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Last Updated: Sunday, 27 November 2005, 19:45 GMT
Battle for Europe

Allan Little
Panorama reporter

Allan Little
Sunday 27 November 2005
Allan Little has spent much of the last six months travelling around the European Union - from the oldest members like France and Germany, to the fast-emerging new economies of the east.

In this week's Panorama, "Battle for Europe" he argues that Europe is now divided into two rival camps, each with starkly different visions of what the European Union should be and do.

They are our closest neighbours and our oldest foes. And two hundred years after Trafalgar we are at each other's throats again.

Next month's European Union summit, which will be the culmination of the six month British presidency, will be dominated by an increasingly bitter dispute between Britain and France.

The French will insist that Britain give up the rebate, won by Margaret Thatcher in 1984. It is currently worth 3.5 billion pounds a year. France knows that Britain is isolated 24 to 1 on this.

Britain has already said that it is willing to negotiate away the rebate - but only in exchange for wide-ranging reform of the European budget as a whole - including the controversial Common Agricultural Policy (CAP). And putting the CAP on the table has touched a raw nerve in France.

France is the biggest single beneficiary of the CAP. Of the 30 billion Europe spends on farm subsidies, more than a fifth goes to French farmers. The CAP has never been popular in Britain, where it is associated with propping up inefficient farming methods, and the historic waste of overproduction.

CAP in question

Allan Little sampling cheese
Allan Little sampling some local cheese in France
But in France it is seen as vital to rural life. The countryside, and its produce, are central to the French national identity. As one cheese maker told me "Without the CAP, France would cease to be France."

But agriculture is not the real divide between Britain and France. It is only where the divide begins: Britain and France are on opposite sides of an argument about reform in general - opposite sides of a fault-line now running through the heart of the European Union.

Britain wants France, and its historic partner in Europe, Germany, to undertake economic reform - liberalisation, privatisation, the freeing up of labour and capital markets - to make their faltering economies more competitive. Britain's New Labour government is, in this sense, economically further to the right than either France or Germany's supposedly right-of centre governments.

Britain says the Anglo-Saxon model is the best way to creating a competitive economy, which, in turn, is the only way to produce growth and jobs.

France believes the Anglo-Saxon model is a threat to social and welfare benefits workers have accrued over the years since the Second World War.

The Foreign Secretary Jack Straw told me

"I think the French have got to hold a mirror to themselves... they've got to work out what is in their interests. I celebrate the French way of life. I love the French. But they've got to understand that the world is changed and raging against the dying of the light won't work for the future."

Britain says the high social costs borne by French businesses are an impediment to the kind of growth France needs to tackle its high unemployment. The employers' contribution to National Insurance in France, for example, is over 40% of salary, compared to 11 per cent in Britain.

France's trade minister Christine Lagarde defended the European social model:

"French employees have the benefit of a lot of insurance coverage, health benefits, retirement benefits... If you try the national health system in France you are almost certain to get fast, efficient, reliable service which is not the case everywhere."

Look East

Allan Little
Allan on a film set in Lithuania, whose film industry is booming
Britain points to Eastern Europe and the reforms that have transformed the former communist countries that joined the European Union in May 2004. The Baltic States have pioneered a "new model capitalism" by driving down corporate taxes, introducing a flat tax on income, privatising, liberalising and embracing competition. Lithuania - if it sustains its current rate of growth - will double the size of its economy in ten years.

"Perhaps it's because we are new, young, and hungry." Ramunas Skikas told me.

He is the very model of the new capitalism that is so changing the economic shape of Europe. At 34 he must be the world's youngest film studio boss.

When the Lithuanian government put the old Soviet run film studios in Vilnius up for sale, he saw a golden opportunity.

"Me and a couple of my colleagues asked ourselves 'what do we know about the movie business?' The answer was very clear - nothing. But we decided to take the risk - and so far no regrets."

Skikas' film studios are growing by the year: Hollywood has come East. This month, the new Highlander movie will finish production there.

Earlier this year, Channel 4's blockbuster TV drama Elizabeth 1st was filmed there. Eastern Europe is providing the global movie industry with services it needs, at a quality it wants, and a price that is irresistible.

Britain wants France and Germany to look East - and learn. But Lithuania starts from a low base and remains a poor country. Its priority is growth, not welfare.

"It has to be accepted that for a mature country with a very wealthy economy it's probably a bit more complicated" says Mme Lagarde. "It's easier to produce changes when you're hungry than when you're well fed."

But there is one corner in Europe that seems to combine the best of both worlds - a strong and competitive economy and a generous and competitive welfare state.

Nordic re-invention

When Esko Aho became Prime Minister of Finland in 1991m his country was collapsing. Its economy was shrinking by 10% per month.

Unemployment was 20% and rising. Aho decided on radical surgery: he privatised, he liberalised, he freed up markets.

He knew that things would have to get worse before they got better. So his medicine was hard to swallow, and he lost his country's next general election and his job as Prime Minister.

A decade on, though, he is celebrated in Finland as the man who - in retrospect - set the country on the road to recovery.

Finland pulled off a small economic miracle that propelled it to the top of the world's economic league tables. And, remarkably, it did so without drastically cutting taxes or slashing welfare budgets.

The Finns argue that they have the world's most competitive economy not in spite of high spending on health and education, but precisely because it.

Finland remains one of the high tax countries of Europe. the Foreign Minister told me;

"Everybody pays, but everybody also benefits. That is the Nordic model of comprehensive social welfare. The social services are not only for the poor. They are for everybody and everybody uses them".

This is the Nordic model. It contains a challenge for us all. But who will listen to little Finland at next month's summit, when the Europe's oldest foes will squaring up for a fight?

For this has become a tale of two Europes. Britain is pulling in one direction - towards deregulation, the global market, open competition. And France is pulling the opposite way - towards a Europe that seeks to protect Europe's social model.

It is about two fundamentally opposed notions of what Europe should be. And the battle is already under way.

Panorama's "Battle for Europe" was first broadcast on Sunday 27 November 2005 at 22:15 GMT on BBC One and online at bb.co.uk/panorama

Battle for Europe
24 Nov 05 |  Panorama
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27 Nov 05 |  Panorama



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