France's decisive rejection of the European Union constitution yesterday heightened financial markets' fears that Europe lacks the political will to revive its lacklustre economy and could be vulnerable to destabilising political forces.
With the euro falling to a seven-month low yesterday and European government bonds weakening, economists warned that the French vote had given succour to those promoting "protectionist" policies, rather than market-orientated reforms at EU level.
In a thin market, due to holidays in Britain and the US, the euro slid 0.8 per cent to $1.2466, its lowest level since October.
Technical factors added to the euro's distress with the single currency triggering a wave of automatic sell orders after breaking below $1.2490 - last week's low.
The euro also fell almost 1 per cent against the yen, to 134.54, and lost ground to the Swiss franc and British pound as investors sought havens from volatility associated with the referendum.
"It is another sign that Europe is on a slippery slope towards more disintegration and less stability," said Joachim Fels, economist at Morgan Stanley.
The president of the European Central Bank said that France's rejection of the EU constitution would create difficulties for the 25-nation bloc, but he was convinced the EU would overcome its internal differences to unify and grow.
"After the French referendum, and before the Dutch referendum, we are facing today a difficult moment for Europe and for our 458 million European fellow citizens," Jean-Claude Trichet told a Montreal business luncheon.
"I am sure that Europeans will, together, find the way allowing them to overcome present difficulties as they did in the past." Mr Trichet added that the central bank will adhere to its mandate to preserve price stability and confidence in the euro.
"Confidence is a key word in the present circumstances," he said.
Reckoning that the impact on the euro had already been discounted, Joaquin Almunia, EU monetary affairs commissioner, claimed the vote would not "affect the economic issues, because it is not connected to them". He was referring to the Lisbon economic reform agenda, the stability pact and attempts to broker a deal on the EU budget.
But Thomas Mayer, economist at Deutsche Bank, said the French vote and the possibility of a similar result in the Netherlands tomorrow challenged the "European consensus" for addressing economic difficulties - the general agreement among Europe's politicians on the need for competitive markets, fiscal discipline and a hard currency.
Moreover, sentiment in the Netherlands had been further alienated by resentment at the more lenient treatment of larger euro-zone countries shown to have broken the EU's fiscal rules.
The French poll, Mr Mayer said, was "not a watershed event in the debate about whether the economic and monetary union will last forever, but it is an element in the brew that has emerged in the last few months".
Such pressures have complicated the task of the European Central Bank, which has its monthly rate-setting meeting on Thursday.
The euro zone's failure to escape from the weak growth afflicting it since 2001 - and correspondingly high unemployment - has forced the ECB to hold its main interest rates unchanged at the historically low level of 2 per cent for two years.
According to one school of thought yesterday, the French referendum would reduce the ECB's ability to withstand political pressure for a cut in interest rates. The ECB's focus on price stability was criticised by "No" campaigners in France.
