That the European Union is at a historic cross-roads is widely accepted following the recent negative referendum votes on the draft of an EU constitution, but there is still only uncertainty, speculation and doubt about whether it means a complete break with the past or which road it will chose in the future.

Both internally and internationally, the most visible or imagined consequences were foreseen on the credibility and stability of the common currency of 12 EU member states, the €uro. Although the constitutional rejection and ensuing uncertainty were more institutional and political, the possible foreign policy implications were largely incalculable in the immediate aftermath.

There was speculation that the rejection would also carry in its wake and end to the enlargement of the EU, including the prospects for Turkey, and could also weaken EU stabilising influence and presence in the Balkans.

It was unclear whether the EU emerging political visibility and influence would be curtailed as a result of the setback. But some experts forecasts that decision-making and unity could be adversely affected by the negative votes. This would bring to the fore, even greater emphasis than in the past on a “two-speed Europe” where some countries decide to integrate further while other opt out, as was the case on the single currency and a number of other policies.

At the root of such uncertainty lies a debate between believers that both political and monetary union are indivisible and mutually dependent and others who feel that monetary and economic integration are perfectly plausible without political unity.

But perhaps the fundamental lesson the EU and many of its member governments have been faced with in these two and other national votes, a message long noted in China and elsewhere, is that their legitimacy and support for further pooling of sovereignty is dependent on a growing economy.

In one of the first external contacts by an EU leader, German Foreign Minister Joshka Fischer sought to assure his hosts in Washington in June that the EU would remain active in world affairs. Before he left for the US visit, he also told an audience in Berlin that despite the referendum rejections, what was needed in the EU was even more democracy, not less. He spoke of EU-wide campaigns and elections to the European Parliament.

While there still seemed to remain widespread support, for example, in establishing the post of EU Foreign Minister and possibly a foreign diplomatic service, it was uncertain whether there would be as much zeal as before for creating and using a joint military force.

For those in Asia, or in Europe or elsewhere, tending to regard the EU as a counterweight or another “model” in the world, the setback could be historic. It is possible that the failure to ratify the proposed constitution and forge a closer union could be seen as a brake or rejection comparable to the French rejection of the proposed European Defence Community Treaty in 1954, which set the stage instead for the assumption of this protective role by NATO for the following 50 years.

Others participating in one recent post-mortem analysis session in Brussels, however, remarked that the rejection of the Defence Community Treaty in 1954 was rapidly followed by the establishment of the Economic Community in 1957 and they reminded that such surges sometimes come on the heels of failures.

But others were unable to see where the leadership for such dramatic progress could originate, when the next generation of European leaders, probably composed of Gordon Brown in the UK, Angela Merkel in Germany and Nicolas Sarkozy in France, are not regarded as passionately pro-Europe.

There is widespread fear in Europe that the inability to ratify the proposed treaty which sought to streamline some of the European institutions and decision-making process following enlargement to 25 members could result in a institutional paralysis in which decisions become harder, sometimes impossible, to reach. This could lead to an inability to take important economic, social and other policy decision, which could also have negative consequences on economic performance. There were also some predictions that the EU could turn more protectionist and less likely to make concession in world trade negotiations.

The Wall Street Journal Europe quoted one harsh assessment by an American bank management fund officer that the no votes “reinforce the view that Europe is a dithering dysfunctional family, unwilling and unable to make tough economic and political decisions.”

Among the most dire predictions would be a collapse of the entire EU machinery; but others also forecast a lengthy phase of several years that could transform the EU into more of a free trade area than a political entity.

Early tests could come during the first EU Summit scheduled for 16-17 June over such issues as the collective budget and the so-called Lisbon Agenda aiming toward reforms designed to make the EU more competitive and knowledge-based in global markets, both areas that were controversial during the referendum and ratification campaigns.

But even in past crises and periods of drift, the EU and its forerunner had been important forces in global trade, economic and political areas. This expectation of continuity was also put forward by one knowledgeable observer based in Asia: “I believe that the rejection of the constitution does not mean the collapse of the EU as it is sometimes framed in the media, because the EU will continue to function as it does until a new constitution or treaty may redefine it. I believe that relations between Asia and the Union will continue as before at the practical levels of trade, diplomacy, development aid, and so on.”

A senior Asian diplomat in Europe also observed that there might be some “difficulties in taking initiatives on reforms, regulations or enlargement, but the EU has functioned in a solid way up to now and achieved so much in two decades which will not be deteriorated. We don’t anticipate big changes in relations with Asia. It’s not the end of the world and we shouldn’t exaggerate the importance to the relationship.”

One Asian ambassador called the EU “a work in progress,” which unfortunately had not acquired visibility either internally or externally, or even had a negative image. Yet he noted his country had and continues to draw huge benefits from the EU in numerous trade, economic and development areas, although it still sought greater market access.

The most immediate focus of attention both internally and internationally was the stability and future of the €uro, which has been adopted by 12 EU member countries and was scheduled to also become the currency of the 10 new members that joined in 2004.

The single currency immediately became the subject of verbal and market speculation as even political leaders in Italy and elsewhere expressed thoughts about leaving the monetary system, the exchange rate of the €uro weakened against the US dollar and Japanese yen and some uncertainty about the future stability or breakup of the currency group flourished.

Jean-Claude Trichet, President of the European Central Bank quickly sought to dispel such speculation in Frankfurt and later in Asia. When asked by a journalist June 2 about the possible dissolution of the monetary union, he tartly replied “I will only say that I do not comment on absurd questions. And if your question were to be whether or not there is a likelihood for California, Alaska or Florida to have their own currencies, I would do exactly the same. This is complete nonsense.” He also later added: “The people in the street are calling upon us to be faithful to our mandate, to deliver a currency which would be as good as any national currency before the euro. It is what we are doing and we are succeeding, it can be proved, including in Germany, and I know the attachment of the German people to a solid currency, a currency which would inspire confidence.”

But market and press comments highlighted the twin-edged positive and negative impacts of a weaker €uro. They and even the International Monetary Fund pointed to the positive spinoff from a declining €uro on export prices and therefore competitiveness for European manufacturers and exporters and the negative rise in imports of oil and other commodities and products labelled in dollars or even yen. In fact, unconfirmed rumors and reports suggested the Japanese Central Bank and Japanese exporters in the automotive and other sectors were anxiously watching the increase price tags in their yen exports in the €uro zone, holding out prospects the Japanese authorities could intervene in the markets to counter the trend in the €uro currency as it had to prop up the dollar in the past.

Another double-edged result was also registered in the growing prospects for purchases of €uros by Asian Central Banks seeking to diversify their vast holdings of foreign exchange reserves from dollars to €uros. There was some concern that Asians could curtail their acquisition of €uros which have been reported to now amount to some 20% of their total foreign exchange reserves because of the slump in the currency, or conversely increase their purchases because of the new bargain rates. An official of the Hong Kong Monetary Authority was quoted as saying that “right now, I’m not sure, looking at the euro, that that’s an attractive investment…The US dollar remains a significant game in town.”

“What is important is the longer-term stability,” noted one senior Asian diplomat. He and others pointed out that the recent slip in the value of the €uro of 6-10% was only a mild correction following a surprisingly steady and sharp climb for over a year against the dollar.

In an address in Singapore June 8, Jean-Claude Trichet largely avoided the issue of the day to cryptically dwell on evaluating risks in asset price booms and bubbles, spending a large part of his speech on explaining a cautionary policy of “leaning against the wind” in the quest for stability. He emphasised that “The ECB’s primary objective is unambiguously the maintenance of price stability.” But he also cautioned that “Policy makers should not fall into the fallacy of attempting to eliminate all risk from the financial system. Either they would be unsuccessful (moral hazard) or they are likely to hamper the appropriate functioning of a market economy where risk taking is of the essence.”