Another Decade Of Diversity.

The big bang is done. The champagne's been drunk. A new Europe stretches from Lisbon to Latvia. And now what? The reality is that the EU's troubles are just beginning. History suggests that successful international cooperation rests ultimately not on abstract rules but on convergence. As the great Hungarian economist Karl Polanyi observed more than a half century ago, any stable economy must balance the disruption of market forces with the protection of diverse socioeconomic and political arrangements. If the underlying diversity is too great, conflict results. So with a wider and deeper Union. The bigger it gets, the greater the challenge of managing its disparate parts.

This is why the EU has moved toward greater flexibility--"variable geometry," it's called in Brussels. Nearly all major initiatives of the past decade have been accepted by only a subset of the EU's membership. The single currency has yet to be accepted by three countries, and the elimination of border controls by two. EU social policy has settled on loose coordination. Foreign and defense policies are based on voluntary "coalitions of the willing." Yet even with this flexibility, the EU may well be nearing its maximum tolerance for diversity.

Consider the European Monetary Union, which seeks to impose a single monetary policy on a market region with divergent national macroeconomic conditions. For years, economists have cautioned that Europe's diversity might ultimately be unmanageable. Remember the doomsday scenarios centering on Italy, where it was feared that government incompetence, political corruption and fiscal irresponsibility would drive up interest rates throughout the entire Eurozone--triggering a political and financial crisis.

Today's culprit is Germany. One London think tank, Independent Strategy, sketches out a dire scenario: the continuing global slowdown, tight money and a rising euro will sap German export earnings, depress employment and consumer spending, and eventually drive Germany into a "Japanese" stagnation, taking the rest of Europe with it. The next two years, the group predicts, could be a "very dangerous time," with close to a 50 percent chance of things going horribly wrong.

The variety of the 10 new members--poorer, smaller and geographically distant from the "core" of the EU--is sure to exacerbate such tensions. Poland is a case in point. Private investment is sluggish. Uncompetitive nationalized industries, including the steel and energy sectors, must be integrated into the EU. So too its farmers. Public administration and courts are less than fully ...