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Iraq overshadows EU meet

"There are very important issues for the European economy we will be discussing. Our message is Europe is moving forward."

George Papandreou, Greek foreign minister

For all their talk of forging the world's most dynamic economy, EU leaders this week will face the fact that they are far off their goals, and war on Iraq will set them back even further.

At a summit in the Portuguese capital Lisbon three years ago, the EU set itself the target of overtaking the US as the most competitive economy by 2010.

Back then, in the frothiest days of the "dotcom" bubble, the talk was all about "realizing Europe's full e-potential."

By embarking on far-reaching structural reforms, by forging a "knowledge-based economy" and by encouraging innovation, the EU would soon be enjoying economic growth rates of 3 percent a year, the 15-nation bloc promised.

But, as EU leaders prepare to review the "Lisbon strategy" at a summit in Brussels today and tomorrow, all that looks like a pipe dream.

The prospect of war on Iraq is in any case overshadowing the summit agenda set by the EU's Greek presidency. But the Greeks are still fighting to keep attention focused on economic affairs.

"The Lisbon process is a high priority for us," Greek Foreign Minister George Papandreou said.

"The Council will take place as planned. There are very important issues for the European economy we will be discussing. Our message is Europe is moving forward," he told reporters.

But if there has been any movement forward, critics say, it has been painfully slow.

The European Commission is meanwhile warning that economic growth in the 12-member euro zone could plunge into recession because of war on Iraq.

The EU is already struggling to achieve its annual "potential growth rate" of 2.25 percent to 2.5 percent, which compares unfavorably to the US figure of 3.5 percent.

From a heady 3.3 percent in 2000, the euro zone expanded by just 0.8 percent last year and will be lucky to achieve 1 percent this year, the commission said in a report this week.

Even that anaemic figure depends on the impact of an Iraq conflict on oil prices, industrial activity and consumer confidence.

But war is also seen as a convenient excuse, at a time when countries such as France are refusing to embark on hard-hitting reforms despite breaching financial rules laid down in the euro zone's Stability and Growth Pact.

EU Economic and Monetary Affairs Commissioner Pedro Solbes said the euro zone's current weakness could only partly be attributed to global tensions.

He said in the commission report that the 12-nation area "suffers from insufficient resilience to shocks" -- in other words, the economy is too rigid.

The EU employers' association, UNICE, said the real problems of the European economy lie deeper than the specter of war.

"Unemployment, reform inertia and fiscal uncertainties play a more important part in keeping European domestic demand paralyzed than geopolitical uncertainties," UNICE said Monday.

Given the global uncertainty, few are confident of the EU regaining its reformist zeal at this week's summit.

"The reforms are basically easy to work out and the European leaders know what they have to do, but they lack the political will to see them through," said Bank of America economist Lorenzo Codogno.

And, observers note, the EU's two strongest advocates of economic reform -- British Prime Minister Tony Blair and his Spanish counterpart Jose Maria Aznar -- are also the most isolated over Iraq.
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