Europe is losing its battle to become the world's most competitive economy by 2010 because of sluggish growth and lack of political will to promote economic reforms, the European Commission will warn tomorrow.

In a keynote document on the economic future of the European Union, the Brussels authorities highlight the risks of a "two-tier" Europe where some countries such as Sweden and Denmark are doing much better than others such as Greece, Italy and France.

The Commission warns that the difference in economic performance within the EU will be exacerbated by the accession of 10 more countries, mostly from eastern Europe, in 2004.

The document sets out the Commission's position ahead of the EU summit in Brussels in March. It could raise tensions with some EU governments, such as France and Germany, which take a dim view of Brussels' reprimands on economic reform.

However, the incoming Greek EU presidency is urging member-states to push through reforms.

Mr Costas Simitis, Greek prime minister, said: "There is a global recession and we need to become more competitive as a union."

The Brussels summit will have to look at ways of kickstarting the ambitious economic reforms aimed at making the EU more competitive than the US and Japan by the end of the decade launched in March 2000. The targets, the so-called Lisbon strategy, included reaching full employment, a substantial rise in investment on research and a marked increase in productivity.

"The strategy has now reached a decisive moment," the draft document, which could be toned down before the Commission president Mr Romano Prodi presents it to the 19 commissioners tomorrow, says. According to the report, the EU faces a "clear choice between following and leading": "It can maintain the current sluggish pace of reforms or show that it is capable of a step change ahead of enlargement."

The Commission urges national governments to implement reforms in their labour, product and capital markets in the next 12 months. It warns that in 2004 the EU risks an institutional paralysis, with European parliament elections, the end of the Commission's mandate and enlargement.

The Brussels authorities criticise national governments for slowing the pace of reform during the current economic downturn.

According to the Commission, some countries are faring much better than others.

In a list of 44 indicators, including economic performance and reform, employment, research and the environment, Sweden, Finland and Denmark are consistently ahead of the other 12 member states. By contrast, Greece, Spain and Portugal are among the worst countries in the vast majority of areas, with large economies such as France and Italy also performing poorly. - (Financial Times Service)