As the ERM Falls Apart, It's U.S. That Will Be Sorry : Europe: With collapse of the European Rate Mechanism, the EC moved a step farther from political union. And America had better start to care.

By Walter Russell Mead

Aug. 8, 1993 12 AM PT

<i> Walter Russell Mead, a contributing editor to Opinion, is the author of "Mortal Splendor: The American Empire in Transition" (Houghton Mifflin). He is now working on a book about U.S. foreign policy for the Twentieth Century Fund</i>

NEW ORLEANS —

“Europe in Turmoil!” the headlines screamed. “European Rate Mechanism in Crisis!”

“So what?” most Americans yawned. The European Rate Mechanism, or ERM, is a system to stabilize the values of Europe’s currencies. Most member currencies were not permitted to rise or fall more than 2.5% against the others. Attacks by currency speculators drove the pound and the lira from the system a year ago; attacks this summer on other currencies were so overwhelming last week that the system was, for all practical purposes, dismantled. European currencies can now float by as much as 15%.

In the short term, the collapse of the ERM was good news for the United States. The end of ERM, sooner or later, means that Western Europe’s recessionary economies will slip out of the tight monetary straitjacket that the German Bundesbank has imposed. As the Europeans loosen their monetary policies, their economies will pick up steam and they will order more U.S. goods.

The turmoil in Europe’s money markets also makes it harder for the European Community to assert itself forcefully in the General Agreement on Tariffs and Trade talks. Just as these negotiations move into a new and intense phase, some of America’s most powerful economic rivals are fighting among themselves rather than working together to cut the United States down to size. American spokesmen piously sympathized with their European friends in public, but underneath Washington was gloating.

Few Americans understood the importance of the ERM to Europe--and its long-term importance to the United States. The dollar has been fluctuating for years, and the only people who notice are tourists on foreign vacations and financial managers of international businesses. For tourists, these fluctuations are no worse than annoying, and the financial managers long ago learned to use sophisticated hedging strategies to control their risks.

Things work a bit differently in Europe. Economically, the 12 European Community members are so closely integrated that even small currency fluctuations wreak havoc with trade. For the last seven years, Europe has tried to overcome its persistent unemployment by building the European Single Market--an EC-wide program to reduce all trade barriers. This was supposed to stimulate growth and reduce unemployment, but without stable currency values the Single Market can’t work. Result: With unemployment headed toward record levels, Europe’s governments have no strategy to cope with joblessness and recession.

Worse still for Europe, the ERM was to be the foundation for European Monetary Union. This EMU, the creation of a single currency for the entire community, would serve as the basis for the European Political Union. This would have meant the end of Europe’s national rivalries and the creation of a European superstate that could challenge America and Japan for world leadership.

Now Europe sits in the rubble of its project for union. With wars in the Balkans and the Caucasus, with its economy deep in recession and its governments divided, Europe is beset by problems that its leaders do not fully understand and cannot solve.

The crisis of Europe hits some countries harder than others. Germany, for example, has its own fish to fry, and, obsessed with the internal problems of unification and the mix of opportunities and dangers to its east, has little attention to spare for the troubles of its EC partners to the west and south. Italy, forced out of the ERM system a year ago, is preoccupied with jailing its business and government elite. Britain is relieved to see the Maastricht plan for union falling apart even as Britain finally ratified the treaty--the dream of European union was always a nightmare in London.

The big loser is France. French ego, as well as French interests, were deeply involved in the system that has just gone belly up. The ERM and the close relationship between the mark and the franc were visible symbols of France’s “special relationship” with Germany. Acting together, these two middle-sized powers would bring Europe together into a single great power that would--at last--put the Americans and the Japanese in their place. France would have recovered the global greatness it had lost in 1940. This vision shaped French policy under President Francois Mitterrand. When Mitterrand took office, Germany was still divided, and France could hope to remain Germany’s political equal--even if its economy could not keep up. But the partnership no longer looks equal. “France is a mistress that Germany can no longer afford to keep,” trumpeted a leading German newspaper as Europe’s finance ministers wrestled with the future of the ERM. The future of Europe--and the French franc--is now in German hands and France must adjust to this.

The result won’t be pretty. Ever since the Berlin Wall came down, Western Europe has been slowly sinking back into the swamp of sterile national rivalries that have led to so many wars in the past. The outlook after the breakup of the ERM seems to be more of the same.

So what, many Americans still say. The Europeans haven’t amounted to anything since World War II. What effect could quarrels among France, Germany and Britain have on the United States?

The answer, unfortunately, is plenty. America’s Cold War European allies are the most valuable and dependable partners the United States has in the dangerous days ahead. There is nobody else to help us help Russia, and nobody else to help us contain Russia if things go wrong.

Moreover, Western Europe and the United States are both modern consumer democracies. Unlike Japan and the East Asian tigers, the European countries believe in high-wage economics. As world negotiators hammer out the details of the international trading system of the 21st Century, Europeans and Americans must work together to ensure this system protects the social order of the West. Child labor, prison labor, low wages, systematic exploitation of women, environmental degradation: Western Europe is America’s most dependable ally in the fight to ensure that the global trading system acts to limit rather than to spread these and other abuses.

The Europeans brought this latest disaster on themselves. The vanity of the French, the ham-handedness of the Bundesbank, Helmut Kohl’s catastrophic handling of German unification, the impracticality of both the Maastricht accord and the ERM itself; British dithering and the overreaching ambition of the EC bureaucrats in Brussels: There is enough blame for all of Europe’s leaders to share. But that is now in the past.

European leaders immersed in petty quarrels and European nations obsessed by ancient rivalries cannot be the strong outward-looking partners the United States needs. As Europe absorbs the aftershocks of the collapse of its plans for political union, the United States needs to be there for its friends. Germany must know that the United States is ready to support its efforts in the east and help smooth its relations with the west. France must understand that the United States believes not just Europe but the world needs to hear an independent French voice. The British must know the United States still believes in the special relationship.

As so often before in this century, the Europeans have stumbled; the United States must--not out of altruism, but for its own interests--help its allies find their feet.