It's Time for Americans to Face the Changes in Europe

IT is hard to believe all the good news on at least one sector of the foreign policy front. For 40 years we have urged the Europeans to unite; now they are uniting. The first expression of this policy was in the North Atlantic Treaty, primarily a military alliance designed to protect Western Europe against the Soviet bloc. It has been a resounding success.

Now the Soviet threat has disappeared and with it so has the main reason for NATO. With respect to economic and political cooperation, the Europeans have taken matters into their own hands, as the US encouraged them to do. The European Economic Community will become a reality in 1992. It will be the world's largest unit - bigger than the US, bigger than Japan.

French President Mitterrand and German Chancellor Kohl are suggesting that the unification process go beyond economics and embrace a political union. The suggestion follows an internal European logic that has been developing for several decades. It becomes particularly timely because of the problem posed by another unification process, namely, that of East and West Germany.

The last remnants of Hitler's Reich went up in flames 45 years ago this month, but so monstrous were the horrors which it unleashed that the prospect of a resurgent, unified Germany causes nervousness on both sides of the Atlantic. The best way to calm these fears is to envelop Germany inextricably in a European union. The idea is to make Germany European - not, as Hitler tried, to make Europe German.

So far, so good. But now separate and urgent questions arise for policymakers in London, in Washington, and in Tokyo. For London, there is no real choice, much as this may pain Prime Minister Margaret Thatcher. The European train is leaving the station. If Great Britain goes with it, Britain can have a say about the direction it takes and can share in the prosperity which it will almost certainly enjoy. Otherwise, the British can sit on their own little island where they can share impoverishment and undiluted sovereignty with each other.

The decisions are less pressing in Washington and Tokyo, but no less important. For the US and Japan, Europe must be open - its economic policies must be oriented toward free market principles, and its politics must be democratic. Our leverage is limited. Our best hope is that the Europeans will see such policies to be in their own best interests.

There is reason to think Europe will do so - if we practice the open market policies we preach. If we take a protectionist course under pressure from trade deficits or competition from imports, we will provoke the Europeans to do the same. This also applies to Japanese policies vis-`a-vis Europe.

A system of three enormous trading entities is emerging - Japan, the US and Canada (which have free trade with each other), and the European Community. These entities have most of the world's wealth and most of its productive capacity. The Soviet Union no longer counts. It still has enough nuclear firepower to blow up the world, and this needs to be reduced in case Gorbachev is succeeded by an irresponsible government. But in economic terms, the USSR is possibly on the level with Brazil.

Now for the bad news. The US still counts, but it is not as strong as it once was. We must take advantage of the opportunities provided by new world patterns so that we no longer depend on others to finance a life style beyond our means. For the last decade, we have borrowed from foreigners, mainly Japanese and Germans, to finance the deficits in our federal budget and in our foreign trade.

In the last four months, the Japanese stock market has lost almost one-third of its value. In the last six months, the West Germans have decided to spend perhaps 200 billion deutschemarks to replace the worthless East German currency. If the Japanese have fewer yen, and the Germans have fewer marks to lend to the Americans, the Americans are going to have to find more dollars.

We can do this through saving, which will be painful now, or through inflation, which will be painful later. Politicians and most other people like to postpone pain, and that will be the wrong choice.