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Regional Outlook : Solving the Euro Puzzle : European unity was expected to gel this year. Instead, the EC is coming unglued. Now only the single market seems likely soon.

December 08, 1992|JOEL HAVEMANN | TIMES STAFF WRITER

BRUSSELS — This was supposed to be the year that symbolized the coming together of the 12 European Community nations. Instead, 1992 is turning out to be the year when the 12 flew apart.

It is barely 12 months since EC leaders met in the Dutch town of Maastricht to sign a historic treaty on European unity. Now that treaty has evolved into an instrument of division. The chances are growing that it will never take effect.

The Maastricht Treaty set a timetable for establishing a common EC currency by 1999. But in the past 12 months, the existing system of fixed exchange rates between EC currencies--a sort of halfway house toward a common currency--has come unglued, and the ultimate goal seems further away than ever.

The treaty also set procedures for developing a joint EC foreign policy and possibly even a joint defense force. But when civil war broke out in Yugoslavia, hard by the EC's borders, the community was unable to agree on an effective policy to stop the fighting.

On one front, the "EC '92" process is marching ahead. Although there will be plenty of glitches (see accompanying stories), the community in many respects will become a true single market after 1992 for its 350 million residents.

Customs checks at borders between most EC countries will cease as of Jan. 1. Banks that operate in one EC country will be able to operate in all 12. Rates on value-added taxes--the European equivalent of sales taxes--will rise to at least 15% in all countries so that no EC member can use low tax rates to lure business from another.

But the near-completion of the single market will be something of an anticlimax. The EC '92 process was launched in 1985, and businesses have long since positioned themselves to take advantage of the new opportunities to operate across national EC boundaries.

Now it looks as if the single market--despite the best efforts of the pro-Europeans who head all 12 EC governments--may be about as far as Europe will be able to go, at least for a while. Three forces in particular have conspired to thwart their greater ambitions:

* The end of the Cold War. The Soviet threat had helped to force Western Europe's smaller nations to huddle together; its absence has left them free to go their own ways.

* The reunification of Germany. With the addition of the eastern states, Germany has become the community's dominant member, straining the alliances, particularly with France, that had cemented the EC together.

* The economic slowdown. With recession persisting in Britain, beginning in Germany and threatening just about everywhere else, Western Europe is learning that cooperation is easier in times of prosperity than in periods of deprivation.

Since its inception in 1957, the European Community has been an exercise in using economic self-interest to achieve political cohesion. The pivotal members, France and Germany, having fought two terrible wars in the past 50 years, chose to link their economic interests so tightly together that neither could afford to let the other go its own way.

For more than three decades, the strategy worked brilliantly. But now the world may be changing faster than the community can adjust.

"The European Community is a Cold War institution," said Jim Rollo, director of economics for the Royal Institute of International Affairs in London. "Now the glue of the Cold War is gone."

At the same time, Rollo said, a reunited Germany is becoming more like a normal country. No longer driven by guilt over World War II, it is seeking political power to match its economic might. "It's not clear that the community can contain Germany any longer," Rollo said.

David C. Roche, a global strategist with the Morgan Stanley International investment house in London, foresees a new shape for Europe, "with a mighty Germany radiating influence from the center."

Along with Germany, Roche places the Benelux countries, Austria, Switzerland, Sweden and Denmark in Europe's prosperous core. Poland, Czechoslovakia and Hungary, where German economic influence is pervasive, might also be included.

France might not be. "It is not a foregone conclusion that the Franco-German alliance will survive the strains of the next five years," Roche said.

Britain and Italy will remain on the outside. These countries, whose currencies proved so weak that they withdrew in September from the system of fixed exchange rates linking EC countries, will form part of what Roche called a constellation of "satellite countries that will follow increasingly wide orbits around the core."

"The Europe of the 1990s," Roche wrote in a recent Morgan Stanley analysis, "is unlikely to be the nice, prosperous, bureaucratically managed and boringly predictable continent which everyone hoped to see after a meeting in the small town of Maastricht last year."

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