Europe has turned pink and now it is hurtling towards integration; once more, Britain finds itself dangerously isolated, reports John Lloyd

This week the British government made it crystal clear that it does not believe that its fraternal parties on the Continent have understood that socialism is dead. It was made crystal clear to the British government, meanwhile, that most of Europe's new ruling class thinks socialism still lives, and wishes to pursue it.

This growing split can be healed only if new Labour, untrue to itself, adopts the rhetoric and policies of the social democratic and socialist parties which now run the European Union; or if - as British ministers devoutly believe they should - their Continental counterparts realise that their measures will not work, and turn to a British, or third, way. However subtly this shift was achieved, it would represent a defeat of one model or another.

The alternative is increasing divergence.

The truth has finally emerged from beneath the honey that has coated relations between Britain and its partners since the SPD victory in the German elections two months ago. On Tuesday, Oskar Lafontaine remarked, after the monthly meeting of European finance ministers, that "we eventually must go to qualified majority voting on the sensitive issue of taxes. I believe the unanimity rule cannot be maintained."

This was after the French and German leaderships had agreed to "campaign for stronger co-ordination in economic policy, particularly in the framework of the 11 euro-countries, for rapid progress in the harmonisation of taxes and for the formation of a real European social model". That, said the Chancellor, Gordon Brown, at his press conference, "is simply not going to happen". Brown and Tony Blair had already sought a protective alliance. Earlier this week Britain issued a joint declaration with Spain - the only European country, apart from Ireland, with a government of the right - to stress their preference for "flexible" policies on employment.

Four iron laws threaten to further separate Britain from a left-dominated Euroland. First, it is not a member of EMU and may not be for another five years. The 11 members of EMU now largely agree that the adoption of the common currency from next month will bring with it an agenda of fiscal and other harmonisation in its train.

Second, since it is not a member of EMU, Britain remains excluded from the Franco-German duo. Thus it can do nothing to modify what seems to be a burgeoning relationship between Oskar Lafontaine and Dominique Strauss-Kahn, the German and French finance ministers. Both agree on the need for tax harmonisation; both also agree - and got EU ministerial approval for it - on a French plan that the chairman of the euro-11 should be represented in international institutions such as G7 and the IMF - the first move in a strategy which will substitute individual representation on these bodies with a unified European one.

Third, Britain has not prepared itself for the integrationist wave which is now rolling through the ministries of Europe. It finds itself in the now familiar position of persuading the electorate to agree to a change already accepted and all but implemented by the rest of the EU.

Fourth, it is not social democratic in the European sense. However vague the Third Way is, it remains a guide-rope for the Prime Minister and the Chancellor, and remains unique to Britain.

Though the Franco-German alliance remains at the heart of the EU, it is changing: Gerhard Schroder, the German Chancellor, made it clear that the days when Germany could be expected to give assent because it needed to expunge its Nazi past were over. Germany is now post-war and post-guilt. Much of the discussion between Germany and France is about the reduction in Germany's contributions - and about the difficulties in reforming the central EU institutions to permit an expansion to the east. It remains functional, and exclusive of the British. "The French and the Germans know that when the chips are down they can normally trust each other to do what is right for the cause of Europe," says Charles Grant, director of the Centre for European Reform, "in a way that they cannot trust the British."

The "pinking" of almost all of Europe this past year has given an extra boost to integration. Discussions among European socialists - which shadow the ministerial discussions and are now crucial forums for flagging up ideas - focus on outlining a "social Europe".

Last month Labour sought to lay down a template for reformed social democracy in a document, originally drafted by Ed Balls, Gordon Brown's main adviser, called "The New European Way". Adopted by the Party of European Socialists' Ecofin group, which brings together finance ministers and experts from the leftist governments, it was at one level another index of the "marketisation" of the European left, with statements about the benefits of trade and capital account liberalisation and the need for globalisation. It ended, though, with a passage on "tax policy co-ordination", which is at the heart of the growing divergence. This section noted that tax was rising rapidly on labour and falling on capital; that "harmful tax competition between states was intensifying and should be ended and that savings and corporate taxation should be 'co-ordinated'." This reflected the concerns, in particular, of France and Germany; both frown on what they call social dumping - low taxes financing relatively low social services, especially in Britain; tax incentives to corporations; and tax havens, as in Jersey or Luxembourg.

However, the paper left the bias in favour of co-ordinated tax at the level of a declaration, one among many. But Germany and France, with most of the other 11 euro-members, want to go beyond that. The real direction in which the majority wishes to go is revealed in a paper written after the New European Way document by Philippe Busquin, chairman of the Party of European Socialists' working party on tax matters. The paper, A Strategy for Solidarity, states that:

l "socialists - aware of the inevitable effects resulting from the creation of the euro and the single market - [must] be attentive to guarantee in the short term an effective minimum taxation on the corporate level as well as on the level of savings, as a necessary condition to avoid unacceptable distortions in competition";

l "minimum corporate tax rates should be fixed";

l "an effective code of conduct, applicable to all, on corporate taxation should be implemented as soon as possible, together with a co-ordinated taxation on interest [on savings]";

l "a more incisive and efficient taxation of capital is no longer an ideological position but an economic necessity".

Busquin's paper, with its stress on mandatory and integrated taxation, its desire to reduce the heavy taxes on employment (especially heavy in Germany, France and Italy) and its intention to nail increasingly mobile multinational corporations which shift assets here and there to avoid tax, is in the mainstream of European social democracy. Lafontaine and Strauss-Kahn, in broad terms, agree with Busquin rather than the UK government, which believes that taxation must be kept as low as possible and that emphasis should be placed on reducing bureaucracy, increasing efficiency and letting the labour market take the strain.

Some of this is mere rhetoric. Part of the reason for Blair's popularity in some sections of the European left is that many of new Labour's strategies and policies are being adopted - usually quietly - by the European socialist governing parties. They do recognise that the welfare states and relatively highly protected labour markets they have created since the war impose too high a burden on the tax systems. Next week, German unions will meet the government to demand a 32-hour week and an earlier retirement age in order to combat Germany's 10 per cent-plus unemployment. The government will be no more inclined than the employers to concede.

In France, says Francois Merrien, an expert on social security at the University of Lausanne, "we see the paradox of a weak state with strong institutional resources, the paradox of a strong ideology of solidarity with a major problem of social exclusion". Merrien says that much of the constant efforts to reform l'etat providence made in the eighties and nineties have foundered - most spectacularly in the withdrawal of the plan by Alain Juppe, the rightist premier, to shake up social security, pensions and taxation.

In Italy, welfare and pension reform is similarly - if more firmly - stalled. Maurizio Ferrera, a professor of political science at Pavia University and a government adviser on poverty, says that "the system here is very uneven; what you get in the way of unemployment benefit and pension depends very much on the strength of your bargaining power and the agreements you have with your employers. The government has made many efforts to change this and bring in a more universal and fairer system, but it breaks down on the resistance of both the unions and the employers."

This is a harsh irony for the Continental socialists. The mechanisms which accord equal rights to social partners - employers, unions and the state - are now working against the interests and wishes of the parties most committed to social partnership. They envy the UK's ability to innovate and reform without significant hindrance from the trade unions.

All countries face a common dilemma; the rapid ageing of their populations and the inadequacy of their pension systems. All will have to do, perhaps more decisively, what Labour is trying to do: encourage more private provision, target services more on the poor, question universal benefits, devolve functions now performed by government to the private sector or to voluntary agencies. Much of this is what Blair and Brown mean by the Third Way, and there is no doubt that it attracts interest throughout Europe.

But not all of the expressions of solidarity and joint routes to socialism are windy words. The very existence of common problems also indicates that there are common solutions. Pension and social security systems will tend to converge - in part because countries are swapping ideas and policies, in part because the common currency will help to even out the larger disparities in provision. And that,too, will reinforce the drive to common levels of taxation, and the view that no member state should be allowed a free ride on foreign investment by lowering its social protection and thus its taxes.

The view that, in Euroland, it is a matter of one for all and all for one is controversial only with the British. Plus ca change, as Tony Blair would say.

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