Currency Chaos Suggests Too Much Unity, Too Soon : Europe: The issue will remain unresolved until Germany is decisively heard from, and that seems unlikely to happen soon.

In recent days, Europe’s financial markets have been consumed by a crisis that has sent currency values and interest rates into wild gyrations. Interest rates have been raised to stratospheric levels to defend currencies weakened by declines in underlying economies. Britain and Italy were forced to abandon Europe’s system of relatively stable exchange rates and others may follow.

If this continues, such extreme financial turmoil will eventually threaten the survival of fragile governments throughout Europe, while damaging important American economic and political interests.

Many market participants as well as government officials on both sides of the Atlantic are hoping that the French referendum on European monetary and political union Sunday will defuse the crisis. This has led to a frantic search for financial palliatives that will at least control the damage for a few days. But the danger is that the cause of the markets’ distress is more fundamental and will not be so quickly or so easily resolved.

The root of the crisis is a profound struggle over whether Europe will continue to be a collection of nation states with some shared interests, or evolve into a coherent political and economic entity. Even in the unlikely event of an enthusiastic French “yes,” the issue will remain unresolved until Germany is decisively heard from and, based on recent performance, that seems unlikely to happen soon.

Since the unexpected gift of reunification, the Germans have been preoccupied with reabsorbing their eastern territories. For understandable historical reasons, this has led Germany to elevate its domestic interests above regional and global ones. This is reflected in behavior ranging from skinhead beatings of refugees to the stubborn reluctance of the Bundesbank to incorporate international concerns into its decision-making.

At the same time, however, negotiations already under way among the Europeans over monetary and political union were moving inexorably forward. Perhaps to reassure their neighbors that their hearts--if not their minds--were still in Europe, the Germans signed the union treaties at last year’s Maastricht summit. The focus of German energies, however, remained internal as the economic costs, social dislocation and political importance of reunification rose beyond all expectations.

For the rest of Europe, the question of whether Germany will redefine itself in European terms, instead of strictly national ones, is crucial. The economic counterpart of reunification resembles Reaganomics: large budget deficits (to rebuild the East), high interest rates (to pay for it) and a strong exchange rate (to attract foreign capital). The goal has been to close the gap between East and West as quickly as possible and then to return to traditional German discipline without damaging the country’s basic economic fabric--in sharp contrast to the U.S. experience.

The strategy has had mixed results. For a time it produced growth in Germany, and it has sparked the beginning of a remarkable transformation in the former East Germany. But it dramatically exacerbated the tendency toward recession elsewhere in Europe by forcing other countries to raise their own interest rates even while their economies slowed. And a recession is an awful environment in which to persuade voters to abandon national sovereignty for the uncertainty of collective, European decision-making.

Sooner or later, the contrast between growth in Germany and economic slowdown in the rest of Europe had to produce a financial crisis. For years, the major countries of Europe have maintained more or less fixed rates between their currencies to encourage trade and discourage inflation. But fixed exchange rates are simply incompatible with increasingly divergent economic policies and performances.

Wildly fluctuating currencies are clearly symptoms, not causes--and adjusting parities or raising interest rates are inadequate solutions. The Europeans are suffering from the pains of giving birth to something that is radically new. Rarely have nations with such different cultures, languages and histories even considered surrendering national control over economics, commerce and finance to the extent envisioned in the Maastricht treaties.

It may be that these treaties with their targets of monetary and political union are simply too much, too soon. This clearly is the opinion of more or less half of France’s electorate, a majority of the Danes, almost all of Britain’s Thatcherite Conservatives and countless others. Until these different interests--but most especially the Germans--are convinced that their future lies in forging a new European identity, recurrent financial crises are inevitable.

The resolution of these issues will affect fundamental American interests. In the short run, currency chaos in Europe means less demand for U.S. exports and even weaker U.S. economic recovery. In the medium term, the United States needs a strong, coherent Europe to help define and manage the post-Cold War world. Among other issues, the ethnic conflicts now re-emerging throughout Eastern Europe and the former Soviet Union will be uncontrollable unless the Europeans can speak--and act--with a single voice.

Unfortunately, there is little the United States can do to affect the European outcome, short of the essential task of addressing our own structural economic problems. But if the Europeans continue to fail, we will all pay a high price.