French 'non' could bring buying opportunities

What is the EU Constitution? A 200-page document intended to create a workable framework for reforming and running the EU in light of its enlargement to 25 member states and future further expansion. The Constitutional Treaty defines the competences' of the EU - the division of powers between the various EU institutions and the member states - and incorporates a Charter of Fundamental Rights. In the UK, it has been described by the Government as a "tidying up exercise", but abroad it is viewed very differently. Belgian Prime Minister Guy Verhofstadt says the EU Constitution will give the EU "all the instruments of a federal state", and Germany's Europe Minister has called the Constitution "the birth certificate of a United States of Europe".

Will France vote no?

For the past two months, most opinion polls have shown a small but steady majority opposed to the Constitution. Some voters see the vote as an opportunity to give their government a kicking over domestic grievances: one in ten French workers are unemployed, for example. However, there are other factors in play. The French socialist party (PS) is split on the issue: although the equivalent of the UK's New Labour' supports the treaty, leftwingers worry it will water down the social rights' they have fought so hard to win, and see the Constitution as a Trojan horse for anglo-saxon' economic liberalism. At the other extreme, the rightwing Front National (FN) favours a no' vote, but mainly to keep Muslim Turkey out of the club. If France does vote no' by a small margin, most British commentators believe they will be offered a "concession"; the ratification process would continue, with France holding another vote later.

And other countries?

In theory, if France rejects the Constitution, there would be no point in any other country holding a vote: the treaty would be null and void as it requires ratification by all 25 member states. In practice, when countries have refused to ratify European Treaties in the past (Denmark voted no' to Maastricht, and Ireland to Nice) they have been made to vote again. This time it could be different: France is a big country and a founding member of the Union, making a no' vote much harder to ignore. In addition, the Netherlands also looks likely to reject the Constitution on 1 June, and a double whammy of rejection would make it harder to impose another vote.

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What does this mean for us?

According to Philippe de Villiers in the European Journal, the French example might strengthen the No campaigns in other potential non-ratifiers, such as Poland and, indeed, the UK. Denis MacShane, the former Europe minister, has stated that if the French vote no' there will be no point in the UK holding a referendum. But if any moves are made to force France into another vote, then Britain's own vote will still be relevant. And if both France and Holland vote yes, the UK's referendum, probably in spring 2006, would become crucially important.

What would a French non' mean for the euro?

The euro has been bumped around for the last week or so, partly because of the negative French opinion polls, and in part due to Gerhard Schroeder's abysmal showing in the North Rhine Westphalia elections. Weak economic data out in France last week hasn't helped either. A strong no' vote would be likely to weaken the single currency further as it would show disunity among the big eurozone powers and increase concerns over the euro's viability, particularly as the terms of the Stability and Growth Pact have been broken by several countries recently. On the plus side, however, as a no' vote would emphasise the inherent difficulties of Europe's one size fits all' policymaking, it might also force the eurozone to undertake proper restructuring. That would be good for the euro in the long term.

And what about equities?

Most analysts expect a French non' would give markets a jolt, although that may depend on the size of the no' vote and how quickly its political impact is absorbed by the EU. Opinion polls have been showing a no' result for a while, so it may already be mostly factored in to investors' decisions. That said, a Barclays Capital survey of 112 global institutional investors this week showed two-thirds think markets haven't yet fully factored a no' vote into stock valuations. In the short term, new candidate countries could be subject to speculative capital outflows - with Turkey likely to be badly hit. Longer term, Threadneedle fund manager Philip Cliff argues that the confusion caused by a French non' could present buying opportunities among recent EU joiners in Central and Eastern Europe. They may have to wait longer to adopt the euro, but will continue to enjoy free trade and anglo-saxon' labour markets.