Thursday, 23 October 2003

A Constitution to destroy Europe

Bill Jamieson 

EU Constitution Briefing Paper #02

This article first appeared on the Bruges Group

The threat to Europe’s economies

A MARKED AND DEEPENING divide is spreading across the face of Europe. It is
a divide between the Europe as envisaged in the draft Constitution, and the
Europe as we know it today.

This divide is evident from the draft’s opening sentence. It runs to more
than 400 words. It describes a noble and lofty European ‘destiny’: billowing
effusive clauses about European civilisation, humanism, equality of persons,
respect for reason, culture, aspiration, inalienable rights and inviolable
laws, solidarity, peace, justice, unity and, of course, ‘destiny’.

But there is another Europe. It is the real Europe as we know it. And it is
hard to detect anything in this draft that bears serious relation to the
Europe it seeks to define and ennoble. Europe is trapped in a growing
constitutional gridlock. The real Europe wrestles with stagnation, recession,
rising unemployment, soaring deficits 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

As I write this, three euro zone economies – Germany, Italy, and the
Netherlands – are in recession. Any hopes that Europe’s economies might work
as a locomotive to pull the world to faster economic recovery have long been
abandoned. Even the deflation-struck economy of Japan looks to be overtaking
Europe in recovery. The GDP of Germany, the largest and most populous country
in the euro zone, has now fallen for the third successive quarter. Its budget
deficit has smashed through the Maastricht Treaty ceiling. Unemployment is
heading towards five million. Across the euro zone as a whole, what was
supposed to be a year of recovery has seen no growth at all in the second

Recently in an impassioned plea to the German Chancellor, Ann Mettler,
director of the Lisbon Council dedicated to promoting reform and
liberalisation, wrote of her “profound shock” on seeing tens of thousands of
German graduates out of work. Those who were in jobs were too frightened to
adopt change or take risks. “‘Keep your head down and hope you will escape
this slump unscathed’, people say.” Germans, she added, were “profoundly
confused about who and what we are, about where we are going and about what we
might do to begin extricating ourselves from the hideous slump we are
in”.1 Whatever else this suggests, it
hardly bears out the picture in the draft constitution of people loftily
aspiring to freedom, humanism, solidarity and prosperity.

So: an “official” Europe with its vainglorious draft Constitution and what
350 million people know to be the truth. This disconnection permeates almost
every page of the draft Constitution. And it begs the most searching questions
about the nature of this draft, the people and the ideas behind it, and why
real Europe is in such a problematic and declining state.

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. But
what is this new Treaty for? Why is it blind to the manifest problems that
face the peoples of Europe today? How will its operation remedy these
problems? Above all, is this Constitution more likely to transform the
prospects of the peoples of Europe, or compound their problems?

In this paper I will seek to answer these questions. The draft Constitution
is not, of course, an economic document. It does not propound any economic
philosophy or insights. But it will have profound economic effects.

First, it is likely to prejudice the economic development of the countries
of Europe in several respects. This constitution is constructed on an
assumption that integration and centralisation have necessarily beneficial
results and that there should be more of them. 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. Indeed the economies of
the euro-zone particularly are not just lagging the global economic recovery.
They are in serious policy crisis.

Germany’s crisis writ large

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. The danger
of Europe’s draft constitution is that it will result in the German crisis
being writ large: the exporting and enlargement of that crisis right across
the whole of the EU.

A commission of academics and politicians has now been set up in Germany to
sort out the constitutional logjam over the Chancellor’s Agenda 2010 economic
reform proposals. Without progress here, Germany may be condemned to years of
delay on vital economic reform. Says Norbert Rottgen, a CDU member of
parliament and the opposition co-ordinator of the project: “Over the past 50
years the competence and finances of the federation and the regions have
become so intertwined that not only has reform become impossible, but the
citizen no longer understands where political responsibility lies. This has
contributed to discrediting politics.” Sounds familiar? It is.2

Loss of flexibility

In what specific, particular ways 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 enabled 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 vital. That response is best
driven by the needs and requirements of markets than by a salariat of
officials in Brussels, innocent of local circumstances and working to a quite
different and separate agenda.3

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
to forces that would work to compound the problem.

The EU’s reach in the economic realm is already considerable – and
damaging. The evidence of flawed integration and misguided intervention is all
around. That is what makes a compounding of the forces that brought about the
real Europe that we see around us so dangerous. 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.

Far from the EU’s relentless drive for integration improving economic
performance, it has gone hand in hand with a deterioration in performance. On
macro economic measures, the EU has persistently under – performed the United
States for most of the past 10 years (see chart
). There is productivity under – performance, a low rate
of business investment and poor rates of business formation. The economies of
the EU today are losing competitiveness, under-performing relative to the rest
of the world, and have been so for years.

The draft constitution further turns the screw. And that has the potential
to create wider problems. For an economy that fails to deliver what the
authors of a constitution expect and demand of it, calls into public question
the political process of which that constitution and the institutions are the
supreme expression. Politics can destroy economics – and vice versa. That is
why, looking at this constitution, the potential for damage to Europe’s
political and economic well-being is considerable.

Expanded powers of the Union

Taken as a whole, it 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.”
(Article 1-10 1.
Emphasis added).

The draft would also reduce the role of national parliaments to compliance
and enforcement agencies for the Union (Article 1-10 2). Article 1-11 3 gives
the Union “competence to promote and co-ordinate the economic and employment
policies of the Member States”. And Article 1-12 1 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.* The EU
Committee of the American Chamber of Commerce in Belgium was also quick to
make this point. “The competences of the EU and the Member States”, it
declared, “need to be clearly identified. In addition, any proposed
legislative act should clarify the reasons for the choice of a specific legal
basis and allow for a correct assessment of the application of the
subsidiarity and proportionality principles.”4

* There is already particular concern over the ‘rubber
articles’: Article 95 of the present Treaty allows the Commission to bring
forward measures to harmonise laws and regulations to establish the internal

In the words of Ruth Lea, head of policy at the Institute of Directors,
“They are worrying mainly because the Constitution will almost inevitably
extend the regulatory reach of the EU and the EU seems wedded to the
discredited and over-regulated anti-enterprise European economic model. And it
is this over-regulation that has contributed to the inexorable relative
decline of the EU’s economic performance as well as the euro zone’s high

Reaching to outer space

Indeed, throughout the draft there appears to be little limit on the
constitution’s aims and aspirations, or on the competences of EU through the
entire document. The attitude conveyed is that the Treaty institutions charged
with achieving them. A declamatory arrogance runs need only to express an
objective or aspiration for it to be put within reach of achievement.

This betrays not just an instinctive belief in the benign power of
government and constitutions to ‘will’ such aspirations into being, but the
fantastical vanity of those involved in the drafting. To the extent that any
thought has been given as to how these ambitions may be achieved in the social
and economic realm they are seen to be effected through the creation of new EU
institutions or the expansion of existing ones. Thus the size, budget,
resources and remit of a department undertaking the achievement of some
objective becomes a proxy for the achievement itself.

In his outstanding paper on the European Constitution, David
Heathcoat-Amory, the Conservative MP who was a member of the Convention that
drafted the constitution, describes how the most far-reaching objectives were
placed on a wish-list drawn up by a working group formed to look at ‘Social
Europe’. The list included lifelong learning, social inclusion, children’s
rights and the promotion of quality of work and ‘services of general

“Most of these found their way into the draft Constitution in some form”,
he recalls, “together with the unexpected addition of the ‘discovery of space’
as a Union objective, apparently a personal interest of Giscard (d’Estaing).
After some discussion, the discovery of space was dropped as an objective,
although it is still included as a ‘shared competence’ of the Union.”6 *

* It is not totally clear in the draft with whom the
competence is to be shared: Zeus, perhaps.

The Social Europe Working Group also successfully requested that the
existing Treaty aim of ‘high employment’ should be replaced by a
constitutional objective of ‘full employment’. The fact that unemployment in
the EU currently stands at almost nine per cent does not seem to have struck
the Working Group as a worthwhile point for discussion, still less an obstacle
to ‘full employment’.

Making the ‘democratic deficit’ even worse

For those who have witnessed the relentless in-tide of the EU’s
integrationist ambitions over the years – the tide that has swelled notably
from Madrid through Maastricht, Amsterdam, Lisbon and Laeken – those
expressions of noble ambition and lofty purpose will come as little surprise.
For example, in Lisbon in 2000 there was a declaration by the heads of
government to deliver “the most competitive knowledge-based economy in the
world by 2010.”

EU summits are littered with such noble declarations. Achievement is
another matter. As the CBI noted with politic restraint, “such commitments
have not been pursued with sufficient vigour”.7 This statement generously assumes that these
commitments have been seriously pursued at all: whether in fact anything was
done of substance after the glow of self-righteousness faded from the
impressive-seeming sound bite is moot.

This is by no means the only issue on which the CBI has expressed
reservations. It raises searching questions on the direction of EU action and
whether the rhetoric of the draft can be taken at face value. Indeed, the
powers of the draft Constitution may be used in quite the opposite way to that
indicated. For example much has been made about the aim of the draft to make
good the democratic deficit. “However”, the CBI notes, “given the imminent
enlargement to 25 states, with obvious implications for the speed of
decision-making, there may be a temptation to cope with greater diversity by
enhancing the EU’s powers to override the views of dissenting Member

Taxation was considered by the Constitutional Convention’s Working Group on
Economic Governance. Some representatives argued that a ‘true’ Single Market
requires some powers of harmonisation. Contrary to this view, the CBI
“believes that – as a matter of principle and practicality – there is no
compelling case.” Tax competition, it says, is what encourages Member States
to keep the burden on businesses low, which promotes competitiveness and job
creation. *

* This is reassuring to see. The CBI’s comprehension
of the dangers of tax harmonisation has not always been as sure.

The forces behind the high integration, high intervention model have not
been driven in the main by concern over the ‘democratic deficit’, though this
has perhaps understandably come to be of increasing concern to the drafters.
The ‘democratic deficit’ – most forcefully expressed in a sharp swing to Far
Right parties in several EU countries – is itself a product of the integration
process: the degree to which the purposes and ambitions of the EU political
class have utterly failed to engage with and win popular support. There is no
European demos on which this construct is being built.

† Heathcoat-Amory is especially sound on this point:
“There is no European People, no single electorate or coherent public opinion.
In short there is no European demos on which to found a supranational
democracy or federation. Nor can such a demos be created by artificial means
such as European anthems, flags and EU information campaigns. ” (The
European Constitution
, CPS, page 8). The Convention on the new
Constitution effectively created its own artificial demos by setting up a
‘civic forum’ and creating a Youth Convention. It is doubtful if one in a
million people in Britain have heard about these organisations, let alone what
they do.

Longer term problems: The EU’s flawed world view

What is it that Europe’s political class so fears? Central to the idea of
European economic and political union has been a belief in the inexorable rise
of highly integrated regional economic blocs. For most of the post war era,
global geo-political events were shaped by the emergence of three such blocs:
America, Japan and ‘Europe’. Technological advance destined them to enjoy a
rising share of global trade and investment. In particular, this triad of
America, Europe and Japan and the intricate webs of trade and investment that
the multinational companies spun between them, would come to capture a growing
share of the world’s wealth and with it growing political influence.

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.

But by the 1980s and as Europe further succumbed to the protectionist
welfare model, it was clear that something new was afoot.* The world outside of the triad was making itself
felt, not just through trade in manufactured goods but as a powerful magnet
for global capital. Multinational companies were bypassing high cost Europe
and acquiring or setting up plant outside the triad and producing goods at
substantially less cost. By the mid 1980s the seepage of capital to the
poorer, low cost economies of Asia had become a torrent.

* For a more detailed elaboration of the arguments in
this following section see Bill Jamieson and Patrick Minford: Britain &
Europe: choices for change
, Politeia and Global Britain,

An epochal shift of global power

By the early 1990s the chief feature of global cross-border investment was
the flow of direct investment and portfolio capital out of the triad blocs
into the disparate economies of South East Asia and developing countries round
the world. In 1983 global cross-border foreign direct investment to emerging
market economies stood at $8.6 billion. By 1987 it had climbed to $14.5
billion. By 2000 it had soared to $149 billion. The same quantum leap was
evident in portfolio capital flows. In net terms relatively little was flowing
into the EU, and indeed in the first years of the single currency there was a
capital exodus, with direct investment flowing particularly to build lower
cost plants in central and eastern Europe.

This global shift is epochal. 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. These
flows thus have enormous implications for the balance of global economic and
political power over the next 25 years. In the mid 1990s Europe accounted for
some 18 per cent of global GDP, Japan for 15.5 per cent, America 26 per cent
and China 2.8 per cent. By 2025, according to the World Council for
Sustainable Development, the US share of global output will have fallen to 20
per cent and that of Europe to just 10.3 per cent-or barely more than half the
US total. China will have advanced to more than 15 per cent, while the GDP
share accounted for by other developing countries will have risen from 37 per
cent to 43 per cent (see chart

In this process the shortcomings of the ‘bloc-ist’ view of the world have
become exposed. Indeed, the fact that the Asia Pacific region has not formed
itself into an integrated economic and political bloc, and has relatively weak
institutions for regional integration, is cited by the economist Harold James
as a fundamental flaw in the ‘bloc-ist’ world view.