Europe's Other Identity Issue

It's one thing for Europe's political house to fall into disarray, as it has over the recent rejection of the European Union Constitution by France and the Netherlands.

But it's quite another for its economic foundation to crack. After all, the EU started out more than 50 years ago as an economic club. Its main purpose was knocking down trade barriers and building a common market. That's why, for example, the Italian labor minister's recent demand to replace the new common euro currency with the old Italian lira is so troubling.

A closer political union is a more recent goal, necessitated in part by the collapse of the Soviet empire, and the need to encourage reform in Central and Eastern Europe. Hence, the EU's big-bang expansion eastward last year. The new Constitution was to help smooth the internal workings of an EU with 10 new members, and to give it more foreign policy unity.

That the Constitution failed is regrettable. That further EU enlargement could slow down, is also too bad - though perhaps a necessity. In any case, neither development threatens the inner core of Europe the way economic backsliding can.

Economically speaking, the EU is at a crossroads. That became crystal clear over the weekend when a summit of its leaders tripped up over a budget impasse.

The specifics of the sharp argument had to do with Britain demanding agricultural reform (at least 40 percent of the EU budget goes to agricultural subsidies) in exchange for reducing its annual EU budget refund. More important, the dispute represents a philosophical choice: Will Europe select economic reform and market liberalization, or cling to its inefficient and costly social-welfare economies?

The nostalgia for the latter is palpable, reflected in: the French rejection of the Constitution (which was as much about high French unemployment and unpopular economic reforms as anything else); German voters' repudiation of their chancellor's party and his attempts at economic and social reform; and Italian yearning for the good old days of the lira (when Italy could simply devalue its way to trade competitiveness).

Next month, British Prime Minister Tony Blair assumes the EU presidency. He plans to push economic liberalization. It's worked for Britain, which boasts a stunning run of economic growth. On the other hand, much of the rest of the Europe, hesitant about reform, slogs along at under 2 percent growth.

The choice is clear, the path difficult. May Mr. Blair provide the needed encouragement.