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The Fate of the Euro

For the last three years, the Euro has been one of the strongest currencies in the world, in part, because of the belief that the underlying political structure of the European Union was strong.

However, in the days after French and Dutch voters rejected the Constitution, many analysts began to speculate about the future of the European Union because of eroding voter support for the new constitution's "one size fits all" approach to government.

Most analysts say French voters were worried about losing jobs to low cost labor from other member states, and Dutch voters were said to be concerned about losing influence in an expanded bloc.

In Italy, where the economy is now in a recession, some politicians have suggested returning to the Lira and dumping the Euro.

Nonetheless, Alisdair Murray, Deputy Director of the Center for European Reform in London, says the common currency will weather this crisis. Alisdair Murray says, "The rules of engagement are already set. They weren't going to be changed by the constitutional treaty, so this is really about mood going forward rather than anything specific the treaty would have provided that was necessary for the Euro to work more efficiently."

France's new Prime Minister says fighting unemployment -- now at more than 10% -- will be the top priority of his new government. But he does not say what he will do and whether his plan will follow guidelines from the European Central Bank, which coordinates monetary policy in the Euro Zone.

Economist Alisdair Murray says French and Dutch voters are also concerned that their governments are moving too quickly with economic reforms such as changing rules about the length of the workweek.

According to Alisdair Murray, "You have to go into a period of reflection. This is going to cause a lot of hard thinking about why European leaders have become so disconnected from their electorate. While the French and the Dutch may have been the ones to turn it down, they are not the only ones who would have turned it down if everybody would have voted."

Ian Stewart, Chief Economist for Europe in the London office of the U.S. investment company Merrill Lynch, says the vote against the proposed constitution was also a backlash against the European Commission's plans to liberalize trade rules. He says in France, the real concern was that the country would be flooded with cheaper labor from Eastern Europe, bringing down wages.

Mr. Stewart says, "A period of high unemployment in Europe and weakness in the European economy has diminished the appetite among voters and politicians for further enlargement. There is an argument that the French government has tended to see the European Union as a defense mechanism against globalization. But voters see the EU as an agent of globalization through EU enlargement."

The Euro became the common currency in 12 EU countries at the beginning of 2003. Ralph Bryant, an economist at the Brookings Institution here in Washington, says many economists feel the European Monetary Union may have happened too quickly given the diverse nature of the countries, which have surrendered their decision making to a European Central Bank. He says, "My view was that they were taking a big gamble. Unemployment is high in one part of Europe and not so high in others. Europe is too heterogeneous in its economic development to make a single currency and a common monetary policy be very comfortable for all parts of Europe."

The likelihood that France and the Netherlands will abandon the Euro and the European Monetary Union is remote, although many political analysts say voters did send a clear message that they are unhappy with the way their governments are dealing with economic reforms.

Even in Germany, where the unemployment rate is nearly 12%, reform minded Chancellor Gerhard Schroeder suffered a major political setback over his handling of the economy. His ruling party recently lost a key election in North Rhine-Westphalia prompting him to call elections for this fall -- a year earlier than planned.

Meanwhile, the European Union is expected holds a summit next week in Brussels to discuss how to deal with voter rebellion against the Constitution.

This report was broadcast on the VOA Focus Program. To see more Focus stories click here.