Speaking on the day UK unemployment fell below the 2 million mark, the Chancellor underlined the "UK advantage" which derived from radical supply side reform and policies which were delivering macroeconomic stability.

"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 we have helped build."

The Single Market means that "Britain now has a tailor-made home base of over 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 the Japanese."

A full copy of the text is attached

Britain and the European Union: Building the Enterprise Centre of Europe

Speech by Rt Hon Kenneth Clarke QC MP, Chancellor of the Exchequer, to the Royal Institute of International Affairs (RIIA), at Chatham House, London SW1 on Wednesday 18 December 1996 at 13.30 hours.

Introduction

1. It is a pleasure to address Chatham House for the first time. For a politician seeking to talk about Europe or any international theme, Chatham House is a challenging arena. I am reminded of the remark attributed to Harold Macmillan, when he was asked as Foreign Secretary what it felt like to give a speech on foreign policy. He said: "you find yourself suspended perpetually between banality and indiscretion". Mr Chairman, I will do my best today to avoid being banal and certainly strive not to be indiscreet.
2. I take as my theme today the relationship between Britain and the rest of the European Union. And in doing so, I want to return to some fairly simple, straight-forward propositions which too often get lost in the polemics and intricacies of the current British Euro-debate. I want to set aside the details of current negotiations and return for once to fundamentals.
3. I would like to address four principal issues this lunchtime:




* first, why we are members of the European Union at all, and what benefits EU membership brings to Britain;



* second, how - as the emerging enterprise centre of Europe - we are likely to be even better placed in the future to benefit from our membership of the EU;



* third, why our continuing success depends on remaining a key player in Europe, politically as well as just economically;



* fourth, how we have succeeded as members of the EU in exercising a significant influence on the political and economic shape of the Union, and why we can continue to do so in the years ahead.

4. There are many other issues which we could sensibly discuss: enlargement, reform of the CAP and the structural funds, the role of the EU in world trade, to name only three. These are all extremely important questions, but I will leave them to other occasions.




British Membership: Politics

5. 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.
6. As a member of the House of Commons for the whole of that quarter century, I can remember very well the debate which accompanied our entry. Indeed, as a young man, I can also remember the first try back in 1961-63, culminating in the shattering veto administered by President de Gaulle.
7. 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.
8. 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." Ted Heath and his Foreign Secretary, Sir Alec Douglas-Home, advanced very similar arguments a decade later, when we finally got in.
9. In a post-Suez world in which Britain alone had only limited influence, and in which pressures on Europe to unite were bound to grow, it made sense for this country to seek to become and stay a leading player in European developments. Of course, we would act in concert with the United States, sustaining Europe firmly in the NATO camp, but Atlantic partnership and closer European unity were - as all except Gaullist France accepted - perfectly compatible means of defending and promoting Western values. Very many of the great Europeans since the war have been strong pro-Americans too, from Jean Monnet onwards. As on Atlanticist myself, I was always rather proud of the 'Trojan Horse' badge that de Gaulle pinned on this country.
10. 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 Government Whip.




British Membership: Economics

11. 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 that far-sighted economic policy.
12. 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, more to the Netherlands than to all the Asian NICs put together. Supplying the European market has become a key motor of British prosperity.
13. 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.
14. The clear pattern over the last 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 has 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.
15. The great British catch-up - the opposite of the famous Italian "sorpasso" - is a product of several things. I believe that the right macro-economic policies in the UK and our supply-side liberalisation on the micro side have both played the crucial role. 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.
16. 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 over 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 the Japanese.
17. 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.




The UK Advantage

18. This leads me to my second theme this lunchtime. I believe that, today, we in Britain are exceptionally well-placed to succeed and prosper still further in the world's largest single market. 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.
19. 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.
20. It is no accident that as Europe's economies have recovered from recession in recent years, the UK's recovery has proved the strongest and most durable. Ours is the only major economy so far to become a serious creator of new jobs. Our unemployment is following further and faster than anywhere else. Today's unemployment figures are simply the latest evidence of this.
21. 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 over 150 billion Pounds. It has brought around 700,000 jobs to the UK since 1979, most of them in recent years.
22. 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.
23. 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-oriented 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 UK GDP. Our firms are increasingly international in their loyalty and interests: British Telecom and Commercial Union are two of a growing number of British companies which employ as many people in the rest of the EU as they do in the UK.
24. To build on our growing position as the enterprise centre of Europe, we must maintain our policies designed to keep the UK economy ahead of the curve, with continued structural reform, sustained removal of restrictive practices, further liberalisation as necessary. 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.




Britain: A Key Player

25. This brings me to the third main theme of my talk today. 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.
26. 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.
27. As a country we cannot choose to live by the European market-place 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.
28. 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.
29. 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.
30. What we have to offer Europe is a practical, common-sense approach. We have a natural hesitation about grand ambition. We retain a desire to see Europe founded in realities, not dreams. Historically, we come with an outward-looking, internationalist perspective and a belief that Europe will be stronger if it embraces competition, rather than attempts to resist it. A free-market, free-trade Europe building prosperity from the bottom up, resisting big government from the centre and promoting supply-side reform: this is the winning formula which we believe is Europe's best route to lasting prosperity. It is an agenda which, in important respects, Europe has adopted and is adopting, under the influence of ourselves and other northern European states.
31. What we have to gain from Europe is the competitive strength of a huge market and the political voice of joint action with a powerful group of the world's richest nations. If Europe evolves in the right way, and I sincerely believe it can, then we in Britain will enjoy a huge twin advantage of being one of Europe's most competitive economies and one of Europe's few genuinely global political players, operating in a European framework which can multiply our strength and influence.
32. 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 one per cent, and falling, of the world's population. Somehow I think we want to continue to enjoy a lot more than one per cent of the world's prosperity and power.




British Success in Europe

33. The third thing we therefore need to do, as a country, is get better at recognising our chances of success in Europe. Not just because we are developing a competitive advantage - as the enterprise centre of Europe - in ways which I have already described. But also because we have already established a convincing track-record of success in moulding the European Union in ways that suit our interests. After a late start, we have in fact become one of the principal architects of the new Europe over the last quarter of a century.
34. Of course, we have not got everything our own way. We would have preferred it if Jacques Delors had not succeeded in even launching his social agenda in the late 1980s. I am not the only British politician who has always voiced doubts about the wisdom of adopting a fixed timetable for Economic and Monetary Union. However, on a range of key issues, most importantly CAP reform and the Single Market, our initially unwelcome ideas have become today's conventional wisdom. We wanted and we got closer foreign policy cooperation in Europe, first through "political cooperation" and then the CFSP. We did not want and we successfully resisted suggestions of a strong European industrial policy or a closed European trade policy, at times when many saw these as solutions to Europe's recent recessions.
35. We did want, however, and we did get a fairer deal for Britain as a net contributor, through the abatement procedure, worth 20 billion Pounds since 1984. Likewise, we wanted and we are getting budget discipline as a central operating principle of the Union. The EU regularly underspends its budget, as it has done for the last three years. And now that there are eight net contributors, a majority of countries, the annual increase in the EU budget has slowed dramatically. And one of the reasons that there are eight net contributors is because we wanted and we got enlargement to the EFTA states included as a key priority for the EU in the early 1990s.
36. In institutional affairs, to the frustration of one or two of our more ambitious partners, we have largely defined the limits of the politically possible. The extension of majority voting to the Single Market, but to relatively few other areas, was a UK negotiating triumph at the time of the Single European Act. The insistence on the pillared design of the Maastricht Treaty, with intergovernmental rather than supranational structures for CFSP and JHA, was again very much a British success.
37. In EMU too, British backing for German principles of sound finance, from the Delors Report onwards, played a critical role in the design of the system. Without ever saying that we would join, we helped shape the contours of the system. Back in 1991, we gave critical support to the Germans in ensuring that the new European central bank would be independent, that price stability would be its goal, that convergence criteria would apply, and that only genuinely convergent countries would be allowed to go ahead and join stage three. We resisted efforts to subject the central bank to explicit political control, to give it other, employment-related goals, and to allow all countries to go ahead together, at one time, even if they were not properly converged. On EMU, as on other issues, these achievements are not minor matters. They have directly affected, and continue to affect, the sort of Union which is now emerging.




Pragmatism in Europe

38. The track-record of British influence in Europe is one of the reasons why we should not be pessimistic about the prospects for the current IGC. 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 cooperation in others. That must be right. And the encouraging thing is that a good number of our partners in reality share that view.
39. Whatever differences of degree there may be on particular points, and however flowery sometimes the rhetoric of the European debate, the bottom line in Europe today is that the relentless pursuit of a centralised vision is looking more and more out of date. A larger Union, with more members reflecting a wider variety of interests, on the one hand, and the wish by many countries that unanimity should continue in sensitive fields like foreign policy and taxation, is combining to limit the prospects of a massive further leap towards supernationalism, of a kind to which the Benelux states have always aspired. In any case, public opinion in many countries - and referenda to ratify any new treaty are likely in about half of them - is more critical of European integration than in the past. There are greater popular limits on what can be agreed.
40. There is a wide and growing acceptance that a decentralised, flexible Europe, respecting subsidiarity and national diversity, is the way ahead. Chancellor Kohl has renounced the notion of a United States of Europe - "No-one wants a centralised superstate", he recently declared, "it does not and will never exist" - and President Chirac would never accept one in any case. Given hard bargaining and the right leadership, there should be no reason why an eventual deal in the IGC cannot be struck, I believe, to Britain's satisfaction.
41. Finally, I would like to say just a few words about monetary union. I have argued today 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.
42. It matters to Britain that EMU should succeed, even if we never join it. The emergence of a euro-zone in the middle of our largest market, the Single Market, will directly affect us in this country, whatever we do. We want EMU to be solid, durable and stable because a euro-zone would inevitably be our most important trading base. Already growth or recession on the continent feeds quickly into the UK economy. If a euro-zone failed, the disruptive effect on us would be enormous, even if we were outside it.
43. Today we are staying in the game to ensure, to the extent we can, that all the remaining elements of EMU are just as well founded. That's what I have been doing on the Stability Pact, where the balanced view we took was eventually adopted, and on the legal status of the Euro, where early agreement on continuity of contracts is of great importance to the City. That's why we raised the issue of "ins" and "outs" at the Cannes Summit last year, and why we continue to work for a Union in which EMU ins and outs can happily coexist. That's why we have expressed a view on the shape of an ERM2, even though we don't intend to join it. That's why we will continue to stress the importance of adhering to the principle of "sustainable convergence", which is at the core of administering the convergence criteria. That's why we will continue to resist ideas for some form of "European economic government" to act as a counterweight to the independent ECB. That's why we plan to stay firmly at the negotiating table right up until the moment when a decision on UK participation has to be taken. Credibility and influence depend on ruling nothing out prematurely, and keeping our options open - which is what we intend to do.