21 April 2005

EZA 675: Euro Politics

French rejection of EU Constitution unlikely to trigger serious problems in very short term but medium-term potential to trigger significant political/market turmoil
Growing momentum for the opponents of EU Constitutional Treaty in France makes a no-vote in the 29 May referendum highly likely. For France such an outcome would probably lead to stalling reforms and a looser fiscal policy, as Chirac prepares his candidacy for a third term as president in 2007. For Europe; short-term consequences likely to be modest, as the existing treaty structure will suffice for now. But cumulative effect of a French No, together with revision of SGP and review of Services Directive, and loss of focus for Lisbon Agenda increase risk of adverse cumulative effect on market sentiment Some increase in volatility to be expected because of increased uncertainty about future direction of EU, but 16-17 June EU Summit might show way ahead but… Medium-term risks of rising spreads and yields and weaker euro under several political scenarios. Although low probability, worst-case scenarios could lead to vicious spiral in medium-term as high yields, low growth, falling euro, rising inflation and growing political disenchantment interact.

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© Graham Bishop