Now Is The Summit Of The Ec's Discontent

In the European Community's grand design for a New Europe, 1992 was supposed to be a landmark year. But it's turning out to be the wrong kind of landmark. Instead of being a high point, "1992 may be remembered as the year when European convergence came to an end, and divergence started," says Michael Hughes, European strategist at London investment house Barclays de Zoete Wedd.

That means the upcoming EC summit in Edinburgh on Dec. 11 is going to be a different sort of affair than its organizers had originally thought. Rather than popping champagne corks for the single market, European leaders will have to pull out all the stops just to salvage the decades-long drive toward unity. Unless they come up with ways to spur a return to cooperation, 1993 will see even more turmoil than this year. Squabbles over everything from oilseeds to immigration will keep pulling the community apart.

More than just parochial disputes are at stake. A politically discordant Europe may be incapable of coping with the disarray that has been growing on its eastern flank. If so, Germany, already inundated with refugees from the east, could find it more and more tempting to break free of the EC and other cold-war moorings and to pursue its own interests.

The summit was supposed to toast the Maastricht Treaty on monetary and political union as the centerpiece of the New Europe. But the treaty is now on life support. Not only did its authors push for more and faster unity than constituents wanted, but the ambitious goals, calling for a single currency run by a European central bank, now seem farfetched in a fractious ec.

ECU DE GRACE. Just look at France's recent behavior. Paris has been a key backer of European union, but now it is using its clout to lobby other EC members to block the mid-November global farm-trade accord that was negotiated between Washington and Brussels. Britain has also been divisive. It has postponed ratifying Maastricht and used its current presidency of the EC to obstruct a new community budget. As for the Germans, the Bundesbank's high interest rates have driven the British pound and the Italian lira out of the European exchange-rate mechanism (ERM). Bundesbank President Helmut Schlesinger's recent charges that the ERM provides "a powerful incentive" for speculators could prove a death sentence for Europe's already beleaguered monetary system.

The Germans are taking a hard look at their EC obligations. They wonder why they should subsidize such weaklings as Greece, Spain, and Portugal when their real interests lie in heading off a meltdown in Eastern Europe and the former Soviet Union. There's a risk they could start cutting their EC subsidies and shifting cash eastward.

To see the direction Europe is heading, one need look no further than the currency markets, where every week brings a new crisis. Money mavens are already adjusting to the changes. Just a few months ago, securities denominated in European Currency Units--seen as Europe's future single currency--were red-hot. Now, no one wants them. The London futures-and-options exchange recently abandoned a key 10-year ECU bond contract. And big ECU players, such as France's Banque Paribas, are reallocating staff from ECU operations to beefed-up currency-trading offices in Frankfurt, New York, and Tokyo.

If there is a new European monetary order, it may not be the 12-country union outlined by Maastricht. It is more likely to be a grouping centered on the German mark, which will include non-EC members with strong currencies, such as Switzerland and Austria.

TICKING CLOCK. Businesses can live without ECUs, but executives are watching closely for any rollback of the single market, scheduled to go into effect on Jan. 1. So far, with 78% of the single-market reforms implemented, it looks as if the scheme is safe. But even some Euroboosters worry that the current discord could affect the promised efficiencies and benefits for consumers. A check in the momentum, says EC competition czar Sir Leon Brittan, would create "a rather sour atmosphere, in which some members might drag their feet on implementation" of remaining single-market reforms.

To get the EC back on track, leaders at Edinburgh must at least find a compromise that lets Denmark, whose voters rejected Maastricht in June, back into the fold. If the EC can thread that needle, both Denmark and Britain may complete the ratification process by midyear. Only then can the EC avoid a catastrophic halt to talks on enlarging the community to include Austria, Sweden, and other countries.

But the EC faces a ticking clock and some bad timing. Spoiler Denmark is slated to take over the rotating community presidency for six months on Jan. 1. Then come Belgium and Greece, two of the weakest members. So the community won't have a president who can hammer out solutions to intractable problems. And even if some form of Maastricht is finally ratified, the reconfiguration of Europe taking place may make large parts of the treaty irrelevant. Unfortunately, Europe seems in anything but the right mood to come up with a better-suited substitute.

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