Europe Searches For New Means To Mend Union

French, German leaders meet to repair ties amid worries of economic renationalization. A WAKE-UP CALL?

CAN the shambles of Europe's aspirations for monetary union, with a single currency, be salvaged?

Two weeks after a currency crisis that resulted in a virtual suspension of the European Community's Exchange Rate Mechanism, more question marks than answers surround the issue.

Currencies that had been banded to each other are now in a virtual free float, causing some analysts to predict a renationalization of economic policies that will fuel greater divergence in economic performances among EC nations, and thus a retreat from the dream of a single currency by 1999.

Other observers expect the crisis to awaken Europe's political leaders to the need for even closer economic cooperation, with a bid to limit currency instability prompting an accelerated push toward monetary union among a core of EC countries.

"This crisis will not be the departure into a renationalization of economic policies, but an alert to reverse a focus on purely national concerns that has been building over the last 18 months," says Rene Lasserre, director of the Center for Information and Research on Contemporary Germany in Paris.

"There will be a rethinking of monetary union as envisioned in Maastricht," the still-unimplemented EC treaty that calls for a single currency, "that will result in quicker union among a hard core of continental countries," Mr. Lasserre adds. "These countries, and Germany especially, have profited too much from monetary stability to give it up."

The currency stability promoted by the EC's monetary system has encouraged trade and helped make the EC the world's most prosperous free-trade area. But do political leaders have the tools to enhance economic cooperation, especially amid Europe's deepest postwar recession and Germany's costly reunification process? After a crisis that showed the reduced impact of national leaders in a global economy, some analysts have their doubts.

"I'm afraid [faster monetary union] is wishful thinking," says Klaus Friedrich, chief economist at Dresner Bank in Frankfurt. "I don't know if governments can agree on greater cooperation during an economic crisis, and the foundations and statutes for closely coordinating policy aren't there even if they could." Franco-German ties

Yet important signals on the determination of European governments to defend and enhance economic cooperation will become clear soon, observers agree, during a rush of high-level meetings culminating in a special EC summit in Brussels at the end of October.

As always in European integration, the determining factor will be France's and Germany's ability to put cooperation above short-term interests. "France and Germany remain Europe's motor," Lasserre says, "and they are like two boats that are so closely tied together that they only go forward when they pull in the same direction."

A series of Franco-German meetings in coming weeks also will be crucial, especially when French Prime Minister Edouard Balladur visits German Chancellor Helmut Kohl in Bonn Aug. 26. After the strains the crisis placed on the relationship, observers will be looking for signs of cooperation on European integration.

Among the topics the Balladur-Kohl meeting will address:

* Economic policy. The two countries could take new steps to stimulate growth and thus trade between them. Rumors are circulating in Paris of joint cuts in income taxes to promote consumption, although German officials say this will be difficult without some relief on reunification costs.

* Monetary policy. The two leaders could reiterate a determination to return to the tighter fluctuation bands of the Exchange Rate Mechanism, with perhaps even a proposed timetable for the October EC summit to take up. With the biggest threat to stability being a too-fast decline in French interest rates and a continued appreciation of the deutsche mark, Dr. Friedrich says, the two nations could signal a determination to moderate that trend.

* GATT and reunification. France and Germany have been at loggerheads over international trade-liberalization negotiations under the General Agreement on Tariffs and Trade, with France insisting on a tough stance concerning farm trade. At the same time, Germany, left to finance the costs of reunification on its own, has kept its interest rates high to the detriment of the rest of Europe. In exchange for Germany's cooperation, France could soften its GATT stance and propose EC help in paying for reunifica tion. Divorce is unlikely

Much has been made in recent weeks of a Franco-German "divorce" caused by diverging economic needs, but analysts say a separation is impossible because the two have grown more economically interdependent in recent years.

"France has become much more Germany's economic equal than when their cooperation began, and Germany is developing its political power," notes Ingo Kolboom, director of the France-Germany Research Center of the German Society for Foreign Affairs in Bonn. "There will always be tension between the two, but their growing equality makes economic cooperation even more indispensable."

Europe's economic reality as revealed by the currency crisis may require more "flexibility" than envisioned by the framers of Maastricht, Dr. Kolboom says, and more realism. But most observers expect a stability-starved Europe to hold on to a goal of monetary union - even if it doesn't happen until the next century.

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