Magazine

For Europe, Opportunity Knocks


It's a devastating blow to Europe's political elite. In rejecting a proposed European Union constitution, French and Dutch voters have dealt a stern rebuke to the leaders who spent nearly three years drafting the 400-page document and campaigning for its adoption. And they have cast aside a longstanding article of faith with those leaders: That a more united Europe is essential to act as a counterweight to the economic and political might of the U.S. and, increasingly, China. Without a constitution, Europe would be "broken, searching for an impossible consensus," President Jacques Chirac had warned French voters just before that country's May 29 referendum. But his caution was to be of no avail.

Losing face isn't the only risk for Europe's politicians. The miserable economic performance of the Continent's biggest economies, a key reason for the "no" votes on the constitution, could also propel voters in Germany and Italy to oust their country's current leaders within the year. Now, reform advocates fret, the political uncertainty will make it that much harder to enact long-awaited measures to stimulate growth.

Worrisome? Yes. But not catastrophic. In fact, French and Dutch voters may have done Europe a favor by turning conventional wisdom on its head. Here are three reasons why:

DEATH OF THE FRENCH-GERMAN IMPERIUM

From the EU's beginnings shortly after World War II, France and Germany have called the shots. That was understandable. After all, if those two old enemies situated at the heart of Europe didn't get the ball rolling, the EU and its predecessor organizations would have been stillborn. And for many years, France and Germany had the two biggest and strongest economies.

No more. While the French and German economies are sputtering, leaders in new member countries such as Slovakia and Poland are growing at much faster rates and no longer see France and Germany as positive economic models. Countries that have enacted deep reforms to juice up their economies, such as Finland and Ireland, have been seething as France and Germany modified the rules on fiscal discipline that everyone pledged to support as a basis for European monetary union. The Franco-German team, still clinging to notions of national protectionism, has even scolded governments such as Poland and Ireland for luring investment with low-tax schemes that render "core Europe" and its high taxes increasingly unappealing. "The competitive countries are losing patience," says Ann Mettler, executive director of the Lisbon Council, a Brussels group that lobbies for the structural economic reforms that EU leaders embraced during a summit in 2000 but have largely failed to achieve. "You cannot allow the big countries to keep holding them back. If some countries choose to self-destruct -- well, let them."

Exactly. The constitution was largely the handiwork of French and German elites. Now that it has hit the rocks, the influence of Germany and France in the councils of Europe could wane. So could the voice of Brussels, which many in Europe have seen as a branch of Franco-German policy. "The Franco-German engine exists more on paper than in reality," says Alexander Stubb, a member of the European Parliament from Finland. "The new member states, the Nordic states, and the U.K. will push for economic change." British Prime Minister Tony Blair, for example, plans to press ahead with an economic reform agenda when Britain takes over the EU presidency on July 1. The potential Franco-German setback plays into the next scenario:

A POLITICAL GENERATION EXITS

This tumultuous spring also marks a generational shift in Europe's political landscape. The 72-year-old Chirac, German Chancellor Gerhard Schröder, 61, and Italian Prime Minister Silvio Berlusconi, 68, came of age when European politicians on both the left and the right embraced the idea of state-directed economies. Now all three whose countries account for 50% of the EU's output are fighting for their political lives against challengers who embrace more market-oriented policies.

Angela Merkel, the 50-year-old head of Germany's center-right Christian Democratic Union, is heavily favored to unseat Schröder in September elections. Growing up in East Germany, Merkel witnessed first-hand the economic suffocation of communism. She has promised to propose major tax reforms and introduce more flexibility to Germany's labor market.

Chirac, though his term runs to 2007, is increasingly overshadowed by his bitter rival and would-be successor, Nicolas Sarkozy, 50. Sarkozy heads the center-right ruling party and will hold the government's No. 2 post after a post-referendum shakeup. He grew up in France in the '70s, when the heavily regulated economy slumped after nearly three decades of postwar growth, and has been a strong fan of deregulation and downsizing the costly welfare state.

Berlusconi, meanwhile, is running well behind the center-left opposition led by Romano Prodi in polls for elections coming up next spring. "A new center-left government would look more liberal than a center-right government, closer to Tony Blair," says James Walston, a political scientist at the American University of Rome.

Let's be clear: There's no chance of a Thatcherite revolution breaking out on the Continent. Merkel, Sarkozy, and Prodi are keenly aware that many opposed the EU constitution out of fear that it would draw jobs and investment away from Western Europe toward less regulated economies on the EU's eastern rim. The day after the referendum, Sarkozy vowed to fight such a move. "All the debating about the economy is short-term. No one is talking about a road map," laments Marco Alverà, chief financial officer of Italy's Wind Telecommunications.

Even so, a new generation of politicians may be less beholden to labor and other entrenched interests that have long dominated political life in their countries. And they may be less insistent on keeping Franco-German dominance in the EU. Which leads to the third possibility:

A NEW, TWO-SPEED EUROPE

Among the victims of the referendum was a Franco-German plan for a "two-speed Europe." The idea was that those two countries and a few others would press ahead with integration even if some outlier states, such as Britain and Denmark, refused to ratify the constitution. So much for that scenario.

But a different kind of two-speed Europe could still work. Many countries in Europe have pumped up growth by deregulating their economies and slashing taxes and spending. The Lisbon Council's Mettler suggests they could create a coalition within the EU whose members could agree among themselves to adopt pro-growth measures.

One example is the EU proposal to deregulate service professions that was shelved this spring, largely at the request of France and Germany. Undiluted, the plan would sweep away national rules that make it difficult for service providers like accountants and plumbers to work outside their home countries. If the more vibrant economies pressed ahead with such reforms, the pressure would be on France and Germany to join the club. Even if these countries don't organize formally, they could lead by example. The demise of Europe's constitution is no reason to celebrate. But sometimes it takes a disaster to produce change.

By Carol Matlack in Paris, with Stanley Reed in London and Jack Ewing and Gail Edmondson in Frankfurt


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