Regional Outlook : Solving the Euro Puzzle : European unity was expected to gel this year. Instead, the EC is coming unglued. Now only the single market seems likely soon.

This was supposed to be the year that symbolized the coming together of the 12 European Community nations. Instead, 1992 is turning out to be the year when the 12 flew apart.

It is barely 12 months since EC leaders met in the Dutch town of Maastricht to sign a historic treaty on European unity. Now that treaty has evolved into an instrument of division. The chances are growing that it will never take effect.

The Maastricht Treaty set a timetable for establishing a common EC currency by 1999. But in the past 12 months, the existing system of fixed exchange rates between EC currencies--a sort of halfway house toward a common currency--has come unglued, and the ultimate goal seems further away than ever.

The treaty also set procedures for developing a joint EC foreign policy and possibly even a joint defense force. But when civil war broke out in Yugoslavia, hard by the EC’s borders, the community was unable to agree on an effective policy to stop the fighting.

On one front, the “EC ‘92” process is marching ahead. Although there will be plenty of glitches (see accompanying stories), the community in many respects will become a true single market after 1992 for its 350 million residents.

Customs checks at borders between most EC countries will cease as of Jan. 1. Banks that operate in one EC country will be able to operate in all 12. Rates on value-added taxes--the European equivalent of sales taxes--will rise to at least 15% in all countries so that no EC member can use low tax rates to lure business from another.

But the near-completion of the single market will be something of an anticlimax. The EC ’92 process was launched in 1985, and businesses have long since positioned themselves to take advantage of the new opportunities to operate across national EC boundaries.

Now it looks as if the single market--despite the best efforts of the pro-Europeans who head all 12 EC governments--may be about as far as Europe will be able to go, at least for a while. Three forces in particular have conspired to thwart their greater ambitions:

* The end of the Cold War. The Soviet threat had helped to force Western Europe’s smaller nations to huddle together; its absence has left them free to go their own ways.

* The reunification of Germany. With the addition of the eastern states, Germany has become the community’s dominant member, straining the alliances, particularly with France, that had cemented the EC together.

* The economic slowdown. With recession persisting in Britain, beginning in Germany and threatening just about everywhere else, Western Europe is learning that cooperation is easier in times of prosperity than in periods of deprivation.

Since its inception in 1957, the European Community has been an exercise in using economic self-interest to achieve political cohesion. The pivotal members, France and Germany, having fought two terrible wars in the past 50 years, chose to link their economic interests so tightly together that neither could afford to let the other go its own way.

For more than three decades, the strategy worked brilliantly. But now the world may be changing faster than the community can adjust.

“The European Community is a Cold War institution,” said Jim Rollo, director of economics for the Royal Institute of International Affairs in London. “Now the glue of the Cold War is gone.”

At the same time, Rollo said, a reunited Germany is becoming more like a normal country. No longer driven by guilt over World War II, it is seeking political power to match its economic might. “It’s not clear that the community can contain Germany any longer,” Rollo said.

David C. Roche, a global strategist with the Morgan Stanley International investment house in London, foresees a new shape for Europe, “with a mighty Germany radiating influence from the center.”

Along with Germany, Roche places the Benelux countries, Austria, Switzerland, Sweden and Denmark in Europe’s prosperous core. Poland, Czechoslovakia and Hungary, where German economic influence is pervasive, might also be included.

France might not be. “It is not a foregone conclusion that the Franco-German alliance will survive the strains of the next five years,” Roche said.

Britain and Italy will remain on the outside. These countries, whose currencies proved so weak that they withdrew in September from the system of fixed exchange rates linking EC countries, will form part of what Roche called a constellation of “satellite countries that will follow increasingly wide orbits around the core.”

“The Europe of the 1990s,” Roche wrote in a recent Morgan Stanley analysis, “is unlikely to be the nice, prosperous, bureaucratically managed and boringly predictable continent which everyone hoped to see after a meeting in the small town of Maastricht last year.”

EC leaders hope Roche is wrong. At their semiannual summit this Friday and Saturday in Edinburgh, Scotland, they will try to breathe new life into their foundering campaign to legislate their own brand of European unity.

That will be a tall order. Europe is engaged in a game of every man for himself. France is threatening to veto a U.S.-EC agricultural trade agreement that its 11 EC partners seem to want. Germany is keeping short-term interest rates high to fight inflation at home, even though those rates are retarding economic growth all around the Continent and upsetting the delicately balanced system of fixed EC exchange rates.

“This is the most severe crisis I can remember in the community,” said Peter Praet, chief economist of Belgium’s Generale Bank.

“One can’t be optimistic at the moment,” added Stanley Crossick, chairman of the Belmont European Policy Center in Brussels.

The Edinburgh summit could serve merely to expose the bitter divisions within EC ranks. The issues that pose the most serious threats are the community’s internal budget and the Maastricht Treaty itself.

The EC’s four poorest members (Spain, Portugal, Ireland and Greece) want the other eight to double the amount of money they transfer to them. A year ago, during brighter economic times, all 12 EC nations agreed to such a formula as part of the Maastricht Treaty. But now the other eight, their economies caught in a squeeze, are resisting, with Britain and Germany the least forthcoming.

At a meeting of EC finance ministers last month, Britain proposed a seven-year EC budget that would allow for little growth beyond inflation. Jacques Delors, who as president of the European Commission is the EC’s chief executive, reportedly castigated the British approach as “a serious political error.”

A Delors confidant framed the issue this way: “Is the community going to be just a free-trade zone, or is it going to become something more? What kinds of ambitions does Europe have for itself for the next decade?”

These same questions underlie the continuing uncertainty over the Maastricht Treaty, which was supposed to take effect at the end of this year. But first, all 12 EC members must ratify it, either by popular referendum or by parliamentary vote.

The Danish public already turned it down last June. Danish leaders, who hope to put the treaty to the voters a second time next May, insist that it must first be modified to let Denmark opt out of some of its provisions, such as a common European currency and defense policy. They also insist on ironclad guarantees that the EC bureaucracy will not usurp powers now held by the Danish government.

But the other 11 EC countries refuse to consider any changes so sweeping that the ratification process would have to be started all over again. It is a pretty riddle, and the EC has been unable to solve it in the six months since the Danish vote exploded its dreams of ever deeper integration.

Nor is Denmark the Maastricht Treaty’s only problem. The British Parliament nearly shelved the treaty last month. Only after Prime Minister John Major promised that the final vote would await the outcome of a second Danish referendum did the Parliament, by a mere three-vote majority, decide to go ahead with the ratification process.

Philippe Moreau Defarges, a European specialist with the French Institute for International Affairs, said the Maastricht Treaty has become a trap, distracting the EC’s attention away from the monumental changes in the world around it.

On the EC’s flank, five members of the European Free Trade Assn.--Norway, Sweden, Finland, Switzerland and Austria--have applied for membership in the much bigger European Community. Their admission would put virtually all of Western Europe into the EC.

But the EC feels it cannot begin negotiating the terms of their admission until it sorts out exactly what kind of community it is going to be. That means either ratifying the Maastricht Treaty or junking it.

Meanwhile, the EC’s internal problems seem to be sapping the enthusiasm of the EFTA countries to join up.

Even as Norway’s Parliament voted by nearly a 2-to-1 margin last month to apply for EC membership, polls showed that the Norwegian public was opposed by about the same margin. The constitution requires a public referendum before Norway can join; once before, in 1972, the voters turned thumbs down after the government had negotiated membership.

And just two days ago, Swiss voters rejected Switzerland’s membership in the European Economic Area, a free-trade zone scheduled to take effect Jan. 1 between the EC and EFTA countries. In the current climate, the chances that the Swiss would shed their traditional independence and accept full membership in the EC seem almost nil.

If the EC is struggling to define its relations with its non-EC neighbors in Western Europe, how much harder will it be to shape a coherent policy toward Eastern Europe and the former Soviet Union?

The community has negotiated or is negotiating various levels of commercial ties with all these countries. But the accords reached to date erect barriers to the very goods that Eastern Europe could probably sell in the West--agricultural products, textiles and steel.

Most analysts believe the West is courting disaster, in the form of continuing political turmoil and massive flows of refugees from the East, if it does not rise above what Morgan Stanley’s Roche called its “latent protectionism.” Only Germany has opened its borders to accept a meaningful number of immigrants, with one result being an explosion of neo-fascist violence against foreigners.

“The integration of successfully reforming Central European countries into the new core of Western European countries is a prerequisite for achieving both German stability and European prosperity,” Roche said.

But for now, the EC’s attention is directed inward, not outward. Its leaders know that their community is in crisis. If they cannot continue their march toward unity, they fear that what they have already accomplished will be jeopardized.

“There will be no formal decision to make a U-turn,” said Graham Bishop, an EC specialist with the Salomon Brothers investment house in London. “But there could be death by a thousand cuts.”

Continental Drift

New realities are clashing with hopes for a united Europe. Three major factors unsettling the 12-nation European Community are the end of the Cold War, the reunification of Germany and a general economic slowdown.

* The Soviet Departure

The breakup of the Soviet Union and the withdrawal of its troops from Eastern Europe, starting n 1989, transformed the Continent. “The glue of the Cold War is gone,” notes one British expert. EC nations grope for new policies while struggling with the Yugoslavian tragedy and an influx of refugees from the East.

* The Power of Germany

Balance of trade - billions of dollars (1992)

Spain: -33.8 Britain: -19.7 Greece: -10.9 Portugal: -8.2 France: -0.7 Italy: 1.7 Belgium (includes Luxembourg): 1.8 Ireland: 4.0 Denmark: 5.5 Netherlands: 14.4 Germany: 32.8 *

Population: in millions Germany: 79.8 Italy: 57.8 Britain: 57.4 France: 57.1 Spain: 39.5 Netherlands: 15.1 Greece: 10.1 Belguim: 10.0 Portugal: 9.9 Denmark: 5.2 Ireland: 3.5 Luxembourg: 0.4

*

* The Weakened Economy GDP Growth % in EC (1992)

Britain: -0.4% Germany: 1.2 Italy: 1.3 Netherlands: 1.3 Greece: 1.4 Belgium: 1.6 Denmark: 1.8 France: 2.0 Ireland: 2.3 Spain: 2.4 Portugal: 2.6 Luxembourg: 3.2 *

Unemployment % in EC (1992)

Ireland: 16.9% Spain: 16.1 Italy: 11.2 Denmark: 10.7 Britain: 9.8 France: 9.8 Belgium: 9.7 Greece: 9.4 Netherlands: 6.5 Portugal: 5.0 Germany: 4.7 Luxembourg: 1.4 Source: European Commission