Tony Blair and Silvio Berlusconi have agreed on the need for a radical overhaul of employment laws and regulations across Europe.

The British prime minister and his Italian opposite number called for economic liberalisation across the EU in a joint statement issued after their meeting in Rome on Friday.

Stressing the need to focus on job creation, the two leaders said the EU had fundamental labour market flaws that need to be addressed.

"European labour markets are characterised by structural problems. Fundamental reforms are needed if we are to tackle the challenges ahead, increase employment rates and ensure the full development of our economic potential," said the statement.

"The current regulatory framework often reflects forms of work organisation which are now obsolete. For this reason it is necessary to reinvigorate the structural reform process to ensure the efficient functioning of our labour markets and to develop more targeted labour market policies."

The two leaders also agreed on the need for measures to improve labour mobility, the "reshaping" of tax and benefits systems, and measures such as improved training to help employees find work.

"The European Spring Council at Barcelona should set new priorities and identify key strategies which will lead to full employment and a more cohesive and open society. Short-term concerns about the European economy should not detract us from the need to pursue necessary reforms. On the contrary, they should act as an incentive to pursue comprehensive reform more vigorously," the statement added.

With the UK government listing the need for economic flexibility to cope with economic change as one of its criteria for membership of the euro, ministers are keen to point to progress on EU liberalisation, believing it could help it make the case for membership of the single currency.

The Anglo-Italian talks signal that economic reform is moving up the European agenda, with the Spanish presidency listing it as one of its key priorities as the EU aims to create 20 million new jobs in Europe by the year 2010.

"The new phase of the employment strategy should be extended through 2010 and should put greater emphasis on structural barriers to the creation of employment, tax and benefit systems and labour market institutions," Jose Maria Aznar, the centre-right prime minister of Spain, has pledged.