The attention being paid to the economic welfare of Central Europe and the Soviet Union by the 12 member nations of the European Community (EC) is inspired by far more than a sense of noblesse oblige. The greatest threat to the successful implementation of the EC's Single Market Act is an economically underdeveloped and politically unstable sector to the east. Western governments are uncertain that the recent commitments made by the new Central European governments to democratic political systems can withstand the painful remedies necessary for their transitions into modern industrial economies. The " Europhoria" of only months ago has given way to the realization that the building of market economies and stable political regimes in Central Europe will require far more than the financial resources currently available in the West. The global slowdown in economic growth, high deficit spending in the West, the weakening of the Deutschmark and the German economy in general, and the increasingly apparent knowledge that Central Europe lacks not only financial resources, but the technical and cultural resources to develop capitalist markets, all contributed to the anxiety apparent at the July Group of Seven (G7) economic summit.

While EC members regard this situation with great apprehension, they are nevertheless preparing for the increased capital resources which are necessary for the industrial reconstruction of Central Europe. Member states are willing to go to great lengths, short of expanding the Community's current membership, in order to avoid complete economic breakdown in the Central European countries and the resulting waves of displaced workers migrating to the West who would overwhelm social services and threaten the painstakingly devised political coalitions necessary for completion of the Single Market Act's final stages. Member states in which high unemployment persists, such as France and Italy, are particularly sensitive to any expansion of EC membership to states which are likely destinations for the Central European diaspora of displaced laborers.

While stronger economies such as Sweden and Austria are the most likely candidates for expanded EC membership in the near future, precluding, at least temporarily, membership for Poland or Hungary for example, an alternate route to the European market may be found in the European Free Trade Association (EFTA). Under the terms of EFTA membership, Central European economies will benefit by reduced tariffs on manufactured goods, and will be in favorable positions to negotiate bilateral agreements for agricultural commodities. In the near future. Central European trade with the West will consist for the most part in agricultural and low-technology, semi-finished goods. One obstacle in this alternate path, however, is the EC-EFTA negotiations on creating a " Common Economic Area" where both organizations can take advantage of reciprocal market access. While the negotiations are stalled on a number of crucial issues, EFTA's potential addendum of Central European countries could possibly make the " Common Economic Area" quite a nettlesome proposition.

Most significantly, and the strongest argument against the immediate membership of Central European states in the EC is the awareness that no eastern economies will be prepared any time soon to match the " hard ball" level of competitiveness envisioned for 1992 - the year when the EC moves fully to a unified market among its members. Indeed, it is fully expected that within the EC a great deal of capital reallocation will occur. Heavily subsidized industries, most notably in Spain, France and Italy, will undoubtedly experience layoffs as they struggle to compete with their more efficient counterparts in a unified market. EC member states have not resolved their own ambivalence towards complete laissez-faire and state-directed resource allocation. The recent appointment of Edith Cresson as prime minister of France indicates just such a retrenchment on the part of labor. Further retreats from market forces in favor of protectionist policies will not be a surprise, particularly in those countries with large but weak industrial sectors.

Contributing to the anxiety throughout the EC is the experience of German unification. For political reasons, and in order to prevent a mass migration from east to west, the Bundesbank followed a policy of monetary integration - later described as a disaster by the chairman of the Bundesbank - in which the Deutschmark was exchanged for the East German Ostmark at a rate of 1:1, despite the fact that eastern productivity is one-sixth that of the west. Inefficient eastern firms, unable to compete at western prices, have been forced into bankruptcy, pushing local unemployment to nearly 40 percent. Not surprisingly, eastern workers are flooding western labor markets - exactly what the policy was designed to avoid. Germany, once the anchor in any possible European Monetary Union, now suffers inflation, a weakened Deutschmark, 40 percent unemployment in the east, and a budget deficit higher as a percentage of GDP than the United States.

The most significant Western institution in the development of Central Europe and the Soviet Union is the 39-member-nation European Bank for Reconstruction and Development (EBRD). Chaired by Jacques Attali, former aide to Francois Mitterand, the Bank's charter states that, unlike the IMF and the World Bank, it will foster not only market economies, but environmentally sound industrial policies and democratic political institutions as well. With an initial capitalization of $13 billion, EBRD will guarantee export credits, primarily in manufacturing sectors, offer technical assistance for the development of equity markets and legal regimes favorable to private investment, underwrite debt and equity to both privately and publicly held firms, and offer public financial assistance for the rebuilding of capital infrastructure. Pending political developments in the Soviet Union, the Bank's largest shareholder, the United States, requires that no more than $215 million, the amount of Soviet capital in the bank, return to the Soviet Union within three years.

As an example of the Bank's ideal activities, it recently made its first loan to the Bank of Poznan in Poland, $50 million, on the condition that the money be reloaned for the conversion of the country's municipal heating systems from coal to gas burning systems. In choosing the Bank of Poznan as a financial intermediary, EBRD took into consideration the Bank's relative profitability, the strength of its portfolio, and its future plans for privatization. It is just such financially sound, economically productive, and environmentally beneficial projects which the bank wishes to pursue.

It is clear, however, that with a capitalization of $13 billion, and with most Western governments facing budgetary deficits, direct aid to Central Europe and the Soviet Union will not be forthcoming. It is not even apparent within the West that direct aid, were it available, would even be expect from private creditors, but it is also not possible to detect any consensus among world financial institutions as to future debt forgiveness. As of now it is virtually impossible to predict fiscal and monetary policies and positions among the Central European countries. It is certain, however, that the capital requirements far outstrip the capital resources available through Western lending agencies.

The most likely form of financial aid from Western governments to the Soviet Union will be in export-trade credit guarantees, in which creditor governments can simultaneously expand export markets and protect domestic producers. Agricultural credits are the most likely forms of this type of aid. Though these agricultural export credits will relieve short-term political and economic pressure, they do not contribute to, and may even retard, improvements in agricultural productivity and distribution.

It is also unlikely that EC member state will throw open their borders to Central European products. With Common Agricultural Policy negotiations desirable, at least in the case of the Soviet Union. Apart from the argument that aid to the Soviet Union could at this time impede political liberalization, the Soviets are scheduled to repay up to $12 billion of interest alone on foreign debt this year, in addition to money owed to foreign firms - estimated by London's Financial Times to stand between $5 billion and $8 billion. Poland alone has already received $50 billion in debt forgiveness from Western nations. Of course, it is not possible to estimate the amount of debt forgiveness that the Soviet Union and Eastern Europe can stalled and the Uruguay Round of the General Agreement on Tariffs and Trade tenuous, the EC is under additional pressure from its member states' domestic producers, particularly those in the agricultural sector, who are resentful and fearful that they will be sacrificed in order to enhance European manufacturing and consumer interests. The French, Italian, Spanish and Portuguese governments are particularly anxious to protect the politically powerful blocs of farmers within their countries. While it is unlikely that EC agricultural subsidies will be eliminated in the near future, it is even less likely that EC members will be willing to allow cheaper agricultural imports crossing their borders.

German unification has indicated that the costs of building market economies in Central Europe and the Soviet Union far exceed the amounts of capital that are available from the EC, the G7 or from any individual nation. Private capital is the only source of financing sufficient for the massive reconstruction necessary.

EC policy has shifted in the last year towards providing technical and managerial assistance for creating conditions which will encourage private Western investment and for increasing market productivity throughout the region. Hungary has enjoyed the greatest amount of private western investment as a result of its early flirtation with market-oriented reform even during the Communist era. Most importantly, though, is Hungary's policy of letting Western firms hold majority ownership in Hungarian companies, and of letting these firms repatriate profits to the West. EC leaders wish to develop political and legal regimes in other countries which can guarantee the safety and integrity of Western capital investments, educational programs for the training of capitalist management techniques, widespread privatization of state-controlled industries (also on the agenda of Western Europe), the development of privatization agencies such as Germany's Treuhandstalt to assist in ' selling off assets such as state-controlled industries, and the development of Central European equity markets for raising internal capital.

Anthony Binando is director of North American operations for Milano Group International, a consulting firm that provides information on trade and investment opportunities in the European market.