TONY BLAIR has given in to French demands for a “far reaching” revision of controversial plans to streamline employment regulations across the EU after President Chirac of France declared that the free market policies championed by Britain were “the new communism of our age”.

Mr Blair agreed, after a major row, to water down the proposals to open up Europe’s market in services to help the French Government to avoid defeat in May’s referendum on the European constitution and to protect the “European social model”.

The head-on collision between competing French and British visions for Europe overshadowed a summit designed to kickstart the Continent’s stagnating economy.

The conflict between Britain’s support for free markets and the protective labour policies championed by France came to a head over proposals backed by the UK to enable everyone from mechanics to architects to work without hindrance across the European Union. Britain and the European Commission insisted that the plans to create a single market in services were needed to create 600,000 jobs and generate billions of euros by encouraging economic growth.

However, the so-called EU Services Directive has caused outrage in France, where unions claimed that it would destroy jobs and lower wages, and where it is regarded as a classic example of “AngloSaxon neo-liberal” economics.

At a dinner of European heads of government, M Chirac declared “ultra-liberalism is the new communism of our age”, and put forward proposals, supported by Germany, to redraft the legislation.

Jean-Claude Juncker, the Prime Minister of Luxembourg, which holds the rotating EU presidency, said: “People think there are inherent risks in this directive, and we want to remove those risks. We’re not going to open the door to social dumping.”

Göran Persson, the Swedish Prime Minister, said: “There is agreement to have a farreaching revision of the proposal, which is in line with the social European model.”

Britain leads opposition to the French demand, and managed to prevent the directive being entirely withdrawn. José Manuel Barroso, the strongly free-market President of the European Commission and a close ally of Mr Blair, said: “We have to open up the services market, but we have to do that by respecting the European social model.”

An EU diplomat said: “Discussions were very much through the prism of the referendum. Chirac needed help, but withdrawal was not an option.”

M Chirac gave a warning that if he failed to persuade his fellow EU leaders to rewrite drastically the directive, he would find it even harder to persuade his increasingly eurosceptic nation to back the new European constitution in a referendum on May 29. A French “non” would create an unprecedented political crisis within the EU. It would, however, let Mr Blair off the hook by removing the need for a British referendum next year.

Senhor Barroso has insisted that the Services Directive is the single most important piece of legislation needed to boost the European economy. It would sweep away regulations preventing EU citizens from offering their services in other member states.

He has the strong support of Britain, Ireland, the Netherlands and the former communist countries of Eastern Europe who have enthusiastically embraced free-market economics.

But M Chirac telephoned Senhor Barroso at the weekend to tell him that the directive was unacceptable and should be withdrawn in its current form. He told Senhor Barroso that “Europe means the protection of labour rights, loyalty to the conditions of competition, respect of public services and respect for cultural diversity,” his spokesman said.

That provoked an extraordinary riposte from Senhor Barroso, who told the French Government to stop telling the Commission to abandon unpopular legislation and to start selling the constitution on its merits.

The directive is opposed by “old Europe” countries more wedded to the more traditional European “social model” which gives greater priority to job protection.

Gerhard Schröder, the German Chancellor, has said: “The content of the directive puts fear and horror into the hearts of people. In no circumstances should it go through.”

The Services Directive is part of a ten-year package of free- market reforms known as the “Lisbon Agenda”. They are designed to make the European economy as dynamic as that of the United States.

Halfway through the programme, the reforms have been only partially implemented and countries such as France and Germany are suffering mass unemployment.

SUMMIT ISSUES

• How to promote economic growth and employment
• Whether to relax the Stability and Growth Pact to make the single currency’s rules more flexible
• Whether to rewrite the services directive allowing professionals to work in any member state
• Whether to lift the EU’s arms embargo on China
• Whether to endorse the appointment of Paul Wolfowitz as head of the World Bank

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