'No' Votes Create Trouble for European Currency

The value of the Euro falls more than analysts had predicted after two "no" votes on the European constitution. Uncertainty about the future of an integrated Europe and the poor economic performance of countries such as France and Germany triggered the decline — and may end several years of the currency's steady growth.


Those two no votes had their most immediate impact on the euro. Shortly after the Dutch results came in, the euro dropped far more against the dollar than most analysts had predicted. That may put an end to several years of steady growth. NPR's Adam Davidson explored why the no votes hurt the euro so much and what the implications may be for the future of the European currency.

ADAM DAVIDSON reporting:

Andrew Spanton made a strong and confident bet yesterday. He's a New York-based currency trader with his own firm, Global FX, and he was sure that the euro would not drop once the official results came in that the Dutch rejected the European constitution. He thought it had dropped too much already. Then the news came.

Mr. ANDREW SPANTON (Global FX): There was no immediate reaction. You know, it just drifted around and probably it took about a half an hour and then it was just meltdown.

DAVIDSON: So Spanton was wrong and the euro meltdown caught him by surprise. He had studied the macroeconomic picture and was sure that Europe's economy was strong enough that the currency would rebound.

Mr. SPANTON: It doesn't make a difference what I think. From a macro standpoint, if the market psychology, if people are nervous, there'll be a herd mentality out. So what you're seeing is that herd mentality out.

DAVIDSON: The market, that is the tens of thousands of people all over the world who trade massive amounts of euros and dollars and other currencies, were deeply shaken by the no vote. They got out of euros, sold them and bought dollars, and that's what sent the euro downward. But why? Why does a vote on the European constitution mean that the euro should go down? Is this a permanent change? Will the euro continue to slide for years? Adam Posen is a senior economist at the Institute for International Economics in Washington, DC. He spends much of his time thinking about the euro.

Mr. ADAM POSEN (Senior Economist, Institution for International Economics): There are two forces at work. One is uncertainty. No one's quite sure how this will play out. I don't think anybody in the market expects Europe to break up or anything disastrous, but we don't know what the way forward is going to be on economic policy. We don't know who's going to win the next election. We don't know what proposals will come out. And investors don't like uncertainty.

DAVIDSON: Since the euro's birth, the currency has followed reassuring, predictable steps as the member states have unified their economic policies. Approval of the European constitution was supposed to be the logical next step, but now that's not going to happen any time soon, and so investors are worried that this very new project, a single European currency, might not go forward as smoothly as expected. Posen said this uncertainty was one cause of the euro's slide. The second cause is more fundamental. He says Europe, especially France and Germany, are in bad economic shape and desperately need reform. The no vote was in many ways a vote against that reform, and the size of the no vote shocked Posen and many others.

Mr. POSEN: I was forced to rethink a lot of the politics behind this, the depth of the political opposition to reform and change in Europe. I mean, it's very easy to sort of say, `Oh, yeah, the special interests don't want this to work,' but the special interests have mobilized on a massive scale and have taken over the debate.

DAVIDSON: Posen says Europe has no choice. It has to stop being so generous to its citizens. Europe just can't afford to provide the world's best health insurance and unemployment benefits. Workers can no longer take summerlong vacations. These things cost a lot more money than Europe has to spend and eventually the bill will come due and Europe will be in severe economic distress. This is what most economists say, including European ones, but, of course, this is a very hard sell to Europe's citizens, especially since the worst troubles won't come all at once in some big crisis.

Mr. POSEN: Think New York City in the 1970s, right? Everything just gets a little bit dirtier, gets a little bit more rundown, there's less opportunity, there's more crime, more unhappiness, things work a little bit less well. Just a negative cycle.

DAVIDSON: To Posen and many other observers, the no votes in France and the Netherlands were more than anything a vote against these much-needed reforms. And without those reforms, the economy could stagnate, Europe could fall further behind the US and Asia and the euro in the long term could be worth less and less.

Adam Davidson, NPR News.

MONTAGNE: The euro's fall does have an up side for thousands of Americans planning summer vacations in Europe. The European currency has fallen nearly 10 percent from its high, saving tourists about $20 a day on a French hotel room.

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