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Markets take stock of EU
by Tony Butcher
Issue 5
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The French were the first to say ‘Non’ that has led to the Dutch saying ‘Nee’, with two founding member countries of the European Community rejecting the proposed Constitution the EU is struggling for a post-referendum direction. At present, none of the major leaders are willing to be the first to kill the treaty off, something that may have to wait for the European summit on June 16th.

Some ministers are certainly taking the opportunity to make their voices heard, with the Italian euro-sceptic welfare minister Roberto Maroni calling for Italy to reinstate the lira. Although President Chirac and Chancellor Schroeder are keen for the ratification process to continue, it is most likely that planned referendums in other EU countries will be delayed. Britain has already taken those steps by stopping the parliamentary process for the referendum. The overall effect of the No votes from France and the Netherlands is hard to interpret right now.

At present, there seems to be three clear options. Firstly, the EU could decide to shelve the whole idea. This would make further political and economic integration unworkable given the current inflexible and differing natures of the 25 economies of the Union. Secondly, the ratification process could continue, since there is a clause in place which allows for 20 of the 25 countries to ratify the constitution and have it potentially approved, although this would be very controversial in its current format. Thirdly, the constitution could be ‘watered-down’ to give a new constitution that, when agreed, would form a basis from which to build.

I would be more inclined to suggest that the EU will settle somewhere between the second and third option. Continue the ratification process for as much of the Union as possible, then attempt to re-negotiate, with the remaining countries, some form of ‘watered-down’ constitution which could be approved. This is because the French no vote could be read as an anti-Turkey vote or rebellion against the government of Jean-Pierre Raffarin, who has since been shown the door, and the Dutch were seen to protest about the poor economic situation in the Netherlands.

The economic effect of the no vote has been mixed during the month of May. With the polls already predicting a rejection, much of the bad news was priced into the markets before the result came through. In fact, the French stock exchange finished higher on the day after the vote. However, a public holiday in the UK and US delayed most of the reaction by 24-hours. The Euro suffered a large fall during overnight trade and continued for most of the week, slipping to an eight-month low against the Dollar.

I would expect the euro to recover over the short-term as people take profits and re-position themselves in the market. However, my long-term view is that the euro will continue to weaken as the “one rate fits all” policy from the European Central Bank has an impact on growth in the major economies of Europe. The Stock Markets have been particularly strong during May, the Dow Jones posted a 2.6% gain in the month and the FTSE 100 share market rose 3.4%. I know many people will be looking to quote me “Sell in May and Go Away”, but the other half of this saying is “Don’t come back ‘til St. Ledger Day”, which is a famous horse race in England that falls on September 10th, so the prediction is not doomed yet.

In fact, June and July could well be tough months for Stock Markets across the world as the United States’ employment data has shown poor signs of growth. However, Federal Reserve Chairman Alan Greenspan said: “Most recent data support the view that the soft readings on the economy observed in the early spring were not presaging a more serious slowdown in the pace of activity.”

This suggests Mr. Greenspan is still confident about the prospects for growth in the US. Europe has had downward revisions to growth forecasts almost every quarter and there are continuing calls for Jean-Claude Trichet to cut the European interest rates from their current 2% level. At present, the ECB chairman is adamant he is not planning to signal a rate cut to the markets. Even the UK is struggling with the Gross Domestic Product [GDP] figures for the Second Quarter looking to be worse than expected. The Monetary Policy Committee voted to keep interest rates unchanged at 4.75% with markets widely expecting a rate cut of 0.25% before the end of the year.

So what else is there to look forward to in June? The Wimbledon Tennis tournament starts towards the end of the month and look for Federer to lift the Men’s title again, while temperatures are set to rise across Europe as the summer gets into full swing, plus keep an eye open for the European summit on the 16th. We also have the build-up of “Live 8” to look forward to as Bob Geldof attempts to solve Africa’s debt problems with a little help from Mr. T. Blair and Mr. G. Bush. I look forward to seeing you in July.

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