Economic consequences of “No” vote
What will happen to the European economy, should the French or the Dutch (or both) vote No in the forthcoming referenda on the European ‘Constitution”? One of the arguments of proponents of Yes is that the No vote will have dire economic consequences and may lead to reversal of integration gains, protectionism and who knows the break-up of the Union. Barometers of financial sentiments, bonds markets are showing a degree of nervousness about the outcome, with some sovereign bond yields, particularly in Central Europe, rising strongly.
Yet, a cold-headed analysis shows that such dark vision and dire warnings are not only misleading self-serving (as a part of Yes campaign) but basically unwarranted. As a matter of fact, a case can be made that the defeat of the Constitution initiative could have beneficial economic consequences both in short and in medium-term.
In the short-term, the market consensus is the No vote should lead to the weakening of the euro. But isn't the current parity of the euro too high? The drop in the value of the euro would make European experts more competitive, and this would stimulate eurozone growth, which need all the help it can get.
Another short-term impact would a greater differentiation between capital markets of various EU countries and widening of euro-bonds spreads. Some analysts *believe that the markets will become less tolerant of countries, which transgress Stability Pact criteria and lack fiscal discipline. Given the signal failure of the political arrangements to police fiscal sinners, particularly the big ones, it is difficult to see how a greater dose of market discipline could be harmful to European macro-economic equilibriums.
To the extent that the No vote will preserve the existing institutional status quo, there is no reasons to believe that it will trigger a return of trade barriers or raise obstacles to free movement of people within the EU countries. Clearly, the defeat of the 'Constitution' would substantially slowdown European legislative and regulatory process and discourage any new large-scale initiatives. While it could be argued that there is still a great deal of unfinished business to be enacted, many proposals in the European policy pipeline appear as a costly and cumbersome. All EU economic actors, from high-tech entrepreneurs to large multinationals, suffer from acute case of regulatory fatigue. Recent pronouncement of Charles McGreevy in favor of a pause in the implementation of the Financial Services Action Plan was universally greeted with relief.
Potentially the most beneficial effect of the No vote would be a psychological shock it would provoke among the EU policymakers. Hopefully, it would make them realize that traditional EU way of making policy decisions, through complex, opaque and confused procedures really does not work.
More fundamentally, it might end the confusion between economic and political integration and put an end to a persistent and counterproductive illusion that a political union can be introduced through a back-door maneuvering by clever penholders and shaky compromises between fundamentally irreconcilable views.
Let's face it, the entire ‘Constitution’ exercise has been a huge and costly distraction. While obscure points of fisheries policy (see Section III, chapter 4, articles III- 225 through 232 as well as Annex I) and other such momentous items were being debated at the Constitutional Convention by the best and the brightest of the European elite, the European economy continued to underperform relative to the US and to Asia. Two largest EU economies, France and Germany, have been suffering from large unemployment and slow growth for a decade and their prospects are far from bright. Earlier this year, EU had to admit that the ringing promises of making Europe the world's most competitive and modern economy by 2010 will not be achieved and that the Lisbon agenda has to be substantially adjusted to more modest but more realistic goals.
Approval of the ‘Constitution’ by the French and the Dutch voters would only prolong the distraction. It will also perpetuate the political uncertainty as other EU countries still need to approve the text. With chances of the approval by the UK votes being somewhere between negligible and nil, the future of the ‘Constitution’ will remain cloudy for at least several months.
For those of us, who would like to see Europe improve its economic performance both in short and medium-term, a clear No vote by the French and Dutch is the best possible outcome. Sooner the Constitution is abandoned, sooner the EU policy-makers can concentrate on real issues that have been holding back the European growth.
* Henderson Strategy Advisors, Life in EU after the French referendum, April 25, 2005