Europe's balancing act

The 'social model' is fraying, but the Continent is wary of raw capitalism. So now what?

For decades, European leaders have proudly offered their "social model" as a beacon to the world, marrying free markets with strong welfare systems to guarantee their citizens both prosperity and security.

But as the Continent ponders its future in the wake of voters' rejection of a European Constitution that sought to balance those two goals, the European model is fraying at the edges. Profound disagreement exists over how to make it meet the demands of a rapidly changing world.

On the one hand, nudged by the European Union (EU), every European government has agreed - in principle - on the need for reforms to deregulate their economies and unleash their competitive potential.

On the other hand, growing numbers of voters in some of Europe's biggest nations are resisting such moves as a threat to their lifestyles, and demanding continued state benefits and job security.

With 19 million unemployed in the EU, and populist anti-immigrant politicians eager for their votes, the debate over how to stimulate Europe's sluggish economies holds implications for Europe and beyond.

One constitutional phrase, guaranteeing "free and unfettered competition" across the EU economy, generated especially strong hostility in France.

Jeremy Rifkin, author of "The European Dream" and adviser to European Social Democratic governments, worries that the debate has been limited to a contest between unfettered market capitalism and democratic socialism. "Europe has lost sight of the need for a model that stimulates the market and understands its failure to distribute wealth fairly," he argues.

That was exactly what the "social market model" was meant to do. But under the pressure of global competition, it is under fire from both right and left, for being either too social, or too market oriented.

For Ann Mettler, cofounder of the "Lisbon Council," a proreform group based in Brussels, France's 10.2 percent unemployment rate is due to "the lack of reform" of rigid labor laws, high employer taxes, and generous welfare payments.

For ATTAC, the international left wing "alternative globalization" movement that opposes the EU Constitution, mass unemployment can only be countered by "breaking with neo-liberal economic policy" and reversing such minor reforms as have been made in France and Germany, says ATTAC spokesman Christophe Aguiton.

Five years ago, the 25-member EU set itself an ambitious set of targets known as the Lisbon Agenda, pledging to create "the most dynamic and competitive knowledge-based economy in the world" by 2010, while preserving high levels of social welfare and environmental protection.

Few governments did much about the program, however, and it has riled trade unionists. The problem, complains Lena André, deputy General Secretary of the European Trade Union Confederation, is that "the agenda has not been pushed in a balanced way. A lot of demands have been put on workers, and fewer on employers."

The reform medicine is especially bitter, Ms. Andre points out, when it does not appear to work. Welfare cuts in Germany have helped push Chancellor Gerhard Schröder's popularity rating down to 28 percent, but they have yet to reduce the country's 11.8 percent jobless rate. "We have to adapt to change, but it should not be only at a social cost," Andre argues.

Some European countries have shown the way: Finland, Sweden, Denmark, and Norway are all in the top six on the World Economic Forum's list of most competitive economies, while maintaining their famed social welfare programs.

Elsewhere, however, economic success is often seen as a trade-off with social protection. To French eyes, for example, Britain has sacrificed too much of its social safety net to achieve its low unemployment and 3 percent growth rates.

Announcing on Tuesday evening that his new government's top priority would be job creation, French President Jacques Chirac stressed that he was "committed to respect for our French model. This is not an Anglo-Saxon type model."

That will be popular with farmers and traditional workers, and it will reassure members of groups such as ATTAC. But it does not bode well, argues Ms. Mettler, for the small businesses that make up 90 percent of European companies, which hesitate to hire new workers because of their cost. "We need to focus on the parts of the economy with the capacity to sustain our standards of living," she says.

Nor will Mr. Chirac's approach be popular with countries such as Britain and new EU members in Eastern Europe, which say the EU as a whole could achieve their high growth rates if it shared their greater enthusiasm for free-market policies, including lower taxes. It is precisely those policies, however, which alarm French and German voters and spark fears that cheaper Eastern European labor will lower wages and welfare standards on the rest of the Continent.

Factory owners' threats of relocation to Eastern Europe "are often used as blackmail," complains André. "They say that either workers accept lower wages or longer working hours, or they will move."

French and German opposition obliged the EU earlier this year to withdraw a planned reform that would allow artisans to work anywhere in Europe under the laws in force in their home country. Western European visions of Polish plumbers undercutting their French and Italian counterparts sparked a widespread outcry.

At the root of the problem, suggests Stephanie Wahl, an analyst at the Social and Economic Research Institute in Bonn, is that "Europe is in the middle of a real paradigm shift, and we have become relatively weaker in the world.

"Once we profited from the free market because we were there first," she adds. "Others could import our sophisticated cars while they sold bananas. Now there are millions of people elsewhere in the world who are as capable as we are, but more motivated and more modest.

"It is legitimate that people should feel insecure" in Europe, Ms. Wahl says. "The free market is worrying for us now."

That shows, she says, in Germans' contradictory attitudes to economic reform. Opinion polls consistently indicate that most Germans accept the need for reform, but "the minute they are actually execute and affect lots of people, they say they are against them." Since Mr. Schröder launched his economic reform program three years ago, she points out, his ruling party has lost every regional election it has contested.

In the wake of France's rejection of the EU Constitution, "clearly it is going to be harder" for governments to push through reforms in the big European economies, said Maria Livanos Cattaui, head of the Paris-based International Chamber of Commerce, the world business organization.

But in other parts of the Continent, "people in some parts of Europe are fed up with the some of the status quo and the entrenched ways of doing things in some of the larger areas," she added. "It is going to be interesting to see which vision of Europe triumphs."