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Last Updated: Sunday, 29 May, 2005, 23:10 GMT 00:10 UK
'Non' unlikely to halt economic reform
By Jorn Madslien
BBC News business reporter

Having voted against the European constitution, many on the French left could be waking up to a nasty surprise.

French children in front of posters urging voters to say 'non'
What will the 'non' vote mean for future generations?

If their goal had been to halt the unfettered spread of free-market Anglo-Saxon style economics, their 'No' vote may be worse than futile, according to the investment bank Merrill Lynch.

True, in the short-term, rejection could "weaken momentum towards... liberal economic policies in the eurozone", according to Merrill Lynch economist Ian Stewart.

But longer term, the French 'No' vote could in fact backfire.

"Rejection would not head off a new 'ultraliberal' economic agenda," Merrill Lynch strategist David Bowers insists.

"On the contrary, failure to ratify the treaty would be likely to shift the community's focus away from the impasse over institutional matters and back towards economic reform, where progress can be more easily made."

Political support

Among Eurosceptics on the right - who are equally opposed to the EU constitution, but for different reasons - such a development would be welcome.

European parliament decorated with yes to the European constitution slogans
Critics say the European Union should scale back its political ambitions

Brussels's political ambitions, they argue, should be scaled back and the European Union should return to its origins as merely a trade zone where capital, goods, services and people can move about freely.

Rejecting a treaty aimed at streamlining and centralising political decision making would be a first step towards achieving such a goal.

The problem is, many in business are loath to accept the notion that this would be the best way to secure the European Union's and, more importantly, the eurozone's economic future.

French Prime Minister Jean-Pierre Raffarin has warned that a 'No' vote could put off investors and thus spark a rise in unemployment, while the chairman of the insurer Axa has warned that the political uncertainty resulting from such a vote would stifle business and reduce European firms' ability to keep up with US and Asian competitors.

"An [additional] intriguing question is whether a 'No' vote might lead markets to worry about the risk of political de-convergence in the eurozone," says Mr Stewart, pointing out that "the dominant characteristics of successful currency unions over time is political durability and popular support rather than economic optimality".

Sliding euro

None of the economic consequences are likely to be felt just yet, however, not least since the European Union could go on as is under the existing Nice Treaty.

French prime minister Jean-Pierre Raffarin
Mr Raffarin warns that a 'No' vote could result in rising unemployment

Even an anticipated fall in the value of the euro as a consequence of the 'No' vote is unlikely to be sharp.

"Most market investors have factored in a 'No' vote," said ING analyst Rob Carnell ahead of the weekend.

The euro had already been sliding for weeks ahead of the French referendum, but not merely because traders were anticipating a rejection.

The slide is also seen as a reflection of the widespread and worrying economic weakness in the eurozone's largest economies Italy, Germany and France.

Last week, the Organisation for Economic Cooperation and Development (OECD) called for interest rate cuts in the eurozone, where growth is expected to slow to 1.2% this year from 1.9% last year.

As such, it seems the vote's impact on the economy will be small when compared with how weak economic performance appears to have sparked a protest vote.

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