Choice for Europe may be to abandon its common market: Andrew Marshall reports from Brussels on the Community's struggle for survival

JACQUES DELORS walked into the conference room in the Charlemagne Building on Monday night, and he was not happy. It wasn't just sciatica that was causing him pain. 'The journalists down there say that there's no Europe any more,' he said. 'Are you going to prove them wrong?'

The 12 ministers in the room had failed to reach agreement on dividing up the EC's structural funds cash, and Mr Delors had been brought in to knock heads together. But clearly bigger things were on his mind. 'There's no family spirit any more,' he told reporters later. 'This is an anti- European state of mind.'

The European Community is slowly emerging from the frying pan of a crisis over the Maastricht treaty and has found itself in the fire. The new assault on the European Monetary System, targeted on the French franc, threatens to wreck the exchange rate mechanism. Agonisingly slow negotiations over trade are still on a knife edge. And beyond, there is the prospect of unemployment in the EC reaching 19 million next year.

In this context the long, obtuse arguments about pillars and trees, the discussions of the 'F' word and the logic of the second stage seem woefully academic. The cornerstone of the Community has always been co-operation on economic issues; and this co-operation is ebbing. Economic and Monetary Union, the mainstay of the Treaty on European Union, is in trouble. In short, the treaty that John Major has so painfully negotiated through Parliament looks to be virtually dead on arrival.

The arguments over structural funds are just one sign of a deterioration in EC bargaining, and the return to the member states of powers the European Commission once guarded jealously. Bruce Millan, the British commissioner for regional policy, was outflanked by the member states, each desperate for a bigger slice of the 141 billion ecu pie. Buying off each country cost Mr Delors dearly, but 'it was the price of peace', an EC diplomat said. In the process, the EC lost a number of powers over spending decisions.

Solving the crisis in the European Monetary System will not be so easy. The renewed attack by speculators on the French franc is likely to continue. If they do not win this time, they will return in the autumn. 'There is still clearly very strong pressure,' said Bernard Godemont of Nomura research institute in Paris. 'They will not let go.' But the French government is in a bind. 'If they let Europe go, then they let everything go,' Godemont said.

The problem is not just a French one; it is a function of the weakness of the system itself. 'The trouble is that the EMS is not a very successful vehicle for monetary union,' one London banker said. The markets do not believe that a single currency is on the way, or that France is ready to pay the price of high interest rates. There is a credibility gap.

The most ambitious plan to tackle this prescribes that the French and Germans lock their exchange rates, or otherwise signal their intention to move rapidly to a single currency. They would probably take Belgium, the Netherlands and Luxembourg with them. Two-speed union - splitting the Community - seems the only answer, particularly to central bankers weary of political indecision, Godemont said.

Unemployment is not subject to quick fixes. The latest forecast points to unemployment of 12.1 per cent in Europe by the end of next year, up two points from 1992. Yet the Community has laid down targets for fiscal policy that make expansionary measures all but impossible. Budget deficits and government debt must be brought down; and that means cutting spending.

Social policy has to bear a lot of the burden of putting Europe right, in the Commission's view at least. Padraig Flynn, the social affairs commissioner, is working on a new green paper. 'We have to have this; we need something to show people that Europe works,' said Wim Bergans, a spokesman for the European Trades Union Confederation. Zygmunt Tyszkiewicz at UNICE, the employers' organisation, agrees - broadly. But the employers want evidence of a more realistic attitude from the Community on social policy.

They will probably get it. Commission officials say a 'new approach' to social legislation will target results, not methods. It will focus on deregulation of labour markets while providing social protection.

The social protocol of Maastricht, Britain's great bugbear, is still an unknown. A document specifying its operation is still in preparation. It will be hard for the other states to accept Britain's exclusion, which will lead to accusations that the British are profiting from their own low social standards at Europe's expense.

Such fears are exacerbating trade tensions within the Community. Joblessness and falling growth have made every state more jumpy about concessions that involve opening up protected sectors. France last week demanded a 'jumbo meeting' of foreign and farm ministers to discuss reopening agricultural negotations in the General Agreement on Tariffs and Trade (Gatt). 'We must face reality,' Alain Juppe, France's foreign minister, said. 'We must reopen the farm dossier without waiting for the end of the year.' France has stated repeatedly that it wants to clip the Commission's wings and repatriate some elements of trade policy negotiation.

The waning of public support, the failures of national co-operation and the Commission's credibility gap all preoccupy Delors. It is around these three areas - trade, unemployment and social policy - that he is developing his strategy for economic renewal. It is a gamble, a calculated bet that with the promise of a big headline, some new cash and a package of reforms he can pull the 12 together as one again.

Papers are circulating throughout the city, pushed discreetly over office desks, handed over in cafes, and they are all on the same subject: competitiveness. The Commission's Forward Planning Unit, the Social Affairs Directorate, the trade unions, companies, all have their own strategy. The fundamental issue is: how far can the EC maintain open markets in the face of external threat?

There is a fear in Brussels that member states are going to re-nationalise policy, slowly bring control back to their capitals. The rationale is simple: if the Community cannot protect them from the instability of world markets, then they will do it themselves. Something of this kind is already happening in agriculture.

Maastricht began the trend, with opt-outs for Britain and Denmark on monetary policy, for Britain on social policy and for Denmark on defence. As a road map through the years to come, the treaty is 'pretty useless', an official in London said.

Will variable geometry work? This odd phrase means the fragmentation of Community institutions, the scattering of policies through different decision-making bodies. The Community method has always specified that all members proceeded at the same speed and in step.

There are two problems with this fragmentation of policy, linked to economic integration. First, it may not be possible to go further without confronting real obstacles. Enlargement of the Community is next on the agenda, first Sweden, Finland, Norway and Switzerland, then, perhaps, Malta and Cyprus, and then Poland, Hungary, the Czech Republic, Slovakia.

If all these countries keep their national vetoes, if they all belong to different security organisations, if they all keep their own agricultural policies, the meaning of the Community will have been diluted to the point where it hardly means anything. 'We are not just an arm of Gatt,' one official said last week.

Indeed, the EC may start rolling back. The 'bicycle' theory of integration - that if the Community is not going forward then it must go back - is largely discredited. But can the single market operate with a high degree of currency instability? 'These pressures will get worse, not better,' Godemont said. And can hard decisions be made when the rules of commerce are challenged? 'Without strong political will, the rules just cannot be made to work,' said the London banker.

For Britain, a Community dominated by rising national barriers and a division into two camps could be dangerous - fear of a two-speed monetary union has preoccupied British officials since last year.

This is what the EC is really about now: not form, arguments about structure, but content, the policies to restore credibility and stability. The debates in Parliament over the past year look antique from Brussel, at odds with what is really going on. To give him credit, Major has been saying just that; that the Community must now move on to more substantive issues, to Eastern Europe, Gatt, jobs. But as one EC official asked anxiously on Friday: 'Does anybody listen to him any more, even in Britain?'

(Graph omitted)