(FORTUNE Magazine) – EUROPE'S euphoria over the collapse of the Berlin Wall three years ago has given way to fear, insecurity, and rising hatred. Fascists have won elections in France, bitter strikes have hit Germany, and open warfare rages on the Continent for the first time since 1945. In Italy a young Mussolini has entered Parliament, and Germany has a crop of fresh-faced Nazis. Blame it partly on the current economic downturn. But to find the biggest cause of trouble in the European Community and the countries immediately surrounding it, look at the faces on this page. They belong to immigrants fleeing war, poverty, repression, or all three. For U.S., Japanese, and European multinational companies that have been banking on a unified market across Europe, the wave of immigrants -- and the reaction to it -- is bad news. The goal of closer political union among the 12 members of the EC now looks tenuous. Many Europeans worry that greater unification will result in extension of too many rights (like voting) to immigrants and their children. These jitters are fast derailing plans for a more federal-style European government and harmonization of labor practices. They could even slow down plans for a unified European currency. The refugees are arriving -- and looking for work -- just as the region's largest employers are eliminating jobs and shifting manufacturing to low-wage countries. Hundreds of thousands of immigrants are coming into Western Europe from places like Somalia and Sri Lanka as well as Romania, Bulgaria, and war- torn Yugoslavia. With unemployment rates averaging 9% across Europe, prospects for high school graduates, let alone for relatively untrained immigrants, are poorer than they've been for years. Many political experts and academics now believe that the wave will grow, with five million or more economic and political refugees hoping to crowd into Western Europe over the next three to five years. ''The instability in Europe today is unprecedented,'' says Susan Woodward, visiting fellow at the Brookings Institution in Washington, D.C. Adds Jean-Claude Chesnais, head of demography at the National Institute for Demographic Studies in Paris: ''We are apparently witnessing the start of a long period of chaos.'' Western Europe's 17 million immigrants already make up nearly 5% of the population, including four million North Africans and Turks, many of whom came as so-called guest workers decades ago. That percentage is expected to rise quickly. In France, Germany, and Sweden, foreign-born children account for more than 10% of primary school enrollment. Says Volker Ruehe, Germany's Defense Minister: ''Immigration is the No. 1 issue in Germany today.'' As the number of foreigners grows, tolerance toward them is melting away. You don't have to go to neo-Nazi rallies to find this out. Former French Prime Minister Jacques Chirac, now mayor of Paris, recently told journalists: ''Take a French worker who lives next door to a family whose father, with three or four wives and 20 kids, earns 50,000 francs in government payments, naturally without working. If you add to that the noise and the smell, well, the French worker goes crazy. You have to understand him.'' The growing racism in France is shocking, but it is not hard to see why even the most open-minded Europeans are worried. The civil war in Yugoslavia has prompted the worst refugee crisis since World War II. Some 1.7 million people have been forced from their homes because of the fighting. So far, an estimated 375,000 of them have escaped the country and have found their way to makeshift refugee camps from Hungary to Sweden. THE SAME SEEDS of the Yugoslav war -- ethnic rivalries, economic hardship, and plentiful weapons -- exist in Romania and many of the former Soviet Republics, especially Ukraine and Moldova. Even if war doesn't break out, many minorities will flee rising persecution. Says Chesnais, the demographic expert in Paris: ''Nationalist sentiments, having been suppressed by the fictional notion of international socialism, are now resurfacing.'' The more stable Eastern European countries, such as Poland and Hungary, are worried too. Hungary, which touches Yugoslavia, Romania, and Ukraine, has tightened border controls in recent months and rounded up 50,000 illegal immigrants. Most will be sent back to wherever they came from. Karoly Nagy, a senior Interior Ministry official, says Hungary does not want to repeat the ''mistakes'' of the West. Says he: ''Western European countries once kept the gates wide open for immigrants. Now, clearly, they are becoming prisoners of the situation they created.'' Beyond politics and persecution, Western Europe can expect a crush of economic refugees. Millions are losing their jobs in the rough passage from communism to market capitalism. Chesnais estimates that about five million workers could be jobless within the next few years in Poland. In the former Soviet Republics, the total could top 40 million. In the Muslim nations of North Africa, the unemployment rate is above 20%, and per capita GNP ranges from $700 to $2,500. Most of Russia's 1.5 million Jews will leave for the U.S. or Israel. But some two million ethnic Germans there will head for the Fatherland, despite Bonn's pledge to invest heavily in the Volga region where many of them now live. The one million or so ethnic Germans in Poland and Romania will likely follow them. The rising tide of immigrants is already most dramatic in Germany. Nearly every city now has a refugee camp encircled with a chain link fence. Newcomers are being jammed into abandoned army barracks, or even the portable shelters normally used on building sites. More than 250,000 foreigners arrived last year, twice the number in 1990. This year the figure is expected to top 450,000, bringing the number of foreigners seeking residence in Germany to more than 1.2 million. These figures do not include the 1.2 million ethnic Germans who have already come into the country from Poland, Romania, and the old Soviet Republics since 1988. Up to now, Germany has been wide open to immigrants. As a penance for Nazi atrocities, West Germany agreed to provide food, shelter, and pocket money to anyone seeking asylum at its borders. While only a small percentage are eventually allowed to settle in Germany for good, the state often ends up supporting applicants for as long as seven years while appeals are heard. During this period, they are not allowed to work. With the costs of unification now soaring out of sight, Germans from Frankfurt to Dresden have become increasingly angry about the alleged abuse of their system. Just a few hundred yards from the Oktoberfest site in the elegant city of Munich, for example, is a container village for refugees erected by the municipal government. The place is flimsy and cramped, but it is clean and has cooking facilities, water, and electricity, all provided free by the city. This village houses West Africans, who will most likely slip into the illegal work force or be sent home after a year or more of German hospitality. MEANWHILE, as any German can tell you, the country faces an acute shortage of housing, currently running some three million apartments short of demand. Once the powerhouse of Europe, Germany's economy is sputtering, the inflation rate is rising, and short-term interest rates are twice those of the U.S. The cost of taking care of refugees is beginning to look perilously high. Says Klaus Blumentritt, an official at the Federal Office of Refugees in Nuremberg: ''Politicians are now asking, how can we throw up the barriers?'' As immigrants pour in, Germans awake nearly every morning to fresh announcements of job reductions by major employers. Nearly every famous German name is cutting back hard. Daimler-Benz wants to eliminate 20,000 jobs over the next two years; Volkswagen hopes to reduce employment by 12,500 in the same period. BMW, which plans to cut 3,000 jobs in Germany, is now considering its first U.S. plant. Other big German manufacturers are adding new facilities in Southeast Asia and Latin America. Says Eberhard von Kuenheim, CEO of BMW: ''Industry's exodus from Germany has begun.'' Overseas investment by German industrial companies more than doubled last year to $21.9 billion. Marcus Bierich, CEO of auto parts giant Robert Bosch, which eliminated 8,000 jobs last year, argues that relocating to low-wage countries is the ''necessary consequence'' of the growing gap between costs in Germany and elsewhere. The combination of anxiety about jobs and the very visible and growing presence of foreigners has been politically explosive. The scariest reaction has been the rise of an evil breed of young neo-Nazis. Totaling about 4,000 members nationwide, they specialize in arson, swastika-daubings, muggings, and, occasionally, murders of asylum seekers. Most Germans roundly condemn the neo-Nazi hooliganism, but they are often more tolerant of other new right-wing parties. In Bremen, where foreigners now make up 20% of the population, six members of the extreme right-wing German $ People's Union were elected to the state assembly earlier this year, largely by young voters. In April the party won 6% of the vote in Schleswig-Holstein in northern Germany. IN THE SOUTHWEST region of Baden-Wurttemburg, home of the industrial city of Stuttgart, the anti-immigrant Republican Party took 12% of the vote in the April elections, pushing Helmut Kohl's Christian Democrats out of the majority in that district for the first time in 20 years. Listen to Helmar Haas, a Republican Party officer in Stuttgart and owner of a company that cleans sewers and disposes of public waste. About a third of his 120 workers are foreigners, but now he wants Germany to shut out all immigrants, even refugees from war-torn countries. Says he: ''Companies like mine will be hiring unemployed workers from Mercedes-Benz and Bosch in the future.'' Though Germany seems in no danger of a Hitler revival, the new right wing should be taken seriously. Travel down to Bavaria to meet the leader of the Republican Party, Franz Schoenhuber, 69, former Waffen SS soldier, journalist, and author. If Schoenhuber is the devil, he's the devil you'd have lunch with. He's fluent in five languages (he acquired Russian as a prisoner of war), loves Italian food, speaks perfect English, and complains about being lumped with bad guys like Hitler. His first wife, he wants you to know, is half- Jewish. Says he: ''It's not easy being on the right side of politics. We have idiots.'' Jews, says Schoenhuber, should be let in, along with ethnic Germans and trained Europeans, like Italian cooks and Spanish architects. But not Muslims, most dark-skinned people, or any of the unwashed unless they can prove German heritage. Says he: ''The whole of Germany is crowded together like Manhattan and the Bronx. We don't have room. Look at Los Angeles. I give you a guarantee. In a few years, Germany will be like L.A. was in April.'' His own SS background? He was 18 years old; what did he know? ''At least I'm honest about my past,'' he says. ''Everyone else my age lies.'' Anyway, he says, it's time for Germans to stop using immigration policy to atone for the past: ''Our politicians forget that 80% to 90% of Germans had nothing to do with the atrocities of the war. If we continue to lead our country according to what England or America or Israel says, it will come to a bitter end. We must think of our own national interests like Americans do.'' Schoenhuber advocates a quota system, a tighter version of that used in Britain or the U.S. ''We're not revising history,'' he says. ''But if you put the German on defensive all day long, he gets mad. Please, let's give the living German a chance.'' His parting shot concerning national guilt: ''The next time I see President Bush, remind me to ask him about the Indians.'' In a modest office in Bonn, another Munich native, Cornelia Schmalz- Jacobsen, shudders at the mention of Schoenhuber. Recently appointed Minister for Foreigners' Affairs, Schmalz-Jacobsen says, ''The Republicans are plowing the same ground Hitler plowed.'' But, she admits, the right-wingers are having an ''enormous'' effect on the established parties. She also concedes that the current immigration system is unworkable and, at $3.2 billion a year, too costly. ''Quotas will have to come,'' she says. RIGHT-WING parties in France are also gaining ground on anti-immigration platforms. Jean-Marie Le Pen, founder of the racist National Front party, has never been more popular. He personally won 31.1% of the vote in Nice in last March's regional elections, and his party took 14% of the vote nationwide, four percentage points better than its showing in 1986. Le Pen's party also broke the dominance of the Communist Party in working-class suburbs of Paris. France has stricter laws than Germany about who can be granted asylum. But once refugees get in, gaining citizenship is relatively easy. About two million have been naturalized in recent years. Immigrants, including those who have become citizens, account for some 6.5% of the French work force, but are twice as likely as a native Frenchman to become unemployed. (Algerians in France have a 28% unemployment rate.) Even if they haven't yet been naturalized, immigrants receive the same unemployment benefits as Frenchmen. Although Le Pen loves to indulge in inflammatory rhetoric (Nazi gas chambers were a ''detail of history''), his new lieutenants and followers are increasingly well-spoken and well-educated members of the middle and upper classes. While big business shuns Le Pen, small-business men are less hostile. Take Jean-Michel Dubois, owner of an office supply business in Paris, who vacations in Florida and lunches with the mayor of Algiers when the mayor comes to town. Says Dubois: ''Immigrants here are eligible for the same benefits as French people, but are generally less qualified and therefore at a higher risk of becoming unemployed. There just are not enough jobs or money in France to allow this to continue.'' Like Schoenhuber, he favors a U.S.-style immigration quota system. ADDING to the political shift to the right in France and Germany is growing concern elsewhere about what will happen if all EC countries remove border restrictions at the end of this year, as they are scheduled to do. Britain, among others, is having second thoughts about the idea. Europe's borders are already anything but closed. About a million North Africans live in France, all of whom traveled through Spain as visitors. In Italy, where the unemployment rate is around 11% and many big companies have reduced workers' hours, the immigration issue is equally explosive. After accepting Albanians by the boatload last summer, Italy is trying to stanch the flow. Right-wing parties have used the issue to gain ground. One of them, the Northern League, now has 80 deputies and senators in Parliament, up from just one five years ago. And Alessandra Mussolini, granddaughter of the Fascist dictator, was elected to Parliament this April as a member of the neo-fascist Movimento Sociale Italiano. Both parties say their motives have nothing to do with racism. Says Mussolini: ''In Naples there are plenty of black immigrants, but we have to look after the interests of our own young people first.'' Even some Italians with less radical views agree, though in milder tones. Carlo Ripa di Meana, who currently serves as EC Commissioner for the Environment, says, ''Europe does not have the characteristics of America in the late 19th century -- an immense territory where anybody had the opportunity to be successful.'' He has a point. The U.S. has 70 people per square mile, while Europe has 373. Looking ahead, some demographic experts argue that Europe will need the workers it now rejects. According to Bernd Hof, an economist at the German Enterprise Institute in Cologne, Germany's work force started shrinking in 1988 because of low birthrates. Says Hof: ''The Germans have decided to die out.'' He figures that Germany needs 300,000 immigrants a year to keep the work force stable. Other European countries -- even Italy has zero population growth -- face shrinking work forces as well. Hof believes that Belgium, Denmark, Holland, Greece, and Spain will start seeing work forces shrivel within this decade. Britain will reach that point in 2007. But the problem is most acute in Germany. Says Norbert Walter, managing director of Deutsche Bank Research in $ Frankfurt: ''There's a time bomb ticking in Germany's social insurance system'' because of the country's rapidly aging population. THE ANTI-IMMIGRANT politicians brush off such warnings. Says Schoenhuber: ''Untrained immigrants can't support the German social system.'' Others, though, think the newcomers can be trained. Says Horst Kramp, president of the Berlin Chamber of Commerce and a member of the board at Schering, the German chemical company: ''We want Berlin to grow into its new role as Germany's capital and bridge between East and West. For this we need a special measure of openness. There's no room for hardheaded reservations against foreigners, even if they come from alien cultures.'' Whatever their political stance, nearly all Europeans agree that they badly need an immigration policy. Until one can be achieved, expect more chaos on Europe's borders.

CHART: NOT AVAILABLE CREDIT: SOURCE: TRENDS IN INTL. MIGRATION, OECD; BRITISH GOVERNMENT; NATL. INST. FOR DEMOGRAPHIC STUDIES, PARIS CAPTION: WHERE THEY COME FROM