Patricia Hewitt's speech to the Foreign Policy Centre in full

"I congratulate Mark Leonard and the Foreign Policy Centre for putting together this excellent conference at this important time - just two weeks away from the Heads of Government meeting in Barcelona on Economic Reform and just a few days after I launched the Economic Reform White Paper together with the Chancellor Gordon Brown.

The Centre's mission is to revitalise foreign policy debate. With timing and topics like this, they are, as always, bang on target.

This afternoon I will be speaking about the role of policy-makers in helping to drive up productivity in our economy and to deliver prosperity for our citizens - at home and in Europe.

Prosperity

In our first term in government, we started by putting economic stability as our first priority.

We have the lowest unemployment rate since the 1970s, the lowest inflation - and the lowest interest rates - since the 1960s. 20 years ago our long term interest rates were five per cent higher than in Germany and three per cent above those in the US - now ours and there are all similarly low.

No country is immune from the global economic slowdown but as the IMF and the OECD recently confirmed, the UK economy has been more resilient than all the other major advanced economies to the current very difficult economic conditions. So we were right to put stability first.

Now, in our second term, the challenge is to build upon that foundation of economic stability - and secure the rise in productivity in the public and private sectors that is the only way to raise our living standards and improve our quality of life.

I recognise that the challenge facing us is rather different from that faced by some other European countries, notably France and Germany, whose productivity levels are much higher, but levels of employment lower.

That, of course, explains why the British policy agenda is sometimes seen as different from that in other European countries. The UK focussing on productivity, the euro-zone on employment. But the overall aim is the same - greater prosperity in our continent.

So in Britain, we are concentrating on raising skills and expanding educational opportunities for all ages. Modernising our transport and telecommunications networks.

Strengthening our competition authorities in order to create the most open and dynamic markets in the world. Investing in our science base - an outstanding national and European asset - and ensuring that world-class science and technology are turned into world-class products and businesses. Indeed, we have already trebled the rate at which new businesses are spun out from universities.

Why European policy matters to Britain

I don't think I have to tell this audience why Europe is so important to Britain - even though there might be some differences in this room about what that means.

Over half our trade is with other EU member states. Three million jobs are linked to that trade. Our ability to go on attracting inward investment - and, of course, we receive a quarter of all foreign direct investment into Europe - depends, crucially, upon our place in the Union.

But being at the heart of Europe is also a crucial part of our drive to raise productivity. Our companies need the challenge and the opportunities of being part of a large single market - and the more dynamic, competitive and innovative our single market, the better for our people and our businesses.

The single market, currently comprising 380 million consumers, could increase to over 500 millions consumers after enlargement. Larger than the US and Japanese markets combined.

We are strong backers of enlargement. Indeed, my colleague Melanie Johnson will be in Poland tomorrow, promoting the benefits of economic reform.

The Lisbon agenda is crucial to the UK.

Our prosperity depends on a prosperous Europe.

As we prepared for Lisbon, two years ago, we knew that Europe needed major structural reform to succeed in the modern knowledge-driven economy. We knew we had to open up product markets; liberalise capital markets; remove unnecessary restrictions in labour markets.

We knew that without flexible, strong and open markets, our companies would be unable to improve their competitive position and create new jobs.

We had seen the IT revolution create millions of new jobs in the US - but we also saw that 70% of all e-commerce was transacted in the US and only 20% in Europe.

We knew too that while it took just one week to set up a business in the USA, it took twelve weeks in Europe - and cost four times as much.

And, most damaging of all for our families and communities, even in boom times, average unemployment in the EU did not fall below eight per cent.

We were lagging the US. But we knew it. And we acted on it.

At Lisbon, every EU Member State made firm commitments to the economic reform agenda.

The Lisbon agenda marked a sea change in European thinking away from heavy handed regulation and intervention towards knowledge, skills, enterprise and innovation.

An ambitious agenda aimed at matching US levels of job creation and over-taking the US on productivity within 10 years.

We understood that that was the route to solving Europe's problem of high unemployment.

And it was explicit as a goal: 20 million new jobs to be created by 2010. Employment levels up to 70%.

Much done, more to do.

We are now two years into the life of this ten year plan. And already we have made some good progress on the Lisbon targets.

Five million new jobs have been created

Four million more women are now at work

Connections to the internet have more than doubled - with almost 30 million more homes now online than two years ago, that's an additional one in every five European houses since Lisbon.

Just about every European school is now wired up to the Internet - in line with the Lisbon target.

phone calls are 25% cheaper on average.

Real benefits to British citizens and British consumers.

And we're making real advances towards our goal of making Europe the world's most dynamic and innovative knowledge-driven economy.

A new legal framework for telecommunications coming into force next year.

A new legal framework for e-commerce, with the E-Commerce Directive the centrepiece of a set of single market rules to boost business and consumer confidence.

The European research network - now the fastest and most extensive in the world, embracing thirty-one countries.

The European Small Firms Charter, helping to shape policy-making in Member States and the Commission as we seek to raise the rate of business start-up and create a more entrepreneurial European economy.

The Charter, which is now a cornerstone of EU enterprise policy, has the positive effect of forcing the European Union to Think Small First and act in key areas such as improving the representation of small firms."

So we're making progress on European economic reform.

But there have been some setbacks too.

Discussions on the Community Patent failed to reach a conclusion in December. This was disappointing.

It still takes almost four years on average for a patent to be granted in Europe - twice as long as in the USA and costing five times as much to maintain patent protection.

The failure to agree the Takeovers Directive.

Now that the High Level Group has reported, I very much hope that Commissioner Bolkestein will be able to bring forward some further proposals.

And, of course, we still have the long outstanding issue of energy liberalisation.

Countries that have led the way have seen productivity improvements go hand in hand with lower prices.

But the failure to agree on energy liberalisation has sent a damaging message to investors around the world and to businesses and consumers here in Europe.

There is a fear amongst business and investors that the will for economic reform - so strong at Lisbon - has weakened and faltered.

And of course, economic conditions are very different today. Growth in the G7 economies which was 3.5% two years ago, down to 1.0% in 2001, and only 0.6% in 2002.

Manufacturing industry is struggling and the high tech and communications sector is finding trading conditions harder.

We shouldn't be too gloomy: there are some tentative signs that the slowdown in the US, Euroland and non-Japan Asia is bottoming out, suggesting that the global downturn in 2001 may be relatively shortlived. Our economies are still growing, albeit more slowly than we thought.

But there is pressure on the policy makers. When times seem tough, the instinct could be to batten down the hatches, retrench, retreat, protect and wait for the good times to return.

Demands on government to bail out loss-making companies become louder

The possibility of using legislative power to prevent companies from laying off workers could acquire a new attraction

But these pressures must be resisted.

The need to pursue the agenda of European economic reform is more urgent, not less urgent, in these difficult times.

The Lisbon agenda is not just for the good times, it's for the bad times as well.

It is inevitable that economies, however successful, will at some point experience a slowdown. But flexible, dynamic economies are better placed to withstand difficulties. They have shallower recessions and they recover from them faster.

Just as a fitter individual is better placed to recover from illness, so a fitter economy is better placed to withstand a downturn.

And every continent must play its full part in restoring world growth. All of us by pro-active monetary and fiscal policies.

We can all do more. Japan by radical banking reform. America by opening markets.

And the British Government has made clear to the highest levels of the US Administration the dangers involved in introducing restrictions on steel imports.

Should the US propose significant action we would strongly support any moves by Pascal Lamy to seek WTO dispute settlement action. We cannot allow the EU and UK industry just to be swamped by the backwash. So we defend our right to consider options for preventing serious injury to the industry including, as Pascal Lamy has stated, the possibility of safeguard measures.

I reject the arguments of those who would see economic reform go on the backburner in today's economic climate.

If the benefits of liberalisation are in any doubt, we only need to look at the telecoms sector. Liberalisation throughout Europe in 1998 resulted in a surge of competition, driving prices down and standards up - something that should give governments the confidence to open up business and domestic energy markets across Europe.

Indeed, despite the slowdown in telecommunications today, I have no doubt that the sector will help to fuel growth in the European economy in future - particularly as demand for broadband grows, and third generation mobile services arrive towards the end of this year.

So we must seize the opportunity of Barcelona to re-energise the process of European economic reform. The agenda is clear:

More competitive gas and electricity markets and better cross-border connections to bring down prices for consumers.

Widely available broadband technology - essential infrastructure for the knowledge economy and the knowledge society

A single European sky to cut air traffic delays.

Getting the directive to create a level-playing field for cross-border takeovers back on track

Putting the focus back on job creation and labour market reform

We also need to take firm action to ensure we make better use of our science and knowledge base. Tony Blair and Wim Kok recently wrote to José María Aznar to set out some proposals on this. This letter highlighted the role of Intellectual Property Rights, the new Framework Programme, increasing science-industry links, innovation in services, and recognition of the growing importance of intangibles/intellectual assets.

We need to be more intelligent in Europe about the way in which we regulate. I reject the arguments of those who see economic reform and social policy as opposing forces - those whose first instinct as economic reform progresses is to reach for regulation and impose red tape.

Putting obstacles in the way of companies who need to respond to change will cost jobs in the long term.

Of course, regulation is sometimes necessary - to protect consumers and employees but also to create the structures that promote and safeguard competition.

In Britain, we are sometimes accused by business of 'gold-plating' European regulations - and we are tackling that problem. But we also need to be more intelligent about the way we regulate in Europe.

We must ensure that the benefits of a proposed regulation really outweigh the costs of implementing it. We must stop instinctively reaching for the regulatory lever, like an alcoholic instinctively reaching for another whisky - convinced the answers to his troubles will be found at the bottom of the bottle.

The Mandelkern report last year set out clear ideas for better regulation in the EU. We are keen to see rapid progress in implementing it - an inter-institutional group committed to better regulation, and a clear mandate to the Commission to develop an action plan before the end of the Spanish presidency.

I hope too that we will make further progress at Barcelona in rewriting Europe's rules on state aid. Our goal should be less state aid and better state aid - reducing it when it undermines competition, targeting it to increase the efficiency and dynamism of our economies; and ensuring a more efficient, more transparent state aid regime.

The new state aid rules introduced to tackle market failure in environmental protection and in venture capital markets are a good first step. But more needs to be done to modernise EU state aid and I welcome the ambitious reform agenda set at Industry Council in December.

There are, of course, those who argue that Europe needs more social action. But let's remember that one of the best ways of tackling social exclusion is to give people opportunities to fulfil their potential - whether that is in employment or self employment.

I see that only too clearly in some of the most deprived areas in my constituency in Leicester. Where enterprise - whether it is part of the private sector or part of the social economy - us helping to regenerate and renew neighbourhoods.

The impact there can be obvious - sometimes it can be more subtle. A recent Commission study showed that the liberalisation of the telecoms and electricity markets have not only reduced prices in these areas overall, but that the impact of these price cuts has been most felt amongst lower income groups.

So, provided you do it the right way, economic reform doesn't have to be "balanced" by social policy. It helps to delivers social policy.

Economic Reform was the way to job creation, prosperity and opportunity at Lisbon. It remains so now.

The single currency

Of course, the other major change since governments all met in Lisbon two years ago is that we now have a single European currency as a tangible reality.

As our Prime Minister said when he welcomed the introduction of euro notes and coins, a successful single currency is massively important to British interests.

By June 2003, the UK Treasury will have completed an assessment of the five economic tests, which will determine whether a clear and unambiguous case for UK membership can be made.

In principle we favour joining the single currency, because of the clear benefits a successful single currency would bring in terms of trade, transparency, costs and currency stability.

In practice, the economic conditions must be right. And Government, Parliament and the British people must agree to join.

With the single currency now in circulation, Europe must get on with structural reform..

Just look at the prize. If we achieve our Lisbon ambition, we will have 20 million more Europeans in work by 2010. If we can match American levels of productivity - and that is our goal - we will increase Europe's output and prosperity by 40% - equivalent to £5,000 a year extra for every EU citizen. That's the scale of the prize - and of the challenge ahead.

This strong economic will must not be defeated by a political won't.

So we will redouble our efforts to deliver progress at Barcelona.

And deliver on the issues that matter to British people - jobs and prosperity."