The EU Constitution - the economic implications

Bill Jamieson

When Robert Oulds of the Bruges Group wrote to me some months ago kindly inviting me to write a critique of the European constitution from an economic point of view, I soon found I had an enormous conceptual difficulty.

The constitution had nothing to say about economics. It is not a work of economic philosophy. It contains no economic insights. It is not meant as an economic treatise. When I started to read it - particularly that opening sentence with all its lofty waffle - it was as if Robert had sent me a very wobbly blancmange - and a single chopstick to eat it with.

But while the constitution does not have an economic idea or programme, it will have the most profound economic consequences. And these consequences will have in my view a most damaging effect across the economies of Europe.

For a striking feature of this constitution is the enormous gulf between what has been happening to the economies of the EU - real world economics if you like - and the economic world as conceived by this Draft.

There is barely a mention that the economies of Europe are in serious structural trouble. There is no recognition that the lofty world to which this constitution aspires - the inalienable rights, the inviolable laws, social inclusion, social justice, solidarity - is currently locked in stagnation, recession, rising unemployment, soaring deficits, a shrinking adult workforce, a growing dependency ratio and decline on the world stage.

Its institutions such as the European Central Bank and the European Commission are locked in a war of words over responsibility for this crisis. Vitally needed reforms struggle to make headway through layers of enterprise sapping bureaucracy.

And this real world economics is devouring the foundations of this constitution.

Formal and solemn undertakings, agreed at lofty European summits only a few years ago with all due pomp and ceremony - I refer to the Growth and Stability Pact - are now put aside, and the complex system of fines, penalties and sanctions agreed with a great laying on of hands, are suspended as being inappropriate or non applicable. Might this not exactly be the same fate for great swathes of this constitution?

And here we come to another striking feature of this Draft Constitution. There is no limit to the government it foresees. Read through the constitution and it is hard to see any limit to its competences and powers. There is no limit because it cannot conceive of a limit.

And that is the beginning of our problems with this constitution. For it does not just describe a world in which government has no limit. It also describes a world in which government creates and provides everything.

This is what drives those fantastic opening paragraphs and in particular that 400 word opening sentence with its reference to European civilisation, humanism, equality of persons, respect for reason, inalienable rights and inviolable laws, peace justice and solidarity. All flow from the competences and interventions of government.

When I draw attention to this lofty rhetoric, a frequent reply is: "Oh, don't worry about that. It's just preamble. It's just the funny way the continentals talk." We heard much of this at Maastricht. "Treaty on European Union? Means nothing old son."

But in a sovereign treaty, and especially a constitution, words have a very heavy and deliberate legal meaning. It may well be convenient to waive the most difficult or disagreeable bits and say, "Oh, it doesn't really mean what it says", or, "it isn't important, it's just rhetoric". But this isn't a piece of copywriting. It is a legal document. And not just any legal document. But the most important one there can be. It is a constitution.

And who in any event is to be the arbiter of what's important and what is fluff? It can be all fluff. Equally it can all be legally binding.

This Constitution describes a vast exercise. No political class in history has sought to create jurisdictional competence over so many nations and so many millions of people and to claim in doing so a democratic legitimacy. It is one that cannot understand why the democratic response - a backlash of the Far Right or a reluctance of voters to turn out and vote at all - is entirely and exclusively of its own making.

How might this constitution destroy Europe? First, it is constructed on an assumption that integration and centralisation have necessarily beneficial results. But there is no evidence in the economic realm that integration has brought an acceleration in the rate of economic growth in the EU, or a growth rate higher than would otherwise have been the case through inter-governmental co-operation.

What has the European economic model delivered thus far? I would like to refer - courtesy of the latest edition of that excellent publication Eurofacts - to an assessment published this year by a High Level Study Group for Romano Prodi: an impeccable source in this context.

Among its findings are the following:

"The EU system has failed to deliver a satisfactory growth performance... In the EU there has been a steady decline decade after decade, and per capita GDP has stagnated at about 70 per cent of the US level since the early 1980s.

"The US achieves higher per capita GDP than the EU through both labour productivity and higher employment.

"The US already spends a greater share of GDP on higher education from public sources than the EU average, but the addition of very substantial private resources means that the US spends more than double the EU average on higher education and more than any other EU state."

This sober assessment is echoed in the work of many private sector economists who follow the EU. For example, earlier this month HSBC produced a document entitled The Trouble with Europe. It found that the euro zone trend rate of growth has shrunk to little more than 1.5 per cent and is headed below 1 per cent if nothing is done.

Its central forecast for the euro zone for growth between 2006 and 2009 is 1.8 per cent. Further out the central forecast is for 1.5 per cent, falling to 1.2 per cent over the period 21020 to 2029.

The reasons for the EU's poor economic performance and its gathering decline on the global economic stage are many and complex. But they spring in large part from the interplay of two factors. One of these is the EU's commitment to a high level of government intervention and regulation. This commitment is driven by an innate suspicion of economic freedom and an instinctive faith in the benefits of state regulation and control.

The other is that the federal model on which the draft constitution is based has given rise to a policy gridlock and paralysis. Even where the need for reform and liberalisation is recognised, as in Germany now, the conflicting competences between federal and regional government make the adoption of reform slow and difficult, where it is adopted at all.

How might the adoption of this constitution be harmful? By strengthening the powers and competences of the EU at supra-national level, it would diminish policy discretion and flexibility at country level. This loss of flexibility has already damaged the economic performance of EU countries in two ways. First, it has empowered the imposition of EU-wide employment regulation that has harmed the competitiveness of the EU bloc as a whole.

And second, the 'one-size-fits-all' monetary policy of the euro zone has prevented its economies from pursuing interest rate policies more appropriate to local conditions. This has worked to deepen the recessionary forces stemming from global economic slowdown.

Across the euro zone as a whole unemployment is among the highest in the OECD. In Italy it is 8.7 per cent. In France it is 9.1 per cent. In Germany it is 9.4 per cent. The comparable figure for the United States is 6.1 per cent, and for the UK five per cent.

The further loss of policy discretion and flexibility is particularly harmful to the UK. Our economy is one of the most open in the OECD, with trade and investment with non-EU countries as a proportion of GDP higher than any other EU country. Our ability to respond quickly and decisively to fluctuations in world trade and activity is critical.

This constitution has the potential to inflict damage right across the European Union. One of the key concerns of UK business is that its provisions are so vague and loosely worded that they have the potential to expand the powers of the EU to an almost unlimited extent. Thus, far from improving Europe's economic performance, the draft Constitution gives a carte blanche to forces that would work to compound the problem.

The EU's reach in the economic realm is already considerable. The evidence of flawed integration and misguided intervention is all around. A misconceived constitution can inflict huge damage on an economy through government heavy-handedness, misallocated resources and a relentless hail of petty interventions. And it is as much in small actions as in large ones that government can frustrate and crush the enterprise and wealth of its people.

Taken as a whole, the constitution represents a significant step towards the creation of a single European state. This state, as defined in this constitution, is to have its own legal system, competences, parliament and currency. Through its provisions the enlarged EU will have its own legal personality and rules. Its law will have primacy over the law of member states. The inter-governmental method of decision-making will give way to the proposed powers or "competences" of the Union.

Thus the Draft treaty represents a significant extension of the powers of the Union. And these powers are wide. "Shared" competences include the internal market, agriculture and fisheries, transport, energy, social policy, economic and social cohesion, environment, public health, consumer protection and the broad and borderless spaces of freedom, security and justice. But in arguably the most significant clause in the entire document, the draft declares, "the Member States shall exercise their competence only if and to the extent that the Union has not exercised its." This is the critical clause.

The draft would also reduce the role of national parliaments to compliance and enforcement agencies for the Union. It gives the Union 'competence to promote and co-ordinate the economic and employment policies of the Member States'. And it gives the Union exclusive competence in matters pertaining to the internal market, monetary policy in the euro zone, common commercial policy, customs union and conservation resources in the common fisheries policy.

To a casual reader there seems to be little that gives rise to particular concern: no one specific measure or proposal that business may find objectionable. But it is this very lack of specifics, coupled with the zealous ambition of the EU to expand its competence and the remit of its institutions, that is the source of unease.

What really drives this integrationist model? Central to the idea of European economic and political union has been a belief in the inexorable rise of highly integrated regional economic blocs. The pressure for European integration, and in particular monetary and political union, flows from a belief in the entity of Europe as a bloc to challenge and contain the hegemony of the US and to meet the challenge of Asia. This bloc-ist view is also seen as the only means to protect the centralised and highly politicised dispensary of state welfare and "social solidarity". This is the cosmology that has dominated the thinking of the constitution's leading author Giscard d'Estaing and the officials and advisers who contributed to the drafting.

And they are deeply fearful of the global shift in capital flows towards developing economies. It is without precedence in scale and in its pace of acceleration. And it is re-shaping the world. It is today's flows of capital that determine tomorrow's growing industries and economies.

The Constitution ignores these realities in its scramble to create the illusion of a powerful European presence on the global economic and political stage, better to pursue at home its corporatist welfare dispensary model of social democracy. This process of supra national construction creates any number of new functions and competences to advance the career opportunities, employment, resources and power of the EU salariat.

The new supra national platform is a quantum leap for Europe's political class. It may be seen as the means to effect one of the most self-serving and self-interested seizures of power in modern times. It is draped in the justification of advancing a massive welfare and social solidarity model that has to be defended against external economic challenge. Therefore one of the higher aims of the constitution is to create a European polity that can challenge and compete with the United States on the political stage.

But there has never at any time been any serious analysis or questioning of the integration model that Europe's draft Constitution seeks to promote. It speaks from a set of unquestioned assumptions about the primacy of politics over economics and the creation of a political construct that in scope and scale is gargantuan. It is set on building a supra-national construct through which the authors believe the will of a greater Europe will be felt on the global stage. In this they are dismissive of the demographic changes that are set to shrink Europe, not grow it, and that its grand ambitions are being built on sinking sand.

We have been here before with Europe. For here is what at critical points in history has characterised European ambition at its worst: the gilded but fatefully misdirected arrow of insouciant power. And it will end, as previous misdirections have ended, in frustration, disillusion and failure.

Vital need for a referendum - motion for a consultative referendum tabled before the Scottish parliament yesterday. There is a slim chance that this could be the spark that could make a referendum imperative across the UK.