The no show

Hit by a quick succession of ‘no’ votes and then budget disagreements, speculation on the future success of the EU is rife. Elizabeth Crossick and Gail Orton discuss the implications

One of the objectives of the Convention on the Future of Europe was to bring the EU closer to its citizens. Ironically, the recent referendums in France and the Netherlands on the draft Constitutional Treaty drawn up by the convention seem to have done just that, but with an outcome that few could have predicted. The context of the new UK presidency, which began on 1 July, has changed dramatically in the past three weeks. The French and Dutch no votes and perhaps more importantly the open disagreements over budget at the Brussels EU summit on 16 and 17 June, caused Luxembourg Prime Minister Jean-Claude Juncker to declare that the EU is in “deep crisis”.

But is the outlook really that bad? The fact that EU leaders failed to reach agreement on the multi-annual budget for the period 2007-13 is not in itself surprising. The negotiations are, by their very nature, tricky. Every budget negotiation over the past 25 years has featured disagreements – in recent years between France and the UK over the Common Agricultural Policy (CAP) and the UK rebate. It is not unusual for leaders to have to meet for a second time, and indeed there is still another 18 months in which to hammer out a deal.

It is the context in which these negotiations failed that is more important. Following on the heels of rejections of the draft treaty by voters in France and the Netherlands, it is illustrative of a rift among member states. There no longer seems to be a shared common view on what the basic purpose and objectives of the EU should be.

A clear example of this is the rather schizophrenic approach to the ‘Lisbon process’. On the one hand, the EU has set itself the objective of becoming the most competitive, knowledge-based economy in the world by 2010; but on the other, there seems to be a reluctance to put that into practice, in particular where funding of such an enterprise is involved. Over the past few months, each provisional budget proposal submitted either by the Council of the European Union (the council) or the European Commission included cuts in spending on research and development, innovation and education, which is in direct contradiction to the objectives at the heart of the Lisbon process. The objectives are designed to help the European economies meet global competition by moving to the new, high value-added, knowledge-based industries and services, yet it is highly unlikely the resources will be reallocated now.

In France, the reaction to the no vote was an announcement by newly-appointed Prime Minister Dominique de Villepin that government money for France’s Agency for Industrial Innovation would be doubled to €1bn (£663m). The funds will back commercial projects in areas such as biotechnology, nanotechnology and solar energy.

The general political uncertainty that has resulted from recent events is likely to further hamper efforts to introduce the necessary structural reforms in Europe.

What will happen to the European Constitution?

The deadline for ratifying the treaty has been prolonged indefinitely. Continuing the ratification process could accentuate the sentiment of uncertainty. Halting the process would, however, undermine the positions of the 10 member states that have already ratified the treaty.

Opposition to the treaty appears to be snowballing in those countries still considering referendums. Luxembourg’s referendum is planned for 10 July, yet opinion polls are showing a rise in the no vote, despite the fact that Juncker has pledged to resign should the vote go against him.

Bridging the gap between the political class and Europe’s citizens is the only way to reinstall a sense of confidence in the EU. Only once confidence has been boosted can the wider debate on the future of the treaty take place.

What about business?

As far as the UK’s incoming presidency of the council is concerned, its primary job is to continue the work of the Luxembourg presidency and ensure political continuity. Tony Blair is keen to encourage EU countries to stay with his vision of the path to economic reform, which he sees as the only long-term solution to reviving growth and reducing unemployment. This will be difficult, as the French and Germans fear this ‘Anglo-Saxon’ approach to reform. Furthermore, 60 per cent of the French no voters believed the new treaty, and by association the EU, would actually increase unemployment.

The UK’s task has not been made any easier by the difficult discussions on the budget. The presidency traditionally takes on the role of deal broker and facilitator, so it is unlikely that the impasse will be broken.

This battle is likely to lead to political fallout on controversial or sensitive dossiers, such as the draft directive on services. The UK is a fervent supporter of the draft, which seeks to open up the internal market for services. France and Germany are strongly opposed. Coupled with the other disagreements, it is difficult to see how any substantial progress can be made.

The Commission, the EU’s civil service, is giving clear signals that it is business as usual. Internal market commissioner Charlie McCreevy has made at least three trips to the UK in the run-up to the UK’s presidency, highlighting that work on the completion of the single market, and in particular the single market in financial services, is fully on course. However, the priorities of the Commission and the way it operates are, in any case, going through a period of change following the strategic decisions of improving the quality and quantity of EU legislation. Therefore, a slowdown in legislative output – a plus for European business – was already agreed through the ‘better regulation’ initiative.

In areas where the Commission has delegated powers, such as competition policy, there is unlikely to be any substantive change, although a subtle political shift is predictable. It was perhaps illustrative of the current political sensitivity that the announcement of the antitrust sector inquiries into energy and financial services was unofficially postponed until after the French referendum for fear of stoking the fire of the ‘no’ debate. Where competition cases concern typical behavioural issues, the Commission is likely to remain rigorous on enforcement. However, with cases that raise difficult political issues, the Commission may well take a more conservative and less adventurous approach.

Each treaty revision process offers its own opportunity for various European actors to express their views. Some of the Maastricht Treaty protocols, such as on pensions, Danish second homes and Irish abortion, represented a signal by the member states to the European Court of the limits of their ‘patience’ with overambitious EU integration projects. Perhaps the recent no votes have signalled to the institutions more generally the limits of the electorate’s patience with out-of-touch legislators.

Elizabeth Crossick is a director and Gail Orton a consultant in the EU public affairs group art Freshfield Bruckhaus Deringer