It’s been a bad day for the EU:

EUROPEAN Union leaders gather in Brussels later today for their annual economic summit in chastened mood. Five years into the Lisbon agenda, the bright millennial dream of transforming the whole community into the world’s leading economic powerhouse by 2010 lies in tatters.

Germany, faced with 5.2 million of its citizens out of work and output stubbornly stagnant, is resorting to eye-catching cuts in corporate taxes and has negotiated relief from its serial breaching of the union’s Stability and Growth Pact.

France, another serial pact defaulter, is facing growing unrest among its public sector workers and polling evidence that its voters are swinging against endorsement of the proposed new European constitution, when it comes up for ratification there at the end of May.

The two countries which formed the dynamic central axis of the European project for so long are now struggling to come to terms with these stark new realities as their governments prepare for tough domestic election battles in 2006 (Germany) and 2007 (France).

Germany, once a key architect of a rigorous stability and growth pact on the grounds that, without it, less responsible member states might play fast and loose with their deficits, has breached the “borrowing must not exceed 3% of GDP” rule three years in a row and looks like doing it again.

Chancellor Gerhard Schroeder, an outspoken critic of tax competition across the EU, especially since the new former-communist economies of eastern Europe joined and started introducing powerful tax incentives to stimulate development, now seems intent on responding in kind with a headline cut in Germany’s large company corporate tax rate, from 25% to 19%.

France, where unemployment has broken through 10%, has also breached the core rule of the pact three times in succession. However, with public sector unions whipping up sustained resistance to reform of pension rights and working conditions, Jacques Chirac, the president, is now openly hostile to any further extension of the European single market to services, for fear that that might destroy even more French jobs.

Is it too late for Paris to discover that you can’t complete internationally when competition is all but outlawed at home? Probably. I say that because France is looking to act as enablers to any other dysfunctional EU members looking to break the SGP rules:

Special consideration is also being offered to member states embarked on a range of public investment in areas like research and development, innovation, peace-keeping and pensions reform. But if the summit over the next two days endorses the compromise pact, it will not please everyone.

“Everyone” being code for “all those ‘New Europe’ members east of the Elbe and south of the Danube.” It seems our plucky, former Warsaw Pact comrades are out-innovating Old Europe:

Five years on from Lisbon, one senses that the economic dynamic across the enlarged EU is changing in subtle