EUROPE’S DEATH KNELL? : Money could prove to be the root of the continent’s ultimate disunion

“That wasn’t a tile falling from the ceiling,” said an Italian industrialist following Italy’s panicky devaluation of the lira last week. “That was the collapse of the central pillar of our economic policy.”

It wasn’t just the lira, and it wasn’t just Italy. Last week’s tumultuous chaos in the European money markets shook every government in Europe and derailed Europe’s ambitious dreams of a single currency by the end of the decade. The collapse of Europe’s Exchange Rate Mechanism--the ERM--was the death knell of the stable and prosperous European order that grew out of World War II. It cast a cruel light on the comfortable illusions Europeans have been living with and showed that none of Europe’s leading countries have faced the costs of the European unity all claim to seek.

As French voters troop to the polls today for a national referendum on the ambitious Maastricht plan for European monetary and political union, the existing institutions of European unity have failed their most important test to date. Not since the debates over German rearmament and the foundation of North Atlantic Treaty Organization have Europeans faced this kind of political uncertainty--it is the most serious crisis in Europe since the Marshall Plan.

The Germans, as usual, have the hardest lessons to learn. Germans have lived with a lie for some time--that there was no contradiction between Germany’s national interests and the construction of the European Union. But this isn’t true. Germany’s massive obligations in the East--$100 billion a year to keep the old East Germany on economic life support--were the root cause destabilizing Europe’s money markets last week. To save East Germany, the country had to borrow massively from around the world; this drove up German interest rates and, thanks to the ERM, its European partners were forced to follow suit to save their currencies from collapse.

Germans now need to look this fact in the eye: The pursuit of narrow German national interests has, once again, upset the European order and divided Europe’s peoples against one another. As the British pointed out in a series of acerbic statements last week, the Germans used the ERM system to tax the rest of Europe to support German national objectives. The European Community was turning into an instrument of German domination rather than an alternative to it; the question was not whether, but when, the other members would break free.

Worse still, the collapse of the ERM comes just as the German government has had to admit that it doesn’t know what to do about East Germany. Chancellor Helmut Kohl has already broken his “read my lips” pledge not to raise taxes for unification. West Germans bitterly resent the economic burdens that unification imposes; East Germans are furious that West German pledges of prosperity after unification have been revealed as hollow shams. Nazis in the streets, confusion in the government: These troubles, unfortunately, are only beginning.

The biggest loser outside Germany may be John Major, the British prime minister who now faces the worst crisis of his career. Major owes his office to Europe. Margaret Thatcher was suspicious of the European monetary system and she didn’t think that the Maastricht plan would work. Her Conservative Party colleagues disagreed and kicked her upstairs to the House of Lords, selecting Major as her more Euro-friendly successor. He promptly staked his political future on maintaining the value of the pound within the ERM--even though it meant high interest rates for the recession-bound British economy. Never mind, said Major: Devaluation of the pound would be much worse. Britain would lose credibility in world currency markets and would pay higher interest rates for years and years.

Now, dozens of denials and months of recession later, Major stands revealed as a man without a policy. A ferocious battle is brewing between pro- and anti-Europe forces in the Conservative Party, and the British people cannot be expected to reward a party whose policies have collapsed into rubble.

Italy, too, has rough sledding ahead. The government is a shambles. Its politics are rotten to the core; the Italian budget deficit makes the United States look like a tightwad; the government cannot collect taxes, control the civil service or keep the Mafia at bay. The deteriorating condition of its state-owned industries, and their enormous debts, could turn Italy into a Third World-style debtor nation.

Italy was counting on Europe, and more specifically Germany, to make all these problems go away. Thanks to the ERM--which theoretically committed Germany to help defend the Italian lira--Italians were able to avoid paying the penalty for their government’s corruption and incompetence. No more. At just the moment when Italy’s financial problems seem to be approaching a crisis, the lira has lost its lifeline to Germany. Look for much more trouble in the land of la dolce vita, and for similar problems among the EC’s other Mediterranean members. The French government is also reeling. French voters going to the polls over the Maastricht agreement do so knowing their vote has become, to all intents and purposes, irrelevant. Maastricht is dead; the French can neither kill nor revive it.

President Francois Mitterrand, like Major, invested his prestige in Europe. The French have put up with high interest rates, slow growth and unemployment for almost 10 years in order to build a stable European monetary system. The long-term goal was to escape the control of the Bundesbank by replacing the German Central Bank with a European version of the Fed, to regulate the common European currency. The French had to convince the Germans that a European monetary union would be safe--and they have failed. The convulsion in the currency markets last week strengthened the German determination to hold on to their country’s chief economic assets: the enviably strong deutsche mark and the Bundesbank.

Europe’s economies are sick, its institutions in crisis and its leaders discredited. Bad news for Europe, many Americans are tempted to say, but why should we care? As Richard M. Nixon remarked during a European currency crisis 20 years ago, “I don’t give an (expletive deleted) about the value of the lira.”

In one sense, Nixon is right: last week’s Euro-crisis did not spill over into U.S. markets. It was business-as-usual on Wall Street and, down the road, many observers think it will be good news for the dollar. Bad as our deficit looks, the United States right now isn’t as scary as Europe. Foreign investors are more likely to see U.S. stocks and bonds as a safe place to park their money.

But that isn’t the end of the story. Europe’s turmoil is likely to translate into slower growth. That means smaller markets for U.S. exports in the world’s biggest and richest single market. That, in turn, postpones the day when the United States will emerge from its current economic stagnation.

It also means political trouble. Economic growth and political cooperation in Western Europe are important to the United States--and to world peace. A dynamic European economy will create jobs and help stabilize the political situation in the two most explosive trouble spots in the world today: the Arab Middle East and the former Soviet Empire. If the Western European economy bogs down, and its governments fail to find ways to work together for peace, the United States will have to try to pick up the slack. That won’t be easy, and it won’t be cheap. It may not even be possible.

The collapse of the ERM is one more sign of an approaching global crisis comparable to those of 1914 and 1939. The commotion in Europe last week was no tile falling from the ceiling; it was the collapse of the central political and economic initiative of America’s best friends and strongest allies. America needs a strong, prosperous and politically self-confident Europe; we will feel its absence in the difficult times ahead.