EU's classical grand compromise

Europe's major economies badly need a co-ordinated stimulus of reform and innovation if they are to deliver growth, jobs and …

Europe's major economies badly need a co-ordinated stimulus of reform and innovation if they are to deliver growth, jobs and prosperity in coming years.

The European Council in Brussels endorsed changes in the stability and growth pact governing the euro zone and relaunched the Lisbon strategy for growth and employment. It also agreed to make substantial changes to the services directive in response to widespread criticisms, not least from France, lest it endangers the referendum on the EU constitution at the end of May by undermining existing levels of social protection.

Economics and politics intermingle in these decisions, as is to be expected when the issues at stake determine the fate of governments. For several years EU ministers have wrangled over reforming the stability and growth pact. While there has been agreement in principle that its terms are too inflexible to suit the different set of economic circumstances applying after the euro's successful introduction, compared to those needed to prepare for its launch, smaller states bridled at the failure of larger ones to accept its strict disciplines.

The package of reforms accepted by Ecofin ministers at the weekend and endorsed by this summit is a classical grand compromise. Germany, France and Italy gain fiscal leeway from a relaxation of rules on state spending limits, while Ireland and other smaller states will be able to spend more each year on infrastructure projects. It remains to be seen whether the relaxation of automatic disciplinary rules once spending limits are breached triggers inflation and therefore higher interest rates, as the European Central Bank fears might be the case. Overall this has been a sensible and necessary change - but it is certainly insufficient to stimulate the European economy as much as needs to be done.

READ MORE

That task falls to the Lisbon strategy laid down five years ago. It was originally intended to make the EU the most dynamic and competitive economy in the world - an objective which has fallen sadly below expectations. This is a voluntary, inter-governmental approach to economic reform which relies on member-states to implement change, rather than on initiatives by the European Commission and majority voting to adopt a sharper profile. Economic growth, environmental sustainability and social protection are its major terms of reference. The changes agreed yesterday maintain that balance but scale back its ambition to concentrate on innovation, research and development.

This falls well short of what the European Commission led by José Manuel Barroso hopes to achieve during its term. The commission has had to back away from the unsatisfactory services directive drafted by its predecessor, and which is now the direct responsibility of Charlie McCreevy. A prudent retreat was called on it at this summit after widespread protests about social dumping. But without genuine structural reforms in this area Europe's economy will remain in the doldrums.