The full text of the trade and industry secretary's speech in Madrid on the government's European policy.

"It's wonderful to be back in Spain. Our countries enjoy such close ties - economic, historic and geographical.

It was, of course, our two Prime Ministers, Tony Blair and Jose Maria Aznar, who first proposed the Lisbon summit - an idea seized upon and taken forward, over three years ago now, by the then Portuguese Prime Minister Guterres.

The Lisbon summit created a sea change in European thinking. A seismic shift away from heavy handed regulation and intervention towards knowledge, skills, enterprise and innovation.

We're still working closely together on the economic reform agenda, as on so many other issues. Enlargement, institutional reform and, within the coalition, the rebuilding of Iraq.

It's a pleasure to be back.

Trailing the speech

I time my trips to Spain carefully. Not for the weather. I time my trips for the big political events.

Last time I was here was just before Heads of Governments met in Barcelona and agreed to open up commercial energy markets.

Now I'm here as the first Cabinet Minister to speak in the euro-zone after our announcement yesterday on our policy towards British membership of the euro.

Because today we as a government begin the next stage of our campaign on a pro-Europe platform to make the case for Britain in Europe and the principled case for the euro.

On my last trip, I said of the Lisbon agenda that "this strong economic will must not be defeated by a political won't."

The same is true of the euro. If the economic will is there, the political will shall be there as well.

Because we will always act in the economic interests of our country.

Stability

Since this government came to power in 1997, every decision we have made has been designed to build, and then maintain economic stability.

In this, we have been - dare I say it - remarkably successful.

We have the lowest inflation and interest rates that we have seen for a generation. And at the same time employment is at a record high.

In this regard, our experience is similar to yours - you too have reaped the rewards of prudent policies, with steady growth and three million new jobs created since 1996.

Part of our success - for both countries - is due to our membership of the European Union. We have all benefited from the reduction in barriers to trade that the single market has brought, and we will all benefit from the widening of that single market with eastern enlargement.

But the other measures that we have introduced in Britain - such as reduction in debt and an independent monetary policy - have ended the boom-bust economics that characterised our country in the 1980s and early 1990s.

Similarly, your own policy of a balanced budget and economic reform has played a large part in your success.

And because of the economic policy we have pursued, both Britain and Spain have performed better than most in the face of the recent global economic slowdown.

Euro statement

It is against this background that Britain's decision yesterday on euro membership should be viewed.

Our five tests on euro membership are our stability guarantee; to meet them would ensure that we will not put at risk our economy or our public services. At all times we put stability and the national economic interest first.

Yesterday we published the results of those five tests. In doing so we have strengthened our commitment to and support for the principle of joining the euro - showing the gains to Britain are considerable.

We conclude that the financial services test is met.

That we have made significant progress in achieving cyclical convergence.

Indeed we are more converged in cyclical terms with the euro-zone than some existing euro countries are with each other, and more so than they demonstrated in the run-up to the start of EMU in 1999.

We still have to meet the two tests of sustainable convergence and flexibility.

But with the achievement of sustainable convergence and flexibility, all five tests could and can be met.

And at that point, the benefits we will reap will be substantial, as the experience here in Spain has already demonstrated.

The prize on offer is:

• Increased trade - we estimate up by as much as 50 per cent in 30 years.

• Lower transaction costs - worth around a billion pounds a year, the gains greater for smaller companies.

• A larger economy - a quarter of a percent larger each year - worth £3bn a year to start with and rising substantially as the cumulative effects take hold.

• Less exchange rate volatility.

• A cut in the cost of borrowing for business.

• Higher investment - and higher inward investment.

And in particular, with a significant proportion of both our trade and our inward investment in manufacturing industry, there can be little doubt that the potential gains from euro membership are great for British manufacturing.

To achieve sustainable and durable convergence to meet the five tests, we have announced major reforms to be implemented immediately and over the next year.

These include:

• Adopting the euro-zone measure of inflation, the Consumer Price Index in our pre-budget report later this year.

• Step-changes in the planning and supply of housing and in the market for long term mortgages;

• Radical reform at a national, regional and local level to enhance the flexibility of labour, capital and product markets in Britain;

• Publication of a draft Referendum Bill this autumn;

• New arrangements for British fiscal policy inside EMU, including the publication of a regular fiscal stability report to Parliament and - where necessary - the government's response.

We will report on progress in the Budget next year and consider the extent of progress and determine whether, on the basis of it, we make a further Treasury assessment of the five tests which - if positive next year - would allow us, at that time, to put the issue before the British people in a referendum.

Business response

It is this resolve to implement far reaching reforms in our economy that is the best statement of our intent.

We believe that the implementation of these reforms would help us meet the five tests, as well as being right for Britain's economic interest. And we believe there is a realistic prospect of making significant progress over the next year.

And it is for this reason that British manufacturers and inward investors have welcomed the government's position which, they are clear, puts us on a path to membership at the right time, at the right rate and on the right terms.

Reform

Just as we need to reform our own markets in Britain to take advantage of what the euro has to offer, so Europe as a whole must reform to do the same.

At Lisbon we set the target of making Europe's economy the most dynamic and competitive in the world by 2010. For decades, European unemployment in Europe has been around eight per cent against three per cent in the US.

A Europe for the people must give all its people an opportunity to work.

We have made great progress but we must keep going if we're to meet our target of 20 million new jobs by 2010. So we must

• Make sure our labour market policy remains focussed on job creation rather than protection. Not protecting those in work at the expense of those out of work.

• Make sure that regulation is a tool of last resort, rather than a knee jerk reaction - and we are working with Spain to make sure the Chemicals Directive properly considers the impact on industry;

• Make sure we give meaning to our liberal approach. We can't preach liberalisation abroad when we practice protectionism at home.

Trade

On this point, the crucial mid-Round WTO Ministerial Conference in Cancun is now less than 100 days away.

After the division and disagreement over Iraq, Cancun provides an opportunity to re-build and re-energise international relations. Uniting the world - including the Latin American world - behind a vision of a peaceful world community with trade systems that are not only free but fair.

• If tariffs in the developed and developing world were halved, developing countries would gain £150 billion p.a. - three times what they get in aid and

• The number of people living poverty would reduce by over 300 million by 2015.

More than a billion people in our world live on less than one euro a day. Yet we pay our dairy cows in Europe twice that amount under the CAP.

I know it's a difficult and sensitive issue for all Member States - including here in Spain.

But we cannot and will not accept continued distorting subsidies for exports that harm the developing world. We can protect our rural way of life in Europe without denying opportunities to the poorest in the world.

EU Commissioner Fischler has proposed a CAP reform package that would radically alter the focus of CAP support. For this reason, we strongly support his proposal to decouple support from production.

Under his proposals, instead of being paid incentives to over-produce, farmers would get incentives for maintaining the land and farming in a way that promotes biodiversity.

As well as providing opportunities for the developing world, reform of CAP will help us get a deal at Cancun. Providing opportunities for all of us.

Spain, as the 16th largest exporter of goods and 6th largest exporter of services in the world, stands to gain hugely from increased market access.

I know we will work together for success at Cancun - on agriculture, but also as we tackle the difficult issues of TRIPs and access to medicines.

Closing

We are closest of partners - in Spain and Britain - and will remain so.

This is because we are not afraid to take difficult decisions - at home and abroad - be they on the single currency, economic reform or Iraq.

We've done what's right and will continue to what's right - for the peace, prosperity and security of our own people, and people around the world.

Whether it's working together to realise the benefits of the single currency, or reforming trade rules for the benefit of our own economies and global prosperity, we gain from our partnership.

It is in that spirit that I am delighted to be with you today."