Europe's where the action is

Why did we join the European Community in 1973, the European Union today? Ours must be the only country where, nearly a quarter of a century after accession, that question still needs to be asked.

For those of us who can recall the 1950s and 1960s, the experience of missing the boat - being locked out, and then eventually getting in only after many of the key decisions had already been taken by others - has shaped our whole attitude to Europe.

Today we are becoming prey to a mythology that we joined only an economic community, with no serious political dimension, and that the purpose of our membership was uniquely economic. That is not the case. Our motives were political to the extent that, as Macmillan put it at the time, through membership "this country would not only gain a new stature in Europe, but also increase its standing and influence in the councils of the world". Unless the UK joined, "the realities of power would compel our American friends to attach increasing weight to the views and interests of the Six in Europe ... and to pay less attention to our own ... To lose influence both in Europe and Washington, as this must mean, would seriously undermine our international position."

The political dimension of the European Community we entered in 1973 had a second component, above and beyond maximising our influence in world affairs. It involved the explicit pooling of some legal sovereignty in limited and specific areas set down in the Treaty of Rome. This was a conscious political decision, and its full implications were discussed extensively in Parliament in debates during 1971-72, to which I listened for hours in my role as a government whip.

Economics did, however, feature large in our reasons for joining. The economic rationale was very powerful indeed. We knew that access to a much larger market, the absence of internal tariffs, and the removal of non-tariff barriers would give our business the chance to enjoy economies of scale on a truly continental scale - and our consumers access to a wider choice of goods at more competitive prices. The single market programme of the 1980s, to complete the common market of the 1960s, has made that a reality, and enabled our people today to reap the benefits of a far- sighted economic policy.

The result is that today, 60 per cent of our trade in goods, and over half of all our trade, is transacted with other EU states. That compares with 40 per cent of our trade when we joined. Since 1973, the growth in UK exports to EU states has been twice as rapid as to the rest of the world. Today, Britain's visible exports to Germany alone equal those to the United States and Japan combined. We export more to France than to the Commonwealth, and more to the Netherlands than to all the newly industrialised Asian countries put together. Supplying the European market has become a key motor of British prosperity.

And to those who claim that, throughout all this, our trade deficit with the EU has widened, the facts actually prove the opposite. As a share of GDP, the UK's trade deficit with our EU partners has shrunk since we joined, not grown, even though our overall trade with these countries has more or less doubled.

The clear pattern over the past quarter century has become one of growing British economic interdependence with the EU, and also of growing economic convergence with our partners. For many years, we were falling behind France and Germany in living standards. That process has now been reversed. Over the last cycle, our output growth per head outpaced that of both countries. And in manufacturing performance the improvement been more spectacular still. In the 1970s our manufacturing productivity grew at half the rate of France and Germany. In the 1980s and 1990s, we have exceeded it.

We are beginning to match the stability achieved by our most successful partners in their general economic management, and we in turn are leading the way as a model for liberalising, supply-side reform.

But UK membership of the world's largest single market-place has been of vital importance in enabling us to obtain the full benefits of that liberalising reform. Since the major strides made in completing the single market, Britain now has a tailor-made homebase of more than 370 million of the world's richest and most demanding consumers on its doorstep. In value terms the single market is one and a quarter times the size of the US market, and two and a half times the size of that of Japan.

Here in Britain, our domestic market is now the European market. However much we may like to criticise Europe in this country, every sensible Briton needs Europe's customers, and knows that he or she depends on them for their prosperity.

Ironically, as we engage in a seemingly endless political debate over our role in Europe, the economic debate is largely over. Business sees that Europe is where the action is commercially, and consumers see it, too. Europe offers us a growing opportunity to excel economically, and the best is yet to come.

It is precisely because the United Kingdom has been engaged in radical supply-side reform, charting a path which others now have to follow, that we have managed to get ahead of the game. With a more flexible labour market, more deregulated product markets, a larger and more efficient capital market, a smaller state sector, as well as lower corporate and personal taxes than any of our principal European competitors, Britain now stands in an ideal situation to draw real economic gains from the continental market which we have helped build

The continuing success of the UK as a centre of inward investment is a striking illustration of the enterprise-friendly environment we have been fostering. In the single market, Britain has now been the largest recipient of non-EU investment for several years. Some 40 per cent of Japanese and US investment in Europe, and 50 per cent of South Korean investment, comes to Britain. During the 1990s, the UK has received as much inward investment as Germany, France and Italy combined. The total inward investment stock in the UK from all sources now stands at more than pounds 150bn. It has brought about 700,000 jobs to the UK since 1979, most of them in recent years.

Inward investment has been very good for British business. We have become Europe's biggest net exporter of televisions, computers and microchips. We are now a net exporter of motor cars. Compared with British-owned firms here, inward investors in the UK boast wages a quarter higher, value of product per head a third higher and net capital expenditure per head twice as high. Because of inward investment and ease of access to the UK market, no less than 40 per cent of UK exports are now generated by foreign-owned firms

Internationalisation has consequences. It links you closer to others and reduces your capacity to take independent actions that contradict the interests of others. And Britain in the mid-1990s is a very internationally- orientated economy indeed. We are more dependent on foreign trade than any other large industrial economy. We are a larger recipient and generator of investment flows as a share of GDP than any other G7 country. Our economy is exceptionally orientated towards the financial services sector, which now accounts for no less than 17 per cent of the UK's GDP.

Economically, we must continue to make change our ally, technology our friend. But equally, I believe you cannot be the enterprise centre of Europe without being centrally involved in every economic and political debate in Europe.

I believe that our continuing and future economic success, exploiting the opportunities of our enterprise economy, depends to a significant degree on Britain being and staying a key player in the politics of our continent.

People do not invest in Britain, they do not acquire our companies, they do not create new jobs in this country just because they like to play golf or practise their English. They do it because they see Britain as a high-skill, low-tax, flexible, business-friendly entry-point into the big, rich consumer market-place which is Europe today. For them, as it should be for us, the words "Britain" and "Europe" go together. The one leads to the other. Doing well in Britain means doing well in Europe. Good economics and good politics in Europe, as at home, go hand in hand.

As a country we cannot choose to live by the European marketplace economically and then exclude ourselves from discussion of the political future of our continent. That is the path of those who would seek British withdrawal from the EU or a fundamental renegotiation of our membership terms. It is one which we rightly reject.

The decisions being taken in Europe daily are too important for us to stand aside from them. We have a huge vested interest in how Europe's single market and competition policy operate, what trade policies Europe pursues, what environmental standards it sets. It matters to us deeply what Europe's foreign and security policies are. Inside the EU or outside it, at the heart of Europe or at its edge, we will be affected by the choices made by our partners. We need to be - and we want to be - in there, arguing as a committed member, determined to advance British interests and build a Europe that works

In arguing for Britain to be and remain a key player in Europe, I believe that we need to become more confident as a people about what we have to offer Europe, what we have to gain from Europe and what our chances are of success in Europe.

Certainly Europe is not, and never will be, the be all and end all of either our economic success or our political power as a country. But, properly structured, it offers a serious opportunity for Britain to continue to punch substantially above its weight in world affairs - a world in which we, and some other European countries too, might otherwise find our influence gradually eroding year by year. In this country we represent only 1 per cent, and falling, of the world's population. Somehow I think we want to continue to enjoy a lot more than 1 per cent of the world's prosperity and power.

The future institutional design of Europe remains open. Malcolm Rifkind said last week, in a striking phrase, that Britain wanted the EU to be more than a free-trade area and less than a federal state. In fact, that is its current shape, and one which we have helped mould, with sovereignty- sharing in some areas and intergovernmental co-operation in others. That must be right. And the encouraging thing is that a good number of our partners share that view.

Finally, I would like to say just a few words about monetary union. I have argued that Britain joined the EU for both political and economic reasons, that Britain is exceptionally well placed to succeed economically in Europe, that capitalising on that advantage means remaining a key player in Europe, politically as well as economically, and that Britain has already exercised a significant effect on the political and economic shape of Europe as it evolves. It follows from all these propositions that the Government's policy on EMU is right. It would be contrary to British interests to rule out now, on any specific timescale, participating in the next important development that may occur in Western Europe: the creation of a single currency. That is our position, and we will stick to it.

This is an edited extract of a lecture delivered by the Chancellor of the Exchequer yesterday at the Royal Institute of International Affairs.