The document committed Labour and the German Social Democrats (SPD) to deliver tax cuts and strict control of government spending, and to run the economy on free- market lines.
"We agree that there mustnot now be any reversion to the failed policies of the 1970s," Mr Blair said as he launched the statement with Mr Schroder in London.
The document, Europe: The Third Way, repeatedly rejects traditional "tax and spend" policies of left-of-centre governments, saying they undervalued the importance of individual and business enterprise. "The promotion of social justice was sometimes confused with the imposition of equality of outcome," it states. "The result was a neglect of the importance of rewarding effort and responsibility, and the association of social democracy with conformity and mediocrity rather than the celebration of creativity, diversity and excellence."
It adds: "Too often rights were elevated above responsibilities, but the responsibility of the individual to his or her family, neighbourhood and society cannot be offloaded to the state."
Mr Blair insisted that Labour remained committed to fairness, social justice, liberty, equality of opportunity, solidarity and responsibility to others. "We will never sacrifice those principles," he said.
As well as putting some much-needed flesh on the bones of Mr Blair's "Third Way" philosophy, the statement will be used by Mr Schroder to try to overcome opposition to economic reforms inside his Social Democratic Party and its Green Party coalition partners. The Chancellor has been frustrated in his attempts to capitalise on the departure last year of Oskar Lafontaine, his left-wing Finance Minister.
The two leaders announced that ministers from their governments would meet regularly to take forward the common agenda. They will seek to involve centre-left parties in other EU countries.
The document commits Mr Blair to further tax cuts. "Modern social democrats recognise that in the right circumstances, tax reform and tax cuts can play a critical part in meeting their wider social objectives," it states.
The declaration strikes a delicate balance on the tricky issue of tax harmonisation in the EU, on which the German government is keener than Britain's. "This requires enhanced co-operation, not uniformity," the document states. "We will not support measures leading to a higher tax burden and jeopardising competitiveness and jobs in the EU."
The statement's tone will alarm Labour left-wingers, who will see it as vindicating their claims that Mr Blair has turned Labour into an "SPD Mk II."
The document rejects a European superstate but says people will support further integration where this is fully justified, such as common goals in social and employment policy; protecting the environment and combating crime.
Francis Maude, the shadow Chancellor, said: "Nobody is going to be fooled by Tony Blair's ludicrous claims that he and Chancellor Schroder are committed to cutting taxes in Europe. The German government is committed to tax harmonisation, which would mean higher taxes in Europe."
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