If Europe fails to put its economic house in order, two problems are likely to develop: pressure will grow for inward-looking trade policies, and both the United States and the burgeoning Asian nations will move toward greater trade liberalization, leaving Europe isolated from the world's most dynamic markets."Europe's Maastricht unification treaty is responsible for many of the continent's economic woes"-Claude Barfield

Europe's Maastricht unification treaty is responsible for many of the continent's economic woes. Particularly in its social charter, the treaty was based on self-deluding assumptions about "social dumping" and the ability of governments to administer social justice and maintain expensive welfare systems -- even though these governments lacked the ability to increase productivity.

In the short term, Europe's efforts to achieve greater economic growth have been slowed by campaigns in each country to meet the economic criteria for launching a European Monetary Union. The toughest of these is the requirement for a maximum budget deficit of no more than 3 per cent of a country's gross domestic product. This stringent debt standard has drastically squeezed many economies, largely through tight monetary policy and bitterly contested budget cuts. This comes at a time when governments are struggling with record high unemployment rates: Belgium, 13.7 per cent; France, 11.8 per cent; Germany, 11 per cent; and Spain, a staggering 23 per cent.

"In the short term, Europe's efforts to achieve greater economic growth have been slowed by campaigns in each country to meet the economic criteria for launching a European Monetary Union"-Claude Barfield

Along with the creation of a monetary union, the Maastricht decision to grant the European Union's governing institutions greater power over welfare and employment issues goes far beyond the original Treaty of Rome's goal of the "free movement of goods, services, capital and people." The Treaty of Rome, which created the European Union, strongly tilted toward a Europe of "mutual recognition" and competing national systems. Maastricht pointed toward an EU with substantial top-down decision-making, harmonization and a leveling up of social and employment policies. To buy off the poorer, Mediterranean economies, massive subsidies were promised through a "cohesion fund" that allowed these poorer governments to pay for their increased social and employment costs.

Since Maastricht, it has become ever clearer that even the rich countries of the North can no longer afford the hugely expensive social-welfare systems and the inefficiencies of rigid, protected labor markets. Once again, Germany, the largest economy and the engine of Europe's growth, is the best example of the structural flaws in national social contracts. In 1980, labor costs in Germany and the United States were roughly equal; today, German labor costs are the highest in the world, about 40 per cent above those in the United States.

German workers now enjoy the shortest workweek and have the shortest working lives of citizens in any industrial nation. They put in an average 1,602 hours a year, compared with 1,957 for the Japanese and 1,896 for the Americans. In effect, Americans work an extra seven weeks and Japanese an extra nine weeks compared with their German counterparts.

Germany is not alone with its daunting labor problems. Six of the seven industrial countries with the highest manufacturing labor costs are members of the European Union. In all of them, up to 50 per cent of total compensation covers fringe benefits, including vacation, health and unemployment benefits. The high cost of adding jobs has forced EU corporations to be cautious in hiring new workers. While the U.S. economy created 18 million new jobs between 1984 and 1994, the more populous EU added only about 3 million to 4 million, mostly in the public sector.

Belatedly, Germany and France have committed to significant reforms of both the labor market and the social- welfare system. But both governments have encountered heavy resistance from powerful interest groups. Bonn has announced the boldest plan, including a freeze on public-sector wages, reduction of public spending from 50 per cent to 46 per cent of GDP by the year 2000, a cut in sick pay benefits and relaxation of job protection for workers in small companies. France is committed to a similar but less stringent program.

To their credit, German Chancellor Helmut Kohl and French President Jacques Chirac have resisted turning inward and raising protectionist barriers. If, however, growth stalls and unemployment remains at record levels, it is unlikely they and their EU partners will agree to further liberalization in the World Trade Organization, or even through regional or bilateral arrangements with the United States.

EU agriculture ministers already have vetoed further agricultural liberalization with east European countries, and France, Spain, Greece and Portugal have reservations about market-opening negotiations with East Asian and South American countries. The test will come when, after the 1996 American election, the United States once again embarks on multilateral or regional trade liberalization. If the EU balks, the United States is likely to go it alone, choosing a path that will lead to an ominous fragmentation of the world trading system.

Claude E. Barfield is a resident scholar, director of science and technology policy studies, and coordinator of trade policy studies at AEI.