Some succour for the sceptics

Economic Impact

Even the most fanatical advocate of the European single currency will have been unsettled by the size of the Danish people's vote against membership of the euro.

Even the most fanatical advocate of the European single currency will have been unsettled by the size of the Danish people's vote against membership of the euro.

Certainly the reactions by opponents of the result were predictable - that the euro is sickly and the vote was a rejection of a centralised European state. But once the dust settles, it will become clear that two clear and very distinct issues at stake. What is the impact for the euro? And what will happen to Denmark outside economic and monetary union?

The second issue is less important and can be quickly addressed. Denmark has been locked into an exchange rate mechanism against the German mark and then the euro since 1982. A "yes" vote would have merely formalised that reality. A "no" vote therefore alters little.

The immediate reaction was the decision by the Danish central bank to raise interest rates by half a percentage point to a five-year high, to defend its currency's link with the euro. The pro-euro camp was quick to point out that higher interest rates have been the price paid by the Danish people for retaining their full sovereignty.

On the more crucial issue of the future of the euro, the financial markets made their verdict clear. The exchange rate against the dollar held steady yesterday.

This should not come a surprise. Denmark is a small country with an economy just 2 per cent of the size of the 11-nation eurozone. As such, its membership of the single currency area would not have had a noticeable impact on the key indicators - inflation, growth or trade. Yesterday Europe's financial leaders insisted it was business as usual.

To be fair, the financial markets' insouciance probably had more to do with the fact that only a week ago the world's seven richest nations spent a few billion dollars buying up the euro.

Respect for - or fear of - those nations had outweighed traders' inclinations to batter the currency in the wake of the vote. In the words of one economist, the central banks "are breathing down the necks" of the speculators.

Such is the climate surrounding the euro that it actually rose against the dollar later in the day after Laurent Fabius, the French Finance Minister, forecast the only direction for the euro was up.

At the end of the day, it will be the behaviour of the United States that will determine the future for the euro. If America continues to steam ahead, the euro is likely to remain weak. But if the US economy falters and the eurozone keeps growing at its current rate, the single currency should recover.

From the viewpoint in Frankfurt, headquarters of the European Central Bank, a small country held a referendum and decided not to join the club. The dogs have barked, but the caravan moves on.