Europeans' Choice: Defy GATT Or Cut Back on the Welfare State

AS Western Europe sinks deeper into its worst economic downturn in decades, the 12 countries of the European Community have reached a crossroads. They could either move toward more market protectionism, which would antagonize their American and Japanese trading partners, or anger their own populations by scaling back unprecedented levels of social protection.

Neither of those choices is on the agenda as EC leaders meet in the Danish capital, Copenhagen, for a two-day summit beginning today.

"This is not going to be a philosophical discussion of free trade versus protectionism," says Jean Musitelli, spokesman for French President Francois Mitterrand. "Cutting back on the welfare state is not at all the line of thinking of [Jacques] Delors," says a close aide to the EC Commission president.

But with the Community's unemployed now standing at 17.5 million - more than 10 percent - and expected to swell to 20 million by the end of 1994, officials and observers agree that remedies are no longer a simple matter of returning to economic growth.

Many economists and business leaders are talking of such steps as reduced unemployment benefits and eased regulations on labor management as the only kinds of measures for making Europe competitive in what has become a global labor market.

That is why so many European eyes will focus on Mr. Delors this morning as he delivers to EC leaders a much anticipated speech on unemployment. While the talk has been kept under unusually close wraps, officials around Europe expect Delors to take a long look at the EC's international competitiveness.

"It is quite significant that this is coming from a French Socialist," says Stanley Crossick, director of the Belmont Center for European Studies in Brussels, speaking of Delors. According to Mr. Crossick, the focus on what the Commission president will say is the result of "weak national leadership that hasn't done what it should have in policy coordination. They [European national leaders] have left everything to Delors and the Commission."

What is taking place across the Community, from Spain to Denmark, is an intense discussion of the relationship between development of an international trade economy and the EC's current difficulties. On Friday in Germany - a country with the world's shortest average work week and highest number of paid holidays - Economic Minister Gunter Rexrodt declared that a substantial reform of German labor law is the only way to ensure the country's industrial survival.

But in France, especially, the topic has led to protectionist rumblings and predictions of a "fortress Europe."

In an interview in the Paris daily Le Monde, French Minister for European Affairs Alain Lamassoure called Saturday for a decision at the summit to "better defend the European economy and employment, and beyond that, the European identity."

In a weekend interview with Danish television, President Mitterrand said he supports "giving the 12 [EC countries] common rules to protect their production in the face of goods produced on the outside in social conditions that provoke such price inequalities that we will not be able to put up with the competition."

Acknowledging that such measures entailed "a form of protectionism," Mitterrand said they were needed to stave off a "revolt" in Europe of nationalism and protectionism "which would be even more fearsome."

PERHAPS the first shot in such a "revolt" came last week when the president of the National Assembly, Philippe Seguin, stung his own ruling Gaullists by accusing the government of "preparing a social Munich" - an allusion to Western appeasement of Adolf Hitler before World War II. He also called for "the death of GATT," the General Agreement on Tariffs and Trade, shorthand for the international trade liberalization process.

Still, most analysts do not expect such thinking to get too far. "There is a clear enough understanding in the Community that such protective measures would lead to swift reprisals from the United States and Japan, and thus a dangerous syndrome," says Philippe Moreau-Defarges, a European specialist at the French Institute for International Relations in Paris.

What, then, can this summit produce? Probably not much beyond words, Mr. Moreau-Defarges says, given the depth of the economic crisis and "the contradictions in a society that no longer knows how to finance its social system." On the one hand are companies and employers calling for reduced employment costs, and on the other "the states that feel a responsibility and the political necessity to protect their population," he adds.

Also restricting the EC countries' margin of maneuver are their already-high budget deficits - averaging 6 percent of gross national product across the EC - and the necessity to bring them down for any country hoping to participate in the single EC currency planned for the year 2000.

"There's a lot of talk about addressing unemployment, but these countries are strangled by the single currency [qualifying] criteria and their big deficits," says Rosalind Stevens-Strohmann, a research fellow at the Policy Studies Institute in London. "But take up that issue and you're talking about the whole European integration process."

EC Commission sources say they do not expect the discussion over an eventual relaxing of the single currency qualifying criteria to be officially addressed here because of the desire to give a signal of collective spirit and action.

In addition to the economic crisis, EC leaders will discuss the ongoing GATT trade talks; relations with Central and Eastern Europe and Russia; the status of enlargement talks with four wealthy European countries (Austria, Sweden, Norway, and Finland); a French proposal for a pan-European security pact; and the conflict in ex-Yugoslavia.