Surrounded by dark-panelled walls in the Treasury’s main conference room in May 1997, Gordon Brown introduced the British public to a new long-term monetary policy framework, heralding the arrival of “prudence” and “economic stability” as phrases soon to become inextricably linked with Labour’s stewardship of the economy. Announcing the independence of the Bank of England, the new Chancellor said he was leaving behind “the economic instability that has characterised the British economy, not just in recent years but for most of the century”.

Along with a raft of other structural reforms, such as the Government’s fiscal rules and incentives to encourage capital markets, future historians will probably agree that making the Bank of England independent did create the sort of stability that Gordon Brown spoke of in 1997. History will certainly show that turn-of-the-century Britons lived in a time when inflation, long-term interest rates and unemployment were at their lowest levels in 30 years.

The true test, however, of Labour’s commitment to longtermism, and the changes to Britain’s economic structure that have resulted, will be in how it fares in the global economy, in an ever-more interdependent world. Equally, the true test of how Europe’s economic future unfolds will depend largely on whether the EU – as an institution and as individual nations – pursues the economic reforms that will create the conditions for stability and allow it to withstand the global shocks of an interdependent world.

As the world economy experienced the first simultaneous downturn for 30 years, the UK economy has, so far, held its own. In 2001, the UK economy grew by 2% – the fastest of any G7 country and higher than the EU average – and the UK ranked second in the world at attracting inward investment. Even in UK manufacturing, where output declined by 2.4% in 2001, after growth of 2% in 2000, there is a positive comparison to be drawn with Japan’s manufacturing output contraction of 7.5%, and an output fall of 4.4% in the US over the same period.

But the experience of European businesses and economies in the first years of the 21st century demonstrates that in a new era of globalisation, global economic insecurities and opportunities arise together. Such co-ordinated action demands that Europe develops a collective response to achieve shared economic objectives of high and stable levels of growth.

The response to the economic challenges that arose from an international downturn, and the terrorist threat that countries on every continent now face, has been truly global. Japan introduced extensive financial sector reforms while the United States – where a number of corporate scandals were also shaking investor confidence – took steps to tighten accounting and auditing standards.

Now, at a time when we can fully understand the insecurities and opportunities of the interdependence that bind nations together, it is clear that the EU must adopt far-reaching economic reforms across Europe to entrench the conditions for stability and growth that businesses need to succeed.

As in business, if Europe makes the right long-term decisions to create the best conditions for high-quality investment – through initiatives to encourage innovation, R&D, and infrastructure – then the continent will be better placed to secure our objectives.

At the Lisbon Council in 2000, heads of state vowed to make the continent “the most competitive and knowledgebased economy in the world”. Some progress has been made, including the opening of energy markets to encourage greater competition and reforms to anti-trust rules that allow competition to flourish. But a great deal remains to be done if we are to complete the single market and create the conditions for stability that can withstand the shocks of the global economy.

The Centre for European Reform recently identified Denmark, Finland and Sweden as having met most of the Lisbon criteria, with Britain, the Netherlands and Ireland all making good progress toward them. But “the eurozone’s three largest economies have so far made little attempt to fulfil their Lisbon promises, particularly over labour market and pension reforms,” says Alasdair Murray, director of the CER’s business and social policy unit.

Europe needs, as Murray says, a clear ‘road map’ for reform.

First, EU countries need to innovate with policies to improve skills, employment and labour market flexibility. European businesses no longer compete in a low-investment and low-skill economy, but in markets where there are high levels of skills and technology that demand greater investment. Dynamic economies that succeed in this global market will need adaptable and flexible labour markets where there is an understanding and willingness among workers to be more mobile, where they are equipped to compete in high-skill positions and there is flexibility within all parts of business to adapt to new working patterns in response to a rapidly-changing marketplace.

In each of these areas, the EU must raise its game. In the United States – a single currency area that has demonstrated the importance of labour market flexibility to economic success – not only is there far greater geographic mobility in response to change than in the EU, but the rate of job turnover in the US is four years, far outstripping the seven years per job in the euro area.

As we need greater labour market flexibility, so too must the European Union nations work toward better regulated and more flexible product and capital markets that are transparent and well-informed to ensure the most productive use of capital flows. Flexibility in product and capital markets demands that business and EU economies embrace competition to extend choices and benefits to consumers as well as rewarding innovation, entrepreneurship and higher productivity levels.

By advocating single market liberalisation at a European level, businesses are hoping to reap the benefits forecast in the 1988 report by European Commission special adviser Paolo Cecchini. The Cecchini report projected that such liberalisation would add 4.5% to Europe’s GDP, cut prices by 6% and increase employment by 1.75 million. Yet the gains have yet to be realised. To achieve them we need a more aggressive EU competition regime that scrutinises markets and sectors to stimulate competition and prevent firms being excluded from European markets, as well as faster progress on proposed reforms of airport slot allocation and postal service liberalisation.

Another critical aspect of improving the economic conditions for stability and growth in the EU is enhancing the climate for R&D by removing the obstacles to business innovation. At a time of economic challenges it is, perhaps, easy to see research as an area for governments to cut spending. But businesses know that investment in the ideas and innovation of tomorrow is a sensible investment in the long-term dynamism of an economy. Securing an innovation and research-led economic future for the EU will depend, therefore, on the decisions made by national governments on research and the regulations at an EU level on the commercial use of that research.

Unnecessary regulation can also hamper the chances for high and stable levels of growth. With 40% of new regulations coming directly from the EU, we need finance ministers across the continent to put in place the mechanisms that will assess all new directives for their regulatory impact as well as taking stock of rules already on the books. Economies and businesses cannot prosper and succeed without some guidelines and, indeed, effective and well-informed regulation can be a spur to economic growth and innovation, but there must be serious attempts to identify regulation that does not serve Europe’s public or economic interests and can be reduced.

The final piece of a reform agenda was proposed by the British Government in March this year: a modern state aid regime that gives wealthier nations with domestic regional inequalities greater freedom to tackle capital, labour and product market failures closer to the areas where those decisions will have greatest impact.

While it makes sense for Europe to address inequities in the state aid regime that distort the single market, it is also appropriate that the EU addresses a system that exacerbates failures in local and regional markets. In the UK, for example, it took more than a year to secure EU approval for the creation of regional venture capital funds, critical to areas sorely in need of stronger capital markets. Such a system is a hindrance to the development of the EU economy as a whole and the proposals put forward by the UK help move this process forward.

These are the components of a European economic reform agenda that can drive economic and business growth not just in the UK, but across the European Union. At a time of global uncertainty, and as enlargement threatens to make the EU decision-making process even more cumbersome, such a collective approach to economic reform is not simply an objective to aim for, but a necessity for the future success of European businesses and economies, and all nations must play their part.

If such a plan can be developed – the “road map” that Alasdair Murray speaks of – and is quickly and effectively implemented, the economic future for the continent can be one of high and stable levels of growth with dynamic businesses rewarded for innovation and equipped to succeed in the new and rapidly changing global economy.

Wilf Stevenson is Director of The Smith Institute, which is an independent Think Tank that has been set up to undertake research and education in issues that flow from the changing relationship between social values and economic imperatives. In recent years the Institute has centred its work on the policy implications arising from the interactions of equality, enterprise and equity.