What now?

By Anna McLauchlin and Tim King

Date: 02/06/05

The leadership of the European Union is struggling to find ways to restore its credibility after the EU constitution was rejected twice in three days in national referenda.

Negotiations on the EU budget, the working time directive and a common salary for members of the European Parliament will now test the EU's ability to make decisions.

Wednesday's referendum in the Netherlands, whose citizens voted 62% to 38% against the constitution, coming after the French voted 55% to 45% against, was a heavy blow to the EU's credibility.

But the president of the European Council Jean-Claude Juncker, the prime minister of Luxembourg, declared that ratification procedures should still go ahead in the 14 states that have yet to pronounce on the constitution.

Concern about the EU's future comes amid mounting concern about the state of the European economy.

The European Central Bank is expected today (2 June) to cut its growth forecasts for the eurozone in 2005 to 1.4%. With the euro weakening, the German Finance Minister Hans Eichel and the Bundesbank put out a statement denying a report in Stern magazine that they blamed the single European currency for weak economic growth.

The Luxembourg presidency is now under enormous pressure to prove that the EU can still function, by securing agreement between the member states on spending plans for 2007-13.

But the referenda results have made the task more difficult. Complaints that the Dutch are the biggest net contributors to the EU budget featured prominently in the referendum campaign of the 'No' vote in the Netherlands. And the French are unlikely to make concessions on sensitive spending dossiers such as agriculture and regional aid.

Daniel Gros of the Centre for European Policy Studies predicted greater tensions between the member states over the revised Stability and Growth Pact and a widening gap between Northern and Southern Europe.

He said the French might now scupper the chances of agreement on the directive to liberalise services, which the Commission regards as essential for boosting jobs and growth.

Employment and social affairs ministers will today (2 June) discuss legislation on maximum working time, an issue which has embodied the differences between France and the Anglo-Saxon economies.

Jean Pisani-Ferry, head of the Bruegel think-tank, said the French referendum result had been "an expression of dissatisfaction with the way the EU as it works now". Voters, he said, were "risk-averse and afraid" of globalisation and delocalisation of jobs.

Paul De Grauwe, one of the European Commission's Group of Economic Policy Advisers, said that in the long term, eurozone members might even abandon the single currency.

"The eurozone is a fine construction but it is an unfinished construction and its development will depend on the dynamic for more political union," he said. "The 'No' vote is a signal that maybe we don't want this political union and in the long run this may mean we cannot maintain the economic union."

Jonathan Hoffman, an economist at RBS Financial Markets in London, said that the EU had been through crises before and that it would "hold together". But he warned of continuing market uncertainty if a decision was not taken on the constitution.

Article says that the leadership of the European Union was struggling to find ways to restore its credibility after the Constitutional Treaty was rejected twice in three days in national referenda. Author suggests that the negotiations on the EU budget, the working time directive and a common salary for members of the European Parliament would now test the EU's ability to make decisions.