Hamish McRae: In France they may kill the constitution. But will Europe's economy rise from the ashes?

There are two elections coming up, and by any rational analysis the second is the more important. The first, of course, is our own general election; the second, at the end of May, is the French referendum on the new European constitution.

There are two elections coming up, and by any rational analysis the second is the more important. The first, of course, is our own general election; the second, at the end of May, is the French referendum on the new European constitution.

We can judge, within normal 80 per cent bands of probability, the outcome of both. While a result outside these bands is possible, the most likely issue here is the size of the Labour majority - for if it is small, this would help shape both the durability of the next government and its internal balance.

In France things are a little more open, for events may push the country back towards a "yes" vote, though at the moment that looks most unlikely. So the issue there is also in all probability the size of the majority against the constitution. If big, the constitution is truly dead - the final knife probably being inserted by the Dutch referendum a few days later; if narrow, maybe a bit of fiddling would take place before the British give their own verdict next year. At the moment, the polls point to a reasonable vote against, but as you can see from the left-hand chart, the momentum behind the "no" vote is quite recent and so arguably could be reversed. Two different polling organisations show a majority in favour of rejection, but had the referendum been held at the end of last year, the vote would probably have gone the other way.

The second election has been given a spin by President Jacques Chirac, who has suggested that to vote "no" would be to play into the hands of the British, though the opposition there seems to be largely because the treaty is too "Anglo-Saxon" in tone. Odd, since the case against in the UK seems to be because it favours a French view of Europe's future.

A further oddity is that it seems to be accepted that were the French to say "no" by a reasonable margin, the constitution would be dead - whereas were the British to say no, the rest of Europe would go ahead without us. So the EU's second-largest economy is somehow less important than the third-largest one? Or does being a founder member of a club confer rights that more recent members do not have? Or, by not joining the euro, has the UK already indicated that it wants to distance itself politically from the union?

Just last week, Tony Blair suggested that it was most unlikely the UK would consider joining the euro during the life of the coming parliament. Given the poor performance of the eurozone and in particular its largest members, not joining is, from an economic point of view, a bit of a no-brainer. It is good to see the Prime Minister understands that. From now on, the policy of Labour will be "yes" to Europe and "no" to the euro, which to a lot of us would seem the only sensible way forward - though it has to be admitted there are political consequences.

But what sort of Europe will we be dealing with? That is the fundamental question on which we will learn more from the French. Meanwhile, we can catch a sense of it from the way Europeans feel about their future. The European Commission runs a confidence indicator both for the eurozone and the EU as a whole. It concerns economics rather than politics, but people who are confident in their economic prospects tend also to be relaxed in their view of the world. Unsurprisingly, the eurozone indicator is somewhat more gloomy than the EU one.

The latest eurozone figures, out last Friday, showed that economic sentiment is falling and at its lowest level since August 2003 (right-hand graph). The worrying thing here, though, is not one month's statistics but that there has been no real recovery since the recession earlier this century. Things perked up a bit last year but have flopped back since. The whole cycle of growth that "ought" to have happened, and has happened in the UK and the US, has passed the eurozone by. Arguably, the thing that upsets the French is not something as specific as the new constitution but the general economic failure.

If that is right - and it would be hard to prove - then a vote against the constitution would actually be a vote against economic failure. It would be a vote against stagnant living standards, against double-digit unemployment and specifically against a political elite that delivered this failure - just as a vote for another Labour government here would be in favour of a political elite that delivered economic success.

Seen in this perspective, the two elections take on a much more precise significance - the votes aren't about politics. In President Clinton's phrase, "it's the economy, stupid."

It is ridiculous to ask electorates, facing a single question, to convey the nuances of their feelings. The French will not be voting for a new set of economic policies any more than the British will be giving a specific endorsement of Gordon Brown's economic management. But it would give a profound shock to the European economic policy makers.

The question, then, would be whether Europe can change direction. Not a lot can be done on a broad macro-economic front. Arguments as to whether the European Central Bank should drop interest rates by one quarter of a per cent seem a bit like those medieval ones about the number of angels who could dance on the head of a pin. Anyone who thinks people react to such fine adjustments have no feeling for the drivers of economic change. You have to thump interest rates to change behaviour.

Not much can be done on fiscal policy either. All the big economies in the world have governments running deficits near the top of the acceptable range - in some cases, above it. Tiny changes in that percentage either way don't have much effect.

The economic question that the French referendum will pose - assuming a "no" - is whether a key EU electorate is seeking a move towards serious reform or simply to impose paralysis on French policy. If it is the former, then the rejection of the constitution could signal a shift towards a much more competitive Europe. We might look back on this May as a turning point - the moment when the EU stopped fussing about political integration and focused on economic performance. Until the mid 1990s, Europe was narrowing the gap between its own economic performance and that of the US. Then things went wrong and it went backwards. That coincided with the thrust towards further political integration.

And if the French electorate wants paralysis? No, it can't want that, can it? And even if it did, other European countries will surely take up the baton of reform and carry it on to the next stage of the long race.

Will Bush please markets, or himself?

There is another political choice coming up that will affect British voters, but in which, like the French referendum, we have no say. It is the choice of successor to Alan Greenspan as chairman of the Federal Reserve Board.

Mr Greenspan's term of office does not end till next January but there are many practical reasons why President Bush will make a decision much earlier. One is that financial markets are wobbly at the moment - both the exchanges and share markets. Another is that inflation numbers in the US look tricky: amber lights are flashing, though they have not yet switched to red. Still another is that the political bow-wave ahead of this kind of appointment is such that there is a lot to be said for surprising people by doing the job early.

The three main names in the frame are: Martin Feldstein (a former Reagan adviser and president of the National Bureau of Economic Research); Glenn Hubbard (former head of the Council of Economic Advisers under George Bush); and Ben Bernanke (the Fed governor who is soon to move to the Council of Economic Advisers).

One concern is that if you look at all the appointments Mr Bush has made so far, they've been based on loyalty and not necessarily experience in the job. Messrs Hubbard and Feldstein are well known as competent academic economists with a lot of experience in public life. Mr Bernanke is more tetchy and best known for his emphasis on inflation targeting, not favoured by Mr Greenspan. An outsider, who would go down well on Wall Street, and is apparently Mr Greenspan's favourite, is Don Kohn. He would please the markets because he is a very stable and safe choice and an expert on inflation and interest rates.

But if you really know what will happen, go to Paddy Power's online betting shop. On Friday the odds were Bernanke 13-8; Hubbard 2-1; and Feldstein 4-1. We cannot vote in this election but we can at least put some money on it.