The EU Constitution: a missed opportunity

Citation

Scott, D. (2005), "The EU Constitution: a missed opportunity", European Business Review, Vol. 17 No. 3. https://doi.org/10.1108/ebr.2005.05417cab.002

The EU Constitution: a missed opportunity

The EU Constitution: a missed opportunity

Purpose – The purpose of this article is to present an explanation and a critique of the current debate in the UK over the EU Constitutional Treaty and the planned referendum on its acceptance.Design/methodology/approach – The constitutional debate is set in a context of British economic performance and wider economic and political relationship with continental Europe. The key arguments in favour of, and against, acceptance of the constitutional treaty are explained and the evidence on both sides assessed. The author then draws conclusions about both the proposed EU constitution itself, and the political debate in the UK.Findings – The author concludes that the proposed constitution fails to resolve the tension between European politicians who seek further integration and those who believe that the process of integration have already gone too far. It fails to properly clarify the relationship between nation states and pan-European structures in the light of an enlarged, and therefore more diverse and complex European Union. The constitution also appears to institutionalise a European “social model” that is, in the author’s view, inflexible and outmoded. However the British constitution is flawed because it over-simplifies and falsely conflates scepticism about the constitution with rejection of the EU itself. Politicians in Britain and continental Europe alike seem to be missing an opportunity to revisit and update the principles and processes of the EU.Originality/value – Useful for politicians, academics, students, as well as businesses and NGOs, seeking an overview of political thinking on the EU constitution in the UK and who wish to move beyond simplistic “for” and “against” arguments.

Keywords: European Union, United Kingdom, Political systems

Much of the commentary on my book (Off Whitehall published by I.B.Tauris) has inevitably focussed on what it says about the relationship between Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown, but the core of the book is about the economic and political framework of Europe, in particular the euro and the new EU constitution.

Much economic commentary on EMU fails to take into account the huge changes that have taken place in the international economy, in particular the amounts of private sector capital flowing round the world. This is relatively recent phenomenon (from the mid-1980s) and in many respects it recreates the world last seen in the latter third of the nineteenth century. Capital flows in search of the highest anticipated rate of return and this has two important effects. First, the relationship between the anticipated rates of return on investment and the anticipated real rate of interest re-emerge as the driving force for economies. And second, the freedom of the nominal exchange rates to appreciate and depreciate becomes the pivot fro stabilising output and jobs within and between individual economies. Contrary to the view put forward by proponents of EMU, the massive amounts of private sector capital moving around the world makes it more not less important for individual countries to retain an independent monetary policy.

There are a number of reasons for Britain’s economic success in the past decade, including the reforms to labour, product and capital markets when Mrs Thatcher was Prime Minister, but the ability of Britain to run its monetary policy (the combination of interest rates and exchange rates) to meet the needs of the domestic economy, consolidated in Bank of England independence, has been critically important. The absence of domestically oriented monetary policies within Euroland has had some predictable results: in EMU nominal exchange rates cannot move up and down so that necessary adjustments in real exchange rates have come through inflation and deflation. The euro has also added an extra ingredient of instability into the world economy and the lack of investor confidence in the euro when the Fed was cutting rates in 2001 is one of the reasons the so-called “twin deficits” in the USA have grown so large. Proponents of EMU used to argue that being a member of large currency bloc would make Britain less vulnerable, but the more volatile the international economy the more important Britain keeps an independent monetary policy: far from being “tossed about like a cork”, sterling’s overall stability is enhanced.

EMU is an important step on the way to political union: nobody on the continent denies that though proponents of the euro pretend otherwise. And the type of political union will be affected by the economics of EMU: it will reinforce the centralising tendencies of the EU reflected in the new Constitution.

It was right that the countries of the EU should have re-examined their political and economic framework. But there has not really been a re-examination: merely a reassertion of an old model that consolidates and extends a set of institutional arrangements that will be politically and economically damaging.

An opportunity was missed to re-examine the allocation of powers between the Union and Member States, and the British government never saw the discussions on the constitution as an opportunity to stand back and think clearly about the appropriate political and economic framework to sustain the EU. There was no strategic thinking.

The Prime Minister and the Foreign Secretary Jack Straw say they want an honest debate, based on reason not myth. So far we have had too little honesty and not a few new myths, including the notion that there is no alternative to the constitution other than withdrawal from the EU.

Some of those against the constitution do want to leave the EU, just as some Europhiles would sign up to it whatever its terms, but most do not, yet anyone questioning the constitution is said by its proponents to be supporting “isolation” or “disengagement” from Europe as though given its geographical position that Britain has been or can be other than a European nation or engaged in Europe. The question, as ever, is how and on what terms?

Words are being used to mislead and box people into positions they do not hold. For example, advocates of the constitution stress the desirability of “cooperation” with other countries of Europe, implying that their opponents are against it. No one in their right mind is opposed to more cooperation between the countries of the EU on a wide range of issues. But there is a world of difference between that unexceptional objective and ever more integration.

Periodically there have been setbacks and diversions on the way but the overall direction during the last half-century has been towards deeper integration and an accrual of authority or “competence” away from individual member states to the Union, in practice the Commission. The constitution consolidates this structure, but it goes further too: the whole is bigger than the parts.

In Britain we can become obsessed with the federal nature, or otherwise of the EU. Of course this is important, but for the moment the more pressing issue is the consolidation of an undemocratic and unaccountable Europe, in which intergovernmental and supranational decisions share responsibility.

The outcome is the acquis communitaire, the entire body of laws, policies and practices of the EU. In principle, EU legislation can be repealed, but in practice competence acquired by the EU is never returned. The acquis, much of it acquired in different times and different circumstances, never shrinks but only expands and the constitution reaffirms the “continuity” of the acquis.

Jack Straw says the constitution gives specific provision to return competences to member states. This is not right: there is a theoretical provision that the Commission may choose to cease exercising its power, but that is very different. Chris Patten, among others, says that European integration is “at the end of the road”. It is true that the Single European Act and the Maastricht Treaty took bigger leaps, but like doing the high jump, when the bar gets to six feet, further advances are less dramatic. But the direction is the same: there is no high-water mark in sight for expanding the acquis and further integration.

This has dangerous political and economic repercussions

For obvious reasons, nationalism has a bad name in Europe, but in the years ahead the constitution could well lead to political strife and reawaken a very nasty nationalism. There are some signs of this already.

It is no answer to say that the nations of Europe are in no danger of losing their identity. Indeed, if they could lose it there would be no problem. The bigger threat to stability and tolerance comes when a nation finds itself without real voice in a political structure that is unaccountable to anyone. The EU risks eroding national identity without replacing it. This is dangerous. If people see that the politicians they elect have less and less real power over the things that matter to them they will turn elsewhere and express their identity in other ways: through race, language, religion and through hostility to anyone with different tribal characteristics.

The constitution will also entrench Europe’s economic malaise

The only economic convergence that has taken place in Europe in the past few years is towards slower growth and deteriorating public finances. Practically everyone agrees that budget deficits need to be cut and most pay lip service to the need for economic reform, but both these tasks have been made much more difficult within EMU.

For many the problem with the lack of economic reform has been a lack of political will, but there is something else that is more important. Economic reform can take many forms and will reflect the differing cultural and political traditions, but whatever form it takes and whatever else it does, economic reform must result in a rise in the rate of return on investment, otherwise it has no economic meaning at all, and the more radical the reform the more dramatic the impact. However, if the rise in anticipated rates of return, generated by economic reform and the investment that follows, is not to spill over into a boom (and eventual bust), monetary policy must respond appropriately. In EMU this cannot happen.

On top of all this, the EU constitution endorses a very particular notion of the single market that only accentuates current economic difficulties.

The so-called European social model was successful for many years after the Second World War, but there were very particular and temporary features in the post war years that have not existed for some time and this model is less well suited to the modern world. The European Social model emphasises a “level playing field” and the route to a single market is by the establishment of a framework of pan-European standards, both economic and social, within which business, labour and capital operate. This objective is very clear in the constitution.

In practice compromises are made that penalise the most competitive aspects of individual economies, bringing down the collective performance in the process. When competition and markets are working properly there will be a tendency for some convergence of labour standards, tax and a raft of other things. However, a prior imposition of a so-called level playing field actually prevents markets operating efficiently. There is a huge difference between a level playing field emerging as a result of competition working through properly functioning markets and being imposed in advance to reduce the implications of competition.

The issue to be addressed is whether the political and economic structure embodied in the constitution is any longer appropriate. But, to use a phrase associated with Mrs Thatcher in a different context, we are told, “there is no alternative” as far as the EU is concerned, it is a matter of “in or out”. But there were and are alternatives available to the political and economic model outlined in the constitution, should Britain and other countries chose to take them.

Most of those opposed to the constitution are not saying “scrap the EU”. They are calling for a political structure that is more in tune with the aspirations of Europe’s peoples and less designed to meet the inclinations and ambitions of its politicians and bureaucrats. The old model designed in the 1950s and amended in subsequent Treaties is simply not roadworthy and unless it is replaced all the passengers risk being involved in a nasty accident with political and economic consequences for Britain and the rest of Europe.

Derek ScottEconomic consultant to KPMG. From 1997-2003 he was an economic adviser to British Prime Minister Tony Blair, and his book Off Whitehall was published by I.B. Tauris (London) in 2004. E-mail: Derek.j.Scott@KPMG.co.uk