The bicycle theory states that one cannot stand still. Unless one moves forward, the bicycle will lose its equilibrium and the rider will fall off it.

Does this theory apply to the EU, now that two founder countries have rejected, through national referenda, the Constitutional Treaty which was proposed to give the legal framework for taking the EU forward to make a success of the recent enlargement and prepare itself for future challenges?

Challenges that are daunting. Challenges to restore American-type economic growth to European economies by adopting the Lisbon agenda as much as challenges to extend the confines of the EU to include such countries as Turkey, Croatia, Serbia and maybe Ukraine, among others.

The magnitude of the significance of the “no” vote by the French and the Dutch should not be underestimated. The EU has consistently said that no plan B exists and once plan A has met with what presently appears to be an insurmountable barrier, the situation cannot but raise doubts about the future viability of the EU. It is universally agreed that the present legal framework through the Nice Treaty, which will have to continue to operate until replaced, is totally unsuitable for the efficient functioning of an enlarged EU of 25 – soon to become 27.

So if the present legal framework is unworkable, and we cannot seem to agree on a proper replacement, the default position could be death by attrition.

I am not that pessimistic – quite the contrary. I would argue that the French and Dutch vote was a needed reprimand to the EU elite to come up with the leadership qualities to carry the people with them forward to the EU integration project rather than continue to seek integration through bureaucracy.

If the French and the Dutch have not delivered a “yes” vote, it is just as much because the people in these states are unhappy with the way they are being governed domestically, which in turn is forcing them to take an unrealistically protectionist view of the need and logic to integrate neighbouring countries into the EU even if this causes transitory adjustment pain to existing members.

The process of ratification should continue to move ahead and, hopefully, the Maltese parliament will do so quite soon with an overwhelming majority if not total agreement. The EU must as of now prepare a plan B for a situation where, by the end of the ratification process, four or five members will have failed while the other 20 odd will have ratified – giving the four-fifths needed to keep the Constitution project alive.

And the plan B has to focus on the economy, with special emphasis on the employment situation. It is illogical to assume that people will vote for a treaty that they perceive to be a threat to their existent jobs.

So it is absolutely essential that if the French, the Dutch and other dissenters will eventually have to be re-approached with a fresh referendum to keep the Constitution project on track, there must be some doses of flexibility added to the Treaty but, above all, there has to be a substantial improvement in the economic scenario of the EU countries. The measure of dissent against the domestic government would hopefully by that time have been overcome through fresh elections.

While at political level the EU leaders should start discussing what measures of flexibility ought to be included in the Treaty to justify a re-run of referenda where necessary (maybe a different kind of membership should be considered for members joining post 2007 – thus keeping these countries’ EU aspirations alive without causing undue adjustment pain to existing members), it is on the economic front that immediate measures are necessary.

Some measures are market-driven and indeed the same negative vote has forced the market to give the EU economies what they badly need – a more competitively-priced euro on the foreign exchange markets. Since the French “no” vote on Sunday, the value of the euro has fallen by four per cent against the USD and is now just a whisker above its launch value in 1999. On this score, the French refusal was a blessing in disguise.

But more needs to be done. In particular, the European Central Bank (ECB) needs to revise its objectives and economic policies. We cannot have such a powerful institution in charge of coordinating a single monetary policy for the whole euro area almost completely unconcerned by the unemployment situation and focusing solely on inflation and stability. Stability at high levels of unemployment is hardly a desirable objective.

The ECB needs to mature and develop by accepting a greater role in economic management, as the Federal Reserve does for the USA.

The ECB needs to accept that with the Euro now well and truly accepted as a reserve currency and many countries eager to diversify the over-exposure of their reserves versus the USD by adding more euros, they must take counter measures to keep the value of the euro competitive. This is particularly important for euro countries that depend mostly on exports for growth and job creation.

So the three per cent budget deficit limit, desirable as it may be as a long-term objective, needs to be widened to permit job creation initiatives by domestic governments through infrastructure investments, as well as weakening of the euro exchange value as market operators are deterred by such increasing deficits and risks of higher inflation. This is a luxury that reserve countries can afford, as the recent US experience has shown. It is now the responsibility of the EU to grow its deficits and economies to give time for the US economy to consolidate its growth without risking disequilibria of a magnitude that threaten global economic stability.

The EU bicycle has to continue moving forward as we pedal, admittedly more slowly, towards ratification by remaining countries, flexible revision of the Treaty and more aggressive economic policies to promote job creation based on export competitiveness which will eventually bolster domestic consumption. This is the tripod that can keep the EU Constitution project on track.

www.alfredmifsud.com