Uneasy markets keep a close eye on referendum outcome

ALL the attention of the international financial markets will be on Ireland in the week ahead. The referendum on the Treaty of Nice is attracting sizeable interest both at home and abroad, interest that is only likely to intensify as we approach next Saturday.

Many international institutional investors have undertaken sizeable investments in the ten accession countries, in anticipation of the benefits membership of the European Union will undoubtedly bring. The market is now concerned a No vote will delay the timetable for expansion, and of course devalue those investments.

The general consensus in the market is that a Yes vote will see the euro, European bonds and European equity markets rise, as it will be seen as a positive step toward the strengthening of the EU. As the Union becomes stronger, the economic power of the eurozone as a trading bloc will strengthen, enabling Europe as a market to challenge the USA's dominance of the global economy.

As recently as last Thursday, the President of the European Central Bank (ECB), Wim Duisenberg told the market that the solution to the eurozone's problems would not be found in reducing interest rates. Instead he told us that when confidence returned, and member states initiated programmes of structural reform, the eurozone would resume trend growth. The Nice Treaty is precisely the type of structural reform Mr Duisenberg had in mind when he made these comments. As such, if a Yes vote is cast, it should enhance the market's perception of the euro and eurozone assets next week.

The initial reaction to a No vote would probably be quite severe in the market, although it wouldn't last. The euro would initially fall, as would European bourses. As enlargement would effectively be delayed for a year or two, economic reform in the applicant states would invariably be postponed. However, ironically, if the accession process were to be delayed, the cost of the process for existing member states would also be deferred and in the current economic downturn, any such deferral would be welcome development.

However, the market generally appears to want a Yes vote. Mr Duisenberg is correct in saying what the eurozone needs now is structural reform. Arguably, the new voting arrangements that will be adopted in Europe if the Treaty is ratified would quicken the decision-making process of the EU, and allow for much needed reforms to proceed.

Labour market reform is the most cited issue that needs resolution, and perhaps a streamlined decision-making process would allow the EU to tackle this problem. Enlarging the Union so the size of its market would exceed that of the US is also seen as a positive outcome of the Treaty by the market's perception. So while we may be a small peripheral nation on the western edge of the continent, the attention of European and global markets will focus on our decision in the week ahead.

Of lesser importance, Irish retail sales data are also scheduled for publication next Friday. Retail sales have risen for three of the past four months in the Republic. However, with international economic conditions deteriorating, such a pattern can't be expected to continue indefinitely.

Data released last week showed that our inflation rate held constant at 4.5% in September meaning prices for an average basket of goods and services were 4.5% higher last month than they were in September 2001. And the ECB last week decided to keep eurozone interest rates on hold at 3.25%, for the 11th month in a row.

Looking abroad, the US economy continued to disappoint last week, with figures showing retail sales slowed dramatically in September. Consumer confidence also dipped dramatically, amid heightened anxiety ahead of proposed military action in Iraq. But for once, this week Ireland will take centre stage in the global market. For the sake of the economic strength of the eurozone, it's probably best to hope we give the market the result it wants.

Niall Dunne, economist,

Ulster Bank.