A V Rajwade: The European Union dilemmas

WORLD MONEY

What do the people want "" greater equality or growth and employment?

"The first step in the recreation of the European family must be a partnership between France and Germany".

"" Winston S Churchill (1946)

What we have witnessed in the past few weeks is a partnership in the decisive rejection of the political leadership in both the countries, not quite what Churchill had envisaged! In Germany, the ruling Social Democrats were defeated a couple of weeks ago, in an election in a state that had been their stronghold for decades.

After the result, the Chancellor has called for an advancing of the national election by a year, to September 2005. In France, a referendum decisively rejected the adoption of the new European Union constitution. These developments throw into sharp focus some of the major dilemmas before the EU.

The constitution: The new constitution does not become effective until ratified by all 25 member countries. Before last week's rejection in the French and Dutch referenda, the constitution had been ratified by nine of the 25; the last week's developments raise major question marks about what happens now.

The answers are by no means simple or clear: while it is expected that the remaining countries would continue with the processes of ratification, the constitution cannot become operative in its present form. Ironically, last week's rejection comes in the wake of the desire of more countries to join the Union, as 10 did last year. Turkey, which will become the first Islamic member when admitted, begins negotiations later this year; and, some satellites and constituents of the former Soviet Union are waiting in the wings.

In fact, the constitution aimed at simplifying the decision-making processes of the EU to cater to the larger Union. The opponents in France campaigned on the basis that the constitution gives too much power to Brussels, which is seen as an ultra-liberal bastion of free market economics. In passing, one cannot help questioning whether an extremely large and complex document like the EU constitution, was a fit subject for a referendum.

The Growth and Stability Pact: The countries participating in the single currency had entered into the so-called Growth and Stability Pact, which, inter alia, limited fiscal deficits to 3 per cent of GDP. Germany, which prided itself on its fiscal rectitude, was the strongest proponent of the Pact. It thought that this was the only way to discipline the fiscally more adventurous members.

Paradoxically, in the current year, Germany will exceed the 3 per cent ceiling for the fourth successive year; the other pillar of Eurozone, namely France, has been equally lax.

While the other countries, except Greece, had so far managed to remain within the limit, albeit with some help from creative accounting , Italy and Portugal are expected to breach the limit in the current year.

Given, however, that the offenders were/are the two largest EU economies, the smaller countries have not been able to impose the punitive sanctions provided in the Pact. In fact, some time ago, the Eurozone countries were forced to water down the provisions to allow greater flexibility in the fiscal balance.

As it is, the fiscal balance is coming under pressure because of the increasing social security burden of an ageing population; second, the governments have little control over monetary policy which is the province of the European Central Bank whose charter does not require it to worry about economic growth or employment; its sole concern is price stability.

Of all the countries, only Germany is used to working with an autonomous central bank. While the Bundesbank no longer controls monetary policy, it recently refused to sell its stock of gold to help reduce Germany's fiscal deficit.

Growth and unemployment: The underlying reason why the people are disenchanted, as witnessed by the German election and the referenda results, is unemployment: it has remained in double digits for a long time and shows no sign of coming down. In turn, this is the result of slow economic growth. Germany, the EU engine, has grown at just about 1 per cent a year for the past 10 years.

Paradoxically, as is the case in India as well, efforts to protect existing jobs have come at the cost of creating new ones. In much of western Europe, it is difficult to reduce workers even as there are very high social security taxes and minimum wages. The result is that more and more companies, particularly in Germany, prefer to invest outside the home country, where wages are lower, rather than create jobs in the domestic market. The result is continued high unemployment.

Chancellor Schroeder in Germany tried to introduce more flexible labour laws, one of the reasons why he lost the provincial election. Paradoxically, the much higher unemployment in France and Germany as compared to the US and Britain persists despite the average US and British employee working more than 1,800 hours a year "" as against less than 1,500 in France and Germany.

Another contrast is worth taking note of. Britain, which lagged way behind France and Germany in per capita incomes and GDP growth 25 years go, is now ahead. Clearly, the Thatcher policies, generally continued under the nominally socialist Blair, have led to higher growth and employment, perhaps at the cost of greater inequality in incomes and a less egalitarian society. The final dilemma is existential: what leads to greater happiness? Growth and employment "" or greater equality?

Email: avrco@vsnl.com