Page last updated at 12:04 GMT, Thursday, 2 June 2005 13:04 UK

Blow to EU economic reform hopes

By Steve Schifferes
BBC News economics reporter

Workers from across Europe protesting in Brussels about the EU's poor record on job creation
High unemployment has undermined support for the EU

The rejection of the EU Constitution by voters in France and the Netherlands is, among other things, a rejection of the "neo-liberal" economic reform agenda.

Voters had many reasons to vote against the EU constitution.

They wanted to punish unpopular governments; they feared that enlargement would change the character of the EU or their own nation; or they worried about crime and immigration.

But one key reason was dissatisfaction about the economic performance of the core countries in the eurozone.

And for many voters, this dissatisfaction was linked to the belief that the creation of the "eurozone" - the 12 countries which have used the euro as their currency since 2002 - has led to higher prices, greater unemployment and lower living standards.

This year growth in the eurozone is forecast to be just 1.6% compared with 3.6% in the United States. Unemployment is twice as high (at 8.9% in the eurozone as a whole), and over 10% in France and Germany.

Failed reform

Many EU leaders, especially Britain's Prime Minister Tony Blair and EU Commission president Jose Manuel Barroso, have argued that the only solution to this slow growth is to accelerate the so-called Lisbon reforms.

European Commission President Jose Manuel Barroso
Jose Manuel Barroso wants to continue EU reforms

This plan, agreed in 2000, committed EU leaders to making Europe the world's most competitive region by 2010 by liberalising labour markets and accelerating economic reform.

Five years on, it is clear that the Lisbon Agenda is meeting increasing resistance among the public in key countries.

Germany's attempt to reform its labour markets and benefit system, known as Hartz IV, has led to serious losses for the ruling Social Democratic Party in recent elections in its North Rhine-Westphalia heartland, forcing Chancellor Schroeder to call early national elections.

And in both France and the Netherlands, attempt to reform the welfare state and pension system to increase contributions and reduce benefits have led to strikes and demonstrations across the country.

The failure to reform their welfare states, along with slow economic growth, led to growing budget deficits in these countries which breached the rules laid down in the EU's Stability and Growth Pact.

Germany and France defied EU attempts to make them adhere to these rules for three years, until they were finally watered down at the EU summit in March.

Levelling down

That summit also came unstuck on proposals to liberalise Europe's huge service sector, allowing companies and individuals to operate services like computing and construction across Europe without restriction.

French President Jacques Chirac
Mr Chirac rejected the "Anglo-Saxon" reform model

Supporters said the services directive could create 600,000 new jobs.

But it prompted fierce opposition by unions who feared it could lead to lower standards for workers.

The richer countries of Northern Europe such as France and Germany also feared that it would open the way for companies to transfer jobs from their higher-paid workers to Eastern Europe, where salaries and benefits are much lower, exacerbating unemployment.

And there were further fears that service sector workers from Eastern Europe would move West, overwhelming public services.

In the Netherlands, worries that massive immigration would swamp the Dutch way of life have also been an important factor in the growing scepticism about the EU.

It is notable that Britain was one of the few countries in Europe to agree to free immigration of people from the new EU entrants who joined on 1 May 2004 - and even Tony Blair was forced on the defensive over immigration issues during the recent election campaign.

Saving the welfare state

The vote on the EU constitution has laid bare the fundamental philosophical division within Europe between those who want to press ahead with economic reform at all costs, and those who fear that the social costs of such change will be too high.

For many in the "old Europe", the preservation of the welfare state with its social protections is paramount, even it means slower growth.

And, in contrast to the US, where mass immigration is seen as an economic benefit, many European countries with strong welfare states believe that mass immigration, even from other European countries, could put those benefits in jeopardy.

The fact that the EU constitution was at its heart about restructuring EU institutions to reflect enlargement no doubt did not add to its popularity.

EU leaders will now have to focus on many political issues.

But they will also have to rebuild the shattered consensus on economic reform that has dominated EU policy-making for the past half-decade.

ECB 'concerned' about euro deal
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