He told businessmen at the Confederation of British Industry annual dinner that the Social Chapter of the Maastricht Treaty had been painted as "the great bogeyman and an effort to handicap business in Europe".
The UK Government secured an opt-out, arguing that the chapter adds to the costs of British companies. Mr Santer said unemployment would not be solved by taking a "pickaxe to the welfare state" and the countries in the world with the strongest trade balances were "certainly not all those with the lowest labour costs".
His defence of the chapter led to a sharp rejoinder from Sir Bryan Nicholson, CBI President, who said Europe had not offered a persuasive response to the problem of structural unemployment and Britain's good job-creation record had been helped by flexible wages and keeping social costs low.
He said: "British employers are not opposed to good employment practices, quite the contrary, but what they do not want is to have them imposed in a rigid, centralised manner which increases business' costs whilst reducing their flexibility, and does nothing for the unemployed."
Mr Santer added: "If any European member state government were to attempt to take a pickaxe to welfare - God forbid - wage rates for an engineer or a blue collar worker would still be 15-20 times more than in most parts of the EU than, for example, in Eastern Europe."
But he believed most Europeans wanted a caring society which looked after those in need.
"I would go so far as to say that the belief in efficient welfare is a determining characteristic of the humanity, even identity, of Europe," he said.
Mr Santer added that it was time to stop treating the Commission as an opponent when it was on the same side.