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All around her, Caroline Blet can see signs of the slump that has beset the once-flourishing town of Ris-Orangis (pop. 25,000), 15 miles south of Paris, for more than two years. Things went from bad to worse in March, when the big LU cookie factory closed, taking 412 jobs with it. Shopkeepers complain of declining sales, and on May 25, five buses carried protesters from the town hall to antigovernment demonstrations in the capital. Blet, 41, runs a small real-estate agency that has so far escaped the downturn, as falling interest rates continue to boost house sales. But she has no illusions about her longer-term future. "My parents' generation was very lucky. They bought property cheaply before inflation came, they benefited from huge advances in health care and they retired at 60," she says. "I know I won't be able to retire at 60: I'll have to work two, three or four years longer."

That sentiment is echoing throughout Europe: the holiday is over. During the past quarter-century, workers have grown used to ever-rising wages and ever-shorter working lives. They enjoy long vacations and reduced workweeks, and retire well before 65; the French strikers last month were marching to protect full-paid retirement in some positions at the not-so-ripe-or-old age of 52. European countries were proud to provide free education and health care and generous pensions. Those benefits were affordable as long as a buoyant economy made up for the costs. Governments have whittled away at them, but now the one-two punch of a shrinking population and dwindling productivity means the perks are no longer sustainable — and makes an imperative of deep reform.

Yes, a recovery will come, and it's greatly anticipated: in last week's TIME/CNN poll, economic growth tied with the war on terrorism as Europeans' No.1 priority. But if the past is any guide, the next upturn will be weak. The average per-capita economic growth in the E.U. dropped steadily from 2.6% annually in the 1970s to 2.1% in the 1980s and just 1.7% in the 1990s. The falloff will likely be even steeper over the next decades. Women in the E.U. are having on average 1.5 babies, well below the 2.1 required to keep the population stable. At the same time, the proportion of people over 65 is rising sharply. If these trends continue and policy is left unchanged, the E.U.'s working-age population will drop by about 40 million by 2050.

All that will widen an already yawning gulf between Europe and the U.S., where long-term growth has remained constant and birthrates high, thus replenishing the workforce. U.S. workers on average spend 475 hours more on the job per year than they do in the Netherlands. But now the economic decline is forcing governments in France, Germany, Italy and elsewhere to become more — gasp! — American in their approach to labor policy. Reluctantly, they are embracing unpopular measures they ducked for decades — and that's enraging labor union members, who turned out in the hundreds of thousands in Paris late last month. Public-sector workers crippled transportation and shut schools to protest a change in pension rules that would require them to work for 40 years, rather than 37.5 years. In other words, they were protesting the same new reality that confronts Blet and many others: if European economies are to fight off long-term stagnation and unemployment, then Europeans will have to work longer or harder — or for less pay. No wonder so many people have been marching; who would want this sort of holiday to end?

For workers like Rüdiger Hass, it already has. He took a 10% pay cut last year to save his job. Hass is a 19-year veteran of Dienes Werke, a company in Overath, near Cologne, that makes industrial knives and other cutting equipment. Sales fell last year to j35 million, and the ceo, Bernd Supe-Dienes, the grandson of the founder, is doing all he can to cut costs. A decade ago he started moving some production to Hungary, where labor costs are one-quarter what they are in Overath. Since then, he's created 200 jobs in Hungary, and just 40 in Germany. Last year he reached an agreement with German employees to reduce working hours by 10% in return for a cut in pay.

Hass accepts the push into Hungary: it wouldn't be possible for the same products to be made as competitively in Germany. "It's better to give up some jobs to keep the company alive," he says. He's not thrilled about earning less, but it's better than being out of work.

Many other German firms have been moving production abroad. Last week, a survey showed nearly one in four German firms intends to transfer some facilities out of the country over the next three years. The exodus is not just in high-wage manufacturing, but also corporate operations such as administration or R and D. The oft-cited reasons are high labor costs and inflexible rules.

But shifting production isn't enough for Supe-Dienes, who is now trying to shrink his Overath workforce from 200 to 175. That's happening mainly through attrition, but he's laying off six people. It's a cumbersome process that requires giving formal notice and often going before a labor tribunal. The procedure can take about four months, and usually ends in an out-of-court settlement. Once, when he didn't settle, the ruling went against him and he ended up having to reimburse a government agency for the months of unemployment pay the dismissed worker had drawn while the case was being considered. "I won't risk that again," Supe-Dienes says.

Such red tape, say employers' organizations and some economists, helps explain why companies in Germany, France and other Continental European nations are so reluctant to invest and hire new workers at home. Not so fast, say labor unions and other economists, who believe the fault lies elsewhere — with overly restrictive government fiscal policies and tight monetary conditions imposed by the European Central Bank that are choking growth. Jean-Paul Fitoussi, a prominent French economist, says "logic dictates that you would cut taxes in a recession and cut public spending in a period of growth. But we're doing the opposite. That limits growth and makes the slowdown last longer."

Not all European countries are affected equally. Britain likes to contrast its less regulated economy — including more flexible hiring and firing rules — with those on the Continent to explain why U.K. unemployment is at 5% of the labor force compared with almost 9% in Germany and 9% in France. But not even the U.K. has been spared the longer-term decline common to the rest of Europe. Although its economy sped up during the 1980s, per capita growth fell back in the 1990s to the same rate of the 1970s, and is now barely higher than the E.U. long-term average, according to O.E.C.D. statistics.

Union bosses are caught in the middle of the argument. Michael Sommer, the head of the German Trade Union Federation, which has been battling Chancellor Gerhard Schröder's efforts to overhaul labor-protection rules and reduce social-security costs, declared last week that the original program had been defanged to his satisfaction. But he added: "It's not clear that the government has understood the seriousness of the situation. It needs to start an active economic policy, or else the nation will be driven further into crisis." Even militant French unions see the current system needs an overhaul; there simply aren't enough younger people to continue paying for the retirement of their parents' generation. And yet they march. It's not just union members who feel this conflict. A recent poll in Le Monde shows that 80% of French people see financing their pensions as a serious problem that needs to be tackled urgently. But 49% support the unions' stance.

Marion Uteza, a Paris elementary-school teacher, epitomizes this straddle. Marching in a mass demonstration through Paris late last month with her 5-year-old daughter and a handwritten sign proclaiming no to an american-style society, she acknowledged the inevitability of changing the pension system. It was the details of the government's plans she didn't like. "Surely it must be possible to reform pensions without destroying the system," Uteza said.

Arcelor, Europe's largest steel company, may provide a glimpse into Europe's workplace future. The Luxembourg-based firm, which has j26.6 billion in revenues and employs 104,000 workers, has managed to extend the retirement age without destroying the system. For 15 years, starting in the mid-1970s, everyone over 50 at its French operations — then a stand-alone company called Usinor — took early retirement. It was part of a government-subsidized restructuring program for the steel industry, and a boon to 100,000 workers, who retired early on 92% of their salary. But when the government stopped the subsidies in 1990 after protests from rival steel firms and other French industries, Usinor had to scramble to figure out what to do with its older workers. The answer, says Daniel Atlan, human-resources manager, was a program to push the retirement age out to 60, and upgrade skills. The jobs of everyone over 50 were guaranteed, and thousands were retrained to use computerized equipment. People under 50 were told they would only be laid off if other work could be found for them: the firm created an employment agency to help. "Most of the people we hired in the '70s we hired for their muscles, not their brains," Atlan says. "But we told them: 'If you improve your skills, we'll improve wages.' It was a big bet: we'd pay more, but we'd improve our performance." The bet paid off, Usinor was privatized and merged with Luxembourg and Spanish steel firms to become Arcelor. Overall productivity doubled in the 1990s and Atlan estimates that about half of the increase was due to the improved skills of the steelworkers. But weaning the workforce off early retirement hasn't been easy, and many older steelworkers ended up working part time. "People still want to leave early," Atlan says. "We haven't changed the mindset."

Back in Ris-Orangis, too, people are having a hard time adjusting. Like many towns outside Paris, it grew at a solid clip in the 1990s. But starting in 2001, the economy sagged. Bigger firms in the area, including telecommunications giant Alcatel, began layoffs. The hardest blow came when Danone shut its LU cookie factory on the edge of town. The 290 ex-employees still looking for jobs have an average age of 48. "It's not going well," says Farid Djitli, a union representative. Only one person has found work at the same pay; 40 others took a 30% pay cut. They are being cushioned by Danone: as part of the severance package, it's making up for the shortfall in pay for three years. Even so, says Jean-René Buisson, the firm's general secretary, "it's difficult to convince people to take lower-paying jobs." Who can blame them? No one wants to believe the good times are gone. But doing so may be the key to getting them back.

• PETER GUMBEL | Paris
• The endless slump is forcing Europeans to rethink their attitudes toward work