Europe Slogs Ahead in Melding Economies Early Preparations Continue in Quest for a Central Bank with the Development of the European Monetary Institute

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WHAT promises to be one of the world's leading financial institutions is taking shape, even though it does not yet have an office in its hometown here.

It is called the European Monetary Institute (EMI), a body that could evolve into a central bank for Europe and possibly rival the United States Federal Reserve.

It is a grand plan, and from the looks of things lately perhaps a bit too grand. Even as politicians last month inaugurated the European Union to succeed the European Community, they have had to confront growing doubts about whether they can ever crowd the diverse economies of Western Europe under the umbrella of a single central bank.

For the moment, EMI will play the role of junior central bank. It will advise more than supervise. It is intended to do three things: intensify Europe's ongoing coordination of monetary policy; take over the technical functions of the European Monetary Cooperative Fund; and prepare the way for the European central bank. This last point is clearly the aim of the whole process. It is also certainly a long way off.

The last several months have not been good ones for Euro-optimists.

To move toward an eventual single European currency, EC countries had created a formal mechanism to allow their marks, francs, pounds, and so on to move in tandem. That system is now in tatters. A monetary crisis in the summer of 1992 forced the British pound and the Italian lira out of the system and a similar crisis this summer threatened to do the same for the French franc.

RATHER than junk the system, the EC decided to change the rules. Currencies, it said, could fluctuate up to 15 percent on either side of the central rate - a much more flexible system than the 2.25 percent margin allowed before.

"It shows all of us that we have not advanced as far as the politicians thought we had," says Peter Pietsch, senior economist of Commerzbank in Frankfurt. But "it's much better to realize this now rather than later."

Having the economies of the European Union members converge is key to getting them to accept a single currency. A real European central bank cannot control the economy very well until the single currency is in place.

According to the Treaty of Maastricht, which lays out the timetable for the European Union, the EMI is supposed to become a central bank between Jan. …