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CONTINENTAL DRIFT

To build Europe, Charles de Gaulle once said, is to build a cathedral. But the architects of European union, with their monetary system now engulfed in crisis and with their vision of integration in limbo, are learning very fast what the creators of those architectural masterpieces knew centuries ago: The most ambitious blueprints are usually the first to fail.

The European Community's political and currency turmoil will probably take many months to play out. But the result is likely to be a revised plan for European economic union. Its new look: a far smaller and less competitive Europe than the broad 12-nation monetary and political union that had been envisioned earlier.

In the short run, Europe's increasingly strident debate over its future could resonate through the global economy and upset transatlantic relations. By voicing an ambiguous oui on Sept. 20 to the Maastricht Treaty on political and economic union, French voters neither restored momentum to Maastricht nor reversed what has become an endemic European currency crisis. Says Martin Kohlhaussen, chairman of Germany's Commerzbank: "Monetary union is remote. Euroskepticism is real."

Nor is the currency crisis abating. Dubious that Europeans can hold even their existing monetary system together, much less create a new currency, speculators have savaged the British pound, French franc, Spanish peseta, and other currencies. The massive assault has forced central banks to spend tens of billions propping them up and has raised fears that the confusion will soon spread to other financial markets around the world. Indeed, the dollar hit a postwar low of 119.65 Japanese yen on Sept. 23, as investors bailed out of Europe and America and headed for the comparative calm of Asia.

With German Bundesbank President Helmut Schlesinger backing a broad realignment of European currencies and unwilling to bankroll further intervention, the pressure isn't likely to let up. Indeed, turmoil in the monetary system threatens to break apart the integration process. It's now a "race against the clock," says Belgian Foreign Minister Willy Claes.

Nowhere is the race more intense than in Bonn and Paris. On Sept. 22, German Chancellor Helmut Kohl and French President Francois Mitterrand, Maastricht's prime movers, vowed to defend the franc and push ahead with the treaty. Their goal: to pressure Britain, the last remaining major holdout, into a ratification vote. Only such a vote might avoid a prolonged period in which traders circle Europe's weak currencies.

But time is working against Kohl and Mitterrand. As those leaders met, Denmark, whose voters rejected the treaty in June, said it would need until next year to submit to the people a second Maastricht referendum that included an option to abstain from monetary union.

ON TRACK. For his part, British Prime Minister John Major sees only danger in hurrying Maastricht. After building his political base at home around the idea of linking Britain more closely to Europe, it is crucial to his position that he get things back on track inside Europe. Still, it is likely to be months before Major will bring Britain back into the the EC's exchange-rate mechanism. On Sept. 22, he signaled that Britain would likely remain an outsider, by cutting official lending rates by one point, to 9%.

Major hopes to use a special EC summit in London on Oct. 16 to try to restore momentum to Maastricht, while he secures guarantees that Britain wouldn't suffer a repeat of the events that led to its embarrassing Sept. 16 exit from the monetary system. But putting off action in submitting Maastricht for approval to Parliament will put Major on a collision course with Kohl and Mitterrand. "The Brits are playing a dangerous game," says veteran EC watcher Stanley Crossick. "The French and Germans want to go faster. It will be basically a power struggle."

Meanwhile, with its referendum completed, France is plunging back into domestic politics. Although Mitterrand's term as President doesn't end until 1995, the virtual dead heat on Maastricht could speed his departure.

The ripples of the crisis will extend far beyond Europe's shores. From issues of international trade to security, Europe's self-absorption during its current redefinition calls into question its ability to move forward. "The EC was a strong counter to the fragmentation and instability that are taking place everywhere to the east," says one diplomat. "Anybody who thinks the transatlantic relationship will become easier to conduct is only kidding himself."

While the turmoil may have some competitive advantages for America, and although wider doubts about European union may buttress U.S. efforts to preserve NATO, Washington is a net loser from Europe's woes. Global trade liberalization talks could falter, as European countries turn inward. Yugoslavia's drift toward an all-out Balkan war now has even less hope of a Western brake. And America's long-term foreign policy agenda, which is dependent on help from allies, may be harder to maintain.

For now, Europe would be happy just to get its currency system back in sync. But success on that front may depend on further Bundesbank interest-rate cuts. The strong mark is already weakening Germany's export-led economy. But so far, the Bundesbank shows no intention of cutting rates beyond its meager mid-September actions. Instead, the bank is conducting a major mop-up operation in the German money market to stop the 70 billion marks it paid out recently to support the pound and lira.

To make matters worse, German money-supply growth -- the bank's key interest-rate indicator -- rose in August to a 9% annual rate. "It will be very difficult for the Bundesbank to find any domestic justification for cutting rates," says economist Richard Reid of UBS Phillips & Drew.

That's bad news for Europe's economy, already flirting with recession. While Britain cut rates, Italy had to keep its discount rate at 15% to protect the lira. France has raised rates, too. Investment, already moribund, is suffering further because of skepticism about the European outlook. "If this situation doesn't get unblocked in the short term, the consequence will be deindustrialization," warns Giorgio Bodo, top economic analyst at Fiat.

Whichever way the Maastricht drama plays out, however, the demise of a broad monetary union is giving way to a revised vision. Instead of a 12-nation union with a single currency and a single central bank, Europe is moving toward a "multispeed" Europe. In this arrangement, Germany's strongest neighbors, such as Belgium, the Netherlands, Luxembourg, and maybe France, would form an economic union that might include fixed exchange rates or even a common currency based on the German mark.

Weaker countries, such as Britain, Ireland, Italy, Spain, and others, would form a second tier, whose economic links to the core would be far looser. "The EC of two speeds is a reversal of the procedures of Maastricht, but it will definitely come," predicts Ernst-Moritz Lipp, chief economist of Germany's Dresdner Bank.

Whether inside or outside the Maastricht framework, a two-speed Europe would overcome the primary failings of the treaty's approach: the idea that divergent economies could quickly force themselves into alignment under the stable anti-inflation regimen of the Bundesbank (page 38).

UNBRIDLED CLOUT. But setting up even a more modest monetary union won't be easy. The first test: whether the French franc can hold its own in a mark-dominated core. After years of being more German than the Germans in pursuing anti-inflation policies, the French government is in the midst of trying to build the franc up to parity with the mark. Such monetary stability would provide a significant reassurance to a Europe worried about unbridled German clout.

But if the franc can't cut it, the credibility of any new EC institutions built on that core will be badly hurt. That's why Kohl and Mitterrand have vowed to support the franc in the current currency storm. Traders report that, since the crisis began, the Banque de France has thrown half its reserves into propping up the franc.

Still, given the open season on currencies that the Bundesbank has launched, the onslaught may continue. And the skeptics are numerous. Compared with the mark, the franc "is not as firmly attached as the anchor" of a core monetary system, says Hilmar Kopper, chairman of Deutsche Bank.

Strong as the mark is, a smaller monetary union built around it would still leave Europe less competitive than under Maastricht. Without the single currency, companies won't fully eliminate exchange-rate risks. And while core-country producers may enjoy less currency volatility, second-tier neighbors may be stuck with raised costs or lower margins, says Richard C. Lowry, head of European corporate finance at Chase Manhattan Bank (page 37).

For some, the evolution of the European dream is a stark prospect. Frets Andrea Bollino, chief economist at Italy's state-owned energy conglomerate ENI: "There will be only one Europe -- the mark area -- and the rest will just become bums." But as Europe hits the drawing board, what it comes up with may prove more durable than the utopian blueprint for one currency Europeans just can't swallow.Bill Javetski in Paris, with William Glasgall in Washington, Richard A. Melcher in London, Patrick Oster in Brussels, and Sabrina Kiefer in Rome


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