I can still recall the excitement we both felt, when my wife and I paid our first visit to Budapest—almost sixteen years ago. It was only a few months after I had taken office, in the fifth year of Margaret Thatcher's Premiership, as Britain's Foreign Secretary. And it was the first time for many years that any holder of that office had come to any one of what were then collectively labelled "The Warsaw Pact Countries". We were moving, as it seemed at that time, across the line between one armed camp and another.

Today, after a number of intervening visits, we are excited to be back here again—first, because it is always a huge pleasure to visit this lovely capital city, and particularly in the spring; and second, because there could be no more powerful reminder of the transformation that has taken place in our European continent, that the contrast between today's Hungary and the Hungary of sixteen years ago.

It is natural for someone of my generation to perceive the last half century of European history as divided into two distinct phases. The years before the collapse of the Berlin Wall and thus of the Iron Curtain—an event for which your own country can claim credit—are bound to be perceived as the Dark Age; and the years since that seismic event, by contrast, as a near—Golden Age. The starkness of the comparison prompts in my mind the question: how should we characterize the concept of "history", which carries us along such dramatic paths?

Should history be seen as an Elysian process, in which we can feel that we are always moving onwards and upwards to ever broader, sunnier sunlit uplands? Or should history be seen instead as an essentially Sisyphean process, in which we should count ourselves lucky if the stone we have been struggling with over the years finishes up just a little higher at the end than it was at the beginning of our lives? As we look around our Europe today—and particularly at the scene of ethnic hostility and violence in neighbouring Yugoslavia—we certainly need no reminder that the stone can roll brutally back down the hill, often more quickly than it ever moved up. So we have to take a Sisyphean view. But, I hasten to add, I have always been, and I remain, an optimistic Sisyphean.

It is against that background that I wish to reflect for a few minutes about three of the factors which have played, indeed still are playing for all of us, a lead role in shaping what Mikhail Gorbachev memorably, and notably before any of the rest of us, used to describe as "our common European home": nationalism, democracy—and free-market forces.

Significantly, for this speaker to this audience, it is our two countries, Britain and Hungary, that have probably played—at first separately, in the two halves of the then divided Europe, rather than jointly—the leading part in recent years in promoting the role of market forces, as the most benign and power-ful dynamo of economic prosperity. Britain was not, of course, the first protagonist of market economics within the European Community. It was West Germany, under the leadership of Ludwig Erhard, as Edward Heath has recently reminded us, that "pioneered the social market economy and became the economic powerhouse of Europe". At the end of the 1970s, however, the free-market baton passed into the vigorous hands of Margaret Thatcher's government in Britain.

And it was after four years as Finance Minister in that government that I first came (understandably enough) to Hungary, already the economic pioneer of Europe's other half. I quickly learnt that I was not going to be disappointed. For at my very first lunch in this city, I was introduced to a Professor of Economics from the Karl Marx University. I realized at once that I might be improperly dressed for this encounter and apologized for the fact that I was wearing my Adam Smith tie. "No need to worry about that," came the swift reply. "If I had known you were going to wear your Adam Smith tie, that I should certainly have been wearing my Adam Smith sweatshirt!" And I knew immediately that we were on economic common ground. (If the recollection of our then Ambassador, Peter Unwin, can be relied upon, then it was Professor Ivan T. Berend, to whom I had been talking).

Each of our countries has learnt too that if the essential processes—and, equally important, the essential disciplines—of economic liberalism are to get under way, to be carried through and to be accepted—as they very largely have been in both our countries—then they need to be fortified by continuing democratic consent. "Democracy," said one of Britain's former Prime Ministers, Arthur Balfour, "is government by explanation." In each of our two countries, that process of explanation has been successfully sustained, through a series of elections.

So, just as your present government is firmly on the same track as your first democratically elected government in 1990, in my country too Tony Blair's New Labour government has—to a gratifying if not to the full extent—accepted many of the essentials of the Thatcher revolution of the 1980s. The British people had made it plain to Labour, through the ballot box, that only when Labour had learned those lessons would they stand a chance of returning to power. "Government by explanation" is a two-way process!

I am delighted, therefore, to be able to congratulate you on your own impressive economic performance over the last decade. Privatization and other structural reforms are well advanced—and underlined by your success as the largest recipient of foreign direct investment in this region. All this has rightly brought you towards the threshold of accession to the European Union, which I warmly welcome. So I hope you will forgive a former Finance Minister (who still cherishes his reputation for prudence and austerity, as the key to long-run economic success) if I couple my congratulations with a word of warning. Sustainable economic growth, which must be coupled with continuing success in the fight against inflation, depends above all upon fiscal discipline. And that requires continued determination always to keep budget deficits—when and if one can be justified at all—within planned and prudent limits.

It was your country's early perception of the crucial link between economic and political liberalism that was one of the key causes of disintegration of the former Soviet empire, which had denied you political freedom for so long.

When I spoke, just ten years ago in this city to the Hungarian Academy of Sciences, I pointed out that Mikhail Gorbachev's admission of "grave economic problems facing the Soviet Union... had encouraged new talk of reform in the socialist countries"—and certainly in yours. And I argued too that "there is a wider European impulse at work, an impulse towards the greater unity of Europe. Have we not," I asked, "as Europeans, all subscribed to the Helsinki Accords? Accords which seek to establish an important framework for advancing mutual security, economic security and basic human rights and freedoms throughout Europe... There are some positive signs," I concluded, "that change may be coming."

And so indeed it proved to be. Just a year later, Eduard Shevardnadze surprised an audience of Soviet diplomats by proclaiming: "The image of a state is its attitude towards its own citizens, respect for their rights and freedoms, and recognition of the sovereignty of the individual."

And step by step, this sentiment combined with spreading realization of the failure of Communist economic policy and—the final and important factor—the growth of nationalist self-confidence within the countries of the Warsaw Pact. So, almost at the same moment in the early autumn of 1989, the disintegration of Honecker's East German government, the installation of Mazowiecki as head of Poland's first non-Communist government, and the decision by your own Prime Minister Miklós Németh, to make the right choice between the Communist past and a democratic future, triggered the process which overthrew the Berlin Wall, promoted the unification of Germany and fuelled the dissolution of the Soviet empire.

Thus it is that most of our "common European home" has been driven, in each of its two founding halves, by the same classic European phenomenon of competitive nationalism. But because our recent histories have been so different, each half has been driven down rather different paths.

For we in the West have been reacting for a full half century, upon the basis inspired by the founding fathers of the Treaty of Rome, to what we have perceived as the threat of competitive nationalism. For the central purpose of the European communities, even before they blossomed into today's wider and deeper European union, has always been to avert any future risk of war between the member nations. The means which the founders visualized for achieving this in the first instance were essentially economic, embodied progressively in the customs union, the free trade area, the single market and finally in the euro zone. It is in this way, as we believe, that we have together been able to find a means of taming nationalism without suppressing patriotism, of sharing sovereignty without destroying the nation, of setting the magic of the market to work in the cause of wider democratic prosperity and peace.

And for a long time, of course, we had an additional glue to hold us together, and together with allies on the other side of the Atlantic, in Canada and the United States. That glue was fear of a common enemy, the Soviet Union, which drew us all into the even wider NATO network. Britain was a founder member of that vital alliance. But for a time we believed (though I myself have never done so) that we could and should stand aside from the closer continental Community. Our tardiness in realizing and correcting that mistake has left us sometimes at a disadvantage. Indeed even today, it is the reason for our absence, temporary as I am convinced, from the euro zone. But Britain has often, I like to hope, made up for that in other ways: for example, by the great skill, professionalism and commitment of our armed forces in the cause of peace and, at least on some occasions, by diplomatic leadership as well.

But for you and your neighbours, for too long ensnared by the former Soviet empire, the history of the last decade has been very different. For, within the former Soviet bloc it is by the twin horses of democracy and nationalism that the chariots of revolution and reform have been pulled forward. They have indeed swept aside as well the two multinational states originally created by the Peace Treaty of 1919: Czechoslovakia, and Yugoslavia. In the first of these, mercifully, the divorce has indeed been velvet. But within the former Soviet Union—in Chechnya or Georgia, for example—and in Yugoslavia above all, these same forces of "liberation" have shown how easily they can turn themselves into engines of crisis, hostility, violence and conflict—what Isaiah Berlin has described as "the brutal and destructive side of modern nationalism".

Your own country, happily along with your democratically successful neighbours, has not been thus afflicted. And increasingly we have all been learning that in many places throughout our continent the attempt to make state boundaries coincide completely with those of nationalities must be regarded not just as an impossible but as an intrinsically undesirable task. For we have been convinced of the immorality of requiring people to choose between nation and family, in an ethnically or culturally mixed marriage or family, in a state which has been or is being broken up or divided on ethnic or religious lines. It is this kind of exhumation of long-buried antagonisms which all too easily provokes the euphemistic obscenity of so-called "ethnic cleansing".

It is and has been our reaction to this kind of thinking, which has inspired the European Union and its member states to such continuous development in recent years of multi-national structures and institutions. Our life together looks less and less like a large-scale mosaic of vertically divided "sovereign" states. We have been developing instead a series of overlapping, multinational structures of partnership and participation. Instead of the enforced linkages of empire, we are trying to create arrangements that are consensual and sensitive, diverse and democratic. Incidentally, but significantly—if I may blow a nationally proud trumpet for a moment—that has also been the inspiration for the courageous process, sustained now through several decades of violence, whereby successive British and Irish prime ministers have been seeking peace and reconciliation between the peoples who have to share life together in our two islands.

These are some of the reasons—which I have explained at undue length—why opinion in my country is, almost without exception, so strongly in favour of enlargement of the European Union, so as to embrace countries like your own into full membership. For we believe that it is not just the economic but the real and wider practical and political aspects of working together that can be of real advantage to the cause of peace and prosperity throughout our continent.

Some people try to summarize this approach by proclaiming, as one of the European Union's key objectives, the concept of "political union". I have to tell you of my own deep felt fear that no phrase has done more to impede effective European partnership that those two words—and I hope I shall not be misunderstood as I say this—"political union". Helmut Kohl and others have often tried to explain that those words, "political union", do not imply a "United States of Europe", still less a European nation state. But however often they have tried to do so, the phrase—I am convinced—misleads and frightens public opinion much more than it unites. We are not a European nation but we are all Europeans. And the wider the European Union spreads—as it should—the less realistic and more misleading become those two words—"political union".

In my judgement, much the most memorable and accurate description of the institutional design of the European Union is that offered by the former Italian Prime Minister Giuliano Amato. He has described the Union as an "unidentified flying object". The EU, as he has explained, is neither a federation nor a confederation; it is simultaneously supranational and intergovernmental; and at Union level, the traditional distinctions between executive and legislature are blurred. The first transnational, democratic experiment in joint policy-making and joint law-making is following a unique institutional pattern of its own.

So I want finally to say a few words now about the process by which—and the pitfalls around which—sooner, I hope, rather than later, you will come to join this unique organization. First, the single market economic regime and institutions, with routine decision-making on the market adjuncts—competition policy, intellectual property rights, environmental and consumer protection, transport and so on—taken by majority voting and the Union-wide directly applicable system of law, determined and enforced by the Union's own Court of Justice. All this you will, as we did when we joined over a quarter of a century ago, have to accept as acquis communitaire; and you will, of course, have to complete the significant progress which you have already made towards meeting the economic criteria for membership. The transition will not always be comfortable but it will certainly prove worthwhile.

So too for membership of the euro zone, the convergence criteria—for Hungary, just as much as Great Britain—are clearly laid out. The most important of these—essential for good economic governance, in existing as well as in future euro member states—are the rules prescribed in the stability pact. These prescribe (as you will certainly recall) low inflation and low interest rates and strict ceilings on the levels of budget deficit and public indebtedness.

The responsibility for achieving these standards of economic prudence rests, of course, very largely with you and your government. Achievement will bring the benefits of participation in a single currency zone and trading bloc—together the most valuable economic consequences of European Union membership. For in all the globalized relations of our single world economy, you will be able to enjoy, with the rest of us, the bargaining strength, and generally the stability, that comes with size. If even the pound sterling can benefit from that, as I believe it will, then the replacement of the forint by the euro will surely bring similar advantages. And in trade negotiations too, for example with the US, you will be less exposed as part of the Union than as a smaller unit.

Once we are both partners in this network of economic relationships — we, Britain and Hungary—it will be important for our common understanding of the benefits of economic liberalism to be deployed with vigour. For the existence of the euro will, by definition, deprive every member state of one familiar (and seemingly benign) option, namely devaluation. In those circumstances we must take the utmost care not to allow ourselves and other member states to be deprived of control of other elements of economic policy: for example, of flexibility on national labour markets or flexibility in choice of methods to maintain fiscal responsibility. Scope for tax innovation and reform certainly needs to survive. Competition of that kind will serve to promote harmonization, so that there should be no need for central compulsion in that respect.

There are other important economic components on which negotiations are still in progress, notably the size and nature of your contributions to and benefits from the EU budget and the terms of your participation in the common agricultural policy. I am not qualified to comment on the details of those. But I can offer one word of general advice. Recognize that these are areas where it has always been and will remain supremely difficult to achieve significant change from the existing allocation of gains and losses. This is not least because the aggregate figures involved (no more than 1.27 per cent of GDP) are very small. My own country has long been proposing radical reforms in these fields, most notably in respect of agricultural policy. And we have been doing so—from within the Union, but even that with only limited success.

The one field in which further reform is essential, before you or any other applicant countries will be able to enter the Union, is in respect of the central institutional arrangements. Even with the present number of member states, there are, for example, far too many members of the Commission and of the Parliament. And in the Council of Ministers (the primary law-making body) the voting power of the small states—their ability to block progress of any kind—is far too large. All this has been obvious for many years to anyone who has ever worked within the EU system. No less than 14 years have now elapsed since Margaret Thatcher and I first proposed—and I offer this simply as an illustration—to give up one of our two British members of the Commission, so long as other larger states were ready to do the same. As you may imagine, the Iron Lady would not have been ready to offer such a sacrifice without good cause. Yet even today not even that one aspect of institutional reform has been accomplished.

There is, I am happy to report, one way in which my third driving force, democracy, through the increasingly democratic structure of the EU, may now be coming to our rescue. It will not have escaped your notice that only a few weeks ago the European Parliament secured the resignation from office of the entire Commission—and the replacement of the former Commission President Jacques Santer, by the new Italian strong man, President Romano Prodi. The new parliament, to be elected in two months time with modestly increased powers, will be no less energetic than the present. And institutional reform will, I predict, be one of the matters to which they will, like President Prodi, be giving priority. Reduction in their own numbers, however I predict with equal confidence, is probably the only proposal for which they will be much less enthusiastic!

And, finally and most significantly in today's sombre circumstances, Common Foreign and Security Policy—and, as a consequence, common European defence capability. Is it not ironic, indeed in many ways deeply tragic, that within days of Hungary's most welcome entry into the most successful defence alliance in history, we all now find ourselves effectively at war with your own immediate European neighbour?

Nobody, I think, can doubt the sincerity of motives which have brought us to this point. We are reacting, collectively and instinctively, to the most brutal, systematic and deliberate abuse of human rights, here on our own European doorsteps, the most deliberate such abuse since the defeat of Nazism in 1945. The circumstances in which, and the methods by which, we find ourselves doing so—and they are changing almost from hour to hour—raise many questions—and re-emphasize many truths.

Some of the most important perhaps are these. First, that there are few, if any, security problems that can or do arise on our own continent which we Europeans are yet equipped, politically or militarily, to tackle by ourselves.

But secondly, and for us fortunately, the Unites States' interest in the peace and security of our continent is still today sufficiently strong for her to be ready and willing to deploy her huge technical and other resources in the course of European security. That is the importance of NATO and why we are right (you, as much as we founder members) to adhere to and sustain that organization and to continue building NATO partnerships-for-peace with all our European neighbours. It is right to emphasize that NATO is by no means designed to be an exclusive partnership.

Thirdly, however, we cannot be sure that American willingness to play such a leading role will endure for ever. Certainly it is less and less likely to do so, if we Europeans appear to be, or are, less and less willing to play our own full part in upholding the security and defence of our own continent. And that points to and underlines the importance of the EU's moves to build an effective common foreign and security policy.

That is indeed the most urgent practical problem, with which we need your help—as much as that of any existing member of the EU. For the Union's common foreign and security policy is not and cannot be some theoretical construct, put together by lawyers, diplomats or draftsmen. That is why it is not, even now, the subject of majority voting within the Union—and remains unlikely to become so. For it has to represent the common, shared commitment of the member states. For that very reason, we need to be sure to set ourselves objectives that are clear, realistic and attainable. We need to be sure that we can manage well and effectively our achievement of those objectives. We need to leave noone in any doubt, least of all ourselves, of our settled determination to achieve them. And all those things must have been explained to and understood by our peoples, for if events of great peril were to threaten the peace and security that

NATO—though not yet the EU—is designed to defend, then they, or their sons and daughters, may have to sacrifice their lives for the sake of the common cause.

All these propositions are now being tested, as I speak, not many miles from here. The outcome is bound to have a powerful impact upon the way in which our nations, along with many others will handle the agenda that I have been trying to discuss.