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EU: After Danish Rejection, What is Euro's Future?

Denmark's clear rejection of the euro is another blow to the prestige of the European Union's common currency project. At stake is the well-being not only of the present euro-zone states inside the EU, but also eventually that of the 10 Central and East European candidate countries, which will be required to join the common currency as soon as their economies are ready. RFE/RL correspondent Breffni O'Rourke reports.

Prague, 2 October 2000 (RFE/RL) -- Danes, who enjoy one of the highest living standards in the world, decided at their referendum last week (Sept 28) not to take any risks. By a solid margin of 53 percent to 47 percent they turned down joining the European Union's common currency, the euro.

That's hardly surprising when one considers that for weeks before the Danish vote the euro had been making headlines as it slid ever lower against the world's other major currencies. Its downward spiral only stopped when key central banks on both sides of the Atlantic and in Asia jointly intervened on currency markets to buy up the euro, thus supporting its value.

The Danish rejection is undoubtedly a blow to the EU's common currency project, but analysts see the setback as mainly political rather than economic. For instance, on the political downside, unofficial polls in Sweden and Britain this week show an increase in the percentage of citizens there who now oppose those two countries joining the euro-zone.

However, a senior analyst at the Deutsche Bank in Frankfurt, Stefan Schneider, says the Danish "no" vote will not have much negative impact on the actual value of the euro, either in the short or long term. He says:

"Obviously, it has not affected the [euro's] value, contrary to some concerns in the market, which might be due to the fact that the latest polls we saw just ahead of the referendum were indicating a 'no', so a 'no' result was to some extent already priced in. I guess that explains why the euro has not reacted as badly as a lot of market participants actually thought it would do."

Schneider and other analysts point to another key reason why the money markets reacted so calmly to the result of the referendum. It is that the intervention by the central banks put what is known as an informal "floor" under the value of the euro. A floor represents a value below which speculators believe a currency can not fall without prompting intervention. In this case, the floor of the euro is thought to be around $0.86.

By their surprise intervention, central banks let potential speculators know that they could lose money if they tried to force the euro down in value against the banks' will. As John Wyles, an adviser to the Brussels-based think-tank, the European Policy Center, puts it:

"That is what [the intervention] was intended to do, and it seems that's what it has succeeded in doing so far, and I'm absolutely sure the central banks were ready to intervene [again] after the Danish referendum result was known. And the markets were pretty convinced of that, too, that's why they did not test the euro too much."

Deutsche Bank analyst Schneider says it's too early as yet to consider this floor under the euro to be fully established. He says he expects that there will be occasions when the central banks will have to intervene again, and show firm commitment to the currency.

Schneider also raises the point that the planned eastward expansion of the European Union is one of the factors making life more difficult for the euro on the money markets. That's because the markets perceive the central and east European economies as less developed. He says:

"The countries like Denmark, and [prospectively] the United Kingdom, with a higher standard of living, are saying 'no' to the euro, while the [eastern] countries with lower standards of living are likely to join it, perhaps not this decade, but in 10, 11 years or so, lots of them will join, and that's something which is weighing on the euro as well, this perception."

The eastern candidates for EU membership do not have a choice about joining the euro. The European Commission says they are required to go through the lengthy step-by-step process of joining the currency, even though this may come years after they join the EU itself.

Schneider says any market sentiment against eastward expansion of the euro-zone would be in any event based on misconception. That's because all the eastern candidates will have been properly prepared in advance for the single currency.

Brussels-based analyst Wyles says likewise that the eastward enlargement is unlikely to have any lasting negative impact on the euro's value. He says:

"They [the eastern newcomers] are not going to be encouraged to join the euro until the judgment is made that their economies are sufficiently adapted, and indeed robust enough, to live inside a single currency area."

Wyles also believes that the eastern economies -- which he describes as "very, very small" -- will not make a big impact on the economy of the present euro-zone. He notes that the total output of the 10 central and east European candidates is equivalent to only about 4 percent of the collective gross domestic product (GDP) of current EU member-states.