Currency traders get jitters over constitution ‘No’ vote

By Anna McLauchlin

Date: 14/04/05

A French 'Non' to the European Constitution could harm currency stability in the EU's candidate countries, particularly Turkey, currency strategists have warned.

If there is a domino effect and the constitution is not ratified, then the enlargement process is likely to stall, leading to fluctuations in financial markets in those regions.

"There is certainly a case for a Turkish lire sell-off," said Hans Redeker, global head of foreign exchange strategy at BNP Paribas. "Rejection of the Constitution would mean that enlargement would be put on hold, and it would be difficult to enlarge further through the Nice Treaty."

Mansoor Mohi-uddin, head of FX strategy at UBS Warburg, agreed. "A 'No' vote may delay Turkey's entry into the EU which would affect financial markets over there."

But strategists were less concerned about the impact of a failed constitution on the member states' currencies.

On Monday (11 April), the chief economist of Deutsche Bank, Norbert Walter, told journalists in Germany that a 'No' vote on 29 May could stymie the expansion of the eurozone, thereby sparking a "wave of currency attacks in the new member states".

But others were not so sure. Jean Lemierre, president of the European Bank for Reconstruction and Development and Thomas Laursen, economist at the World Bank, argued that joining the eurozone is already laid out in new member states' accession treaties.

Redeker agreed. "Those countries will still be on track so I don't see a problem there. The real problem is further enlargement."

Some have also speculated that the euro will be negatively affected by a 'No' vote as its value is built on the perception that it is an expanding currency that will soon incorporate the new member states as well as Sweden, Denmark and even Britain.

And according to Mohi-uddin, "uncertainty about where EU members will go next" could lead to a temporary dip in value.

But Fortis Bank economist Elwin de Groot thought that the effect on the euro could be positive. "If the markets think that the expansion of the eurozone will be delayed it could reduce uncertainty about the role of the currency in the future and therefore react positively."

The FX traders played down the importance of threats that Italy could face EU action over its booming deficit - expected to hit 3.6% of gross domestic product (GDP) this year and 4.6% in 2006.

"Markets have become pretty comfortable about large member states running high deficits," said Mohi-uddin. "If anything, it might lead to the European Central Bank raising interest rates which would have a positive effect on the euro."

Article reports on speculations on currency instabilities in candidate countries such as Turkey if France was to reject the ratification of the Constitutional Treaty for Europe in its national referendum on 29 May 2005.

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