Why enlargement of the EU reinforces the case for reform

Today marks an important milestone in Europe's postwar journey: the European Central Bank opens its doors. European Monetary Union is happening, and it is happening on time and with the support of the markets. I will be in Frankfurt for the inauguration to wish the bank every success.

Today also marks the end of the British presidency of the EU. The baton passes to Austria, which I know is keen to take on the challenge and well prepared to do so. The detail of the Union's day-to-day work can often obscure the big picture. I hope during our presidency we have co-ordinated the EU's affairs in a competent and professional way and that we hand our Council business to our successor in a good state, but I believe this presidency was important for three reasons.

Firstly, Britain's relations with the European Union have been transformed since the elections in May last year. The days of 14 against 1 are over, as was clear at the European Council in Cardiff. Secondly, a consensus has emerged that EMU and enlargement - the two historic challenges launched during the last six months - require fundamental economic reform, and thirdly, at Cardiff we agreed to take forward reflection on political reform, too.

This is essential if we are to carry the people with us over the next few momentous years. It may seem odd to claim an improvement in our relations with the EU as a presidency achievement, but it needs little explanation for those of us who have followed the often damaging rows over the last 20 years.

I believe this change is a great step forward for my country. I also believe we now have something more to offer Europe. This presidency has underlined that a different political generation has taken power in Britain, a generation which sees no contradiction between constructive engagement in Europe and promoting national interests.

My government's position on EMU is clear and was set out by the Chancellor, Gordon Brown, last October. "If, in the end, a single currency is successful and the economic case is clear and unambiguous, then the government believes Britain should be a part of it."

We are not in the first wave because that would be contrary to our economic interests, not because there are overriding constitutional barriers to our participation, as many Conservatives in Britain believe. Our policy has not changed since October. What has changed is the fact that EMU is now happening, and all of us, not least the City of London, must prepare for its arrival.

We recognise there could be benefits to a single currency. A currency based on sound macro-economics can be a force for stability in the world and a catalyst for growth in the EU. In any event, a successful single currency is important for the whole of the EU, including those countries not in the first wave.

If we join, it will be on the basis of national economic interest, according to a series of economic tests set out by the Chancellor and, in the end, if the government decides to recommend entry, the people will have the final say in a referendum.

The European Central Bank will have a vital role to play in launching the euro successfully. The process which led to Wim Duisenberg's appointment as president of the bank was difficult, but as I said at the time, what mattered was getting a credible result, and it was precisely to protect and promote the independence of the bank that we took such trouble in getting it right.

Why do we support reform in Europe? People in Britain and elsewhere in Europe fear the EU is too centralised, too remote, and its economic policy is too caught up in regulation. Such concerns do not justify being anti-Europe, but they merit being addressed, and we addressed them in Cardiff.

I am pro-Europe, without hesitation, but I am also pro-reform, both economic and political. In economic terms we need an open, competitive Europe which has macro-economic stability and dynamism and innovation in its supply side. Education, not regulation, is the key for our workforce.

The single market must be driven through. I reject laissez-faire, I reject state control of industry.

The third way is to recognise that government has a vital role to play but one that is enabling, empowering our people and business to prosper in a new global market.

The European social model must not be abandoned, but it should be reformed, to provide for solidarity in today's world of international financial markets, industrial change and technological revolution. The reform agenda agreed at Cardiff showed that the Union is ready to meet this challenge.

Enlargement also reinforces the case for reform. We cannot let individual vested interests stand in the way of our historic obligation to the former communist states of eastern Europe. They took the path to democracy, we must help them along the path to prosperity. EMU, enlargement and the reforms they entail will transform the European Union.

This brings me to the third important change during the last six months, the growing realisation that we need to restore the Union's legitimacy if we are to win popular support for these momentous changes.

We need a vision for Europe which allows people to feel safe in their national identity while reaching out for European partnership. In some areas like crime, the environment, common foreign and security policy, we will integrate more.

For the single market to work, we need a strong Commission and strong European Court to police it, but in other areas much more can be done at the national, regional and local level. We must think boldly about how we connect the EU with its citizens. This is the coming debate in Europe. We began it at Cardiff. We shall carry it on at the informal summit in October.

Tomorrow Britain hands over to Austria, a country I know is determined to make a success of its historic first presidency. It is an exciting and challenging time for the Union. Austria has our full support. One of the things I have learnt over the last six months is that the presidency takes a lot of a government's time, but in the end it matters and it is important for all of us to get it right.