The European Union faces 2004 with a full agenda. It must finish the constitutional process interrupted last December during the Brussels Summit, for example, and confront the changes that will be caused by its expansion from the current 15 countries to 25 countries in May. All of this will take place in an environment of growing tension among EU members caused by a number of factors: differences in the sharing of power contemplated by the current constitutional text; the death of the Pact of Stability and Growth which governs the euro; and competition for future distribution of structural funds (regional assistance programs). Meanwhile, the European economy is slowly emerging from its lethargy.
The First European Constitution
Although the first European Constitution was supposed to be approved in December 2003, representatives of the EU’s 25 member-states – including the 10 countries that are about to enter – could not come to an agreement over the system for sharing power that will govern Europe’s future. Without such an agreement, approval of the Constitution is postponed indefinitely.
“There are two opposite visions” at work here, says Antonio Fatás, professor of economics at the INSEAD business school. The first is that each country has one vote (the traditional system), and the second is that the votes have to be proportional to the size of the population (the democratic tradition).
“The debate is complex, and you have to add in the special interests of each country,” notes Fatás. Smaller countries, led by Spain and Poland, defend the current system of weighted voting that was approved by the Treaty of Nice in 2000. Meanwhile the larger countries, headed by Germany and France, support a system of double majority in which decisions must be adopted by half plus one additional state, and add up to 60% of the population.
According to Fatás, “the big countries gain power if the votes are proportional to the population, and the small ones lose it. The Treaty of Nice was a compromise between two systems, but to the extent that we add more countries, [the traditional system] becomes less and less sustainable.”
Sara González, professor of international economics at the Complutense University of Madrid, suggests that the fundamental question behind the disaster at the Summit “is not how votes are distributed” but about leadership in Europe. Until now, she says, “it was very clear that Germany was the economic power and France was the political power. But during the last two years, Europe has developed a new strategy regarding foreign policy: France and Germany have maintained independent positions, while Great Britain and Spain have taken a more Atlantic position in which Europe is a natural partner of the United States.” The Iraqi war clarified the existence of these two coalitions.
To get the constitutional situation on track again, it is necessary first to resolve the leadership problem, notes González. “An intermediate position must be negotiated, but it must be neither pro-American nor anti-American … How can we define a European constitution if it winds up that we don’t know what we want to be with respect to outsiders?”
For that matter, how long will the citizens of Europe have to wait to get their first Constitution? “I don’t think that an agreement will be produced in 2004,” says González, adding that it almost certainly won’t happen during the first six months of this year when it is Ireland’s turn to hold the presidency, because Ireland doesn’t have enough gravity in Europe. General elections in Spain in March and in Great Britain in autumn make likely an extension of the negotiations until the beginning of the second half of the year, when it is the Netherlands’ turn to hold the presidency.
Even if a definitive constitution is approved, another obstacle would have to be overcome – approval of the constitution in a referendum by all member-countries. “Citizens in every one of the countries feel more and more removed from the concept of the EU that the politicians are defending; with so many internal squabbles, the image [of the EU] keeps getting worse,” says Fatás. That means even if the politicians reach an agreement, “it is possible that the public will reject (the text) in a referendum, the way it happened in Ireland with the Treaty of Nice.”
Despite everything, González feels positive about the process of constructing Europe. “That’s how Europe has advanced; it’s not something new. In 60 years, we have moved on from a world war to discussing a constitution. As in all [such situations], negotiations take place, but issues need the time that they need,” she says.
Parceling out Structural Funds
After the failure of the Brussels Summit in December, political confrontation between Europe’s big countries and small countries moved almost immediately into the economic arena. At the end of 2003, the six net contributors to the EU – Germany, France, the United Kingdom, Sweden, Austria and the Netherlands – demanded, in a letter to the President of the European Commission, that national contributions to the EU budget be limited to 1% of the community’s GDP instead of the current ceiling of 1.24%. Until now, contributions have amounted to 1%, but when the new financial framework goes into effect in 2007, it is expected that this figure will rise to the maximum.
According to calculations, limiting contributions to 1% would mean some 25 billion fewer euros in regional aid to those countries that have a development level below the community average. Currently, Mediterranean countries such as Spain, Greece and Portugal have benefited the most from structural aid, but with the broadening of Europe and the freezing of funds, there will be more competition for the distribution of these resources.
Few doubt the economic undercurrents beneath European political confrontations. “Behind the debates are struggles for limited resources. No country wants to lose power and it is not clear what sort of solution can satisfy everyone,” says Fatás.
What’s more, some Spanish media have interpreted the proposal of Europe’s six most economically powerful countries as an act of reprisal for the position held by Spain and Poland regarding power sharing in the European Constitution. “They see it as a clear punishment for the Spanish posture, within what is permitted by the rules,” notes González.
Timid Awakening of European Economy
Last November, the European Central Bank (ECB) predicted in its report that the euro zone economy would grow by about 1.6% in 2004 compared with the 1.5% announced for September. It forecast a revival of inflation to 1.8% compared with the 1.6% figure that it had predicted earlier. Specifically, the ECB expected that the GDP of the region would shoot up by between 1.3% and 2.3% in 2004; and between 1% and 2.2% during the following fiscal year. Although these figures point to a slight economic recovery compared with 2003 (0.4%), they are very far from the current expectations regarding EU growth (3.9%).
According to Rafael Pampillón, a professor at the Instituto de Empresa business school, the recovery is “very slow and not very appropriate for these times … The EU will not have a brilliant performance as long as it does not take control of the public-sector deficit, as long as the euro continues to appreciate, and as long as no structural reforms are carried out.”
Observers note that the European economy has been weighed down lately by the crisis in Germany, which experienced zero growth during 2003. In addition, along with France, Germany exceeded the public-sector deficit limit of 3% [of GDP] that was established by the Pact of European Stability and Growth. Yet neither of the two countries suffered any economic sanctions as a result, even though such sanctions are suggested in the Pact.
Given that situation, these countries “are once again going to generate high public deficits,” warns Pampillón, which means increased public debt and a medium-term hike in interest rates that, along with a strong euro, will cause a loss of competitiveness and a drop in business margins.” This could lead to large-scale unemployment, he adds.
Despite everything, Germany and France are expected to slightly improve their economic conditions. According to the Economist Intelligence Unit, Germany will grow by 1.6% in 2004, while France will experience growth of 2.1%, dropping to 1.8% in 2005. Moreover, Germany will carry out some timid reforms in its fiscal and labor policy regarding health and pensions. In the case of France, “the bad habits acquired by labor unions and officials make it very complicated to undertake reforms,” says Pampillón.
In addition to the public-sector deficit, the spectacular rise of the euro is another major danger to European recovery. The currency has risen by 17% since September, and in recent days it reached the rate of $1.2813. Although the ECB believes that a strong and stable euro is favorable, the rise of the currency has undermined business confidence, which has fallen for the first time in five months.
Until now, Europe’s recovery had been sustained by the recovery of the American economy and by foreign markets. Nevertheless, “the (euro) exchange rate is rising much more than it should. This is going to mean that European exports lose their competitiveness, particularly German exports. Logically, it is a pendulum, and the euro will continue to appreciate until a specific point when it will stabilize once again,” says Pampillón.
Unlike other countries, Spain has maintained a strictly rigorous budget, and it has been a firm defender of the Stability Pact. Within the European landscape, Spain is one of the most solid economies and is among those countries with the best economic prospects for 2004. Both its ministry of economics and the European Central Bank are predicting GDP growth of approximately 3%. “Spain has its limitations, because the economic recovery is based on construction and domestic consumption,” says Pampillón. “Its growth model may not be the best, but the Spanish economy is growing.” The main reasons for nervousness about the progress of the Spanish economy are the strength of the European recovery and, to a greater degree, an eventual correction in Spain’s extremely high real estate prices.
In Great Britain, the European country with the most economic strength, the GDP will grow as much as 2.4% in 2004 and 2% in 2005, according to the Economist Intelligence Unit. Moreover, with elections coming this year in the United Kingdom, the Labor Party of Prime Minister Tony Blair could rack up its third consecutive term of office. However, the Party first needs to recover the trust of the electorate after criticism for its position regarding the war in Iraq. Two of its priorities are to deal with reforms of [the ministries of] Health and Public Education and to consider holding a referendum for entering the euro zone.
Amidst this maze of countries, each with its unique problems, the main economic challenge facing the EU in 2004 is its expansion to 25 members. Expansion will benefit current members because they will gain access to a large market that has acquired greater political stability. For those countries that are entering, “economic growth is going to be stimulated by trade and by access to more advanced forms of production and organization,” says González. However, she warns that modernization of the economies will require time, and everything will depend on stimulation from European investment.