As impressive an achievement as European monetary union may be, it is not a sufficient condition for regarding the 11 participating members as a single entity. While that remains a key goal, it is important to understand the degree to which national interests still conflict, particularly as the debate over reforming the European Union's budget looms. Unlike previous issues facing the pan-Europeans, however, this debate is being framed not by ideological issues but by the pursuit of simple crude national interest -- and that makes the problem so intractable.

The pressure will only be heightened by broadening the EU to include countries in Central and Eastern Europe. Six countries (Poland, Czech Republic, Hungary, Slovenia, Estonia and Cyprus) could be ready to join in 2003. Given their level of development, these countries are bound to be on the receiving end of EU transfer payments.

This heightens the pressure on individual member countries to reduce their budget deficits. Ahead of a recent summit, the Belgian prime minister aptly summed up the problem: "Nobody wants to pay more. Some want to pay less. Nobody wants to get less, and we all have to spend more for enlargement."

Germany wants to reduce its net annual contribution of some 11.5 billion euros. Former Chancellor

Helmut Kohl

agreed to large contributions and generous subsidies to demonstrate Germany's commitment to Western Europe in the 1980s. Since the unification of the country and the commitment to share the virtues of the mark by accepting the euro, German leaders (including Kohl toward the end of his tenure) have had less political need to demonstrate solidarity and less material ability to be as generous. Embarrassingly enough, Germany itself needed something even more flexible than a literal interpretation of the Maastricht Treaty to meet the requirements of monetary union. Germany resorted to some accounting techniques that allowed it to claim its budget deficit was within the 3% ceiling and to claim that its debt was within the 60% limit.

Buying the Vote

Nearly 85% of the EU's 90 billion euro budget is spent on two areas: farm subsidies and infrastructure projects for poor areas. The former accounts for a full half of the budget, which testifies to its political power, considering that the agricultural sector employs only around 5% of Europe's workforce and accounts for less than 2% of its

GDP

. That's because, along with the Coal and Steel Community, the Common Agriculture Program, or CAP, provided the basis for European economic integration.

This key political quid pro quo, in fact, both fostered a Bonn-Paris unity and in turn is the foundation upon which the rest of the EU edifice was constructed. Retracing those steps, Berlin now argues that national governments should pay a share of agriculture subsidies, which currently are fully funded by the EU. Recognizing the need for some reform, France proposes a gradual reduction in farm subsidies as a practical way to limit expenditures.

The latest compromise proposals, which were not in the end agreed upon, would have capped agricultural spending at 47 billion euros through 2006, rather than the 40.5 billion euros insisted upon by finance ministers. An agreement seems unlikely ahead of the self-imposed deadline of the Berlin Summit on March 24.

The German-French fissure is not the only fault line. The North-South divide, which is really a rich-poor issue, rears its head whenever issues of redistribution dominate the agenda. Stabilizing expenditures means different things depending on where you sit. Using a seven-year average, prosperous Northern countries want to cap aid to poorer areas at 190.5 billion euros for the next five years. Less prosperous Southern countries favor a more generous resolution and wish to freeze transfer payments at 1999 levels of about 216 billion euros.

Another source of contention is the U.K.'s 3.2 billion euro refund, which was craftily negotiated by the ultimate euro-skeptic,

Margaret Thatcher

. (Thatcher demanded that the U.K. receive a 1-pound rebate for every 1.5 pounds Britain pays to the EU as its concession for not casting its veto.) Even though current U.K. Prime Minister

Tony Blair

doesn't share ideological common ground with his Tory predecessors, he defends the rebate as adamantly, even if not as colorfully, as his illustrious predecessor. No lofty principle is at work, only naked self-interest. The rebate is a bald concession that will be defended by those who enjoy it and looked jealously upon by those who don't. Expect the debate on this to heat up in coming months.

A Risk of Spillover

German Chancellor

Schroeder

has already warned that if these issues are not resolved, the euro will likely come under pressure in the foreign exchange market. This is a clumsy use of scare tactics. Many, including some in Schroeder's own government, appear to welcome a weaker euro as a stimulative salve in lieu of a rate cut by the

European Central Bank

. Nor will agreements to cut subsidies to farmers or to freeze spending on infrastructure projects in southern Europe reverse the euro's weakness by themselves.

Like the proverbial committee that tries to create a horse and winds up with a camel, European officials are known for their compromise formations. And yet the traditional path whereby they reach agreements to disagree and postpone painful decisions to some distant date may now work against Europe's long-term interests. Europe is now engaged in a process similar to pouring the foundation of a house. Shortcuts at this stage could jeopardize EU enlargement, the next round of world trade liberalization talks and Europe's own efforts to improve economic efficiency.

Fred Bergsten reminds us again in the latest issue of

Foreign Affairs

that what the U.S. confronts in Euroland is an equal or superior force -- and to which it may ultimately lose its seniority -- the dollar's key role in the international economy. And yet the debate over Agenda 2000 raises a question that Bergsten would rather assume away: Is there sufficient cohesiveness in Europe to regard it as a single actor?

These substantive and procedural issues suggest the EU is no more a cohesive unit than are the various assortment of countries (Argentina, Panama and Russia, among others) that use the U.S. currency and whose interest rates are largely determined by the

Federal Reserve

. The prophets of doom who warn that the U.S. is soon to be eclipsed by Europe are mistaken -- because they confuse monetary union with union.

Marc Chandler is an independent global markets strategist. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to mchandler@erols.com.