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Mr. Wayne David (Caerphilly) (Lab): Does my hon. Friend agree that one issue that has to be tackled by the Commission and the European Council is the fact that so many nations agree to the directives that make up the Lisbon agenda but fail to transpose them into their own national law? My understanding is that, according to a report to the European Council produced in the spring, two northern European countries, France and Germany, were at the bottom of the league table in that regard, along with Greece.

Keith Vaz: My hon. Friend is absolutely right. That area needs to be looked at if we are to make the progress on the Lisbon agenda that I have asked for, and I hope that the new Commission will ensure that that happens. Given the quality of the people who have been appointed to it, I think that it can be achieved. I want to congratulate Peter Mandelson on his appointment as the EU Commissioner for the United Kingdom, with responsibility for the trade portfolio. Both he and the Spanish Commissioner will play an important part in ensuring that this agenda is furthered.

The EU is falling further behind the United States in terms of gross domestic product per head, and the growth has been below the target of 3 per cent. More labour needs to be employed more productively in the member states to generate growth. This requires an increase in both the employment rate and in investment which can only come about if we start taking the structural reforms seriously by relocating resources from declining to growing sectors. We have to give fiscal and structural policy a chance to put Europe back on the path of sustainable growth.

The responsibility for the success of the Lisbon agenda lies with all member states and their willingness to implement the targets. The Commission has few powers on national employment laws, social welfare legislation, tax rates and education and research policies, or any other tools to enhance EU competitiveness. The role of the Commission, therefore, is to assist the national Governments in finding the right policies and setting a framework for economic reform.

Intrinsically linked to the development of the economic union is the development of the political union. At the Brussels summit on 18 June, all member states agreed to the wording and contents of the draft treaty of the European Union. The ratification of that treaty is a unique development in the relationship of the member states. The EU constitution will finally give Europe stability and strength, after two decades of constant negotiating of new treaties. For all the reasons put out by the Foreign Secretary and the Minister for Europe, it will consolidate the treaties that have gone before. In Britain, this means winning the referendum on the constitution over the next few months.
 
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My view is that we are not lacking the political will to put our country at the heart of Europe. That has been the Government's agenda since 1997. What we need to do is to ensure that that political will is understood by the British people. That means that all Ministers must heed the words of the Prime Minister by making the positive case for Europe, so that people can form their opinions on the basis of what their elected leaders say. And the Government must explain precisely what they intend to do.

We have great challenges ahead, but Europe is the reality in which we live and work, and Britain needs strong leadership and guidance in the important period that lies ahead. Next year will be crucial: we will take over the presidency of the European Union, and in July we will host the G8 summit in Scotland. That will put Britain at the centre of attention and action, and many countries in the EU will look to Britain for guidance.

To remain a strong international player, Britain must adopt the constitution, implement the euro, and look to its partners in the G8 to work towards sustainable development and fair trade. I call on the Government to go out and make that case for Europe. I know that the Minister for Europe and the Financial Secretary will do so in the months that lie ahead.

As the Chancellor has said, there must be a speedier implementation of EU agreements and policy making at national level to create sustainable growth and more and better jobs. Higher employment rates are critical to achieving growth and to further social inclusion. On Lisbon, it must be our Government, who are so much in the forefront of pursuing the reform agenda through the excellent work of the Prime Minister, the Foreign Secretary, the Chancellor and the Minister for Europe, who hold Europe to account. It is our agenda: let us make it work for the people of Britain and for all of Europe.

10.56 pm

The Financial Secretary to the Treasury (Mr. Stephen Timms): I congratulate my hon. Friend the Member for Leicester, East (Keith Vaz) on securing this debate, and I am grateful to him for his kind remarks. I welcome the early opportunity that he has provided for me to respond to the issues that he has raised.

We are strong advocates, as my hon. Friend said, of economic reform in Europe. Europe can only meet the challenges of globalisation by increasing the pace of reform. It has not been quick enough to date, as he has rightly pointed out. To realise the gains of globalisation, Europe needs to become more flexible, more open and more outward-looking.

In the past three years, cumulative economic growth has been 3 per cent. in Europe but 5.5 per cent. in the US and 6 per cent. in the UK. Living standards in Europe are a third lower than in the US. Eighteen million people in the European Union are out of work. US productivity is more than 14 per cent. higher. We need to speed up the pace of reform.

We are very pleased that, as my hon. Friend has pointed out, Wim Kok is chairing the high-level group on the mid-term review of Lisbon. We want to see that deliver a step change in the pace of reform. Last week, my right hon. Friend the Chancellor published the UK
 
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submission to Wim Kok's group, setting out proposals for sharpening the focus of the Lisbon programme and increasing the incentives for reform.

At this weekend's European Finance Ministers meeting in the Netherlands, there was unanimity that the Lisbon programme is getting more important, not less. The challenges of globalisation are coming faster—developing countries accounted for 5 per cent. of world manufacturing exports a few years ago, and will soon account for nearly 50 per cent. I was in China last week, and saw something of the pace of development there.

The challenge for Europe is to combine economic growth while retaining the priority on social inclusion that sets us apart from the United States. Raising employment is the critical link that will allow us to achieve that balance. As Wim Kok said at the weekend, there is no option of economic security without change. We all need to make labour markets more flexible and adaptable, and reform our tax and benefit system so that it pays to have a job.

The Lisbon programme has been expanded over the past few years, diluting its original aims. The International Monetary Fund suggests that there are now 102 Lisbon benchmarks. We need to prioritise. We need a renewed focus on the objective: long-term growth, through increased employment and productivity.

We need to benchmark member states' performance. We should introduce annual Lisbon score cards at spring council meetings to rank members states' progress with economic reform, and enable Europe's leaders to set out specific plans for reform in the year ahead. We need to do more to sell the benefits of reform to European's citizens, and explain the costs of inaction.

The goal of long-term growth demands, in our view, progress in five areas as a priority. The first is further regulatory reform, building on the four-presidency initiative of January this year to reduce the burden of new and existing legislation on enterprising and innovative businesses. The second is urgent reform of labour markets, with all member states implementing the November 2003 European Employment Taskforce report. The third is the taking of further steps to create a competitive single market, liberalising services and developing a more effective competition policy. The fourth is promoting innovation and enterprise, improving the regulatory environment, swift agreement on the Community patent and improved access to finance for fast-growing firms. The fifth is trade and investment liberalisation, with EU leadership in world trade negotiations and a stronger transatlantic economic relationship. Let me say a little about each of those.

Good regulation underpins effective markets. Proportionate, clear rules make it easier to deal with market failures, such as monopolies that raise prices and reduce choice; but badly designed or excessive regulation can have a heavy cost. It can discourage enterprise, markets can be made less dynamic, and competition can be stifled. There is persuasive evidence that regulation in Europe is dragging down growth. In the United Kingdom as much as 50 per cent. of new legislation originates in Brussels, so improving the
 
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regulatory climate means taking action at European level. That is why, with the Dutch, Irish and Luxembourg Governments, we launched our four-presidency initiative for regulatory reform, spanning this year and next year. It was endorsed by all 25 Heads of State and Government at the spring European Council. In addition, the Dutch and Irish presidencies have launched a major simplification exercise, requesting priority areas from member states. Some 20 Governments responded over the summer.

As we look towards the EU presidency, we remain committed both to implementing the measures we have already set out and to developing further proposals to improve regulation in Europe. That is a key pillar of our strategy for economic reform.

As for labour market reforms, Europe—as my hon. Friend said—is in real danger of missing the 2010 employment targets, particularly the one he mentioned relating to older workers. We cannot rely on smaller nations such as the Netherlands and Scandinavia to do well enough to allow us to achieve our goals; all of us need to reform. Unless we are much more successful in moving people from economic inactivity to productive work, we will not have the work force that we need. It is right to create flexible labour markets, and to equip people to cope with change—through investment in skills and training, through the best transitional help for people moving between jobs, and through policies to make work pay.

Member states need to act urgently to modernise the public employment services, using active job search to reduce long-term unemployment; to reform tax and benefit systems to tackle the disincentives to taking jobs; to ensure that we make work pay through targeted tax and benefit policies; and to invest in human capital to increase skills and lifelong learning. That approach has been successful in the UK, and needs to be taken up very widely.

The single market has been a big success story for Europe. It has allowed countries and regions to specialise in their strengths, and allowed companies to consolidate and become more efficient. It promotes the flow of ideas, and strengthens competition. It is estimated that since 1992 the single market has generated an extra £4,000 for every household in the European Union. Costs have fallen, and quality and choice have increased. But substantial barriers remain. Price differences suggest that competition is still not as open and fair as it should be. Too often Governments try to undermine market opening by building up national champions and protecting short-term interests.

So we have identified a number of priorities for extending the single market. Europe needs to stick to the deadlines and targets that it set itself in sectors such as telecoms and energy, which I know well from my previous work, as my hon. Friend mentioned. Political commitments that everybody signs up to need to be delivered. Moreover, competition policy at every level should be proactive and independent. The European competition authorities should not just respond to cases; they should be proactive in investigating markets and sectors. We need to reduce unnecessary, overly complex regulation, thereby cutting costs to businesses and employees and helping to make markets more open
 
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and dynamic. We also need to remove unproductive, old-style industrial subsidies, while allowing innovative approaches to tackling market failure.

Fourthly, enterprise and innovation are very important drivers of progress. To compete effectively in an integrated global economy, Europe needs to improve its capacity to innovate, and to build an entrepreneurial culture. Some member states stand out as strong performers, but as a whole Europe continues to underperform compared with major international competitors. For example, it lags behind the United States in 10 out of 11 European Commission innovation performance indicators, and rates of entrepreneurial activity are about half those in the US.

Europe needs to become a more attractive place in which to invest in research and development by improving the regulatory environment and the sustainability of research funding, and by achieving speedy agreement on the Community patent. It needs to continue to improve access to finance for new and fast-growing businesses—those that we need most to generate new jobs and to boost productivity. We have also proposed that the EU introduce a new competition for a city of enterprise, so that, just as we compete to become the capital of culture, we will compete to find the most enterprising town or city in Europe.

The last of the five areas concerns an outward-looking Europe. Greater external openness to trade and investment reinforces the drivers of productivity and growth. Structural reforms and more open global markets need to be pursued together. We need to turn away from an inward-looking trade bloc model of Europe and instead be outward looking and globally competitive. Concluding a successful and liberalising multilateral trade round is a priority. Following achievement of the World Trade Organisation framework agreement in July, Europe needs to maintain its commitment and flexibility, particularly on agriculture, to make real progress by the next ministerial meeting in December 2005. Protectionism is hurting our economies and those of developing countries. Global income could be boosted by $500 billion a year—two
 
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thirds of which would go to developing countries—by a good, liberalising, pro-development conclusion to the Doha round.

We need to deepen co-operation with the US, which is our biggest trade and investment partner. The EU and the US should work together to eliminate the most difficult behind-the-border barriers, and to reduce the costs for business and consumers arising from duplicated regulatory systems. We welcome the call at June's EU-US summit for the consulting of business and others on the future of EU-US economic co-operation, leading to a road map for enhanced co-operation at next year's summit. The study by the Organisation for Economic Co-operation and Development on the economic benefits of transatlantic liberalisation that my right hon. Friend the Chancellor and the US Treasury Secretary have called for will provide an important evidence base for that work.

Accelerating the pace of economic reform is vital if Europe's economies are to become more flexible, dynamic, competitive and outward looking, and if we are to create a truly global Europe. That requires making progress in dealing with reform of the common agricultural policy. Some progress has been made, but we need a great deal more. Work needs to be done on the EU state aid regime, in respect of which a number of difficulties remain. There is also a good deal of work to be done on the future financing framework. In our view, the current Commission proposals do not meet the demands and challenges that need to be faced.

We will continue to work with other member states on the priorities that I have set out: further regulatory reform; urgent reform of labour markets; further steps to create a dynamic and competitive single market; promoting innovation and enterprise; and trade and investment liberalisation. I very much welcome my hon. Friend's reminding the House of the importance to us all of making progress on the priorities set out—

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