The Brown government's approach towards the European Union must be governed by a "hard-headed pro-Europeanism", one that recognises the need to co-operate with the EU but also defends the UK's national interest, Ed Balls, the City minister, will argue on Wednesday.

In a report published by the Centre for European Reform, Mr Balls, who is Gordon Brown's leading ally, offered a glimpse into the prime minister-in-waiting's stance on foreign policy. He said that Britain must co-operate more fully with the EU on areas such as climate change, but must also defend the national interest.

Mr Balls is urging the European Commission to ensure that as many member states as possible sign up to Mifid, the markets and financial directive that sets a level playing field for trading across the EU.

Of the 27 states, only the UK, Ireland and Romania have put in place the frameworks required. Mr Balls believes that delivering Mifid on time is "essential for the competitiveness of Europe's markets and financial services industry".

Mr Balls says the Europe debate in Britain has been between a pro-European movement that advocates closer union and anti-Europeans who reject the EU.

Mr Balls says this must now be replaced by a "hard headed pro-Europeanism" that has two key elements.

It is, he argues, a pro-European approach "because we recognise that we are stronger by co-operating with our partners in the European Union to meetthe shared challenges of globalisation and climate change".

It is hard-headed "because we have the confidence to put our national interest first and to say no, and argue our case where we believe Europe risks taking the wrong course".

The central test of Mr Brown's approach is set to come in negotiations over a new EU mini-teaty where Tony Blair is taking the UK into negotiations ahead of next month's European council. EU governments are anxious to know where Mr Brown stands, aware he will have to defend any deal done by Mr Blair.

Leading allies of Mr Brown make little secretof their discomfort thatthe potentially critical summit will end just hours before Mr Blair quits Downing Street.

Mr Balls says "Britain needs Europe" because a string of goals "require effective co-operation with our European partners and reform of Europe's institutions."

But Europe must change, too. "It requires a new economic focus on job creation and single market reform, a radical reform of the EU budget and an end to backward-looking attempts at European state-building."

Centre for European Reform © CER 2008