Editor's view: A mountain to climb

Discord over the European Union's (EU) budget will likely hamper the UK's presidency of the bloc and could set back much-needed economic and political reforms. Dan Matthews assesses the damage to entrepreneurs.

Before the European constitution debacle and the French-led flare-up over Britain's EU budget rebate, businesses in the 25-member group might have been looking forward to the next six months.

On July 1, the UK became 'president' of Europe; a role which while not as commanding as it sounds, gives the country powers to define the course of policy negotiations - at least for the rest of 2005.

Salvaging Lisbon

Prime minister Tony Blair and chancellor Gordon Brown were preparing to breath new life into the deflated Lisbon targets - five years after their conception, which aim to create in Europe the world's most dynamic knowledge-based economy.

A thorn in the side of progress has been the unwillingness of several national administrations to adopt upgrades to tax and employment laws and to offer fresh incentives for entrepreneurs.

In April, Brown told reporters: "We will…push for economic reform in Britain and in Europe," and further promised that he would promote low regulation UK/US-style economics during the presidency.

Speaking to business leaders in May, he added: "As we look ahead to the rest of 2005, the latest risk is low economic growth in Europe - 1% below what was expected a year ago - particularly in Germany, our largest export market in the euro area."

He went on: "Our proposed agenda will be: labour market reform, so we will resist the opt out being removed to the 48 hour week; product and capital market liberalisation, so you have access to European markets."

The chancellor probably hoped that Britain's example of low unemployment; relatively speedy growth and better-than-average business start-up and failure rates would give weight to the reform agenda.

If the drive were successful, British businesses would enjoy knock-on benefits both from a more entrepreneurial Europe - with better prospects for partnership and trade - and a tougher stance against EU-sanctioned red tape.

European disunion

But if the chances of constructive change were remote before, now they amount to a pipe dream. The UK's popularity in Europe is at its lowest since most people can remember, especially in the eyes of France and Germany.

Its position has been undermined by garrulous squabbling over the bloc's budget. Against this backdrop, Blair and Brown will struggle to make ground on their pro-business agenda. But maybe that's the real reason for the row.

Germany, and in particular France, have a number of reasons to keep Blair and Brown quiet over the next six months. The latest breakdown in relations came amid a string of minor tiffs over Europe's economy and employment laws.

Chirac, mindful of France's powerful trade union movement, is reluctant to adopt 'Anglo-Saxon' free market economics for fear of compromising his own country's social model.

In distancing Britain's policies from those of Europe, Chirac has made Blair and Brown's job of championing rules popular in the UK - its Working Time Directive opt out, for example - all the more difficult.

In general, freeing up labour markets is central to the Lisbon agenda, yet Germany has made slow progress. The result is the highest unemployment levels for 60 years and business sentiment in the doldrums.

As an aside, both Chirac and Schroeder need to regain ground lost in recent domestic defeats - over the EU constitution and the lost Bavarian state elections respectively. Bullish British leadership of the EU could hinder that face-saving process.

If the last few months are anything to go by, Brown and Blair will find the UK presidency no picnic. What was an uphill struggle has become a mountain to climb.