A 'No' solves nothing

You can take a horse to the water but can you make it drink? President Jacques Chirac of France has just discovered that you can't. The French people have rejected the European Union's new constitution in a referendum.

Some 55 per cent said no to it. The EU Constitution requires the approval of all member states, before it can take effect in 2006. Nine countries have said yes so far.

France is the first country to have rejected it. Next to say no could be the Dutch tomorrow. The margin of defeat is big enough to have the opposition demanding the government's resignation. While that seems unlikely, the markets have voted in their customary manner when faced with this degree of uncertainty""with their feet.

As a result, as soon as the news came in, the euro fell against the dollar, pound and yen. Some expect the fall to be anything between 5 and 10 per cent.

Little wonder, then, that the French finance minister has been quoted as saying "We're entering a period of high uncertainty... I'll be running 100 metres carrying a 20-kilo bag."

The referendum result could also lead to a lowering of the growth estimate for 2005 by the European Central Bank. The OECD expects growth to slow to 1.2 per cent, as against an earlier forecast of 1.9 per cent.

Few are surprised by the French rejection. Although Mr Chirac had presented it as no more than a mechanical device aimed at making the EU run more smoothly, the opposition had presented it as the thick end of the wedge that would, amongst other things, increase unemployment and seriously endanger the French way of life.

The Left has projected it as a device to end the social security system and convert Europe into an America-like jungle where only the fittest can survive.

All this may not have had much of an impact if the French economy had been booming. But it isn't. Unemployment is at 10.2 per cent, the highest in five years, and many people were worried that the charter could lead to an influx of cheap labour from central and eastern Europe.

This alone would have been enough to seal its fate but the French, who are surprisingly insecure, also saw a threat to their sovereignty. Clearly, the opposition succeeded in projecting the constitution not only as a major threat to the French economic model but also as something that would increase Anglo-Saxon influence in the EU.

What next? The French will discover that rejecting the new constitution does not solve any of their problems; the competition in labour markets will not stop, because some East European countries have already come into the EU tent.

Nor can France hope to keep boxing above its weight in international affairs, not when there are new powers like China on the scene. But the new charter is as good as dead.

This means the end of purposeful labour market reforms in Europe. To the extent that it is the absence of these reforms that holds Europe back and makes it so sclerotic, the defeat is bad news""for the French as much as anyone else.

In a sense, it is reminiscent of India's own dilemmas where exactly the same arguments""cultural, political and economic""are used to preserve an unviable status quo.