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Denzil Davies (Llanelli) (Lab): The debate has, naturally, focused on the constitutional treaty—I am happy to call it that—and the negotiations that will take place in the next few days and may continue into the weekend. As experience has shown over the past 30 years, the final outcome will no doubt depend upon haggling and late-night compromises, which have been the hallmark of the negotiations. At the end, if there is an agreement, as there probably will be, it will be hailed, as has been said by previous speakers, as a great victory or a triumph for Europe and for each of the member states, and of course for the intrepid negotiators, who have done so well to reach a conclusion.

Everyone will be a winner except, as often in the past, the democracies of the member states. Over the past 30 years, as treaty has followed treaty, we have seen a gradual slicing away of the democracies of the member states as a result of those treaties. I shall not attempt to analyse why people voted as they did in the last European elections, but I believe people do understand that, and not just in Britain. There is concern that the democracies, especially those of the old nation states of Europe, are being eroded, maybe for the common good and maybe not. That is a real concern, which was expressed at the ballot box last Thursday.

The European Union is faced with two fundamental problems, which are described in that somewhat inelegant language that one often finds in EU documents. Most hon. Members will know that one of the problems is the so-called democratic deficit. If I may create some inelegant language of my own, the other problem, in my view, is the unwieldy macro-economic structure of the Union itself. With regard to the constitutional treaty, being a fair-minded person, I am prepared to wait for what the Foreign Secretary called the final text, and to judge whether it makes the so-called democratic deficit worse. From previous experience, I do not think it will necessarily improve the democratic deficit of member states.
 
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The constitutional treaty will certainly do nothing—I shall spend a short time on this; it may not necessarily be relevant to what happens at the weekend, but this is a debate on European affairs—to address the problems arising from the EU's inflexible and unwieldy macro-economic structure.

Economic and monetary union is in a mess. The EU as a whole and the countries at its core are stagnating, and the existing structure cannot withstand the onslaught of globalisation over the next few years. Continental Europe has not yet suffered from the globalisation pressures from which the United States is suffering. The United States is hanging on in there. It is doing quite well. With huge deficits and practically non-existent interest rates, it is just about managing to create economic growth despite the pressures on its economy, especially from China.

Europe has not yet experienced such pressure, but that will change. I understand that one of the two main Japanese car manufacturers—I forget which—is setting up a manufacturing plant in China. There is nothing new in that, except that that plant is to produce vast numbers of cars wholly for the European market. To borrow a transatlantic phrase, we ain't seen nothing yet in Europe. I do not believe that its macro-economic structure, monetary union and economic union, such as it is, are capable of withstanding that.

It is only fair to say that some of the countries have done quite well, and Britain especially so. Those countries are often on the geographical periphery of Europe or have not joined the euro. As we know, however, the countries at the core of the Union and the euro area—Germany, Italy and France—have been stagnating.

Mr. Wayne David (Caerphilly) (Lab): I have been following my right hon. Friend's argument with interest. Does he accept that the arguments put forward by the British Government in favour of economic reform based on the Lisbon agenda are absolutely right?

Denzil Davies: I shall briefly mention the Lisbon agenda in a moment. The point that I am trying to make—I do not really need to make it, as my hon. Friend agrees—is clear. In Germany, unemployment is currently at 10.5 per cent.—and that is in the summer. The average unemployment rate for the EU of 15 member states is about 8 per cent., and it is far greater for the EU of 25 members.

I am not quite sure what the EU's purposes are these days. Over my 30 years' experience in this House, I have found that they tend to change from time to time. As I understand it, one of them is to stand up to the Americans, eyeball to eyeball if necessary. That may apply to foreign policy, but the economy is also important. A country cannot have much of a foreign policy if its economy is going downhill.

Angus Robertson: The right hon. Gentleman is right to point out the problems, but will he concede that there are many good news stories? For example, why is it that a small independent member state of the European
 
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Union such as Ireland has managed to overtake the wealth per head of the UK and be a part of the eurozone?

Denzil Davies: I asked some Irish friends that question some time ago at a conference. Being charming and Irish, they said, "Mr. Davies, Ireland is crawling these days with economists trying to find an answer to that question." If one looks at the core, one sees that the problems are very great.

Analysts have suggested that the European Union's GDP per head is now about 60 per cent. that of the United States. That applies to the 15 original members; if one takes the 25 member states, the figure will obviously be less than 60 per cent. That is a problem in the economy of the European Union, especially among the euro 12—the countries that have subscribed to what is described as monetary or currency union.

I do not know all the reasons for that situation—there must be many of them—but I suggest that one of them is the dead hand of European bureaucracy. In most democratic countries, the bureaucrats do not propose legislation; it is proposed by democratically elected Ministers. Curiously, in the European Union it seems that the bureaucracy is the only body that is entitled to propose legislation. Others can look at it afterwards, but as we know, the person who produces the first draft has the advantage.

The bureaucracy churns out material. No doubt we all receive those wretched yellow forms among our parliamentary papers. I try to look at them from time to time. Sometimes, in an excess of enthusiasm, I even try to read some of the documents that are sent out. Most of them come from the Commission, although some come from the European Parliament. There are communications, regulations, directives, announcements and all sorts of different documents. Most of them, frankly, are incomprehensible except perhaps to senior partners in City firms of lawyers. I pity not only the larger firms that have to try to interpret such documents, but the small businesses, which are also affected. People in such businesses somehow have to try to run their business and deal with all the nonsense that is issued. If a particular regulation does not work very well, it will take a long time to change it, and the instinct of the bureaucracy will be to churn out another regulation to try to undo some of the damage caused by the last one.

I think that I know the history, but I ask why we need bureaucracy to be on a par with the more democratic elements of the European Union: the Parliament, which has very little legitimacy in my view anyway, and the Council of Ministers. I suggest that one reason—it may be a minor contributory reason—for the stagnation of much of the European economy is the dead hand of that bureaucracy.

On the Lisbon declaration—I think that it is a declaration or agreement—

Keith Vaz (Leicester, East) (Lab): Agenda.

Denzil Davies: I am sorry; one has to be very careful with the language.

As far as I can see, behind the words, the Lisbon agenda basically says, "Well you, France, Germany and Italy, must dismantle your welfare states." I think that
 
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that is what it says in general terms. It mentions what are called inflexible labour laws. Opposition Members will no doubt approve of that sort of Wall Street Journal agenda, which says that provided that we dismantle the welfare states in continental countries, their economies will surge forward and all the problems will be solved. I do not believe that. As far as Germany is concerned, I do not believe that such an approach is practical or possible. After the elections last Sunday, I do not believe that the Germans will take that route.

In my view, the main reason for the problems lies in the inflexibility and unbalanced nature of the arrangement and the fact that it is out of kilter with the macro-economic structure of the European Union. Monetary policy and the arrangements on interest rates apply to 12 member states and no more, although there are now 25 of them. Of course, the new 10 members have no opt-out and will have to try to bring themselves within the currency union. As a result, they will have no ability to fix their interest rates. A country such as Germany, which is the largest in the Union, cannot now fix its own interest rates. I feel sorry for the European Central Bank, because it does not know which way to move. It can move neither upwards nor downwards; if it goes one way, the rate will be too low for Ireland, and if it goes the other way, it will be too high for Germany. There is complete ossification among the three countries—France, Germany and Italy—that produce 70 per cent. of the GDP of the European currency union.

Fiscal policy covers public expenditure, public borrowing and taxation. Apparently, public expenditure is still the province of the member state—and correctly so—but that does not apply to public borrowing. I do not want to look into the entrails of the growth and stability pact, but I point out that it at least tried to restrict borrowing in terms of public expenditure, because it is not possible to allow each nation in a currency union to borrow as much as it wants. We have had great fun over the growth and stability pact, but it will have to be revisited in some way. I do not think that it is possible to operate a currency union without such an agreement. The problem is that nobody knows what to put in its place or how to draft a new agreement. If such an agreement is drafted, it will not, by its very nature, be able to foresee and deal with unforeseen circumstances. Again, the currency union is damned both ways; it is damned if it does not have such a stability agreement, and also if it does have one, because the entrenchment of such an agreement into the constitution and the treaties will mean that it cannot be changed until it is too late to do so. Of course, many of the new member states are now trying to get inside this somewhat dead growth and stability pact and to reduce their expenditure and borrowing so that they come within the 3 per cent. requirement. That is also contributing to the stagnation of the European economy.

On taxation, we have heard about the red lines. I think that the general view is that member states have an unfettered prerogative and power over taxation, but that also is not true. VAT produces the second largest amount of revenue for the British Government. It is a European tax. We can alter the rates up and down slightly, although the boundaries of change are getting smaller, but we cannot change the structure. No British
 
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political party can go to the country and promise to abolish that rather ridiculous and bureaucratic tax.

I am old enough to remember the Richardson committee, which was established before 1974 and headed by the Governor of the Bank of England to examine the wretched VAT. The committee concluded that we did not need it but Mr. Edward Heath, who was then Prime Minister, had to negotiate entry and VAT came with entry. We must therefore be careful: all taxation is not in the province of member states.

Let us consider income tax and corporation tax. It may be an esoteric point but if one goes through Finance Bills over the past four or five years and reads some of the taxation reports of the cases before the European Court of Justice, one sees that it is clear that the treaties encroach—especially when one considers freedom of establishment—on income tax and corporation tax and have cost the Treasury a considerable amount of money. Legislation cannot be drafted that contradicts case law and the acquis communautaire that the EU has built up on taxation.

The macro-economic structure is neither fish nor fowl. The central authorities of the EU have some but not all the levers of economic power that one would expect a nation state to retain. Member states have some but not all the levers of economic power that one would expect them to have. That puts the macro-economic strategy at a disadvantage when trying to compete in a global economy.

There are two solutions. The first, which I believe that the European élite—as my hon. Friend the Member for Great Grimsby (Mr. Mitchell) refers to them—prefer, is to transfer more power to the centre. Under that solution, powers over taxation would be transferred to the centre and public borrowing—or, indeed, expenditure—would be controlled more stringently. The levers of economic power would therefore go to the centre. Whatever happens to the red lines, the pressure will continue for greater central control of taxation and fiscal powers, because those who want a stronger centralised state believe that the balance is not right.

In my view, any attempt to transfer fiscal powers, especially taxation powers, to the centre would be a step too far and would create a dangerous gap between economics, democracy and politics. However, pressure will exist, perhaps by the back door, to try to co-ordinate economic and taxation policy, to create the same sort of structure for corporation tax without touching the rates, at least for now, and to reduce the parameters whereby the rates can be increased. I believe that there are proposals to that effect for corporation tax.

The second solution is to bite the bullet and start dismantling the central powers. We could begin with the Commission. Why should the Commission be allowed to propose all that legislation? We often consider devolution for many parts of Britain yet I hear nothing about devolution in the EU. "Devolution" may not be an elegant word, but let us have some and start dismantling the central powers. Indeed, we may have to consider dismantling some of the monetary powers because I cannot envisage a country such as Germany, unless it managed to achieve economic growth, accepting that it had no control over the basic levers of economic power.
 
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Of course, such dismantling will not happen. On the one hand, there will be no movement towards more taxation powers because I do not believe that people will accept it. On the other hand, the dismantling of powers will not happen because the political and bureaucratic élite will not allow it. What would they do then, poor things? They have a vested interest in attending the meetings, doing the drafting, standing up and declaring great victories.

A danger is that the external economic pressures of globalisation will create the change. As we know to our cost, such pressures can be haphazard and brutal. However, I cannot envisage the EU's doing anything about it except continuing to stagnate.

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