Prime Minister Tony Blair is holding talks with newly-elected German Chancellor Gerhard Schr�der in an attempt to find ways for Europe to ride out the current global economic downturn.

The talks come a day ahead of Chancellor Gordon Brown's pre-budget statement, which is expected to flesh out the details of UK's preparations for the euro.

Mr Schr�der's trip to the UK is his first official overseas visit, and will include a meeting with business leaders at the CBI conference in Birmingham.

Finding the Third Way

The prime minister has already promised to work with Mr Schr�der to extend the "Third Way" concept across a more integrated Europe.

Writing for the German newspaper Welt Am Sonntag ahead of Mr Schr�der's visit to the UK Mr Blair also said Germany had come to terms with its Nazi past and "moved on".

The prime minister wrote that he and the chancellor would discuss ways to extend their shared political vision - the "Third Way" or "Neue Mitte" in German - into the mainstream of European politics.

And in a move likely to inflame the Conservatives, Mr Blair argued that Europe needed closer economic cooperation and reiterated his vision of a pan-European defence capability divorced from Nato.

Pro-European

In the article printed on Sunday, Mr Blair described Mr Schr�der's election as "welcome and exciting" and said that the two men "have much in common".

"It is in the Neue Mitte - Third Way that the mainstream European debate is now taking place," he said.

The Third Way can be loosely described as a move away from both the radical free market policies of Thatcherism and the old socialist Labour centralised state based on "tax-and-spend".

Mr Blair says it is rather a combination of democratic socialism and liberal ideas based firmly within European politics.

Restore confidence

In a clear attempt to distance himself from the previous, Conservative government's anti-European stance, Mr Blair called for "more economic co-operation to make Europe more competitive".

"We need to promote jobs through the Single Market and by removing rigidities in product capital and labour costs," he said.

"Above all we need to tackle the global financial crisis. I want to discuss with the Chancellor the immediate steps we are taking to restore confidence in the international financial institutions and the reforms we are planning to set them on a new direction in the longer term."

Credible Europe

A European defensive union was also needed, he said, although not at the expense of Nato.

"But, to complement [Nato], Europe should be able to act on its own in a credible way where the US does not wish to participate," he said.

"This is not just a question of institutions. We have to identify the gaps in Europe's capability and plug them. That means planning together and planning for the long term."