The European Union’s troubles. Stability and instability

Fights loom over the constitution, the budget and the stability pact

PRESIDENT JACQUES CHIRAC chose July 14th to announce that France would, after all, hold a referendum on the draft European Union constitution, probably in the second half of 2005. It was time, he said, to “bet on Europe”. With an unpopular government and uncertainty in France about today's EU of 25, this could be a big gamble. But in truth Mr Chirac had little choice. He was cornered abroad, notably by Tony Blair's decision to have a referendum in Britain, a move that hugely upset Paris. At home, he was under pressure from his own party. The prime minister, Jean-Pierre Raffarin, and the finance minister, Nicolas Sarkozy, had both come out for a referendum. Besides, direct consultation is a fifth-republic tradition: there have been nine referendums since 1958.

The risk, as with all referendums, is that the French may not answer the question. In 1992, they almost sank the Maastricht treaty, backing it by a wafer-thin 51-49%, mainly because of discontent with the Mitterrand government. Mr Chirac's government is also unpopular. And the opposition Socialist Party is split on whether to back the constitution. Mr Chirac's best hope is that the French might prove more enthusiastic than they seem. A TNS-Sofres poll in May suggested that 72% of voters backed the idea of a European constitution, and 67% were positive about Europe.

Even so, a referendum in France must increase the odds that the constitution will never be ratified. At least nine other countries are holding votes. The trickiest may be in Poland and Britain. And a further development this week may make a British referendum even harder to win: the European Commission's confirmation of its proposals to phase out the British EU budget rebate. Britain immediately declared that the rebate, famously negotiated by Margaret Thatcher in 1984, was “unnegotiable”. Since any change requires a unanimous vote, the British may be able to prevail. But they will be in a minority of one against 24 - and the fight is likely to be going on at the same time as a vote on the constitution, encouraging a no vote.

Yet another problem for the constitution may stem from the EU's notoriously misnamed stability and growth pact, which supposedly limits budget deficits of euro-area members to below 3% of GDP. Last November, to the great irritation of smaller countries, the French and Germans persuaded a qualified majority of their fellow governments in the Council of Ministers to reject the commission's proposal to threaten sanctions against the pair, and instead to put the entire pact into abeyance. But this week the European Court of Justice ruled that the council had exceeded its powers.

The judgment, which had been sought by the commission, was hailed as a victory for Brussels over national governments. But that interpretation merits closer scrutiny. It has long been a truism of European politics that, when the commission gets into a fight with national governments, it is the commission that comes off worse. And, although the judges annulled the decision to put the pact in abeyance, they also said that the council's failure to adopt the commission's recommendations was not something they either could or should overrule. Thus the court's decision is unlikely actually to change French or German fiscal policy: it will remain possible for the council to ignore any new recommendations for sanctions that the commission may make.

More likely than a fresh proposal for sanctions is a fresh set of negotiations. The commission will discuss with governments some form of revised recommendations with which all can live. In short, a purist interpretation of the pact will be displaced by the real world of political fudge. And, further ahead, the terms of the pact itself may yet be watered down. The commission plans to make proposals for revising the pact in September.

How, one might ask, could any of this affect the EU constitution? The answer lies in the Dutch referendum that will be held early next year. The Dutch were by far the angriest at the let-off for France and Germany. When they realise that, even after the court ruling, the French and Germans are unlikely to suffer sanctions, the feeling that there is one rule for the big and another for the small may strengthen Dutch Euroscepticism.

In short, it has been a bad week for the EU constitution - and maybe for the future of the EU itself.

The EU faces some considerable challenges: getting the Constitutional Treaty for Europe ratified, the question of reforming the budget rebate system to make it more equitable, and the need to reform the stability pact.

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