(FORTUNE Magazine) – Managers and investors are starting to realize that Western Europe may well be the fastest-growing market for a host of businesses in the 1990s. Says Federal Express vice president Christos Cotsakos: ''Everybody talks about the Pacific Rim, but Europe is the sleeping giant.'' The economic picture hasn't been so good in 15 years. The European Community's drive to create a single market of 320 million free-spending consumers by the end of 1992 has become a potent engine of change. In a single, pivotal decade, Europe will transform itself from a poky economic patchwork into a unified, fast-paced marketplace loaded with opportunities. The Continent's sunbelt, particularly booming Spain, is adding a special lift. Governments are determined to make Europe's comeback more than a cyclical blip. They are sticking tenaciously to the free-market programs that sparked the revival. Pro-business policies have turned out to be good politics. Most of the leaders who orchestrated Europe's right turn in the late 1970s and early 1980s -- conservatives Margaret Thatcher of Britain and Helmut Kohl of West Germany, socialists Francois Mitterrand of France and Felipe Gonzalez of Spain -- are still in power. Says J. Paul Horne, an international economist with Smith Barney in Paris: ''Politically, the Rubicon has been crossed.'' ; There are some doubters. Says Roger Hornett, deputy managing director of the London brokerage firm of Sassoon Ltd.: ''Europe is the oldest cartel in the world, so why should it change?'' He thinks 1992 will squeeze profit margins. Even optimists concede that one price of progress will be pain. As protected markets open, many European companies will lose market share to new competitors. Such protected industries as retail banking, coal, and electric power generation will shed jobs. Still, some perennial pessimists are brightening. West German economist Herbert Giersch, who coined the term ''Eurosclerosis,'' says he's optimistic now: ''By creating a large market, 1992 gives Europe the opportunity to overcome its structural problems.'' Former naysayer Walter Seipp, chairman of West Germany's Commerzbank, is positively rhapsodic: ''Eurosclerosis has become Europhoria!'' As incomes rise and tastes become more uniform, Europe will turn into a booming market for consumer goods from appliances to soft drinks. Deregulation will trigger growth. Businesses that have been held down by regulation and government monopolies, such as advertising and telecommunications, will grow far faster in Europe than in the U.S. Foreign companies will be able to break into protected national markets for the first time. In general, U.S. companies are superbly positioned to profit from the single market. For years multinationals such as Ford, IBM, and 3M have been tackling Europe as a whole, while their European competitors have depended heavily on home markets. Fiat sells three out of five cars in Italy, but not many elsewhere on the Continent. Ford is a power in every major market. That will change fast. European companies have begun to think of themselves as multinationals with or without the deregulation of 1992. Says Roland E. Schucht, a Swiss who heads Translink, a Paris company specializing in mergers and acquisitions: ''Ten years ago most Europeans wouldn't consider buying a company in their own country, let alone making a foreign acquisition.'' Now a proliferation of cross-border alliances is creating a new generation of European companies big enough to take on U.S. and Japanese giants.

U.S. companies are rising to the challenge. They honed their competitive edge by spending $20.9 billion in 1987 to buy companies and build plants in Europe, 28 times the figure in 1982. Says Dan Tyree, head of European investment banking for Salomon Brothers: ''The awareness of the importance of ! Europe has been building in the last year. The surge in U.S. investment will continue to be a big trend.'' A host of U.S. companies -- including appliance producer Whirlpool and newsprint manufacturer International Paper -- are crossing the Atlantic for the first time. Asher Edelman, the New York investor and corporate raider (Burlington Industries, Fruehauf), has set up shop in a chalet in St. Moritz. ''I moved here because I can do better business in Europe than in the U.S.,'' he says. The catalyst is 1992. Though the EC may not reach its goal of eliminating all technical, physical, and fiscal barriers by then, the symbolic impact is nearly as important as the program itself. Says Jurgen Aumuller, president of American Express Travel Services in Europe: ''It's a concept, not a date.'' Some measures, notably the controversial plan to harmonize value-added taxes, may take until the turn of the century. But momentum is building. So far, 125 of the 265 directives related to 1992 have become EC law. The underpinning is Europe's sturdy economic outlook. The EC's gross national product rose 3.7% last year, a 13-year high. The EC foresees growth at 3% to 3.5% annually in the 1990s, almost twice the pace in the 1980s. ''Three years ago growth seemed to be stuck at 2%,'' says Michael Emerson, an EC economist. ''Now, presto, we're just where we want to be.'' Strong growth is starting to budge Europe's bogyman, chronic joblessness. Europe is creating 1.5 million jobs a year, the most since the 1960s. In Britain, 1.2 million unemployed have gone to work since 1987, cutting the rate from 12% to 7.2%. Overall European unemployment -- now about 10% and falling -- should continue drifting down in the 1990s. INFLATION is also being kept at bay. During the past two years, prices edged up just over 3%, the smallest increase in two decades. There are signs of overheating in Britain, but Europe is determined to tame inflation by sticking to tight monetary and fiscal policies. Says U.S. economist Milton Friedman: ''Europe's change to conservative monetary policy is a major structural improvement.'' Investment is soaring, largely because of a sunnier labor climate. Wages rose 3.8% last year, about half the increase in 1984. That helped boost profits. Cash-rich companies in France, West Germany, Italy, and Britain spent a record $52 billion last year on equipment, 14% more than in 1987. A recent poll of 460 French chief executives by the business magazine L'Expansion found corporate leaders in their most buoyant mood in a decade. More than half said they plan big investment increases in 1989. Nowhere are the prospects more alluring than in Spain. From Madrid's new skyline to Barcelona's high-tech parks, it is becoming the California of Europe. Newly admitted to the EC, the country hopes to achieve a standard of living on a par with Italy's by the turn of the century. Spain's growth rate -- now around 5% -- is about equal to Japan's. In addition to its balmy weather, Spain has two major attractions: a big home market of 39 million increasingly affluent consumers and an inexpensive skilled labor force. To bolster weak local industry, the government is welcoming foreign investment as never before. Last year foreigners put some $5 billion into Spain, double the figure in 1986. Drawn by the warm welcome -- and lush golf courses -- Japanese are flocking to Barcelona. Kao, a Japanese maker of soap, cosmetics, and other household products, supplies the rest of Europe from three plants there. Says Katsuji Kasutani, Kao's general manager for Europe: ''Wages in Spain are about a third less than in West Germany. And we see Spain itself as our fastest-growing European market.'' Demographic changes will help the sunbelt. Western Europe's labor force grew rapidly in the early 1980s as baby-boomers born in the mid-1960s flooded the job market. Growth will slow dramatically in the 1990s, but with large regional differences. The labor force will begin shrinking in northern Europe in the late 1990s, while continuing to grow in the south, where birth rates remained high until the mid-1970s. The combined work force in Spain, Portugal, and Greece will increase by about half a million a year. Strapped for workers, companies in the north will build plants and research centers in Spain or even Portugal. For the swelling ranks of northern retirees -- Germany alone will add six million by 2000 -- the good life to the south is a powerful attraction. In the 1990s German and Dutch pensioners will settle in Spain or Portugal the way New Yorkers retire to Florida. In some industries Europeans have already toppled U.S. competitors from dominant positions. Two notable examples are electric generating equipment and packaging. Europe's $35-billion-a-year electric power equipment industry is suffering from the worldwide slump in power plant construction. Business should pick up in the 1990s, however, as utilities replace old equipment with new, high-tech turbines. Until recently the European industry suffered from too much capacity, too little R&D spending, and too many companies. Only West Germany's Siemens ranked alongside GE and Hitachi. But 1992 has triggered a massive consolidation. The shakeup started 18 months ago, when middle-size producers Asea of Sweden and Brown Boveri of Switzerland surmounted national borders and nationalist pride to form the world's largest power engineering company (1988 sales: $18 billion). General Electric Co. of Britain plans to merge its power engineering business with France's Alsthom to create the world's second-largest such company behind ABB. The once fragmented European industry is now dominated by three huge companies: ABB, GEC-Alsthom, and Siemens. Says Percy Barnevik, the gangling Swede who put together ABB: ''It's amazing. The consolidation that hadn't happened in 50 years all of a sudden happened in less than two.'' Europeans have moved even faster to wrap up the world lead in packaging. Until late last year the biggest makers of aluminum cans, plastic bottles, and other packaging were American or Japanese, led by American National Can and Toyo Seikan. Europe's $50-billion-a-year packaging industry is dotted with dozens of small and medium-size companies. The Percy Barnevik of packaging is Jean-Marie Descarpentries, chief executive of the French group Carnaud. A burly former consultant with McKinsey & Co., Descarpentries often terrifies his subordinates. ''You have the right to err,'' he declares. ''Once!'' Since 1982, Descarpentries has quadrupled sales to more than $3 billion by acquiring some two dozen European companies. He has generated huge savings by concentrating production in large plants serving all of Europe. HIS BOLDEST move came last October, when he put together a $1.4 billion merger with Metalbox Packaging of Britain that created the biggest packaging company in Europe and the third largest in the world. The Europeans didn't stop there. In November, French aluminum producer Pechiney, then a packaging pygmy, became the world leader overnight by acquiring American National Can for $1 billion. Spurred by the European challenge, U.S. companies are scrambling. ''In the 1990s things will get a lot tougher for U.S. multinationals,'' says Eric Friberg, the managing director of McKinsey in Brussels. ''But they're not standing still.'' With 1992 looming, even the best-integrated companies are out to achieve new cost savings by organizing manufacturing, distribution, marketing, and R&D on a more pan-European basis. Says Harry Hammerly, head of European operations for 3M: ''The 1992 deadline has had an important psychological impact. It led us to become even more European by making improvements in production and marketing that we could have made before, but never thought of.'' For Honeywell the key is to develop high-tech products tailored to the European market. Says European President Jean-Pierre Rosso: ''To fight back against competition from the Europewide companies, we need to be the technological leader.'' Over the next five years he plans to double R&D spending to as much as $50 million annually. In Europe toys are sold through tens of thousands of mom and pop shops. But U.S. retailer Toys ''R'' Us is betting that its formula of big stores offering everything from dolls to candy to computers will be a winner. This year Toys ''R'' Us is spending $90 million to build 15 stores in Britain, France, and West Germany. By 2000 it expects to invest $1.5 billion more to expand to 300 stores. European travel agencies suffer from the same mom and pop syndrome. American Express was ahead of its time in building a European chain of 300 agencies. Now it can cash in on 1992. Lower air fares resulting from airline deregulation should lead to a big increase in travel within Europe. American Express expects to grow 20% a year in Europe during the 1990s. Federal Express is organizing warehousing and distribution for European companies. Its European business, now estimated at $200 million a year, is growing 80% annually. Says vice president Cotsakos: ''It's an incredible, exploding marketplace.'' Three sectors that will be transformed by deregulation are telecommunications , financial services, and advertising. In the past nationalized telephone companies in each country have held a monopoly over everything from the sale of mobile phones to the supply of data services. Most governments are abandoning their monopolies to prepare for 1992, opening the field to private suppliers. From 1988 to 1992, sales of communications equipment are expected to expand twice as fast as in the U.S., growing from $70 billion a year to $105 billion. Says Hugh Small, a European director with Arthur D. Little in London: ''Europe is way behind the U.S. because governments had a stranglehold. But the boom is coming.'' A major beneficiary is AT&T. Since 1984 it has been trying with little success to market its superb technology in Europe. The breakthrough came in January, when Italtel, Italy's state-owned telephone equipment maker, chose AT&T as its partner in a five-year, $27 billion program to update and overhaul the country's aging phone system. The deal ensures AT&T a position in the European market alongside Alcatel, Siemens, and Sweden's Ericsson. The most sweeping changes are coming in the $300-billion-a-year mutual fund business. Each EC country has separate regulations and time-consuming registration procedures that have locked out foreign competition. But starting in October, companies will be able to sell funds approved in one EC country in any of the other 11 member states. Europe's top money managers are ready to pounce. Cigna, the U.S.-based financial services company, is preparing to market its investment funds on the Continent. Wardley, a Hong Kong-based investment manager, has signed deals with banks in Spain, Italy, and France. Foreign money managers will still have trouble selling funds directly to consumers, chiefly because of restrictions on advertising in most countries. Says Robert Gogel, a senior vice president with MAC Group in Paris: ''It will be a long, tough process. But by the turn of the century, the markets will have opened.'' EXCITEMENT is mounting in advertising. With billings of less than $50 billion in 1988, the European ad business is about half as big as that of the U.S. But Europe's is growing faster. Billings are rising at 12% a year, double the U.S. rate. Says Coca-Cola executive vice president John Georgas: ''Europe is like the U.S. in the 1950s, when TV was just developing. For products like Coke that depend on TV, we're entering an explosive era with great growth potential.'' Governments that once monopolized broadcasting and tightly rationed ad time are issuing licenses to private broadcasters. Advertising agencies ranging from Britain's Saatchi & Saatchi to Japan's Dentsu are cleaning up. In the past two years Grey Advertising of the U.S. has spent $25 million buying companies across Europe. It has doubled billings to $1.4 billion. The growing availability of TV advertising is pushing companies to expand and launch new products. In the decade of the 1990s Europe will become more and more a U.S.-style consumer society. Countries will retain their own tastes, cultures, languages, and almost certainly their own currencies. But for the first time, Europe won't be severely handicapped by its divisions. Economically, 320 million consumers will be speaking with one voice. Catering to Europe's finicky new consumers will take companies that are big, agile, and pan-European. For those that can meet the challenge, Europe will be an exciting new frontier of growth.