The Third Way is the route to renewal and success for modern social democracy. It is not simply a compromise between left and right. It seeks to take the essential values of the centre and centre-left and apply them to a world of fundamental social and economic change and to do so free from outdated ideology.

The challenge we face is formidable: global markets; continued poverty and social exclusion; rising crime; family breakdown; the changing role of women; a revolution in technology and the world of work; popular hostility to politics and demands for deeper democratic reform; and a host of environmental and security issues requiring international action.

People seek leadership. They want to know how to adapt and prosper; how to build stability and security in this changing world.

They embrace the centre-left's traditional values of solidarity, social justice, responsibility and opportunity. But they know we must move beyond outdated ways of thinking. Beyond an old left preoccupied by state control, high taxation and producer interests; and a new laissez- faire right championing narrow individualism and a belief that free markets answer every problem.

The Third Way marks a new departure within the centre-left. The 20th century left has been dominated by two camps: a fundamentalist left which saw state control as an end in itself, and a more moderate left which accepted this essential direction but favoured compromise. The Third Way is a serious reappraisal. It draws vitality from uniting the two great streams of left-of-centre thought - democratic socialism and liberalism - whose divorce this century did so much to weaken progressive politics across the West. The old left and new right continue to take different forms across Europe. There is no blueprint for the Third Way. But Europe's progressive parties share common values, and all of us are adapting to meet new challenges.

For many years in opposition, the British Labour Party was seen, however unfairly, as the party of big government, nationalisation, anti-enterprise, soft on crime, unconcerned with family life, gripped by pressure groups, and favouring more tax and public spending.

We were regarded as poor managers of public services, under the thumb of trade unions and producer interests and too little concerned with choice and quality. The right could turn privatisation and free markets into universal panaceas.

A false opposition was set up between rights and responsibilities; between compassion and ambition, between the public and private sectors; between an enterprise economy and the attack on poverty.

New Labour has sought to move ahead and apply its values in a different way. Our work is at an early stage, and we are learning as we advance. But New Labour in government is putting the Third Way into practice.

In the economy, our approach is neither laissez-faire nor one of state interference. The government's role is to promote macro-economic stability; to develop tax and welfare policies that encourage independence; to equip people for work by improving education and infrastructure; and to promote enterprise, particularly the knowledge-based industries of the future. We are proud to be supported by business leaders and trade unions.

Education is a critical priority. Higher educational standards are the key to international competitiveness and an inclusive society for the future. Significant new investment is driving radical school reform, backed by targets and strong intervention in the case of failing schools, so that all citizens of the future have the basic skills they need to work and the great majority attain further and higher level qualifications.

In welfare and employment policy the Third Way means reforming social security to make it a pathway into work where possible. It promotes fair standards at work while making work pay by reducing the taxes and penalties that discourage work and the creation of jobs.

The Third Way strives for a new balance between rights and duties, not just in welfare, but in a tougher approach to youth crime and far greater emphasis on the duties of parenthood. A new approach to family support is being forged to meet children's needs and help families, particularly the most vulnerable, balance work and home more effectively.

The Third Way stands for democratic renewal and a restoration of faith in politics. New Labour has devolved power within the United Kingdom: Northern Ireland has an elected assembly; the first elections to a new Scottish Parliament and Welsh Assembly take place next year; and the election of a new Mayor of London is one of many steps to renewing local government.

We must also reinvent government for the new age. Governments in the course of this century have been well-equipped to regulate money, send out benefit cheques, build houses, even fight wars and put men on the Moon. Now they need to learn new skills: to work in partnership with the private and voluntary sectors; to share responsibility and answer to a much more demanding public; and to co-operate internationally in new ways.

Internationally, the replacement of the old certainties of the Cold War by the more insidious threats of organised crime, terrorism, drugs and environmental degradation all require flexible forms of international co-operation.

We embrace co-operation without denigrating patriotism. New Labour stands for a strong, decentralised Europe, enlarged to the east and able to tackle cross-border problems effectively but with integration only where necessary.

This is the Third Way. A new alliance between progress and justice. A basis of support, reaching out to those who shared our values but doubted our capacity to implement them.

With courage, we can revere our history without living in it, and build dynamic social democratic societies for the 21st century.

Tony Blair is UK Prime Minister and leader of the British Labour Party.