France May Deal Unity A Setback Not A Death Sentence

It's 8 p.m. on Sept. 20. Across Europe, TV sets are tuned to a live feed from Paris. An excited anchor drops the bombshell: "It's non." French voters have killed the Maastricht Treaty for closer European Community monetary and political union.

It's a start signal for a wild ride on financial markets. Sunday or not, dealers in London and Tokyo are ready to trade as investors start a relentless drive into German marks. The frenzy batters the pound and lira. European bonds denominated in anything but marks plummet. France's Socialist government scrambles to hold on to power.

That unnerving picture is painted by Maastricht backers to warn against rejecting the pact. In fact, the vote is too close to call, pollsters say. But even a non in the long term isn't likely to derail Europe's long march toward economic unity. Progress would be slower, though, with negotiations on everything from public procurement to telecom deregulation. What Europe's messy political process may rule out is the Euro-architects' vision of a united House of Europe within seven years. That would be a political setback but not a tragedy.

Over the past seven years, the real engine of European change has turned out to be business, not Brussels' bureaucrats. To meet world competition, executives have pressured politicians for deregulation, open borders, unified taxes, and other goals of Europe 1992. Even if Maastricht fails, this economic payoff may eventually convince voters that pursuing a unified currency and closer political ties is feasible and desirable.

But for now, job losses and fears of meddling from Brussels in their daily lives have made voters wary. Many would shed no tears if other parts of the EC agenda, such as membership for East Europeans, were put on hold.

A French non could crank up Europe's flagging economies by triggering an exchange-rate realignment. To keep their currencies linked to the soaring mark, governments have been forced to push up interest rates. Rejection of Maastricht would give them a chance to escape "the monetary straitjacket imposed by the Bundesbank," says Felix Zulauf, president of Zulauf Asset Management in Zurich.

NO DEFENSE. To ease fears of German domination, however, Paris and Bonn would likely keep trying to create a joint defense force. But the Yugoslavia crisis shows how hard it is for Europeans to agree on foreign policy. That underscores the continuing importance of a U.S.-led NATO to Europe's defense.

Paradoxically, a narrow French oui vote could cause worse turmoil. "A limited 'yes' will just leave a lot of open questions," says Richard Reid, chief economist at Frankfurt brokers UBS Phillips & Drew. It would prolong the debate in Britain and Germany, which still have to O. K. the pact. Chancellor Helmut Kohl needs a strong French approval of Maastricht to persuade Germans to replace the mark with a Euro currency.

A French non would be a clear message that voters want to see how a borderless market works before submitting to a supranational state. Such a step-by-step approach should be more tolerable to Europeans on shop floors and in executive suites--and even to politicians in cabinet rooms.

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