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Mr. Davidson: Give up the British Commissioner.

Sir Menzies Campbell: I will leave the hon. Gentleman to put that point in such meetings of the Labour party as he thinks might receive it sympathetically.
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There is no doubt that the European Union will need to evolve. Further changes may be necessary to ensure that it works more effectively and efficiently. I believe fundamentally that change should be incremental, not convulsive. That is why I said in last week's debate that we must get away from the notion of a Maoist cultural revolution in which the European Union is permanently engaged in the creation of treaties and then their ratification.

It also seems that increased powers for national Parliaments in the European legislative process, and more frequent consideration of draft European legislation, would be an effective method of stimulating the extensive debate for which the hon. Member for Woodspring has called and which most of us would accept. The Prime Minister seemed to be sympathetic to that point today.

At Prime Minister's questions, the Prime Minister talked of two particular areas on which I want to touch briefly. The first was the impact of globalisation and he identified rightly the economic significance of the rise of India and China. We would do well, however, to consider not just the economic advance but the political advance. One does not have to go far among Indian politicians to find an overwhelming conviction that they are now entitled to a permanent seat on the United Nations Security Council. In relation to China, we do not have to accept the official figures for defence spending. Rather, we should look behind those figures to see that, in addition to the quite remarkable economic growth that China is enjoying, there is equally a growth, which is perhaps not quite so spectacular, in China's defence posture.

It is inevitable, if those countries expand economically in the way we have seen and in the way we predict, that they will exercise greater political influence, or seek to do so. That, I believe, is an overwhelming argument in favour of the European Union being not just a free trade area, but an institution that has a political purpose and, so far as possible, a unanimous common foreign and security policy.

The Prime Minister pointed to a second area, and he is quite right to do so, particularly against the background of the last two or three years in our relationship with the United States and Iraq. He said that it is important to consider the relationship between the European Union and the United States. That is absolutely right. I have some criticism, which I have voiced in the past, about the nature of the current relationship between our Government and the American Administration. I would prefer what I have described previously as a partnership of influence.

One eminent commentator in a broadsheet newspaper today has already begun to say that, in this new approach to the European Union, we should regard our membership of NATO as a shackle rather than a prop. That is a fundamental point to make. I believe NATO to be the cornerstone of Britain's defence and I find it very difficult to envisage circumstances in which I would do other than support NATO, and support it to the best of my ability, but there are others who are already beginning to raise these topics. That, once again,
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emphasises the need for the European Union to be not just a free trade area and a single market, but an organisation with a defined political purpose.

Dr. Fox: The right hon. and learned Gentleman began his remarks by saying that the free market has an important role to play in the prosperity of Europe and he is now talking about the impact of globalisation, yet in Europe we have 19 million unemployed and our job creation is way below that of the United States, as is our productivity. It is all very well talking about political structures. What economic reforms does Europe need to introduce far more quickly?

Sir Menzies Campbell: Not all countries in Europe suffer from the ailments that the hon. Gentleman described. For example—again, I think I said this last week—since joining the single currency, Ireland and Finland have enjoyed growth rates in excess of those of others. Many of the problems that France and Germany have experienced are structural. Indeed, there is a compelling argument for saying that it is easy to blame Europe and the single currency for a failure by some Governments to take decisions domestically that would otherwise prove unpopular. Anyone who has followed the election result in North Rhine-Westphalia will see that Mr. Schröder's efforts along those lines have proved extremely unpopular politically, and of course have precipitated a German general election in September.

I do not have a list of measures, but we need to consider the Lisbon agenda, which I shall come to in a moment, as well as European competition policy. We need a liberal, outward-looking trade policy towards the rest of the world, especially developing countries. Those seem to me to be the mechanisms by which to improve the economic performance of the European Union.

Kelvin Hopkins (Luton, North) (Lab): I cannot accept what the right hon. and learned Gentleman is saying. Does he not accept that Germany's real problem is a massively deflationary impact deriving from its membership of the eurozone? Germany joined the eurozone at a relatively high parity and interest rates were too high. It is not permitted to reflate using fiscal policy either. In Ireland, the opposite is the case.

Sir Menzies Campbell: Before making that judgment, we would have to consider the whole German economy, not least the nature of welfare state provision and whether that provision—the rights of retirement and levels of benefit it gives—can be sustained in that country in current circumstances.

I am not suggesting for a moment that we can compete against India or China in terms of wage rates or things of that kind. We must utilise innovation and be quick in the market—much quicker, perhaps, than we have been—but I certainly do not believe that it is simply a matter of membership of the single currency that has brought those difficulties to Germany.

There are structural problems and political inhibitions. Unless and until those are overcome, the position of Germany will continue to be one of great
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difficulty, although there are those who argue, with some justification, that, as a consequence of the deflation to which the hon. Gentleman referred, the Germany economy is, in its fundamentals and underlying features, extremely strong. They also argue that Ms Merkel, if elected in September, may well be the beneficiary of a substantial economic improvement in Germany.

Mr. Mark Hendrick (Preston) (Lab/Co-op) rose—

Sir Menzies Campbell: If the hon. Gentleman will forgive me, I must make progress as others want to speak.

We need a greater effort within the framework of existing treaties to improve and extend the single market, including in services. I have said already that we must strengthen competition policy and have an outward-looking trade policy towards the rest of the world, particularly developing countries. On the rebate, we most certainly support the United Kingdom Government's approach. The United Kingdom is the European Union's second largest contributor. Of course, our receipts from the European Union are comparatively low.

No doubt the hon. Member for Glasgow, South-West (Mr. Davidson) has gone to the Glasgow music hall. [Interruption.] Oh, he is back. This is the point that I want to make: if there is to be any serious effort to reduce expenditure on the common agricultural policy, there may be a price to be paid for that in this country. We have to accept that. We cannot reduce overall support in the European Union and expect the French to take all the grief. That is an internal, domestic argument that we would have to have politically.

It is worth remembering how the current CAP arrangements came into being. We should remember—this made something of a change to the Prime Minister's usual sunny disposition—that, in 2002, he arrived at a Council meeting to discover that Schröder and Chirac had met the night before. They presented him with something of a fait accompli. Perhaps there were options in terms of not signing up to it, but, of course, the Government signed up, no doubt because at the time it was felt necessary to do so.

It is right that there should be a cap of 1 per cent. on the European Union budget, but I want to make the point that I put to the Foreign Secretary in an intervention: there must be concerted efforts to improve fiscal discipline, transparency, the elimination of waste, efficiency and the elimination of corruption. A greater application of subsidiarity in fields such as social policy seems to me desirable.

I still believe that there are circumstances in which Britain would be well advised to join the single currency, although not at the moment.

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