A French rejection would seriously damage progress towards economic and monetary union and a single European currency. Analysts fear this would threaten the ERM, as the markets speculated that weak currencies such as the lira and possibly sterling could drop out of the system.
Fears for the future of EMU would almost certainly encourage investors to move into marks from other European currencies - including the already enfeebled pound.
The first effect could be a sharp increase in interest rates as governments tried to defend their currencies, just as the Italians have done in recent weeks with Milan money market rates soaring to 17 per cent.
If the pain becomes too severe, however, the next most likely result is seen as a general realignment within the ERM, with the pound and other currencies being devalued against the mark. Fear of this outcome has helped to weaken the pound, which closed on Friday at DM2.8427, more than 10 pfennigs adrift of its central rate.
'Jitters over the French referendum are mounting dramatically,' said Steve Barrow, economist at Chemical Bank. Opinion polls have shown the proportion intending to vote 'no' rising steadily since the referendum was announced in June.
A further sharp rise in the 'no' vote is expected in Thursday's BVA poll for Paris Match. Since the last poll, the French government has been hit by bad unemployment figures, further falls in its own popularity and a leaked International Monetary Fund report suggesting that monetary union would slow EC economic growth.
Alison Cottrell, economist at Midland Montagu, said the markets were likely to face a flurry of rumours about the poll this week. She added that the French were likely to block an ERM realignment until after their National Assembly elections next March.
The tension on the pound was being exacerbated by growing pressure on the British Government to devalue the currency unilaterally or leave the ERM, according to Gerard Lyons, economist at DKB International. 'Something has got to give - either the economy or the Government's exchange rate commitment. At the moment it is the economy,' said Mr Lyons.
The Treasury reported on Friday that independent economists have slashed their forecasts for growth in the past month and are now expecting national output to be lower this year than in 1991. Oxford Economic Forecasting predicts that a recovery beginning in the third quarter of the year would still leave GDP more than 1 per cent lower in 1992 than last year.Reuse content