Hamish McRae: The idea of ever-closer union is dead - and Europe's economy will do better as a result

Some countries will choose a high level of tax and state intervention. Others will go for a low tax economy
Click to follow
The Independent Online

A time for reflection. Well that is what political leaders always say when the voters kick them in the teeth. How the European political elite responds to the French vote is up to them. But we have already seen how the world's financial markets have responded: it is no big deal.

A time for reflection. Well that is what political leaders always say when the voters kick them in the teeth. How the European political elite responds to the French vote is up to them. But we have already seen how the world's financial markets have responded: it is no big deal.

True, there was a modest marking down of the euro, but that just took it back to Friday's level. In any case, it was as much a reaction to yet more gloomy news on the commercial front than to any political angst. The euro has been weak for most of this year as evidence has mounted of a eurozone slowdown. So, a non-event from an economic point of view? Not at all; in fact, on balance, an encouraging one.

The French voted "no" for at least five reasons, of which two were political and three economic. The political ones were their concern about further enlargement, and in particular Turkish entry, and the general unpopularity of President Chirac. The economic ones were worries about manufacturing jobs shifting to eastern Europe, persistently high unemployment (10.2 per cent), and a generally stagnant economy.

If, as seems overwhelmingly likely, the Dutch also vote no today, there will be a similar mixture of politics and economics: concern about inward migration at the top of the political reasons and a recession at the top of the economic ones. The Netherlands dipped into recession in 2003 and is now technically just about in recession again. Ordinary people can feel this failure: retail sales are falling and unemployment is rising.

Unsurprisingly, support for the new constitution is strongest in countries that perceive they are doing well out of Europe: Spain, for example. Germany, which is doing badly, is ratifying the constitution without a referendum. So insofar as you can generalise, the no vote seems to be as much a vote against economic failure as against the political elite. Yes, it is against them, but this is, in large measure, because the elite has failed to deliver rising living standards.

Interestingly, in France it has been the young who have been most hostile. But they are the people who suffer most from slow growth, because they find it hardest to get a foot on the jobs ladder. Remember that the French labour model protects those already in jobs at the expense of those who have not yet got them.

How might this frustration be translated into a better economic performance? Put another way, why should people who want to see an economically successful Europe be, on balance, encouraged by the vote?

There is a general answer to this and then a number of more specific ones. The general answer is that European leaders will have to focus more on economic performance and less on political integration. That is easy to say, but of course harder to carry out, for economic reforms in the short term tend to make matters worse, not better. But now, the "do nothing" option is not really sustainable, so politicians might as well get on with it. There will, in any case, be new leaders in Germany this autumn and in a couple of years in France.

The specific answers run as follows. At the margin, European governments will push for looser fiscal policies. The rejection of the treaty weakens the power of the Brussels bureaucracy and hence the already weak central monitoring of countries' adherence to the Maastricht deficit ceiling of 3 per cent of GDP.

This will not be a radical shift, but then it does not need to be. The problem with the Maastricht rules is they force adjustment at the wrong stage of the cycle. Countries have to cut their deficits at the bottom of the cycle, so their economies are kicked when they are already down. The rules need to be reworked so that pressure for the adjustment comes at the top of the cycle. That will take some time to agree; meanwhile, expect a shift of mood towards looser policies.

Expect, too, some shift towards looser monetary policy. The European Central Bank operates independently of the politicians. Its constitutional remit is to contain inflation rather than promote growth, but in practice it has to take into account the growth performance, too - though some would argue it pays insufficient attention to that. But structural reforms, again at the margin, tend to work against inflationary pressures. For example, labour market reforms will increase the supply of labour by nudging people towards taking jobs; that, in turn, will reduce pressure in the jobs market. Thus the UK now has very little wage pressure considering the low level of unemployment. Another example would be shopping hours. Longer shopping hours not only give people more time to shop. They encourage stores groups to invest more in new outletsand to cull under-performing ones. The result is lower costs.

A further advantage of forcing politicians to focus on economic success will be to try and inject some life into the Lisbon agenda. The idea behind this, you may recall, was to make Europe as competitive as the US in high-tech industries by 2010. As it has happened, Europe has lost ground rather than gain it. Most of the endeavour will have to be bottom-up rather than top-down.

It is a bit ridiculous to think that politicians can do a huge amount to encourage the high- tech industries, with the possible exception of increasing their funding for the universities. The private venture capital agencies are much more likely to help. Nevertheless, the Lisbon vision is a useful one because it focuses attention on an area of failure. Admitting you are failing is a start.

Finally, there is the level of the euro. The impact is not going to be huge, in the short-termor in the longer term. A few people may see this as the beginning of the end for the single currency but it is surely far too early to head down that route. The idea that some countries may leave the eurozone must be a decade away, maybe longer. No, the point is that slightly weaker fiscal and monetary policies are likely to lead to a slightly weaker euro over the next five years and that, at the margin, will help the eurozone economy.

No one can "call" the shape of Europe in five years time, just as no one predicted, when the constitution was first mooted, that it would be chucked out. But the more general point surely stands that Europe will evolve more as a group of independent nations, co-operating most of the time but competing quite a lot if it. It will not be an ever-closer union: that concept is surely dead.

That gives countries more freedom to follow the policies their own voters want. Some countries will choose a high level of state intervention and high taxation. The Nordic countries make a great success of that model. Others will go for a lower tax economy, with a relatively small state. Ireland has made a great success of that. The UK can find its own balance more easily. Europe will become a more flexible entity. That is surely what most Europeans, particularly the younger ones who will soon be running the show, really want.

Comments