(FORTUNE Magazine) – THIS NEW YEAR'S EVE, a thousand bonfires will be set across the Continent to mark the opening of the single European market. But the celebration will be less festive than it might have been. All kinds of trade barriers will come down on schedule, but the larger vision of a Europe rivaling the U.S. and Japan as a political and economic superpower is fading fast. Two hammer blows in quick succession are to blame. The first was the unprecedented speculation in the British pound and the Italian lira in mid- September, stemming from both countries' ultimately futile attempts to keep in step with Germany's high interest rates. This led to their undignified withdrawal from the European Monetary System (EMS), a sharp devaluation of both currencies, and the humbling of their political leaders. Less than a week later came the second blow: France's wafer-thin approval of Europe's Maastricht treaty, a blueprint for closer political and monetary union. A more decisive victory was needed to get unification back on course after Danish voters had rejected it in June. Ireland, Luxembourg, and Greece have approved the treaty, but the rest of the EC's members plan to present it to their own parliaments for ratification, an option permitted by Maastricht negotiators. Now further approvals are in doubt, particularly in Britain. For managers across Europe, the turmoil is unsettling but far from unhealthy. In hindsight, it's clear that the European express was moving too fast. Now it can slow down enough to let ordinary Europeans catch up with its lofty concepts. ''There's cause for jubilation,'' says Gilbert de Botton, chairman of Global Asset Management in London. ''We can still dream of unity, but proceed more sensibly.'' At the same time, recent defections from the EMS should help businesses in weaker economies, like Britain's, that had been holding interest rates painfully high in order to support the pound against the German mark. American, Japanese, and European multinationals that invested heavily to prepare for the opening of the European single market in January haven't ^ wasted all their money. The hundreds of trade barriers that have fallen will not rise again. Border controls, already removed in some countries, will be done away with across Europe by January 1. The formation of the European Free Trade Association, including all the EC members plus Norway, Sweden, Austria, and Switzerland, is still moving ahead. And the Swiss and Austrians are expected to seek membership soon in the EC itself. But it will be back to the drawing board for the Maastricht treaty. Achieving the requirements for global superpower status -- a common currency, a common foreign policy, and common political goals -- is still possible, but it has just slipped out of this decade. Expect the following: -- A two-tier Europe. Germany, France, Belgium, the Netherlands, and Luxembourg will most likely emerge as a new economic group, led by Germany with the help of France. This group may well push ahead toward political union. They will keep interest rates level and inflation low, and ultimately try to develop a single currency. Britain, Spain, Portugal, Greece, Ireland, and Italy could fall into a second tier with more flexible exchange rates, less financial discipline, and, no doubt, weaker economies. -- Single-market slowdown. Fulfilling the remaining goals for the Single European Act -- the blueprint for the series of actions known as Project 1992 -- such as deregulation of the energy market and of postal and telecommunications monopolies, could be hard to achieve by the December 31 target or even in the next few years. -- More protectionism. A root cause of all this commotion is the rise of nationalistic feelings in Europe, because of slower growth and higher unemployment. Remaining trade barriers, particularly on cars, will stay in place or get stiffer. Bureaucrats in Brussels who have been fighting to reduce or eliminate subsidies to industries by various EC countries are already softening enough to consider continued aid in specialized cases. Looking back, the vision of European political and monetary unification embodied in the Maastricht treaty seems deeply flawed. Two related provisions, establishment by 1999 of a single European currency and an independent central bank, got most of the attention. But the 311-page, densely written treaty covered a lot of other ground, including regulations on working conditions, legal matters, and voting rights, most of it spelled out only vaguely with the idea that bureaucrats in Brussels would fill in the details. The treaty was hammered out by EC leaders in a frantic 48 hours last December without consultation with anyone outside the small Dutch town where they met. In their hurry, they managed to overlook the uneasiness of ordinary Europeans toward the growing power of the EC bureaucracy. Though the idea of a single market is generally popular, there is growing irritation about the petty directives that have already come out of Brussels, such as the required ingredients in French cheese and the width -- though not the length -- of condoms. The treaty itself is so fuzzy in parts that interpretations of it vary sharply depending on which country you're in. In Britain, officials hail the treaty for giving important decision-making powers to member states, while Germans say they like the centralization of power that will lead to a United States of Europe. In fact, the Maastricht treaty is as far removed from a constitution as your weekly shopping list. The checks and balances between federal and legislative powers are all but absent, leaving the Brussels bureaucracy accountable to virtually no one but itself. Business leaders have been divided on the treaty, with Germans calling for more political union before monetary convergence. The British are largely suspicious of the treaty, worrying that a united Europe would be dominated by its strongest economy, Germany. Countries with weaker economies, such as Ireland, Italy, and Greece, are generally positive but mainly because the treaty proposes to redistribute EC funds from richer countries to poorer ones. Martin Taylor, CEO of Courtaulds Textiles in London, takes the extreme British view: ''Maastricht is dead. This is the best possible result. The politicians supporting it were living in the clouds.'' Even the most fervent supporters think the treaty has been badly promoted. Says Hans Peter Stihl, president of the influential German Chamber of Industry and Commerce: ''Politicians need to do a better job of convincing the European people that the treaty is in their interests.'' But it was more than weak PR that disrupted the steady march toward 1992. The unthinkable happened. The collapse of the Berlin Wall created greater strains on the EC than anyone could have predicted. With the opening of borders across Europe, the fear of an uncontrolled deluge of hungry, unemployed Easterners has fed a rise of ultra-right, anti-European parties in France, Italy, and Germany.

More damaging to the European economy has been the stress resulting from the astoundingly high cost of German unification and a policy error made by Germany in confronting it. After the Wall came tumbling down, Chancellor Helmut Kohl rashly promised to bring the living standards of the East up to those of the West as fast as possible. Then, against the advice of his Bundesbank advisers, he decided in the summer of 1990 to exchange the currencies on a one-for-one basis, even though the deutsche mark was much stronger than the ostmark. Kohl vastly underestimated the bill for his largesse. When the East German currency was given parity with the mark, the fragile businesses left in the East saw their export markets in Eastern Europe and Russia collapse because their customers could no longer afford to buy goods priced in one of the world's strongest currencies. So far, aid to the East has cost more than $240 billion -- the equivalent in constant dollars of more than three Marshall Plans. These extraordinary costs led to higher taxes -- though critics argue not high enough -- and record interest rates. Even so, Germany can afford unification. Still a nation of savers, Germany has a stash of $1.875 trillion in private assets. That means the country doesn't have to import money to fund its budget deficit as does the U.S. The economy has slowed, but it is still expanding; inflation is low, and most economists expect Germany to return to stronger growth next year. Unfortunately, the rest of Europe is not as well equipped. As a result of the European Monetary System, set up in 1979 to be a precursor of a unified European currency, all EC currencies are linked to one another within preset exchange rate bands. Because Germany is Europe's strongest economy, other countries have been forced to follow the Bundesbank's strict fiscal path of high interest rates to avoid a devaluation of their currency. Alas, this steep interest rate policy has come at a bad time for most EMS members. European growth rates have fallen from 4% in 1988 to 0.8% last year, with average unemployment rates stuck at more than 9%. Business failures in many countries have been touching their highest levels since the Depression. Currency traders saw the growing economic disparities between members of the EMS. In mid-September they began conjecturing that Britain and Italy, with much weaker economies than Germany's, could not afford to keep interest rates on the German level. Their bets were well placed. After an extraordinary King Canute-style effort in mid-September to defend the pound and the lira, Britain pulled out of the EMS, cut interest rates, and saw its currency devalued. Italy suspended its membership, saw its currency sharply devalued, and held interest rates firm in hopes of swiftly reentering the EMS. THE ILL-FATED BATTLES of the pound and lira cost the British and Italian treasuries more than $1 billion and gave currency traders the most profitable week of their careers. While Italians blamed their own bureaucracy for the debacle, British leaders and businessmen blamed Germany. David Rough, group director of Legal & General, a British insurance company, expressed the kind of outrage felt in Britain: ''I see no benefit at the present in going back into the EMS. One man has 99% of the votes, and that man ((the head of the Bundesbank)) lives in Germany.'' While Germans rejected the criticism, Heinz Schimmelbusch, CEO of Metallgesellschaft, the metals group, admits, ''Regionalism is an overwhelming feature of Europe right now.'' Most business leaders say that the EMS remains too rigid for such a diverse group as the 12 members of the EC. Says Laurence Martin, director of the Royal Institute of International Affairs in London: ''You can't achieve a united Europe through currency alignments.'' Adds Courtaulds's Taylor: ''The business community wants relative currency stability across Europe. But when economies are going in different ways, it's crazy.'' German discipline has not been hard for small countries like Belgium, Luxembourg, and the Netherlands. But France has also clasped German fiscal policy to heart, raising interest rates and holding down spending. Already the country has lower inflation and a smaller budget deficit than its bigger neighbor. And in order to hold the franc in line with the mark, French interest rates for short-term money went up by 2.5 points to 13% at the end of September. The Bundesbank also bought billions of francs to aid the Bank of France's defense. Proudly, almost arrogantly, many Germans welcome the two-track Europe as a means to divorce themselves from weaker economies and to assert their economic leadership. Calling Britain's departure from the EMS a ''welcome development,'' the German Economics Institute's Hans-Peter Frohlich argues that the Bundesbank's high interest rates have helped those countries that are prepared to pursue sound monetary policy. This results in the twin gifts of low inflation and stronger growth. Given Germany's preeminent position in Europe, why should it want to promote unification, even among a few strong countries? Because of Germany's shameful past, the only chance it has for regaining a role in world affairs is through some kind of united Europe. Further, it lives by its exports, so the fewer barriers to trade, the better. But considering the strains caused by unification, Germany will be hard pressed to piece Europe back together soon. As a result of the narrow victory on the Maastricht referendum, Francois Mitterrand's pro-Europe Socialist Party may well be defeated in next spring's parliamentary elections. President Mitterrand himself has three more years to serve. Only a few days before the vote, he was diagnosed with prostate cancer, and he now appears frail and weak. Public calls for his resignation are increasing. Another victim could be Jacques Delors, president of the European Commission and the creative force behind Project 1992. Six months ago he was a leading candidate to follow Mitterrand into the French presidency. Now much of the ill will generated by Maastricht is focusing on him. After the vote he tried to put on a brave face. ''Thank you, France,'' he told TV viewers. But the strong voice of Mr. Europe was gone. In its place was a timid man nervously rolling handmade cigarettes. This political fallout could be good for business if the old guard is replaced by younger, more realistic politicians. Says Dutch Foreign Minister Hans van den Broek: ''Maybe we'll have to wait for the next generation of political leaders to pick up the thread of European unification.'' In the meantime, businesses operating in Europe will have to keep a close eye on Brussels, where bureaucrats are already on the defensive. Each directive for the single market replaces national directives, often with hundreds of pages of explanation. Says Paul Horne, an economist with Smith Barney in Paris: ''If ministers don't have the will to enforce these regulations because of a weakening commitment to European integration, investment in European-wide businesses could go down.'' This kind of environment provides fertile ground for protectionism. Peugeot's arch-nationalist CEO Jacques Calvet has been a bitter critic of the Maastricht treaty, along with many others in the auto industry. He complains, ( ''We open the Common Market to Japanese cars without getting anything in return.'' The European automobile market remains protected from open competition until 1999, but the level of protection could now go up during that time, rather than go down as currently planned. Can Humpty Dumpty be put back together again? Says Smith Barney's Horne: ''The integration of Europe is on hold. The basic building blocks may have to be renegotiated.'' Most analysts expect it will take between six and 12 months before the monetary and Maastricht unity issues facing the Community are resolved. Even then the result is expected to be well short of what's needed to knit Europe into a cohesive rival of the U.S. and Japan.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHARTS/SOURCE: COMMISSION OF THE EUROPEAN COMMUNITIES CAPTION: GDP GROWTH IN EUROPE'S BIG FOUR EUROPE'S JOBLESS

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: COMMISSION OF THE EUROPEAN COMMUNITIES CAPTION: THE LONG ROAD TO EUROPEAN UNION