Europe's Humpty Dumpty

AS Europe frets over Maastricht and tomorrow, government ministers and central bankers still have today to worry about.

Although the European currency markets have calmed after last week's tumultuous speculation, the French vote Sept. 20 did not wring all the uncertainty from those markets. The English pound, the Italian lira, the Spanish peseta, and even the French franc have continued to drop in value relative to the German mark. Traders are betting that in Europe's upended monetary system, the weaker currencies are still seeking stable levels.

In the short run, these devaluations may be beneficial. Certainly that appears to be true in Britain, where attempts to keep the pound at its prescribed exchange peg through high interest rates were only deepening the country's recession. In lowering interest rates this week, the Bank of England has signaled that, for now, British monetary policy will aim at stimulating the economy, whatever the cost to the pound.

It seems clear that Europe got ahead of itself in establishing a fairly rigid system of monetary coordination. The purpose of the exchange rate mechanism (ERM) to maintain stability in currency values among the members of the Economic Community - while the right goal for purposes of business planning and economic growth - is only as sustainable as underlying economic conditions allow. Those conditions changed dramatically when, at a time of international recession, Germany began to finance the costs of r eunification.

In withdrawing from the ERM, Britain and Spain acted prudently. They can't be expected to sacrifice economic health to Germany's domestic policy.

In the longer run, however, Europe must try to put the ERM Humpty Dumpty back together again, with some added flexibility. Volatile currency values are sweet for speculators, but they wreak havoc on business planning and work against the anticipated benefits of the EC '93 free-trade economic union.

The events of the past week have shown, though, that effective monetary coordination isn't just a matter for central bankers. It will require more effective government-to-government policy coordination, as well.