“The economic relationship between the United States and Europe is, by a wide margin, the deepest and broadest between any two continents in history – and those ties are accelerating.”

So stated a recent study on the changing shape of the transatlantic economy. The European Union (EU) and US together account for 51% of international trade, 79% of outward investment and 62% of inward investment. Annual UK-US trade alone is worth over $100bn.

These are impressive figures, but we cannot afford to be complacent. Growing competition from the economic giants – China and India – and other emerging economies pose a serious challenge to the transatlantic dominance of the world economy. Unless we improve our competitiveness, our economic performance will at best stagnate and at worst decline.

Over the past eight years, the UK government has focused on long-term structural reform of labour markets and tax and benefit systems, and on ensuring monetary and fiscal stability by giving independence to the Bank of England, by building a new monetary and fiscal framework and by cutting our national debt. As a result, the UK is enjoying the longest period of sustained economic growth on record, the lowest inflation and the lowest sustained interest rates for 30 years. UK unemployment has fallen to 5%, the lowest of the G7 economies. The UK now has two million more people in work since 1997.

But if we are to sustain our economic growth and competitiveness, we need to be more enterprising and creative. The government has taken a wide range of measures to make it easier to create and maintain new businesses. We have cut capital gains tax, corporation tax and small business tax. We are reducing regulation – in particular in inspection, audit and enforcement regimes – and we are investing heavily in education and vocational training to improve the skill level across the workforce.

We are setting up a National Council for Graduate Entrepreneurs and are offering graduates of the world’s top 50 business schools the opportunity to come to the UK to seek employment. We are also forming a new transatlantic partnership with the US Administration to encourage further enterprise between our two nations. To remain competitive, we must also develop our high-tech and science-based industries and services. With 1% of the world’s population, we have over 11% of the world’s most cited scientific papers.

Last year, the government published a 10-year investment plan to boost science, engineering and innovation. We have more than doubled government investment in science over the past eight years. This year the budget stands at £3bn. We are increasing investment in graduate and postgraduate engineering, science and technology education and research. Equally important, we are encouraging greater collaboration between universities and business, so that R&D gets translated into new business.

We have extended R&D tax credit to encourage business to invest in R&D and small, high-tech enterprises, giving a £400m boost to business. We now have almost 100 science and technology experts working in 45 UK diplomatic missions in 26 countries, taking forward the science agenda.

Britain is one of the world’s most open trading nations. We believe in free trade. We have a historic global reach. We speak the business language of the world. The UK telecommunications industry is one of the most advanced in the world, as is the UK’s financial and professional services sector. The UK insurance industry is the largest in Europe. As such, the UK and the US are natural business partners. Working in partnership, we are also in a strong position to win the argument for economic reform in Europe.

The EU is the US’s most important trading partner. EU–US trade generates $2.5tn in total commercial sales a year and employs over 12 million people. Over half of the UK’s trade is with the EU. Over three million jobs in Britain are linked to exports of goods and services to European partners. Together, the countries of the EU account for a quarter of the world GDP and a third of world trade. Together, they are an immensely powerful economic force in the world. But to remain so, EU economies need to be more open and less rigid.

In 2000, EU leaders committed themselves to an ambitious 10-year programme of far-reaching economic reform to make the EU the most competitive and dynamic knowledge-based economy in the world by 2010, capable of sustainable economic growth and with more and better jobs and greater social cohesion – the so-called Lisbon strategy. The UK has led the way in pushing forward the Lisbon agenda. This year marks the half-way point in the strategy. We have made some progress, but much more needs to be done. The Commission’s Spring Report, published on 2 February 2005, highlights jobs and growth as the immediate challenge for the EU and the key to meeting all three Lisbon goals: economic, social and environmental.

The focus on jobs and growth is absolutely right. The EU needs more flexible labour markets. We must, therefore, ensure that every proposal for new legislation is subjected to a rigorous assessment of its impact on jobs, competitiveness and growth. We need to strike a balance between protecting workers, ensuring routes into the labour market for vulnerable workers and maintaining sufficient flexibility for business.

Regulatory reform is a key priority for the six EU countries who have held or will hold the Presidency between 2004 and 2006: Ireland, the Netherlands, Luxembourg, the UK, Austria and Finland. We are all committed to working closely with the EU institutions to make better regulation. I am delighted that President Barroso has made cutting EU red tape a Commission reform priority, too. During the UK Presidency, beginning in July, we will focus on improving the assessment of new legislative proposals to ensure that they encourage, not stifle economic growth; simplifying existing EU rules and promoting greater use of alternatives to regulation.

We will also work to strengthen the Single Market by introducing a more pro-active competition policy and further reforms to state-aid rules. We are determined also to make progress on a Single Market for services as well as goods. This directive is, potentially, the most important EU project since the establishment of the Single Market in 1992. It has a strong focus on better regulation and aims to cut excessive bureaucracy preventing businesses offering services across borders or opening premises in other member states. Extending the internal market to the services sector, which represents 60% of EU GDP, will be of enormous benefit to business and consumers alike. In the financial services sector, our focus will be on completing the Financial Services Action Plan in a way that protects and promotes UK and EU competitiveness and ensures that agreed measures are effectively implemented and enforced.

We will work to implement the recommendations of the EU Employment Taskforce to deliver more and better jobs and we will promote greater enterprise and innovation through the creation of new European Centres of Enterprise. Removing barriers to trade and opening up EU markets are essential, not only for our own economic growth, but that of all our international trading partners, particularly in the developing world.

Making progress on the important agreement – reached in summer 2004 by World Trade Oganisation members – to begin the process of dismantling export subsidies on agricultural produce, under the Doha Development Agenda, is also a key objective for the UK this year. We will also take forward the work started at the EU–US Summit last year to promote further EU–US economic co-operation and to develop a strategy to tackle barriers to trade and investment, based on the findings emerging from consultations between the US, the Commission and member states.

Differences of opinion over Iraq undoubtedly soured the political relationship between the US and Europe. But I do not believe that the economic relationship suffered at all. Indeed, US companies invested nearly $87bn dollars in Europe in 2003 – an increase of 30.5% over 2002 – while European companies invested almost $37bn in the US, a 50% increase over 2002.

The new Europe of 25 nations and 450 million people offers a vast new market for US business. The UK has been instrumental in shaping the new Europe. The new European Constitution will make the EU less integrationist and more reformist.

It is our kind of Europe. French commentators have dubbed the new treaty “La Britannique” and the future Europe as “the great British Europe”. As the US’s closest political and economic ally and as a leading power in the new Europe, the UK is ideally positioned to help the US expand its economic partnership with Europe.

As the Prime Minister said last year: “Britain is proud of its alliance with America, clear in its role in Europe and a tireless advocate of a strong bond between the two.”