By Dawn's Early Light

What the French "Non" Means (Part I)

Mr. Chirac knew the train wreck was coming.  The opinion polls foretold the outcome.  The French citizens, united from the left and right of the political spectrum, handed their French leader and the EU a decisive "Non" to a deeper political union by rejecting the proposed European Union Constitution by a vote of over 55% against with better than 70% voter participation.

The cynic can point to the several-hundred-page document (219 in English - see page 8 and 9 for the preamble) and 243-word preamble and compare it to the US Constitution that opens with these simple, yet profound words:

"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."

There were apparently too many competing political interests in Brussels during the draft of the European Union Constitution to produce a document that the average European could conceptualize, let alone explain to a neighbor.  It is striking that its potential demise was at the hands of the French rather than the English, who have yet to vote on it and now are unlikely to do so.

As Charlemagne argues in the Economist:

"The fact that the referendum campaigns in both countries have focused so much on the European Union as a whole underlines the dangers of the current debate. A 'double no' would not just signify rejection of the constitution itself. It might also start a backlash against elements of European integration that were already in place before the constitutional debate got going— in particular EU enlargement and the single market. The federalists' gamble would then have gone spectacularly wrong."

The cause of deeper integration may not just be stalled but could actually retreat as the heads of 25 nations must rethink a "more perfect union".  The French failure and likely Dutch government failure to ratify the constitution may have significant political, economic and military implications for the rest of the world.

The French EU Dream

The goal of Mr. Chirac in pushing forward the EU has always been twofold:  First, to leverage up French power by taking a primary lead in the EU to counterbalance the American superpower.  Mr. Chirac said in China:

"It is normal that a group of nations like the EU should wish to have the very closest relations with China, in such a way as to be able to build together the multipolar world which is in the process of being designed for tomorrow."

A multipolar world works by a counterbalancing system of relations.  Since the United States is the world's lone superpower, it is obvious what Mr. Chirac's goals are for the EU:  working in partnership through arms deals and economic arrangements to push forward a world order that constrains the US.

Mr. Chirac's second goal is to protect the French socialist system, which includes 35-hour work weeks and social benefits that are richer than most, if not all, in the EU.  As the Wall Street Journal (paid subscription required) points out:

"Voters in France, where unemployment is at a five-year high of 10.2%, worried that a more tightly knit EU would emphasize free-market reforms along American or British lines over France's traditional social protections. The emphatic 55%-45% 'no' vote warned Mr. Chirac not to go down that path. France's recent move to allow workweeks longer than 35 hours has already helped make his government unpopular."

With 10.2% unemployment in France and a projected growth rate of just slightly over 1% for 2005, compared to the US projection of 3.6% growth, the impact the "No" vote will have on the rest of Europe and the goal of political integration will be played out in the coming months and years.  Some of the effects likely will include:

• Investment uncertainties in Europe for all large companies (this will reduce investments)
• A move towards the dollar away from the euro.  This is especially important for the Chinese, who may continue to finance a large portion of US debt through the purchase of Treasuries
• Left-leaning governments in Europe (a majority of Western Europe) moving away from structural reforms to placate workers.  The lower income French workers and unemployed voted overwhelmingly against the EU (see WSJ article above)
• A slow-down of national legislation that increases interstate EU cooperation
• Stalled efforts on military integration that will continue to lead other friendly nations into joining American security arrangements
• A power struggle for the "driver's seat" of political leadership within Europe
• Less influence for European nations in world affairs, including possibly relations with the Middle East and Asia

However, the effect of the French vote will likely have some major implications for other powers.  I will address these in a follow-up post tomorrow.

France and the EU Constitution

It will be interesting to see how the French vote on the European Union's constitution on May 29th.  Jacque Chirac has a long way to go if he wants to bring the French citizens with him and move the EU towards tighter integration.  As one of the leading members along with Germany, a "no" vote from the French would be crippling to other countries' passage of the document.

As this article from Charles Wyplosz in RealClearPolitics illustrates:

"Because all EU member countries must ratify the constitution, a French "Non" will, in effect, kill it...

Amazing as this turn of events seems, it has been long in the making. It is amazing because France is not just a founding member of the European Community, but also has been the main driving force behind all major steps toward 'ever closer union.' But French opposition was also predictable because, for over a decade now, France has veered away from Europe and now finds itself increasingly isolated. Of course, Europe has also moved away from France through successive enlargements, but the main roots of the estrangement lie in France itself."

Professor Wyplosz gives several good arguments why France and the other principal nations of the EU are diverging and they are not associated with the Iraq war.

"The French regard with great sadness their declining status and prestige - not only in world politics, but also in culture, science and, importantly, language. Europe, in their view, was always a way of reclaiming world influence.

For three decades, this worked. France and Germany had forged an alliance that called the shots in Europe. Not interested in geopolitical power - a legacy of its Nazi past - Germany was content to back France's ambitions as long as the Common Market allowed it to be Europe's economic powerhouse.

But that alliance is unraveling as Germany's own status declines, owing to its mediocre economic performance and the loss of its prestigious Deutschemark. Moreover, Germany is increasingly interested in exercising political influence on its own; as a result, it is no longer happy with what it gets from the alliance with France."

It must be difficult for the French citizens, with much more generous worker benefits than most of their EU counterparts, to accept a more integrated union when they have an unemployment rate of 10.1% for the general public and 22% for youth under 25, which is over double Britain's 4.8% overall unemployment rate and 12% for those under 25, according to the Economist.  France's economic engine with all of its socialist, lack-of-incentive-to-work structure is making further integration that much more of a challenge.  Mr. Chirac tried a debate before a youth audience to bridge the opinion poll divide and failed.  In the same Economist article, the appearance was summed up rightfully:

"Young job-seekers tend most often to be excluded—hence their anxiety. Asked on television last week why Britain's unemployment was so much lower, Mr Chirac replied that its social rules would be 'unacceptable' in France. In the Rue Damrémont, that falls flat: what is unacceptable is not being able to find a job."

Charlemagne in his regular Economist column (different from the above quoted article) has an excellent analysis of the political thinking behind salvaging the EU from a "no" vote.  Even with the countries stripping out key parts of the constitution and enacting them into law under their current rules, there could be major long-term structural problems.

"But it would ignore the new and unpredictable political mood that would surely follow from a French no. Fed up with the economic and political consequences of EU enlargement, France might be tempted to push for a radical reorganisation of the EU around the original six members. A country that is into its fifth republic would have no fear of a second EU. But the difficulty with French day-dreams of this sort is that, after a referendum failure, Mr Chirac would be too enfeebled politically to launch any such initiative. And the Germans, France's indispensable partners, might anyway be disinclined to follow him."

The EU draft constitution never had wide appeal.  The EU has long been more a dream of political leaders on the left than the average worker or pensioner.  The constitution was originally envisioned without a direct popular vote for some of its participants.

"Eurosceptics have long predicted that deeper integration based on shallow popular support would spark a backlash. And not just Eurosceptics. A year before the constitutional convention met, Frits Bolkestein, then a European commissioner, commented that 'it would be a risky business to work towards a federal Europe, since there is a good chance of failure and Europe might then end up on the road to disintegration as a kind of reaction.'"

A vote of no by the French, followed 3 days later by the Dutch, could set European dreams of integration back a decade or more.  It would also further increase America's long-term political and economic power while staving off further EU military integration, most likely, in the long run. Without a good deal of popular support behind the EU, it would be hard to rally its already struggling economies to move military spending to levels that are anywhere close to the US.

May 29th will be an important date.

The Dragon Stumbles

It appears China may have diplomatically over-reached regarding Taiwan and is now suffering the consequences.  The New York Times over the past week has had several good articles looking at China from an economic, military and diplomatic perspective. 

Overstretching Economically

China has been experiencing a tremendous infrastructure expansion that has played a large part in her growth.  Joseph Kahn in the NYT writes:

"The Communications Ministry announced in January that it planned to pave a further 53,000 miles of intercity highways and urban ring roads within 30 years at a cost of $250 billion. Total mileage is expected to overtake the American Interstate system, the world's biggest, around 2020.

The spending has transformed China's landscape, adding roads, bridges, subways and ports - as well as factories, mines, steel mills and power plants - that could provide the foundation for double-digit growth far into the future.

But to an extent that is alarming some Chinese and Western economists, such investment itself is a main driver of China's economy, which grew at a 9.5 percent pace last year. The investment binge, like any bubble, could produce unneeded factories and underused highways and power plants, weakening the country's already shaky financial system.

"If China keeps relying on cheap capital to generate growth, sooner or later it will face a major crisis," said Xu Xiaonian, an economist at the China Europe International Business School in Shanghai. "Right now, the economy is afflicted by the curse of diminishing returns."

The article goes on to suggest that 45% of China's GDP growth is attributable to infrastructure. "Mr. Xu [an economist with the China Europe International Business School] said the economic payoff from these huge investments had fallen sharply. He estimates that 15 years ago, China generated 50 cents of growth for each dollar it invested in fixed assets - roads, subways, and steel mills and the like. That return has fallen to about 20 cents for each dollar invested, he says."  This compares with 15% of the United State's GDP growth coming from similar projects.

China may overproduce, especially because of its centralized economy, and not be able to sustain its current growth rate or utilize all of its existing capacity.  High inflation could become an problem for the Chinese government.  As a side note, China's growth has probably decreased inflation here at home according to The Economist:

"A study by economists at America's Federal Reserve estimates that cheaper imports from China have lowered inflation in America by an annual average of 0.1-0.3 percentage points in recent years. Another study by Dresdner Kleinwort Wasserstein, which allows for the price-reducing effects of Chinese competition on all producers, reckons that China may have brought down America's inflation rate by almost a full percentage point."

China's growth rate was 9.5% for last year.  The Chinese government believes it needs to maintain 7% growth rates to handle the influx of rural labor to urban markets, according to the above NYT article.  However, the US, Japan and South Korea never exceeded the 40% investment in infrastructure.  China could end up shaving half of its economic growth if it reduced its infrastructure spending to reduce over-capacity.  The problem is the Chinese system of government lends itself, from its central planning system and lack of representation, to encourage large, inefficient projects to stimulate growth.  It will be difficult, as it often is with US transportation bills, to slow the pork-style projects.

Overstretching Diplomatically

While North Korea simmers with a crazed dictator bent on expanding his nuclear arsenal and blackmailing all countries within missile range for fuel, food and money, China refuses to publicly step in.  According to Joel Brinkley of the NYT:

"Chinese government leaders have offered Secretary of State Condoleezza Rice no assurances that they will step up pressure on North Korea to return to nuclear disarmament talks, senior officials traveling with her said Monday."

The Chinese diplomatic position is summed up as not having a great deal of influence with North Korea, even though they are their largest trading partner:

"Some local analysts say that Chinese leaders may be more worried about the possibility that the reclusive North Korean regime might suddenly collapse, or that the United States might decide to strike militarily, than they are by the possibility that the North has a small number of so-far untested nuclear warheads.

This leads into a major diplomatic overreach for the Chinese.

The officials said the Chinese repeated the explanation they have often given: that they do not have as much influence with North Korea as is widely believed, an assertion that many American and foreign officials say they discount. But this time, the officials said, the Chinese also expressed their own frustrations with the North Koreans' recent behavior.

The Chinese also urge the United States to offer "flexibility" to North Korea, an official said.  "Flexibility" is regarded as code for offering incentives or concessions to the North Koreans.  South Korea has also offered that view in the past.

If the Chinese want an increasing presence of importance and respect on the international stage, reducing tension on the Korean Peninsula and reining in North Korea is a fundamental test.  The more the US fears for its security because of North Korea, the more involved the US will be in Asian politics and in structuring and strengthening Asian alliances (see DEL here and here for Japan related and here for India related), all of which the Chinese would prefer not to happen.

However, the domestic politics that led to the Chinese Anti-Secession Bill aimed at Taiwan (see DEL here) are now backfiring with China's relations with Europe, which has been bending over backward to expand relations to increase trade.

The United States and the countries of the EU have had a military embargo on selling arms to China since the Tiananmen Square massacre in 1989.  This has been a stain for the Chinese and it has been a top policy to get the ban lifted.  Jacques Chirac, the happy exporter to undemocratic regimes, has been eager to lift the ban and is supported by the United Kingdom as well as other European nations. 

The bold language of the Anti-Secession Bill that codifies that China has the right to use "non-peaceful means" to unify Taiwan with China gave even the French a bit of heartburn.

Military Overstretch

Joseph Kahn writes again in a different NYT piece titled "Europe's Shift on Embargo Places Taiwan at Center Stage":

"Reports of a shift in European plans to lift an arms embargo on China have sent a sobering message to China's new leadership, underscoring the sensitivity of its Taiwan policy and the continued dominance of the United States, Chinese analysts say.

American and European officials said this week that the European Union might now delay its plan to lift the embargo, imposed after China's crackdown on democracy protests in 1989, until next year at the earliest, dealing a blow to one of China's major foreign policy goals.

European diplomats cited China's newly adopted anti-secession law and intense American opposition to easing restraints on weapons sales to explain the shift. The Chinese law adopted this month threatens military action if Taiwan pursues formal independence from the mainland."

The Chinese rush to codify its right to invade Taiwan will actually reduce the potential for the weapons systems that they will need to counter an American defense.  Fortunately, the US held firm and pushed Europe away from making such a foolish decision when it is America and not the EU (can't this be said for every major global region) that defends the Pacific.  President Bush lobbied the Europeans well on his trip to Europe and Secretary Rice assisted in spreading the message.

"'I think the leadership anticipated that they would get a strong reaction from the parties most directly concerned, like Taiwan and the United States,' said Shi Yinhong, a foreign policy expert in Beijing. "But I'm not so sure they anticipated second- and third-degree reactions, as from Europe. So I think to an extent this comes as a surprise."

Just a few weeks ago, Beijing seemed close to achieving its ambition of removing the embargo, which it views as inappropriate for a country of its rising stature. After persistent Chinese diplomacy, France, Germany, Britain and other European countries all signaled their willingness to remove the embargo by this summer.

But sentiment shifted after President Bush visited Europe in February, where he lobbied against the lifting of the embargo while also backing a highly restrictive code of conduct on arms sales to replace it. Congress has appeared ready to increase the stakes, threatening to punish any European companies that sell arms to China and seek defense business in the United States."

It may only prove a temporary setback as the United Kingdom will give up its presidency of the EU within 6 months, giving France another opportunity to push lifting the ban again.

It has not been a good month for the Chinese on moving their strategic objectives forward.