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Friday, 29 September, 2000, 05:34 GMT 06:34 UK
Q&A: What now for the euro?

Denmark's 5.3 million people generate a gross domestic product of $185bn. It is a small country by anybody's standard. So how important is the country's decision to reject the euro in a referendum?

Economically, does it make any difference that Denmark will remain outside the eurozone?

Not really - at least in theory. Denmark would add only a bit to the eurozone's 295 million people and their $6.993bn gross domestic product.

And Denmark's currency, the krone, is already shadowing the euro, with the exchange rate more or less fixed through ERM II, version two of Europe's Exchange Rate Mechanism.

So why was there so much interest in the referendum?

The poll result is a vote of no confidence in a euro which has declined so far that the world's central banks felt it necessary to intervene on the markets and boost it.

And it cuts the chances of introducing the euro in Sweden and, in particular, the UK - the major EU state still left outside the eurozone, whose support would significantly bolster the currency.

Some observers even feel that dissatisfaction with the euro could spread to states within the eurozone, while Danish finance minister Mogens Lykketoft was among those who warned it could usher in a "two-speed Europe".

A two-speed Europe? What's that?

German foreign minister Joschka Fischer and Jacques Chirac, the French president, earlier this year proposed the idea of dividing the EU into a core of enthusiasts for the 'European project', and a group of more sceptical states.

The Danish result risks seeing that split realised.

The EU would divide into a 'fast track' group of countries, such as France and Holland, keen on political and economic integration, while the northern European states of Denmark, Sweden and the UK would be left in the 'slow lane'.

They would retain independence but, Europhiles fear, lose influence over an EU crystallisation project which will have a huge influence on the future of the Continent.

Already, the UK has raised concerns about its exclusion from the Euro-12 group, formed of finance ministers from countries within the eurozone.

Will the euro suffer?

The result is not expected to have an immediate impact on the euro.

The Danish 'no' vote had been largely predicted. And traders are wary that the central banks which in mid-September stepped in to support the currency will again release more of their foreign exchange reserves to snap up the euro, and so increase its value.

The fundamental point is that for the euro to get stronger, EU leaders have to convince markets that eurozone economies are reforming and improving.

Another factor is the strength of the US economy, which continues to outpace Europe and currently is a safer bet for many investors.

What does the result mean for efforts to support the euro?

Details of the euro rescue mission launched in mid-September are still sketchy, save that it involved central banks in Europe, North American and Japan, and used little money.

So the exact impact of the Danish 'no' is hard to predict.

But it is thought the mission aimed only to underpin the euro, and not to return it to the $1.18 level it started out in January 1999.

Many eurozone firms have, after all, welcomed the weak euro as good for exports, and the US is unlikely to endorse a weakening of the dollar ahead of the US elections in November.

And with the euro stable despite the 'no' vote, the ECB should be able to continue 'business as usual'.

It seems likely the banks will continue to launch a serious of ambushes and skirmishes rather than fight an full frontal battle in the foreign exchange markets.

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