June 7, 2005

European NO.  Last week voters in France and Holland failed to ratify the European Constitution.  The fall out has been swift and significant.  The Euro fell against the dollar in FX markets and there has been talk of “what next” for the Euro and European integration.  It doesn’t look good.

When the French public voted decisively to say NO to the European Constitution it was a huge slap in the face to French President Jacques Chirac.  Initially everyone thought the French people would approve the new Constitution:  Chirac had campaigned hard for a YES vote.  A copy of the Constitution was sent to every single household in France.  And the new Constitution was basically drafted by former French President Valéry Giscard d'Estaing.  So why wouldn’t the French people approve it?  To borrow a phrase from the Clinton people:  it’s the economy stupid.

Many of the French people are worried about the French economy.  This is especially true among the working class French.  They see a very high rate of unemployment in France, especially among young people, and they fear that a “new Europe” will mean even worse times ahead.  The French workers fear that a new Europe will mean labor market conditions more like England the U.S.:  workers replaced by technology and a stripping away of the French generous social safety net.

The argument against this line of thinking is clear and has been pointed out many times before.  I’m not asking you to agree with what the French workers are thinking, but I do ask you to understand what their concerns are.  Because as we have seen last week, when this thinking takes a hold it can have huge ramifications throughout the entire world economy.

So, being risk adverse (and not really liking Chirac anymore) the French voters, especially the French working class, voted the European constitution down.  What comes next for French economy will be interesting to watch.  This is all but the political death of Jacques Chirac.

 

The Dutch vote was due to slightly different reasons.  Unlike the French the Dutch have been much more willing to reduce regulation and introduce competition into their economy.  The Dutch grip has been that a united Europe hasn’t been all that great of deal for Holland.  Many argue that the guilder was mispriced when it was bundled into the new Euro thus putting many Dutch firms at a huge disadvantage. 

Also many in the Netherlands are worried about immigration.  They fear that a united Europe will mean that peaceful Holland will turn into a crime ridden London or New York.  These fears were heightened with the murder of the populist politician Pim Fortuyn in 2002.  Then in November of 2004 film director Theo van Gough was brutally murdered in Amsterdam because of his recent movie was critical of Islamic extremists.  The murders of Fortuyn and van Gough heightened the anti-foreigner and anti-European sentiment in Holland.

So where does this leave European unification?  Some suggest there is a growing divide in Europe between the pro-unification “elites” and the voters.  If that is true the European leaders have to do a better job in explaining to the people why a united Europe is good for them.  If this not done Europe will remain fragmented and economically disjointed.  That would not be good for Europe and it would not be good for the United States.

All the best,

MBrandl