At a lunchtime meeting on 11 November, Rudiger Dornbusch discussed the prospects for European unification in the light of recent developments in the ERM and in the East. Dornbusch is Ford International Professor of Economics at Massachusetts Institute of Technology and a Research Fellow in CEPR's International Macroeconomics and International Trade programmes. Financial support from the German Marshall Fund of the United States for this meeting is gratefully acknowledged. The views expressed by Professor Dornbusch were his own, however, and not those the German Marshall Fund nor of CEPR, which takes no institutional policy positions.

Dornbusch maintained that Europe is trying to solve new problems with old mechanisms, in four main areas. First, the current rift in trade negotiations between the US and the European Community is unnecessary but highly dangerous. Neither the Bush Administration nor the incoming Clinton team has shown any support for protectionism; obstacles to progress to date have come entirely from the European agricultural lobby. Second, there is widespread popular disenchantment with `Brussels' in many EC member countries. A strong Franco-German alliance underlay the Community's early institutional development, but its further integration now requires that the Commission effect major and controversial changes in the regulation of markets for relatively little pay-off.

Third, in the `summer crisis' on European currency markets, member countries proved unable to maintain their parities in the face of speculative attacks. A competitive depreciation by the countries of the EC South and indeed the Scandinavian countries would be the best means of reducing Germany's inflation through its effects on competitiveness and import prices, while also reducing interest rates throughout the Community. But France, Germany and the Benelux countries should continue to push for a core monetary group, by suppressing their exchange rate margins and exercising joint monetary policy, so the countries currently `ruled by the Bundesbank' would rule it instead. Instead, the attempt to achieve monetary integration across Europe as a whole means that expectations of exchange rate realignments now dominate the daily policy-making of EC member governments.

Fourth, and most important according to Dornbusch, the Community is currently proceeding as if the end of Communism had never happened. It is implausible to argue that transfers to Spain or southern Italy can raise overall `European' productivity more than transfers to the East, where they are needed to preserve political and economic stability and to arrest potentially unlimited westward migration. Unless Eastern Europe secures market access to the Community, together with modern treatment of foreign direct investment and intellectual property rights, it has no plausible prospect of economic transformation. Without closer links to the West, much of Eastern Europe risks returning to political and economic instability and then to autocratic government as seen in the 1920s.

Dornbusch maintained, however, that the real challenge facing the Community lies not in Poland nor the Czech Republic but in Russia and the rest of the former Soviet Union, where there is mounting evidence of economic collapse and uncontrolled nationalism. Following World War I, Austria took four years to undergo a complete collapse and hyperinflation, while Germany and Hungary took five years. Russia is now on that path, as are the Ukraine and Belarus. If the political agenda of West European governments is overloaded, they should abandon their current focus on Maastricht and face up to the challenge of minimizing the collapse in the East, in concert with the US and Japan. Dornbusch concluded that `One Europe' is necessary, but attention must concentrate on its `new' half. The end of Communism reminds us that the Franco-German cooperation that underpinned the founding of the Community was initiated to secure peace and prosperity: this is where the new Europe must start afresh.