I am absolutely delighted to be back here at the Keidanren. I have very happy memories of my visit two years ago. Once again, my apologies. I was told by the Ambassador that Saturday was the day for golf - the reason why I was apologising - but I gather that snow has covered the golf course anyway.
I wanted to say particularly though how delighted I have been with the reception here in Japan and I do believe that the state of British/Japanese relations is extremely good today and I want to see it even better, if that is possible. As I said in the speech that I gave last night, Japanese investment has played a very great part in the regeneration of many parts of Great Britain over the past few years. We are delighted with the investments that have been made there. We want to encourage further investment and we also want to see British companies enjoying the prospect of investment in Japan as well, since there should always be a process that exists both ways.
So as I say, my starting point is that we have excellent relations at the moment, we want to build on those further.
You were kind enough to say, Mr Toi, that when I came two years ago I gave you an outline of what I wanted the new Labour government to be. And as you said very tactfully and diplomatically, it was rather different from what you had anticipated from Labour governments in the past. But nonetheless, I hope very much that in government we have fulfilled the promises that we made those two years ago. We have at least tried to make a start governing as New Labour, not merely running for office as New Labour.
And there are a number of changes and reforms that we have introduced. The first thing that has been very important for us is to try and bring about stability and economic management. There are bound to be economic cycles, periods of up-turn and down-turn, but in the past Britain has suffered from short term booms, followed then by deep recessions, and that has made it difficult for business to have the right climate for investment.
So we have wanted to try and introduce monetary and financial policies that give us stability for the long term. We have done that in three principal ways. The first is that we have given the Bank of England, rather than the politicians, responsibility for setting interest rates. Even though that is a huge innovation for the British system, I think it is a good innovation. It makes the system more transparent and gives people confidence. And as I always say to people, the issue is not whether each individual interest rate decision may be right or wrong - people can argue about that. The issue is whether over a period of time credibility is there because the decision has plainly been taken on monetary and financial grounds rather than political grounds. So that was the first reform and we did that literally I think in the first week of taking power.
The second reform was to bring all the regulatory systems in the UK banking and financial supervision under one heading, one body, and to simplify that system greatly and make it open and transparent. That again we think is very important in order to ensure the credibility of the system.
And the third thing that we did was to introduce a budget in July which substantially reduced the budget deficit. There was a danger of a structural budget deficit growing within the UK economy. That has now been eliminated and it will mean that the borrowing requirement of the country now declines very rapidly over the next two or three years - indeed three or four years on we are expecting to be in surplus, which is a more healthy position.
Now even making allowances for the economic cycle, we believe that we have put the financial situation of the country on a secure footing for the long term. We need to keep a very tight rein both on monetary and on financial policy and the reason for that is very simple: in our judgement if we don't do this then whatever very short term advantages you get from loosening financial and monetary disciplines are far outweighed by the medium term and the long term disadvantages. So all those three reforms are designed to put our finances and our monetary policy on a secure long-term footing, responsible, open transparent and clear.
The next element of a reform is to find what I sometimes describe as a third way between, if you like, policies of liassez faire and policies of heavy handed government intervention. My own view is that what is sometimes called the European social model has to undergo now a period of change and reform and modernisation because it isn't working in the way that it needs to work in the future. The third way really means that government does have a role but the role is in areas like education, skills, technology, infrastructure, not government trying to run industry or interfere with the way the market works.
And our next stage of reform is really designed to give us an education system and indeed a welfare system that fits in with today's labour market and today's global economic market so that our workforce is properly skilled, highly educated, able to use the new technology; our infrastructure is of high quality - a first class infrastructure for business and for ordinary people to use - and that we make sure that we are encouraging the dynamism, particularly of our small business sector as well as our larger companies, and encouraging them to operate in the modern global market.
So that second part of reform which is to do with education, skills and so on, is a big priority for the government. We are introducing a whole range of reforms in our education system and we are embarking on a process of welfare reform as well. So that, if you like, you have got the financial changes to produce long term investment and stability; you have got the reforms then in education and welfare to try and equip our people and our welfare system for the demands of the 21st century.
The next big area of reform and change for us has been in our relations with Europe. It is in some ways very fitting and very good that we take on the Presidency of the European Union at this point in time because it allows us to say in a very public way to our own country, but also to the rest of Europe, that we want a change in our relations with Europe. I have no doubt at all that Britain's future lies as a leading partner in Europe. I believe that is the destiny of my country, I believe it is also right for Europe as well. We have since the election taken a far more positive and constructive attitude across the whole range of European relations. We negotiated the new treaty for Europe at Amsterdam in June successfully, without any of the normal disagreements. Britain played a very constructive role in that. I think that the change in British influence in Europe has been immensely productive almost immediately for our companies and businesses operating in Europe too.
Perhaps most important of all, in relation to monetary union and the single currency, we have now set out a very, very clear British position and that position is as follows: for reasons of economics we don't believe it is right for Britain to be in the first wave because we believe that the economic cycle at the present time is divergent from the rest of Europe. British interest rates are at 7 percent, French and German interest rates are at 3 percent. We are at the top of the cycle coming down, they are at the bottom of the economic cycle coming up. We are not convergent at the present time. But though for economic reasons we have said that an immediate joining on 1 January 1999 is not for us, nonetheless we have made it clear that Britain wants to be part of a successful single currency. We have also made it clear that there is no constitutional barrier to our joining a single currency and in addition we have outlined a programme and embarked upon it of preparations for a single currency - the idea being that we are able to make a decision upon that early in the next parliament, ie early in the next century.
So again that is a very substantial change from the previous position. We are now actively making preparations, we are supporting the principle of a single currency, for economic reasons we are not there on 1 January 1999, but we are making preparations so that we can be there shortly thereafter. Those preparations include preparations not just for business generally but also for the city and to make sure that people can actually trade in Euros and do their business in Euros too. And I think that is going to be important for the Japanese businesses in the UK. There will be ample opportunity to do all the business in the Euro that we need to do. The City of London too is being geared up to be a leading centre for the Euro. So all those preparations are happening in the city and in business and industry as well.
I am pleased to say too that since the election and perhaps since we have tried to explain to our people more fully the benefits of being in Europe, there has been a big change in public attitudes towards Europe, and that is important obviously for us. The most recent opinion polls indicated something like a 15 percent shift in favour of the European Union since 1 May. So all these things are combining together to give us the chance to exercise a proper and positive role in Europe and at the same time to allow us to make preparations for Britain to be part of a single currency.
You asked also about our belief as to how we should handle the Presidency of the European Union. Obviously we will be there as President when those countries are determined for entry into the first wave of monetary union and we have said that we will play a very constructive role in that. I think I would just make one point though on our Presidency of the European Union and our attitude to it. I do believe that Europe needs reform. I think that Europe faces, as we all do, enormous competitive pressures in the world today. And I think it is important that the Europe that we build is outward looking, is open, is free-trading, is not isolationist, is not a "fortress Europe", is not a Europe that wants to turn in upon itself. Over this next period of time, for example, we are going to be bringing in the countries from the former communist eastern part of Europe who are going to coming into the European Union. The whole essence of the European Union over this next period of time has got to be one of reform, of change, open, outward looking, making the changes necessary so that Europe can compete in the modern global economy. And I believe that we can do that.
Finally I should say in relation to the troubles that there have been in some of the Asian economies recently that my own belief is that the underlying fundamentals, particularly of the Japanese economy, are extremely strong. What I would say is that the reform programme being undertaken here is something we would very much support and pay tribute to. The financial systems of the world now demand a great deal of transparency and clarity in the way that they are organised. It really is the only way that we are going to avoid the type of turmoil that we have seen, so I think it is tremendously important that we give every encouragement we can for that.
And I would also like to say that I know that the relations between Britain and Japan, as I said right at the very beginning, are strengthening. It is an excellent thing that the Emperor and Empress are going to be coming to Britain later this year. This will be another opportunity for us to demonstrate the strength of relations between us. I know too that many of the companies here have expressed interest in participating in the Millennium Exhibition and experience this great project to celebrate the millenium. So there are a whole series of opportunities for us to work more closely together over a period of time. And the fact that I am here with Sir Colin Marshal and many of his colleagues from British industry, and the fact that we have such a distinguished group of people opposite us today, is an indication not just of the enormous strength of our relations now, but of their great potential for the future.