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France has spoken.
I don’t have any creative or original thoughts on what the French vote means for Europe, though, like many others, I found Henry Farrell’s thoughts interesting. For those interested in reading more about "Europe," we have put a set of links up on the RGE monitor webpage (link at top). The folks at Democracy Arsenal are talking through the issue as well, and Eric Chaney lays out some of the potential market implications.
One thing is clear: the convergence trade just got a bit riskier ...
I will be watching to see how the Turkish markets react to the non -- a non cannot be good for Chirac, or for Turkey’s chances of gaining membership in the EU.
It is worth noting that the Euro is now back around where it was at the end of 2003 -- in the 1.25-1.26 range. All the valuation gains that the US enjoyed on its European assets in 2004 have now disappeared. Remember, when the dollar falls against the euro, it immediately improves the US net international investment position by increasing the value of the United States substantial European assets. To repeat the valuation gains of 2004, the US needs the dollar to fall to 1.455 by the end of 2005. That does not seem likely. If nothing changes, the US is looking at a huge increase in its net external debt in 2005. A large current account deficit, and substantial valuation losses.
The OECD puts the US current account deficit at 6.4% of GDP in 05 (a bit under $800b), and 6.7% of GDP in 06 (close to $900b). If the euro stays around 1.25, European growth continues to lag, and Chinese exports continue to surge, that strikes me as a bit too low -- the q4 2004 US current account deficit was around 6.3% of GDP. The OECD presentation contains plenty of other interesting information. Note strong domestic demand growth in France, for example, fueled by rising real estate values -- which in a way makes current French unhappiness more striking. But real wage growth has slowed in France recently, and real wages are falling in Germany -- there is a reason why European voters are unhappy. Adjustment through deflation is never fun.