform can move more swiftly if the "no" lobby wins than if the "yes" camp does. The conventional view is that a "no" would be bad news. The unconventional one is that it would make the European establishment focus on economic efficiency instead of political integration. On a long view, Europe's prosperity will surely be the best glue to help hold it together. So if the "no" side wins, let's hope the unconventional view proves the right one.

We goofed once. Let's make sure we whup US colleges this time

Some good news. Civil servants set to work last Friday to try to sort out the student visa muddle, a matter critical to pushing up the appeal of British universities in the global market for talented students.

You may recall that visa charges were suddenly raised last year and, as a result, foreign student applications fell sharply. This was stupid because it came just at the moment when the US was making visas more difficult to get. The UK is the only serious challenger to the US in the global league table, and so it was a wonderful opportunity to clean up. Then we goofed.

It transpires that the Home Office pushed up visa fees without telling the Department for Education what it was doing - a great example of joined-up government.

The argument was that the visa system should be self-financing. But this is a monopoly supplier under no pressure to contain its costs, so no one knows what the real cost is. It is hard to see that a student should pay several hundred pounds for a visa for a university course. And in any case, the calculation ignores the financial benefit the universities - and the economy as a whole - get from attracting foreign students.

A British Council-Lancaster University study reckoned that higher education brought in about £1.8bn a year in foreign earnings back in 2001-02, while the total revenues from the sector were worth £6bn. It looks as though we are second only to the US in the field. The trouble is, we tend not to think of education as a global industry but rather as a domestic one - something that anyone who walks into the London School of Economics would quickly realise is absurd.

As in all industries, it is the little things that help build market share - or kill it. So a small cheer that the spirit of joined-up government has been revived on the visa issue. Fingers crossed it produces something helpful.

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