Brown in stark warning to EU: 'Reform or stagnate'

The Chancellor Gordon Brown has issued a stark "reform or stagnate" message to Britain's European Union partners which will intensify the Government's battle with France and Germany over the EU's future direction.

In his annual speech to a City audience at the Mansion House last night, the Chancellor contrasted the two million jobs created in Britain since 1997 with the 20 million unemployed on the Continent, half of whom are long-term jobless. He insisted the rest of Europe must make the same "long-term choices" as Britain to move from being a trade bloc to a "global Europe" that secures a prosperous future and full employment.

Mr Brown, a long-standing critic of what he regards as Europe's "sclerotic" economies, entered the intense debate over the EU's future following the "no" votes on the proposed EU constitution in France and the Netherlands. He argued that they had given a "new urgency" to his drive for economic change.

Hinting that some EU powers might be better handled by national governments, he said the two referendums called into question what is the right balance "economically and politically between national decision making and European decision making to fit us to meet these challenges."

Calling for the EU to be more "outward-looking," he said: "The issue is not just how Europe integrates from 15 to 25, but how all 25 reach out to the rest of the world." He added: "The political reality remains people's attachment, for example on issues of what is taxed and by whom, to their national values."

Dismissing the idea that he was a Eurosceptic, he argued that reform must be based on "pro-European realism" and co-operation between governments that recognised national values. "Those of us who have always been supporters of the benefits of European co-operation have a duty not to be silent about the need for Europe to reform. Instead the best pro-Europeans can do is to show how Europe by reforming can meet the long-term needs of its citizens in future years."

Mr Brown said the EU must reform in five areas - structural change to deepen its single market; ensuring that half of its budget no longer went on agriculture or subsidies to its richest members; a "modern" social dimension that matched "fairness with flexibility"; cutting red tape; and boosting free trade by breaking down barriers between Europe and America.

For example, Europe should set and stick to timetables to open up industries such as energy, public utilities and financial services to competition and dismantle state aids, starting with "inefficient and counterproductive" farm subsidies. "The failure to reform the budget impedes the very economic changes we need. While the priority should be to face up to the science, skills and infrastructure challenges of global change, 55 per cent of the total European budget in 2013 will be spent either on agriculture or on subsidies for the richest countries of the Union," he said.

The Chancellor said that his vision of a "global Europe" in what he called a "second stage" for the EU project reflected the reality of the business world. He said: "While the old assumption was that we would move from economic integration at a national level to economic integration at a European level, it is in fact global not European flows of capital that now dominate; the global, not European, company; and the global, not European, brands."

Today Tony Blair will drive home a similar message when he enters the lion's den of the European Parliament in Brussels to outline Britain's goals for its six-month spell in the EU's rotating presidency. The Prime Minister will shrug off criticism from MEPs for blocking a deal on the EU's budget at the acrimonious Brussels summit last Friday and call for Europe to exploit the opportunities created by globalisation.

Mr Blair will reject criticism that his Government favours a purely free market approach with no "social dimension", saying he wants a balance between the two. He will reassure his critics that he does not want an "overnight transformation but a managed process of change".

Writing in Germany's Bild newspaper yesterday, Mr Blair said: "Of course the EU is much more than a free-trade area. Britain supports a social Europe, but it must be a social Europe which is adapted to today's world."

Calling for reform of the Common Agricultural Policy before the current agreement on it expires in 2012, he added: "We need to modernise sooner rather than later. The rest of the world will not wait for us. We certainly cannot wait until 2014, as some suggest."

The Prime Minister wrote: "Spending four out of every 10 euros on the CAP - and on less than 5 per cent of the population - simply isn't a budget which meets the needs and challenges of Europe and its people. We need a budget ... for jobs, not special interests. We need to invest in innovation and skills, not pay out €2 a day for every cow."