The proposed EU constitution intends to streamline the decision-making process. This has become necessary following the enlargement of the EU from 15 members to 25 in 2004. The new treaty would establish a permanent president and foreign minister and increase the role of the European Parliament. In addition, the proposed constitution includes a human-rights charter.

When the French government decided to advance the referendum it was believed that the “oui” vote would win easily. That is not proving to be the case. Most recent opinion polls give the No vote a slight advantage, with a third of potential voters undecided. The No camp, a hodgepodge of communists, far right nationalists, anti-globalization groups and breakaway socialists (the Socialist party is officially for the Yes vote), has managed to capture public discontent with the government. Longstanding President Jacque Chirac is not popular, government policies appear adrift and the economy is in the doldrums. Unemployment is hovering around 10 percent, despite ongoing claims by the government to be addressing the situation.

The Anglo-Saxon Plot

There is also sentiment that the labor issue is directed by the Anglo-Saxon countries in an alliance with the new Eastern European countries to undermine traditionally generous French levels of social protection. Along these lines, it is believed that the EU constitution is seeking to create an ultra-free market European economy. Article I-3 has become a point of focus for those opposed to the treaty as it states: “there shall be an internal market where competition is free and undistorted.”

To some of the French left, this is horrifying. One of the leading critics of the EU constitution is Socialist Senator Jean-Luc Melenchon, who recently stated of the proposed treaty: “This is the law of the jungle turned into a constitution. I do not want a constitution that imposes a principle – free and unfettered competition – with which I do not agree.” Along these lines, there is apprehension over the possibility that jobs could be outsourced from the rigid French labor market to cheaper and more liberal Eastern European (and eventually Turkish) labor markets. Indeed, there is probably something to this concern, considering that most Central and Eastern European economies have 40 hour work weeks as opposed to France’s mandated shorter week.

Strangely, for all the blame being pointed at the Anglo-Saxon threat to French largesse, much of the document was a repeat of existing policy (reaching back to the Treaty of Rome in 1957, which established the EU. That treaty actually stated that there should be a “an internal market characterized by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital.”

Furthermore, one of the primary architectures of the proposed constitution was former French President Valery Giscard d’Estaing. The former president spent several years negotiating for the proposed constitution and believes that it protects many of the things that the French are concerned about. He has also stated that there can be no renegotiation as “it would be a useless and non-productive confrontation.”

The Turks Are at the Gate, Again!

The No camp has also managed to key on another issue – the upcoming start of membership talks with Turkey. There is considerable trepidation about allowing around 70 million Turks (the vast majority of which are Muslim) into the predominantly Christian EU. It should be clarified that the proposed EU constitution and Turkey’s membership are not directly linked. The referendum vote is not a vote on allowing Turkey into the EU.

However, for many of the No vote camp, an economically liberal EU constitution (back to tooth and claw Anglo-Saxon capitalists who believe in comparative advantage) would allow the Turks to take away a lot of French jobs. In addition, as Turkey would be a large, comparatively poor country, it would absorb a considerable amount of economic assistance to the determent of heavily-subsidized French farmers and labor. Hence, Turkey’s pending membership talks have become very much enmeshed in the French referendum.

A Two-Track Europe?

The proposed constitution, a treaty hammered out between 25 states, cannot come into force unless it is ratified by each country – either through popular referendums or parliamentary votes. In this light, a French No would mean the constitutional treaty is probably terminal. It is not expected that the French would seek to vote a second time in the case the no vote wins (as Ireland did with the Nice treaty, approving it at the second attempt).

French officials have indicated that there will be no going back to the negotiating table. President Chirac commented on May 19th: “How can one imagine that because France says ‘no’, our partners will say ‘fine, well begin again’”. Moreover, other countries, such as the Netherlands and Poland are set to have referendums on the EU constitution in the months ahead.

What is more likely is that EU leaders would seek to salvage key parts of the constitution by agreements between heads of state. The danger with this approach is that the failure of the constitution treaty would stimulate the creation of a "core" group of countries, including France that would seek to integrate more quickly and deeply than the rest. This, in turn, would mean the development of a two-club Europe, the core and the periphery. The core would most likely include France, Germany, Italy, Spain, Luxembourg and Belgium. Such a development would do little to increase the EU’s ability to create coherent economic and foreign policies and complicate access for any new members, including Turkey and eventually Ukraine.

For those countries likely to be in the outsider club, that is probably a better place to be. As one East European analyst noted: “If a two-track Europe emerges, who would want to be in a slow or no growth Europe, saddled with high structural unemployment, an unwillingness to change policies and led by unpopular leaders from France and Germany?”

The Market Issue

Markets do not like uncertainty. A relatively well functioning EU has been a certainty for several decades, despite the occasional set-backs. While no countries have opted out of the European Union, many countries have wanted in. Indeed, the EU has come to represent political stability based on the rule of law, a conflict-free zone at the end of an otherwise turbulent Eurasian landmass, and economic well-being founded upon integration and assistance for the less developed members. Despite the blather of the anti-capitalist Euro-left, the EU is also an important part of a global economy, both in terms of trade and investment.

Take away the certainty that the EU will continue to function and replace it with the hazy notion of a two-track Europe, the reaction in world financial markets will be negative. In this regard, the French referendum carries considerable weight – France is a critical element of making the EU work. A set-back in France will clearly have a ripple effect, giving momentum to Euro-skeptics in upcoming referendums in the Netherlands (June) and Poland (October) and could give Prime Minister Tony Blair the option to postpone the UK’s referendum in 2006. It will add a major dollop of uncertainty into financial markets, touching everything from cross border M&A and the value of European corporate bonds and equities to the viability of the European Central Bank and the euro.

Conclusion

Although we think that the yes vote will prevail, as the French government is gearing up its electoral machine, the contest is likely to be very close. Chirac and other members of the political establishment (including the opposition Socialists) are keenly aware that if the referendum fails, French influence in Europe will suffer and the great European experiment (partially the creation of the French) will stumble, perhaps fatally. If the no vote wins, it could end May with a bang, another unexpected geo-political shock to global markets.

© 2005 Scott B. MacDonald for KWR International, Inc,
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