The purpose of the Nice Treaty, signed by the European member states in February, is to complete the programme of institutional reform designed to prepare the EU for a significant expansion in its membership. It is absolutely key to the EU enlargement process. The European press certainly had a field day after the Irish people rejected the Nice Treaty in their referendum on June 7, and all the euro sceptics must have had a good snigger too.
But, surprising though it was, most observers, pundits and investors agree that the vote will have very little detrimental effect on the EU enlargement plans, and that the rejection in the referendum had more to do with domestic Irish politics than a desire to stop new members trying to join the EU. European Commission president, Romano Prodi quickly issued a statement that read, “The member states and the Commission will pursue the enlargement negotiations with undiminished vigour and determination, in line with our firm commitment given to the applicant countries.” As one investor, choosing to remain anonymous, put it, “This is just another hiccup and will not carry much importance. They’ll smooth it out eventually. Remember that the momentum and dynamic of the whole process is political and not democratic – where there is the political will they will find their way.”
“Keep calm” seems to be the message. The analysts at Dresdner Kleinwort Wasserstein Research suggest that the first wave of new members will join the EU in January 2004 as planned. They go on to advise against putting on any divergence trades in anticipation that these countries’ progress to joining the EU will be significantly postponed or even derailed by the Irish rejection of the Nice Treaty.
Morgan Stanley also agrees that convergence will continue but cautions that the politicians, and in particular the leading countries of France and Germany, will now have to work considerably harder to push through the process. The overwhelming consensus seems to agree that, although the treaty has yet to be ratified by any member state, some sort of a compromise will be found without having to delay the original timetable. Morgan Stanley has not changed its slightly more pessimistic view that a first round of enlargement will take place by January 2005 – that is, one year after the official target date.
So it is business as usual for the convergence plays, with focus on the so-called ‘first wave’ applicants – Hungary, Poland and the Czech Republic. Local fundamentals should continue to be the key drivers of market performance, especially in these Central European countries. It does seem very likely that there will be more hiccups along the way. It was always going to be a difficult journey negotiating through all the complexities of the enlargement process. Although the politicians will probably win out in the end, investors should be making sure they do not remove their hard hats and safety belts too soon.