On the Agenda; No matter how much governments may resist, the market and its allies are forcing change on Europe.

Byline: Karen Lowry Miller (With Stefan Theil in Berlin, Tracy McNicoll in Paris and Jacopo Barigazzi in Milan)

These days, it's easy to despair for Europe, and many economists do. Growth forecasts for the euro zone are down, unemployment is climbing and, while 18 percent of young people cannot find work, political leaders in Germany, France and Italy have gone slow on labor market reforms. The European Union is well behind on a five-year-old plan, the Lisbon Agenda, to create the world's most competitive economy by 2010. Expectations are low as leaders of the EU's 25 member states gather at a Brussels summit this week to discuss ways to realize the Agenda goals. Yet, despite the pessimistic majority, there is an underdog case to be made that change is in the air.

Out in the real world, market pressures for reform are overwhelming resistance from national governments. Global competition magnified by the strong euro is forcing companies to make tough calls where governments won't. Firms are restructuring, entrepreneurs are creating new businesses at a quickening pace, productivity is rising. "Oddly, I feel optimistic," says Deutsche Bank chief Europe economist Thomas Mayer, a longtime critic of the Continent's failure to reform. "I feel like a doctor who has watched a patient with a severe illness for 10 years. Now he's gone into crisis, and the real fight begins."

Brussels is demanding change from above, and new civil-society lobbies are allying with local government to push from below. Recalcitrant national leaders are more and more alone in defense of welfare states. "The biggest politicians in the world, even if they wanted to, could not prevent globalization," says European Commission President Jose Manuel Duro Barroso. "Are we in Europe open to this new world? That is the problem."

Barroso wants Europe to concentrate on growth and jobs so it can afford its environmental and social protections. As Europeans prepare to vote on their new Constitution over the coming months, confrontation will be put on hold. But Brussels is pushing. Barroso is trying to open Europe's service sector to more competition. Neelie Kroes, the new Competition Commissioner, is pressuring cartels and preparing a revamp of state aid that will direct more money to smaller, more innovative companies. "There's been a sea change in the sense of urgency" for economic reform, says a senior Commission official, who calls it a " life-or-death issue."

The private sector is not waiting for an official European Union directive. Small companies have long been the key to job creation in Europe, and they are booming. In France, after reforms simplified the start-up process, the number of new businesses rose 9 percent in 2003 and 2004, after five flat years. In 2004, Germans founded a record 960,000 new businesses, up 18 percent over 2003, due in part to cuts in the red tape required for plumbers, carpenters or hairdressers to set up shop. Entrepreneurs are creating new services, like the dog taxi in Kaiserslautern run by former social worker Karl-Heinz Gerrmann. The EU is trying to redirect more research-and-development spending to these more nimble companies. "Big companies want subsidies disguised as R&D funds," says Isaac Getz, professor of innovation management at the European School of Management in Paris. "Small business drives innovation."

Barroso has firm allies among young entrepreneurs and ...