TIME: Almanac 1993/TIME Almanac 1993.iso/time/102290/1022205.000

Text File | 1992-08-28 | 6.7 KB | 147 lines

                                                                                BUSINESS, Page 55

Cold Feet on the Dance Floor


With Britain joining Europe's monetary club, the partners may
squabble even louder about how closely to embrace one another


    It had to happen. The euphoria felt by a continent awakening
to its full potential after 45 years of cold war could not
last. In the rush toward a united Europe in 1992, the European
Community's toughest problems had been pushed to the sidelines,
and the excitement over communism's collapse obscured the new
dilemmas posed for the West by the political and economic needs
of Eastern Europe. What no one could have anticipated was the
speed with which the gulf crisis, and its attendant threat of
recession, made matters worse by exposing some of Europe's
illusions and sharpening some of its thorniest disagreements.

    All the more reason for Europeans to ponder the implications
of Britain's sudden entry -- at long last -- into the European
Monetary System's exchange control mechanism. Prime Minister
Margaret Thatcher, who had opposed the EMS from the beginning
as an infringement on national sovereignty, was tacitly
acknowledging her need to belong -- and her fear of losing
influence over decisions in an E.C. in which the center of
political gravity is shifting toward the newly united Germany.
At the same time, however, Thatcher brought with her a
philosophical challenge to the wider project, that of creating
a common currency and central bank. Said European Commission
President Jacques Delors: "Only the future will tell us if
British entry into the EMS is not a pretext to slow down the
process of integration." As a full-fledged EMS member, Thatcher
is bound to sharpen the debate about the larger choices facing
the E.C.

    An essential one, peripheral until communism crumbled in the
East, is between "deepening" and "widening": Should Western
Europe accelerate its drive toward closer economic and
political integration among the 12 members of the European
Community, or reach out beyond them to the impoverished,
bewildered East European countries as they grope their way
toward viable free-market economies? Britain -- and increasingly
the German government -- argues that priority should be given
to developing assistance programs for the fragile Eastern
democracies, whose political stability and economic recovery
are essential for all of Europe.

    French President Francois Mitterrand insists that the E.C.
can both deepen and widen: achieve the Community's goals and
help Eastern Europe. But even Delors, "Mr. 1992," doubts
whether that aim is achievable: he fears that Germany's
preoccupation with making unification work and its commercial
expansion into Eastern Europe will slow down the process of
E.C. integration.

    Delors has some grounds for worry. Karl Otto Pohl, the
powerful president of Germany's central bank, last month
expressed some sympathy for Thatcher's economic positions. Said
Pohl: "More than a single currency, the emerging single
European market needs converging economic policies, which are
not yet in place." Like Thatcher, Pohl was asking how the E.C.
can have a common currency when inflation rates range from a
low of 3.1% in Germany and Denmark to 10.9% in Britain and 21%
in Greece.

    The economically weaker countries of southern Europe --
Greece, Spain, Portugal -- also have reservations. Their
principal fear is that once a single currency is created, they
would lose the power to devalue their money, a useful tool for
boosting exports and dealing with trade deficits.

    Thatcher remains alone in her unyielding hostility to the
very concept of a supranational Europe. She was pushed into
joining the EMS by a series of compelling domestic reasons, not
least the prospect of an election within the next year and a
half. The European monetary link, for example, will make it
easier to reduce Britain's double-digit inflation rate.
Sterling, already a petrocurrency at a time of soaring oil
prices, will become even stronger. Pressure on Thatcher
intensified also from other European capitals as the process
of German unification reached its climax this month. In effect,
Britain was being asked to weigh in as a countervailing force
to Germany, which has Europe's most powerful economy. Even the
French have been quietly but assiduously courting the British.
Prior to unification day in Germany, a balance existed among
West Germany, France and Britain, each with about the same
populations, relative wealth and mix of political advantages
and handicaps. A united Germany has upset that equilibrium.

    Worse, the chill wind of recession is in the air. Overall
European growth will slow as oil prices climb. Paul Horne, the
chief international economist for Smith Barney in Paris, points
to recent protests in France over cheap meat imports from E.C.
partners as signs of a potential "backlash against increased
competition, industrial as well as agricultural, that can be
expected." Nor will rising oil prices affect all E.C. countries
equally. The dislocations triggered by the gulf crisis are
bound to test the strength of European cohesion.

    If that is so, the European economy appears much sturdier
than it was during the oil shocks of 1973 and 1979, when the
E.C. suffered disarray. Moreover, although a severe U.S.
recession would not leave Europe unscathed, the transatlantic
economies are no longer so closely tied.

    Most reassuring of all, however, is the prospect that the
German economy will, as never before, take over the leading
role in Europe because of a huge burst of investment and energy
that will go into the reconstruction of eastern Germany and the
rest of Eastern Europe. The German economy is expected to grow
by 3% next year. "At a time when a slowdown is taking place
among many industrialized countries," said Pohl last week,
"united Germany's economic dynamism is acting as a locomotive
for the world economy." Every country is likely to benefit from
the huge demand-led expansion generated by the reconstruction
of what was East Germany.

    Looking ahead, the steady march toward European unity is not
about to grind to a halt. True, the 12 members are divided on
some key issues, and a go-slow period may be in the offing. But
that has happened before; no matter how alluring the vision or
compelling the logic, the United States of Europe remains a
distant goal that cannot be hurried even by its most
enthusiastic supporters. In bad times as well as good, movement
continues because the process has become irreversible.


By Frederick Painton. Reported by William Mader/London and Adam
Zagorin/Brussels.