The core eurozone countries – Germany, France and Italy – find it difficult to reform when times are bad. Invariably, governments intervene to protect voters from the downturn. Worse, these countries also find it hard to reform in good times. Governments often confuse a cyclical upturn with a secular improvement, and ease up on necessary but uncomfortable reforms.

Thankfully, 2008 promises to be neither particularly bad nor good for the eurozone. It is therefore a propitious moment in both econ­omic and electoral cycles to deliver on reform. It is true the fallout from the credit crisis, the strong euro and high energy prices will make life trickier for exporters and governments. But the eurozone economy is still growing around trend. Many economists expect this to continue into 2008 – albeit with some softening in mid-year.

Instead of bleating about the unfairness of external conditions, European governments must concentrate on what they themselves can do to improve the eurozone’s own economic performance. There is a long list of measures. Here are the four priorities.

First, liberalise labour markets. Make it easier for businesses to hire and fire employees. The Danish model has shown how it is possible to make a labour market highly flexible while providing generous – but temporary – support to the unemployed. People, not jobs, must be protected.

The recent reversal of some of Germany’s hard-fought labour market reforms is a step backwards. The creeping extension of the minimum wage to different sectors of the German economy will not help, either – especially in a country that is hankering to impose maximum salaries as well.

In France, Nicolas Sarkozy has shown a commendable willingness to tackle labour market reform. Even he is not daring enough. The statutory 35-hour working week, one of the most perverse economic experiments, should be scrapped. Instead, Mr Sarkozy seems intent on killing it by a thousand administrative cuts. The trouble is that each cut only adds to the cost and complexity of doing business.

Second, reform the state. One of the big challenges for all European governments is to lift public sector productivity. In ageing and heavily indebted societies it is vital to squeeze more benefits out of every euro spent if the quality of state services is not to decline. Clear spending priorities and tough performance benchmarks are needed.

Third, cut the costs of doing business. Governments must streamline their countries’ administrative and judicial processes to cut the private sector burden. Why does it take 63 working days to start a business in Italy, against just four in the US?

Fourth, unleash Europe’s universities. For too long, they have been regarded as branches of the civil service rather than vital engines of the knowledge economy. European governments should give them more autonomy to set their own priorities, to hire and reward the best research and teaching staff, and charge students fees. They should also make it easier for private universities to compete.

In short, governments must themselves do less and make it easier for the private sector to do more. Europe’s corporatist capitalism, based on close relationships be­tween government, business and organised labour, enabled the continent to rebuild after the second world war. But this model of capitalism has become too rigid for the modern world. It is stifling European entrepreneurialism.

Europe needs increasingly to revert to arm’s-length – rather than relationship – capitalism. Economic outsiders, be they immigrants, the unemployed or newly established businesses, must be given more opportunities to inject fresh dynamism into the eurozone economy. It is also up to outsiders, consumers and small businesses to demand such change. Reform must be led by the private sector.