UK faces life on the outside looking in: Nightmare for foreign-policy planners

AS SUPPORT grows for a small band of states to press ahead with European integration on their own, British foreign-policy makers are confronting a nightmare. It is that they will find themselves once more on the outside of Europe looking in, after three decades of trying to build a commanding position on the continent.

It is unclear what form this new alliance would take. But Europe has started to break into camps even before any formal decision is made to push for a two-speed union. It is evident in the financial markets, in the statements of bankers and politicians, and in diplomatic rumours. Two-speed Europe is a misnomer, since it implies two equal sets of states with the same objective proceeding at different paces. 'Little' or 'mini' Europe, a term that has started to emerge over the past few days, is a more accurate description and a bigger threat. There would be tight links between the states in the 'core' but those outside would not have any particular cohesion or any direction.

There are pragmatic reasons, connected with financial stability, for one group to move ahead. Market logic has already separated out the sheep and the goats, as Britain and Italy have slid out of the exchange-rate mechanism (ERM) of the European Monetary System (EMS) and Spain, Portugal and Ireland have been forced to defend their currencies with exchange controls. Greece is not even a member of the ERM.

Germany, Belgium and the Netherlands are so tightly locked together that their currencies already form a bloc; Luxembourg has a currency union with Belgium. France has - so far - been able to keep the franc in the club, with a little help from its friends at the Bundesbank. Linking the currencies more formally would smooth instability, reduce the need to pump reserves into the markets and should lead to lower interest rates over time.

This need not take the form of a Maastricht-style process, involving pages of details and complex arrangements for policy-making. More likely, diplomats say, is a set of arrangements, built on the present EMS, which salvages something from the financial storms of the last two weeks.

But any such move would clearly have political implications. The group of states that would be eligible to proceed to tighter monetary union is also the core of efforts to push for political integration. The governments of Germany, France, and the Benelux countries were all founder-members of the EC. With fears rising that the existing structures of European integration are under threat, it is quite natural for them to want to push ahead.

Mini-Europe might have some odd consequences. Denmark, for instance, has rejected the Maastricht treaty on European union but its currency is so tightly linked to Frankfurt that it is hard to see how it could be kept outside any move to tighter monetary links. Equally, the German central bank marches in lockstep with those of Austria and Switzerland - neither of them members of the EC. Economically, if not politically, they already form a bloc.

Publicly, Europe's heads of government are still affirming their intention to press forward as Twelve. German diplomats say they want to keep the link with London but there is a clear threat implicit in Chancellor Helmut Kohl's statements: if Britain shows signs that it cannot ratify Maastricht, then Germany will lead the core to the promised land.

Members of Mr Kohl's Christian Democrat party want a Europe that embraces more than five, if only to save face. Italy was the sixth founder-member of the European Community, and being left high and dry would be a bitter defeat. It is wrestling with its economic problems, and trying to affirm its place in Europe. But financially it is in too much of a mess to be allowed membership of the rich-country club.

All this is grim news for London. Britain's efforts to build a position at 'the heart of Europe' go back to the 1960s, through its attempts to gain entry to the EC and the rows of the 1980s. While never being committed to the federal ideals which many of the other states held so dear, it has tried to put its stamp on the EC. Under John Major, the British government emphasised its long-term commitment but angry backbenchers and the winds of high finance and have blown it off course.

Alarm bells are starting to ring in Washington. The United States is publicly sanguine about what is happening in Europe but privately, its diplomats express despair. They see a continent that looks inwards and which is circling the wagons. British involvement in Europe helped to mitigate this to some extent: London pressed for closer relations with eastern Europe and for rapid enlargement of the Community. Both aims have been complicated by the last two weeks' turmoil. Formation of a 'hard core' might also lead to intensified defence co-operation in Europe, further weakening the Atlantic relationship.

For British policymakers, the most worrying thing about a core group racing ahead is that it would represent the first signs of a return to the balance-of-power politics which has characterised European politics at its most unstable.

The Community 'method', which the high priests of European integration have always espoused, counsels against this. Instead, it is based on keeping all states equal, formally at least. But the formation of a core group would gravely weaken the existing Community. Britain's traditional policy of avoiding a continental commitment is aimed at remaining formally outside entangling alliances, and preventing any one state from attaining a hegemony in Europe. It is a policy objective that goes back over a century. If Germany goes forward with its Little Europe, British policy will have failed at every level.