Yes or no, the Danish vote will change the face of Europe

'The vote matters in the financial markets, for it comes at a time of especial tension for the euro'

The tail does not usually wag the dog, but this one may turn out to be an exception.

The tail does not usually wag the dog, but this one may turn out to be an exception.

There is little rational reason why the result of today's Danish referendum on joining the euro should affect the rest of Europe. After all, Denmark has a population of just over five million, against 290 million in the euro-zone; and there are nearly nine million people in Sweden and 59 million here in the UK, the other two main "outs". And the chasm in attitudes between Denmark and the UK is pretty big. To take just one measure of our different perceptions of the role of the state, Denmark is at the top of the European league of big-spending governments, while we are near the bottom. We may be the two most Eurosceptical members of the EU, but that is about it.

Yet the Danish vote matters enormously to all of us, for a host of reasons. It matters in the financial markets in the coming months, for it comes at a time of particular tension for the euro. It matters for politics in the UK. And if matters for the future of the whole European experiment.

Why so? As far as the financial markets are concerned, this is the most febrile time for the euro since its launch in January 1999. Since then, it has suffered such a relentless decline that everyone - friend and foe - has been peering forward for an indication of a turning-point. The rescue operation, in which the world's main central banks have supported the euro on the exchanges, may have laid the groundwork for such a turning-point, but intervention on its own does not change anything. The euro can make a sustained recovery only if the flood of European money that is currently exiting the zone for America eases up. That requires more confidence, not just in the euro itself, but in the wider prospects for Europe as a successful economic region.

Now consider the dynamics of the Danish vote. If it is yes, then the euro has won a vote of confidence at a critical moment - the very week that it may be on the turn. The European Central Bank may well need to increase interest rates in the autumn to check rising inflation, but it would do so against a background of gathering confidence in the currency. The way would be paved for Sweden to join after a promised referendum following the next general election there in 2002. Who knows, maybe even the British might follow at some stage, too.

If the vote is no, then these dynamics reverse themselves. The intervention might appear to have failed as the markets take another whack at the euro, and an increase in interest rates might appear a desperate measure to restore confidence. The Swedish people would be less likely to vote for entry in their own referendum, and as for us - well, the chances of entry would recede still further.

Indeed, the dynamics of the situation might lead people to conclude that the euro-zone will never be extended. New members of the EU could side with Sweden, Denmark and the UK rather than with the core, and some of the fringe members of the euro-zone, suffering because they were operating with the wrong interest rates, might even fall off the edge. In its most extreme form, you could even see a set of circumstances in which the euro never came into effect. If the Danes are allowed to vote no, then why not the Germans, who are solidly against it and who have never been offered a referendum? The whole project could be aborted. I don't think this last possibility is very likely, but, if the Danes vote no, it should not be discounted altogether.

Politics in the UK will flow from this. If the Danes - and then the Swedes - vote yes, we would be the only EU member outside the euro-zone. There would be a feeling of inevitability about joining, however much the prospect was against the gut instincts of the British people. So the present government's stance of being in favour in principle, "when the time is right", would seem quite sensible, and the hostility of the Tories would seem to be spitting into the wind.

If the Danes vote no, then the politics reverses. The Government's agreement in principle would appear to put the interests of big business, and big foreign business at that, against the interests of British people. Tony Blair would be a Chamberlain (or at least a Baldwin), prepared to sell out our interests because he was frightened of powerful foreigners. And William Hague would be a Churchill, who survived years in the political wilderness but was proved right in the end.

This may not be directly relevant to the outcome of the next election - it is not really credible that five million people on the far side of the North Sea will change anything here - but it could determine the course of the next parliament, whoever forms the government. Are we as a country going to feel lonely as outsiders from Europe, or are we going to feel we have had a lucky escape from its maw? If the former, that is bad news for the Tories; if the latter, the opposite.

And Europe itself? The two great issues for the coming decade are of course enlargement and multi-speed. They go together. If there is a sizeable proportion of the EU economy outside the euro-zone - 72 million people - then entry to the EU does not need to mean entry to the euro-zone. That might make it easier for aspiring entrants, setting at rest their concerns of being swamped. It might also speed up integration of the euro club, creating a de facto multi-speed Europe. In population terms, were Poland, the Czech Republic and Hungary to join the EU but not the euro-zone, you would have a Europe with 290 million "ins" and 130 million "outs".

Question: is it easier to run an expanded EU if it is clearly a multi-speed operation, with a core and a fringe? I don't pretend to know the answer, but my instinct is that it would be. So maybe a Danish "no" would make for a more durable EU - because the inevitable tensions would have to be allowed for rather than bottled up - than a Danish "yes".

So it is possible to be a good European and hope that the Danes vote no.