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Noble Lords: It does.

Lord Skidelsky: My Lords, not quite. The report says that we should be prepared to trade our rebate for things that are very unlikely to happen.

In its Agenda 2000, the Commission has its own proposals for what it calls "a general corrective mechanism" for dealing with the financing problem. In each of its possible correction scenarios, designed to accommodate Germany and other countries, Britain would lose between 2 billion and 3 billion euros. The Economic Secretary rightly judged that,

It would be quite possible, though, to design a rational corrective mechanism. I offer one today. It would be based on the principle that the pattern of payments and spending should aim to achieve zero net budget balances for all member states, except for the structural funds. The structural funds would then be the chosen instruments for net transfers between member states. That would mean that some key members, such as France, Luxembourg, Belgium and Denmark, would have to pay a fair share for the first time. They would not like it; nor would Ireland. That is why it will not be considered.

This makes it all the more surprising that the report should apparently be willing to trade the solid ground of the abatement that we now have for what is little more than a blast of hot air. So the financing crisis will not be solved, certainly not by the time of the summit in Berlin in two days' time. The Select Committee's report has not suggested a solution but it has made an admirable contribution to the elucidation of the problem, and for that I am sure the House will want to express its appreciation and thanks.

6.26 p.m.

Baroness Sharp of Guildford: My Lords, I was honoured to be asked in December to join the committee which, at that time, was just beginning its work on this report. For me, as a new member of your Lordships' House, it has been a learning experience. I had a high regard for the work of the committees of your Lordships' House, having appeared before them as a witness on some occasions. I have also been an extensive user of the reports of your Lordships' House. It was quite pleasant and enjoyable to be a poacher turned gamekeeper in this respect. I wish to extend special thanks to the other members of the committee, in particular the chairman, the noble Lord, Lord Grenfell, who made me so very welcome. The noble Lord, Lord Tomlinson, was ill for a while during our deliberations and it is good to see him back in the House today.

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It is quite clear that the crisis in the Commission which burst last week will dominate the agenda of the discussions in Berlin in the next few days. As the noble Lord, Lord Grenfell, said, any deal on the budget will be an incomplete deal. But the budget issue will not go away. In the end it will have to be an integral part of what will be a new constitutional settlement. That will be a requirement if the EU is to proceed along the agenda it has set for itself.

I have become well aware in the relatively short time that I have been here that some of your Lordships would prefer not to see the EU proceed with a future agenda but rather to wither away on the vine and proceed no further. I am not one of those. I was born just before the Second World War and I am very much one of the generation which has seen the creation in Europe of what Churchill, in the aftermath of that war, called "A kind of United States of Europe". He said, "We must create a kind of United States of Europe". It is amazing that in the past 50 years we have seen the two old antagonists of Germany and France coming together under the umbrella of what we now call the European Union.

However, perhaps more important is the fact that we have also seen countries like Greece, Portugal and Spain, which were dictatorships, using the rock of the European Union to anchor their fragile democracies and build their new economies. The agenda of the European Union will provide the rock on which the newly established democracies of central and eastern Europe, for so long under the yoke of the Soviet Empire, can anchor themselves and go forward. That is the task which underlies the constitutional settlement and, for that matter, the budget settlement. That is why we are considering the budget issue today. It is an extremely important step for the European Union and one that we should not underestimate.

Some noble Lords may have heard of Amartya Sen, Master of Trinity and Nobel prize winning laureate in economics, talking the other day about his new book, Development and Freedom. I heard him on the radio and I was struck by what he was saying. He said that he had become convinced over the course of his life that, on the one hand, freedom of speech and freedom of conscience but also freedom from hunger and freedom from disease were the right aims for development--not GDP growth or GDP per capita, but freedom. But, he said--this was the most significant feature--freedom is both the end and the means by which to achieve that end. In helping the fragile new democracies of central and eastern Europe, we are both helping them to anchor representative democracy to their way of life and creating in the future new and prosperous markets for our own goods and services. However, in order to do that, we must be in a position to divert some of the resources from the present EU budget towards them. That is why there is a crisis in the budget and why we need to consider these issues.

I wish to turn now to the budget and to make two points about it. First, the European Union's annual budget is approximately 100 billion euros. That is about £70 billion. It is not an insubstantial sum but, equally, it is less than we in the UK spend annually on social

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security. That £70 billion is spread over some 380 million people in the 15 nations of the European Union. A disproportionate share of the budget--some £30 billion--goes on the common agricultural policy. Another 35 per cent.--£25 billion--goes on the structural funds. Those are the two main demands on the European Union's budget. The British rebate is worth 3 billion euro--£2 billion or the equivalent of 1p on income tax. However, the problem with the budget arises from the unsatisfactory and archaic way in which the funds for the budget are raised and spent.

As the noble Lord, Lord Grenfell, made clear, although there are many different sources, what is paid in is roughly, for most countries, 1 per cent. of GDP. The discrepancy arises in what different countries receive from the budget. The UK, because it does not qualify for large payments under either the common agricultural policy or the structural funds, receives very little. That is the logic for the UK budget rebate. It is the logic that underlies the settlement made in 1984 and it remains the logic for our special treatment today. However, I think that the Treasury is disingenuous in some of the arguments that it makes. We could receive much more funding under the structural funds and under the common agricultural policy if we were prepared to co-finance.

Under the common agricultural policy new initiatives are being introduced which aim to move away from paying large subsidies for vast fields of wheat towards helping the rural economy restructure itself. But those require financing side-by-side with the funds that are available from Brussels. We are not paying out to co-finance such schemes. Exactly the same point arises with the structural funds. We could receive far more from the structural funds for our areas of urban deprivation if we were prepared to put more money into our own regional budget.

The discrepancy between what we pay in and what we get out of the budget need not be as great as it is. Even so, there would be a considerable gap under the present system. As I have said, that remains the logic underlying the UK abatement. As the noble Lord, Lord Grenfell, made clear, the problem is that the discrepancy arises in relation to other countries. Sweden, Austria and the Netherlands have made a claim for special treatment. Germany has done so also. In many senses it remains the paymaster of the Community and, with the burden of the integration of the eastern lander on its budget, is by no means as rich as once appeared to be the case. Germany has always made a special contribution towards the UK rebate and is now saying in effect that it wants to renegotiate the whole budget. Sweden, Austria and the Netherlands argue that, if the UK receives a rebate, they should have one too. But if everyone followed the same logic as the UK, the EU budget would collapse. That is the crux of the issue.

The Community is in the process of renegotiating the common agricultural policy. A good deal of movement has been made. If we are to follow the route of enlargement, it is essential that we reform the CAP, because we cannot possibly afford to have Poland within the Community if we retain the CAP as it exists today. There is movement there, whatever the noble Lord, Lord

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Skidelsky, says. At long last there is a wish on the part of the Germans to see some renegotiation within the CAP.

In the report we argue that there is potential for reform of the CAP and that that would not be at the cost of jeopardising the enlargement process. To my mind, enlargement is the vital next step for the Community. We must help the countries of eastern and central Europe to retain the freedom which we have so long enjoyed and which will in turn help them restructure and rebuild their economies. I commend the report to the House. I believe it is the right way forward.

6.39 p.m.

Lord Harris of High Cross: My Lords, I congratulate the noble Lord, Lord Grenfell, on his forthright opening remarks. I readily pay tribute to the Select Committee for all its justly acclaimed work. This report, Future Financing of the EU, is well up to the outstandingly high standards that we have come to expect. It is a matter of some regret to me that I shall have to launch into some criticism of the apparently unanimous central conclusions. First, I applaud the committee for its lucidity, although it invests the EU mumbo-jumbo with undeserved coherence. Its diligence in marshalling so much complex data provides matter for half a dozen Ph.D theses.

Thus one might go deeper into the question of GDP versus GNP as measures of economic welfare on which national net contributions are supposedly based. I would argue that net national income is a better guide than gross national product, although all these measures have a degree of arbitrariness, because they are severely distorted by the rampant black markets that are caused by over-taxation throughout Europe. Another study might examine the idea of a single tax levied from Brussels rather than fiddling further with this rag-bag of so-called own resources. Yet another might look closely at the Commission's own list of eight possible candidates for still further taxes, such as an EU-wide energy tax; a communications tax; a corporate income tax; an earmarked personal income tax; a Euro- supplement to VAT, or to tobacco and alcohol duties. Finally, I should like to see an honest Ph.D assessment of the costs and benefits of this ever-encroaching Europe project.

To speak frankly as an increasingly convinced Euro-sceptic, my chief criticism of the committee is that its membership, like the witnesses, may not sufficiently reflect the fundamental balance of doubts shared by the majority of independent economists known to me. The latest scandals over EU fraud and incompetence must surely provoke doubts about the amiable indulgence with which the committee views the shambolic finances of this long-running Brussels pantomime. Buried beneath the jargon of "own resources, traditional resources, third and fourth resources", to be supplemented perhaps by a "fifth resource", lies a tangled web of levies, duties, VAT-based and GNP-based contributions. That is the debit side. On the credit side are the kick-backs received by some in the form of CAP, cohesion, structural and administrative payments.

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Struggling to comprehend what goes on risks stumbling into a snake pit of politicians and apparatchiks--all working the system back stage, trying to pay less and get more at the expense of everyone else. Some countries, like the UK, end up receiving less than they pay in, while others appear to run off with the swag. But allowing for bureaucracy, the fiscal freight charges in both directions, and the low priority of many of the structural spending projects, most of the 15 nations are in the position of traders buying euros at 1 euro 20 a time!

One of the committee's top Eurocrat witnesses rejected complaints by net contributors about the cost of Brussels by pointing to the non-financial benefits, such as sharing in a common market. It brought to my mind the picture of Sir Leon Brittan standing at the entrance to a shopping centre rattling a collection box for access to a competitive market. Anyway, what about the costs already imposed on consumers by farm subsidies and business compliance with thousands of directives and regulations?

The same lofty complacency was displayed by another former top member of the Brussels nomenclatura on BBC radio's "Any Questions?" last week. Out of delicacy I shall not mention his name. He excused the latest financial irregularities as only what might be expected from any large organisation. He went on to say how modest were the EU budget and staff, considering--wait for it--that they "look after the affairs of 350 million people". But not perhaps quite as well as they look after their own affairs.

Unfortunately, the economic witness to the committee seemed to share similar Euro-phoric delusions, without a redeeming glimmer of healthy scepticism. Thankfully, the British Treasury witness repeatedly provides a welcome douche of correction. For example, against the trivial claim that trade with the EU is a benefit worth paying through the nose for in taxation, the Economic Secretary calmly points out that this:

    "takes no account of increases in exports which might have happened independently of EU membership, nor of the corresponding increase in imports".
The truth--which incidentally punctures the weary CBI case for signing up to the euro--is that our trade (visible and invisible) with America and the rest of the world now exceeds that with the EU and is growing far more rapidly.

Returning to the central issue of the budget, paragraph 15 of Part 2 of the report sets the stage with an astounding admission:

    "We are already being taxed to finance EU expenditure, yet we have virtually no knowledge of what we are paying--or what we are paying for".
Alas, the committee does not enlighten us on the second half of that unequal equation.

The committee's economic witness seeks to minimise the burden by expressing it as the average cost spread over the entire EU population, which he says is a mere one-sixth of what we spend on the NHS. Along comes the Treasury with a more meaningful assessment; namely, that the cost to the UK after the abatement is

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£8,000 million, which is 1 per cent. of GNP and equivalent to 4p on the standard rate of tax. Surely that makes it all the more surprising that the committee should be ready to offer up the UK abatement in negotiation on the future EU budget. Of course the committee wants something back in exchange, but it stops well short of my price, which would be the repatriation of the CAP under World Trade Organisation rules and the phasing out of arbitrary and distortionary cohesion and structural subsidies. That would be a bargain worth striving for. Not only would our abatement become unnecessary, but the so-called "own resource ceiling" could drop well below 1.27 per cent., perhaps closer to 0.27 per cent., and our net contribution would drop towards zero along with everyone else's.

Such a clean, principled renegotiation would have many advantages. Not least, it would finally purify this sordid and sullied project. It would sweep the Augean lobbies clean of corrupting backstage deals, often amounting to little more than Commission payments for support by such perpetual beggars as Ireland, Greece, Portugal and Spain. Above all--and this is my earnest and consistent message--such a fundamental review would redirect attention to the historic engine of economic progress, which is the mutual enrichment of unhindered free trade in an expanding global market.

6.48 p.m.

Lord Barnett: My Lords, the noble Lord, Lord Harris of High Cross, knows very well that my fondness for him is matched by the extent to which I disagree with almost everything he says on European Union matters. With him, it is not simply an emotional spasm; intellectually, I know where he stands. I understand his point of view, and disagree with it totally. In or out of the European Union, there is need for a sensible budget. The noble Baroness, Lady Sharp, says that if we stick to the present system the budget will collapse. I hope that the noble Lord, Lord Pearson of Rannoch, will not mind my saying this; indeed, I am sure he will be delighted. I note that he nodded in total agreement, as he wants to see it collapse.

I start by congratulating my noble friend Lord Grenfell and the committee. They have done your Lordships' House a great service in dealing with this difficult problem. The noble Lord, Lord Skidelsky, made a good point. He said he doubted whether many people understand the UK budget, let alone the European Union budget. He could have gone further and expressed doubt about whether many people understand their own family budget. From my own old days I found that that often applied to clients, their businesses and their families.

I wish to stick to the one point the committee made in relation to the rebate and the general financing of the European Union budget. Under the present system, the committee makes the fair point that equity never demands equality of net contributions. I see that the Government agree with that, and so do I. However, where I strongly disagree with the Government's response, as Ministers may not be too surprised to learn, is in its rigid and inflexible position on the rebate. I strongly agree with the committee and might have

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been tempted to go further than saying that rebates may no longer be the best way of solving the problem. The committee is absolutely right.

It may be a surprise to the Government that I agree with them occasionally, but I do agree with them that nothing in Agenda 2000 would compensate the United Kingdom for giving up the rebate. On that the committee is right. But that is now. It is not necessarily what will happen or what we should seek to change. The committee puts forward a number of sensible proposals for changing the whole budget scenario. It even goes so far as to question GDP and GNP. Everyone who understands their own budget understands that there is a difference between GDP and GNP. But the committee puts forward the question of whether member states should pay as a proportion of their per capita income. That is at least worth consideration in any renegotiation.

The urgency is spelt out by the question of enlargement which has all too often been shirked. Everyone supports enlargement, at least nominally, including the Eurosceptics. They think it an easy way of dealing with the problem. We have such a large Community; we do not need to worry any more about financing or anything else. There is no chance whatever, it seems to me, of achieving enlargement without major reform of the finances of the European Union. I am not at all sure that we will get it even then. There are member states of the European Union, including major ones, who would not be in favour of enlargement. Although nominally they say they are, in practice they do not like it. I am getting worried. I see my noble friend Lord Bruce of Donington nodding in agreement. I have never experienced that previously on European Union matters. I take it that he agrees with me.

Stabilisation will produce only modest gains for the United Kingdom. I refer to the present proposal on stabilisation with which the Government agree. But stabilisation surely cannot be the end of the matter. Negotiations will need to go on. That is only the start, not the end.

I return to my main point about rebates. It seems to me that reform will never be possible if the UK or any other government stick rigidly to not being willing to give up a penny of a £2 billion rebate. If that is the approach and that of other member states, then we can forget about any possibility of reform. Is it not as foolish to say "never" on the rebate as it is effectively to say "never" on joining a single currency? That seems to me just as stupid.

The report makes clear that there is an obvious, simple case, in a complex system, for major reform and an early renegotiation. Of course, it is foolish not to recognise that it would be extremely difficult to get the kind of successful renegotiation most of us want to see. But we must try. In the UK case, to put it into perspective, if we gave up £1 billion of our £2 billion rebate, we should recognise this in the perspective of a money GDP next year of £925 billion. So let us get into perspective what we are talking about. We are talking about petty cash. Here is our Government sticking rigidly to a principle. That would be a crazy situation.

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If we gave up £1 billion of our rebate, in return perhaps we could obtain £2 billion by changes in the budget. So why start from that crazy situation? It seems sheer lunacy to do so if, for rather silly political reasons, there is a fear of being accused of giving up the so-called Thatcher victory. I say sheer lunacy because, with such vital net gains, to stick rigidly to not being willing to give up a penny of a rebate is a crazy way to start a serious negotiation.

I hope that the Government will reconsider what they have said--what the Minister said to the committee and what has been said since. Of course, one does not start by giving up a rebate. But if we are to seek early renegotiation of the whole financing of the European Union, it is vital. If we need those major changes--and I agree with the committee that we do--simply saying no again and again is not a sensible way of seeking to solve the European Union's major financial problem. I therefore agree with the committee and my successor, my noble friend Lord Grenfell, in all that is said in the report.

6.57 p.m.

Lord Howell of Guildford: My Lords, I gladly continue with the theme of fondness and disagreement with which the noble Lord, Lord Barnett, began his speech. Unlimited as my admiration is for the noble Lord, I shall not be able to agree with everything we have heard in the last nine minutes. I must also make a brief apology. As the debate is running late, it is possible that I may have to miss part of the wind-up speeches. I apologise for that, particularly after the lesson we had this afternoon in courtesies. However, we are running late and I must speak elsewhere later.

I confess that I find the report extremely disturbing. In a way that is a compliment. It is meant to be a direct compliment to the noble Lord, Lord Grenfell. He is my noble friend, as a matter of fact, and he is the chairman of the committee. A committee report should be disturbing. A report on this sensitive issue that came out saying, "Everything's fine and it's all going to work out well in Berlin" and so on would be no good to your Lordships' House. To have from such a distinguished and experienced chairman and committee of your Lordships' House the phrase in heavy black type mentioned by the noble Lord, Lord Harris of High Cross, that we have virtually no knowledge of what we are paying, or what we are paying for, needs to send the message that there is something profoundly and fundamentally wrong with the system we are examining. Vast and radical changes will be needed to get round it.

What is the root of the problem? The report describes it accurately. There is inadequate, vague, indeed almost untraceable, accountability. I wish to concentrate on that. We are looking at future financing. But financing is driven by expenditures. That is what it is for. And the expenditures are driven by decisions. The reality is that those decisions come pouring out and unless checked--as would apply to national governmental decisions leading to expenditure and therefore the need for new financing--they will grow. Unless those who make the decisions, with the consequent expenditures and

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generating the consequent financing need, are held to account vigorously and continuously, the whole machinery will expand.

The report talks about achieving stabilisation by 2006. That is a very poor target. I do not believe for a moment that it will be achieved. But even that target would leave the situation that the sub-committee has confronted so perceptively in a very unsatisfactory state. In addition to the very detailed and brilliant questions posed by my noble friend Lord Skidelsky, the question perhaps for the less expert is: who will check all of this? From where will the checks on accountability come? Before we begin to look at new ideas for the financing of this, that and the other by way of new taxes, how is the matter to be held to account? How can we control the driving mechanism for the expansion of expenditure that has been working so vigorously? One answer appearing in the media and current on many people's lips is that it is a task for the European Parliament because it has shown that it has teeth and that it can do it. However, while the European Parliament has performed a signal service with its latest investigation it has not had a reputation for curbing expenditure. On the contrary, it has been a powerful force for increased expenditure. All of its arguments with the Commission each year have been about why more has not been spent on this or that programme. With its co-decision procedures it has now become not only a calling-to-account watchdog and a legislature of the kind that we know in this country but part of the government and executive of Europe. It involves itself in legislative programmes that lead to more and more expenditure. There will be many more programmes like the famous Leonardo programme about which we have heard so much. That is a classic example of unaccountable and unnecessary expenditure.

Before we answer any of the questions on the budget rebate, stabilisation, own resources expansion or, heaven preserve us, the imposition centrally of new taxes directly on the citizens of Europe we must recognise what my noble friend Lord Skidelsky rightly said; namely, that there are two fundamental approaches and we are rapidly coming to the Y-fork in the road. I do not know whether that Y-fork will be recognised at Berlin with all the talk of fresh approaches. I rather doubt it. The Y-fork is the choice between moving towards a centralist or a constitutional European Union. I am aware that "centralist" is perhaps a loaded word. I do not intend to be too critical but that is where we are going now.

We hear suggestions that more power should be given to the parliament and that obviously the Commission should have more expenditure programmes and the power to tax. This is the classic centralist pattern. One has great organisations, perhaps in conflict with each other, trying to hold each other to account. Great organisations, perhaps of a pan-continental size, joust with each other for the government of Europe. I suppose that that was the pattern adopted towards the end of the Roman Empire when the Senate took more power as it ceased to hold the imperial authority to account; it just

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became a very powerful second kind of government. That is the centralist pattern and the path that we have followed.

That is to be contrasted with the constitutional pattern where we now seek to circumscribe much more effectively than in the past the powers and role of the Commission. We question whether it should have the initiative to legislate and propose, as it has in the past. We seek to impose accountability, not by giving more central power to pan-European institutions but by building up the abilities and initiatives of national parliaments. That is the constitutional route, and it is one I prefer. It is not the path we are now following but that may change. We are at the beginning of the talks on co-financing and we worry about the total inadequacy of the past pattern of accountability. That has grown up thanks to weaknesses in both the Commission and the parliament. It may be that when the Prime Minister talks about a fresh start in Europe he is thinking of going that way. It would be wonderful if that were so.

The constitutional role does not rule out the European Parliament which I believe does extremely good work as a watchdog. Obviously, it can play an increasingly effective role in scrutinising and doing the kinds of things it has been doing in the past few weeks. But the constitutional role insists that power should be remitted to the national parliaments. We in the national parliaments should gear up our methods of calling to account to a far higher level than we have so far, excellent though our work is. I am not averse to the possibility of some Members of the European Parliament participating in a reformed House of Lords. They are extremely well informed and see things that are about to happen way up the legislative stream before we are suddenly confronted with an instrument of expenditure.

Our system here is excellent. We have excellent committees and this evening we are discussing the report of one of them. But the system tends to be document-based scrutiny. We have to shift the whole system in the other place and in your Lordships' House into much higher gear and seek to involve ourselves in calling to account initial ideas and procedures that lead to endless growth of expenditure combined alas, as we have seen in recent weeks, with a considerable diversion of expenditure into improper channels.

The choice is between the centralist and constitutional approach. I should like to think that true constitutionalists will now make that choice and that at Berlin a major step will be taken towards circumscribing the Commission, clarifying its role beyond the endless grey area that leads to constant growth, redefining the role of the European Parliament as an efficient watchdog but calling the work of the Commission and the activities of the European Union to account through national parliaments five times more vigorously than we have so far.

7.6 p.m.

Lord Desai: My Lords, I regret that due to the lateness of the start of this debate I may have to leave before the end. I have an Inter-Parliamentary Union

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delegation to receive and it is my parliamentary duty to attend. That is not a private duty. I shall try to stay for as long as I can.

The noble Lord, Lord Skidelsky, said that the system of budgeting was haphazard and irrational. I entirely agree. What we have tried to do is to put it on a moderately rational basis. My argument is that our obsession with the rebate prevents us from doing anything rational about the budget. I go as far as to argue that when the UK won its rebate it was so satisfied with that great national triumph that it took its eyes off the ball and did not play a full part in the subsequent momentous events that took place within the European Community. Now many of the people who were then in power regret that they were so happy with the rebate that they forgot to look out for the single market. That is the only controversial comment that I shall make.

There is an anomaly about the budget. Spending per capita throughout the EU population is £155. That is not a large sum of money. The UK contribution, give or take the odd penny, is £155. At present, with the rebate, we contribute as much to revenue as per capita spending. If we lost the rebate we would spend about £14 more per capita: £170. That is not a gigantic sum. However, a large number of people feel strongly about it and so we should look at it rather carefully. Not only does the method by which the EU budget is financed have no reason or structure to it, but the way in which the whole question is always settled five minutes before midnight by a tired group of 15 heads of state or chief executives is no way to run a whelk stall.

There is nothing to urge the European Parliament or governments to think, "Hang on, there are other confederations and federations around the world. How do they do it?" There is much economic literature on burden sharing. Do we apply those principles? I asked the question of a witness. No one has thought about it. No one wants to start from first principles. People are in entrenched positions which they will not give up, but if they do not give them up we shall be in this mess for a long time.

I have been no friend of enlargement. I have said in your Lordships' House that I wish enlargement would never take place; and if it does, it will be a budgetary disaster. I have also always said that the European Union has not thought seriously about enlargement because it has not tackled its budget seriously. Unless it settles its budgetary problems, enlargement will not occur. Alternatively, it will take place but in such a horrendously messy fashion that we shall continue to have debates like this and there will be much dissatisfaction for a long time to come.

Many people like enlargement because it weakens the centralist tendencies in the EU. I was amused when the noble Lord, Lord Howell, said that there were two approaches: the centralist approach and the constitutionalist approach. The United Kingdom has always taken the centralist approach and it has done us no harm whatsoever. We do not want the European Union to take a centralist path, but there is nothing bad about centralism. We have benefited enormously from centralism. We are one of the most centralised states in

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the world. We would not have considered the welfare state without centralism. A decentralised United Kingdom would not have the same prosperity.

However, I digress. I refer noble Lords to the last page of the report. It has two tables by the European Court of Auditors. They demonstrate that, depending on how one calculates contributions in respect of agricultural levies, sugar and isoglucose levies and customs duties, we are either a net contributor or a net recipient. The difference is £3.5 billion. The figure fluctuates from minus £2 billion to plus £1.5 billion. They are smokescreen mirrors because no one has established correct principles.

In response to the spirit in which the noble Lord, Lord Skidelsky, addressed the issue, I ask: how should we approach it? I believe that the issue does not relate purely to per capita income. Per capita income is one dimension. Given the tremendous differences in the population of the European Union, we should consider per capita income and total GDP. A weighted average--it might be half and half--to decide contributions would, I believe, arrive at a reasonable judgment. I made some calculations, almost on the back of an envelope. The gross contribution of the UK would be reduced, but it would make the position more equitable.

The UK insists on sticking to the principle of per capita income. I feel shocked that our Ministers proudly insist that we are tenth or eleventh in the league and proudly display our poverty. We are a member of the G7. We are a permanent Security Council power. How can we be eleventh in the per capita income league? Why do we not say proudly that we are number three in the European Union as regards total GDP? Why do we always insist on our shortcomings? I have asked our Ministers whether it was Her Majesty's Government's policy always to stick to the eleventh position, perhaps even going down to 12th or 13th, so that they could have a greater rebate. I was given an evasive answer.

I have never liked league tables. They are somewhat fraudulent. I draw your Lordships' attention to the very useful Table 3 in the report. If one adds up the UK's rank on total GDP and per capita GDP, and compares the contributions of different countries by their rank-- it takes some calculation but perhaps noble Lords will take my word for it--high ranking countries are the net contributors, including the United Kingdom. There is one anomaly: the difference between the German contribution of 11 billion euros and the next largest contribution, that of the United Kingdom, at 2 billion euros. The difference is far too large. The anomaly has developed and some way will have to be found to correct it. The noble Lord, Lord Skidelsky, said that everything else should be balanced out and only structural funds should be left as an instrument of mechanism. It is an interesting suggestion which we should perhaps follow up.

I also believe that we should devise a system of contributions that is not based on mechanisms which are subject to fraud. The noble Lord, Lord Boardman, suggested a single identifiable contribution--I would prefer it to be based on total and per capita GDP--that was not accompanied by stories of fraud, or debates on

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the income of Italy, and so on. In any such confederation there should be "progressivity" (if I may use such a horrible word) in contributions. The richer countries should contribute more; otherwise we cannot sustain any kind of Community.

I do not believe in a juste retour. If we based a national policy on juste retour the state would be bankrupt. I do not want as much back from the state as I put in because I am relatively better off. I can put in more than I take because that is the only sensible way to finance the state. If we all received as much back as we put in how would we build roads, and so on?

To conclude, we need a serious, rational, calm consideration of the principles of European Union budgeting, leaving aside the rebate for the time being. I very much agree with what the noble Lord, Lord Barnett, said. Until we do so, this mess will continue. The position will not get better but worse. The report points out that there are ways out of the mess. We may not have suggested explicit solutions, but we have suggested that the present system is not the way to go forward.

7.18 p.m.

Lord Williamson of Horton: My Lords, first, I welcome the report of the Select Committee on the European Communities on the financing of the European Union. I have read its reports regularly and I believe that this report is a valuable contribution to improving the United Kingdom's position within the Union. However, I intervene principally on one point: the United Kingdom rebate. I do so because it is an important point; and because I was a member of the team which, under the command--I think that the word is accurate--of the noble Baroness, Lady Thatcher, negotiated this rebate. I was present when the noble Baroness rejected in a convincing manner some offers on the rebate. I was also present when she accepted the rebate. So for my part, that rebate is like a baby son to me.

But I have noted of course, as have many noble Lords here, the Select Committee's views which have been quoted; namely, that the rebate "should be negotiable" as part of an overall settlement delivering the results of fairer net contributions and:

    "It seems to us that a realistic negotiating result for the United Kingdom would be agreement to forgo the abatement on condition that--and only when--the loss can be made up on a permanent basis through the savings of a reformed CAP and stabilisation of expenditure overall by 2006, and possibly through increased EU expenditure in the United Kingdom".

I recognise that that opinion is conditional and presented very carefully. Nevertheless, we must be careful that we do not find ourselves on a slippery slope. I do not consider that at this time the conditions will be met and accordingly, I side with the Economic Secretary to the Treasury when she informed the committee that:

    "The Government is determined to maintain the rebate".

I believe that there are good arguments for such an approach which I should like to draw to the attention of the House. First, the UK abatement which was negotiated at Fontainebleau is an intrinsic part of the

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current own resources decision. That decision was adopted by unanimity and can be changed only by unanimity. When that was first negotiated, it was an essential point for the United Kingdom.

Secondly, although the Select Committee points out rightly that the sums involved in the European Union budget are relatively small as against total public expenditure in most member states, they are by no means negligible and the present abatement system gives an assurance to the United Kingdom or, more accurately, gives back, as the noble Baroness, Lady Thatcher, would have said, resources which can be used directly to train more doctors, to educate more people and to use for whatever purpose the Government think fit.

Thirdly--and this is a point which I genuinely believe to be very important in the negotiations and which has not been raised generally--the system which we have in place at present ensures that if the UK were to gain more from changes in financing, for which there may be good reasons, the abatement would automatically be less. The reason for that is that subject to certain rules on calculation, the abatement is broadly equal to 66 per cent. of the UK's unabated contribution to the Community budget, less its receipts. Clearly if our unabated contribution and/or our receipts were to change, we could receive 66 per cent. of a smaller figure. It is thus a method of correcting unfairness in the budget but it is also a self-correcting mechanism.

Those three arguments are strong for the retention of the rebate in its present form at this time. Agenda 2000, which is referred to quite often, is a comprehensive package which deals with negotiations with the applicant countries, agricultural reform, structural funds and the budget up to 2006. In that basic substantial document, there is no proposal to change the UK abatement at this time. Rather to the contrary, the European Commission document, the main basic document for the negotiations, states that over the period to 2006,

    "the maintenance of the current financing arrangements and the effects of the reform of the main Community policies are not expected to lead to major changes in the budgetary positions of the Member States".
Consequently, the uncertainty surrounding the relative prosperity of the UK led the Commission to propose postponing a re-examination of the rebate mechanism until after the first enlargement.

That is contained in the basic document which is being discussed in Berlin and elsewhere. On that basis, the UK can rightly argue that the current package of agricultural reforms, structural policies and progress towards enlargement of the Union does not need to include any reconsideration of the UK abatement.

It is correct--and the Select Committee examines this in its report--that in a later document the Commission has suggested three possible courses of action, including a reduction or phasing-out of the abatement which could address the imbalance,

    "if there were a political consensus".
But second thoughts are not always best and I do not form part of a political consensus on that point. It is a perfectly defensible negotiating approach to base

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oneself on the elements of Agenda 2000 and not to disturb the balance of that document by introducing the question of the UK abatement which was excluded from Agenda 2000.

Finally, the Select Committee deals extensively--and a number of noble Lords have commented on it--with the question of a broader reform of financing. That is a different and wider point. It is extremely important. But I share the view of the Economic Secretary to the Treasury that it is not for the immediate future because it is not going to be negotiable in the immediate future. However, I believe that the Select Committee is right to concentrate on a GNP per capita approach in the medium term and, as we already have a GNP-based part of the resource system, that would make it easier to negotiate.

The defence of some other current elements of the financing, such as agricultural levies and customs duties, on the grounds that they are the Community's own resources seem to be now to be largely theoretical.

I conclude that this is not the time to abandon my baby, the UK rebate, on the steps of the Berlaymont or on the steps of the Breydel buildings in Brussels as the conditions suggested by the committee are not likely to be met. However, for the longer term, the committee's views on a medium-term objective of moving to a GNP per head basis for financing certainly deserves most serious consideration.

7.27 p.m.

Lord Tomlinson: My Lords, like the noble Baroness, Lady Sharp, perhaps I may say how pleased I am to be a member of Sub-Committee A and how grateful I am to my noble friend Lord Grenfell for his support, advice and guidance during the work of that committee. I apologise for the fact that illness precluded me from playing a full part in the work of that committee. However, because I was not able to participate in its deliberations I can perhaps be more objective about them.

Much of the Select Committee's report is clear and relatively non-controversial. The statement that spending should be stabilised at current prices--about £85 billion--is not only clear but is almost universally accepted. That must be done not only by strict adherence to budget discipline but by a number of other endeavours into which the report does not have an opportunity to go fully.

It is quite clear, for example, that in future, the European Commission must follow the advice given so clearly by Commissioner Liikanen to follow policies of critical mass, policies where there is clear added value in undertaking projects at the European level. That really does mean that if we are to follow the policies of critical mass, there must be equal rigour in weeding out the policies which are no longer appropriate to be undertaken at European level.

Towards the end of his speech my noble friend Lord Grenfell referred to the use of zero-based budgeting. That could be a major contribution both to the process of budgetary discipline and, through that process, to the

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stabilisation of the budget. We must make sure that some recurrent programmes rejustify their utility in terms of European added value.

At present, in a number of relatively small programmes, we see some sort of European game of snakes and ladders but on a board which still has all the ladders there but without too many of the snakes. That creates some inequity as we go forth with new programmes without having the resource necessary to fulfil them.

However, I say to the noble Lord, Lord Howell, in the same way as I would to the noble Lord, Lord Skidelsky, were he in his place, that it is unfair just to castigate the Commission. The Commission merely puts forward the proposals. The policies are agreed by the Council of Ministers either by themselves or jointly with the European Parliament. To that extent, the Council of Ministers must accept its responsibility for demanding of the Commission the execution of policies without necessarily having the resources to go with them. Therefore, the budgetary discipline aspect is extremely important.

The report also commends greater scrutiny of EU spending and states that such scrutiny should be rigorous. Of course, one of the ways in which that could be improved is by the Council of Ministers accepting its responsibilities. Year by year, it gives a recommendation to the European Parliament on whether we should discharge the European Commission for its handling of the spending of the previous year. I have to tell noble Lords that the Council of Ministers has never called into doubt the question of granting the Commission discharge. I pay particular tribute to Mrs Liddell when Economic Secretary to the Treasury, for being the first Minister during a British presidency, or during any presidency, not only to force a political discussion on discharge in the Council of Ministers but also to come to the Parliament's budgetary control committee and to the plenary session of the European Parliament to spell out the shortcomings.

Ministers must accept their responsibilities in the process of control rather than merely looking to an alibi post factum. Therefore, things need to be done in relation to the scrutinising of European expenditure beyond just the rhetoric of blaming somebody else. For example, for far too long there has been a cosy conspiracy between the European Parliament, of which I happen still to be a member, and the Council of Ministers. It has been called "The gentlemen's agreement". I believe that transparency in the budget would be assisted no end by abolishing the pretence that the two institutions are composed entirely of gentlemen. That is "gender wrong" in the first place and factually wrong in the second place. The European Union would be greatly enhanced by each institution accepting a responsibility fully to scrutinise each other's undertakings.

I turn to the question which has obviously been of greatest concern, that of own resources. The committee--I believe quite rightly--did not support, on either political or practical grounds, a directly collected own resource. I welcome that as an important part of its

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recommendations. However, it very much criticised the traditional own resources system. Such a system is one which is of decreasing economic significance. It is the most fraud-prone part of the European budget and, were it to be abolished, would bring the greatest benefit to the three countries which are the largest net contributors to it.

The benefit to Germany would be 3.8 billion euros; to the United Kingdom 3.4 billion euros, and to the Netherlands 1.9 billion euros. That spending would have to be made up elsewhere, but it would be made up on a far more equitable basis of contribution were it related either to the current fourth resource or to some new GDP per capita resource than to the present system. It is extremely important, in terms of the fight against fraud; and in terms of transparency and budgetary equity, that the Select Committee has commended this attack on the traditional own resource.

This brings me to the heart of the report; that is, the whole question of the inequity of contributions and the EU budgetary revenue. It is perhaps to be regretted that it has almost become an argument as to whether the wording of this is right or wrong when it strikes me that almost everybody who has spoken has said the same thing. They are not arguing that the British rebate should be given up. The argument of the committee is very clear in saying that, instead of merely arguing about that, if the European Union--of which 14 member states are attacking the abatement mechanism--concentrated on following the policies that mitigate the necessity for such an abatement mechanism, the argument becomes unnecessary.

The report seems to me to be quite clear. It recognises that the own resources decision is, as the noble Lord, Lord Williams, said, a decision of treaty status requiring unanimity to change it. It recognises that the own resources decision encapsulates this Fontainebleau mechanism. However, any attempt to change the own resources decision cannot, in any circumstances, be imposed upon the United Kingdom. That is not a matter for argument or debate but merely a statement of fact.

We need to see this abatement mechanism, currently worth over £2 billion, coming into an equation, following member states of other European Union countries taking the necessary steps. Those steps contain some terrible words. They contain the Commission proposal for agricultural reform plus the so-called degressivity in direct payments to farmers. They include stabilisation in real terms of the agricultural budget between now and 2006; non-discrimination against large farmers, particularly British and German farmers with more efficient farming systems, and co-financing of agriculture, not as an act of reform in itself but as an aid to correcting budgetary imbalances after reform has taken place.

However, the report speaks not only of the agricultural sector. The report of the Select Committee clearly recognises the need for cohesion fund reform. Countries which have received major financial aid from the cohesion fund, particularly Spain, Portugal and Ireland, which have met the qualification, the convergent standards, for economic and monetary

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union, are, in my opinion, no longer automatically entitled to receive cohesion fund money. That is part of the process of reform for living within the 1.27 per cent. ceiling.

If we follow that agenda, I believe that we would have an agenda fully compatible with the Select Committee report. It would produce sufficient levels of budgetary reform and budgetary equity such that it would largely mitigate the need for an abatement mechanism, especially if reforms were to lead us to a budget financed on a different mechanism, such as that suggested by the Select Committee of per capita GDP-based contributions.

On the basis of the comprehensive nature of the report, I am certainly envious of those who are able to take part in the deliberations. I express my regret at not having been able to do so. However, I say to my noble friend Lord Grenfell that, had I been there, I would have been proud to be associated with the report of the Select Committee which is not only a great aid to this House, but of substantial assistance to the Government in the negotiations they have to undertake.

7.38 p.m.

Baroness Ludford: My Lords, I, too, applaud the committee and its chairman for an excellent report. I also welcome the timeliness of this debate, not only because of the cathartic events of last week but also because of the imminence of the Berlin Summit.

I shall make my remarks more on the politics of the question than the technicalities, but I am comforted by the fact that others, including noble Lords on my own Benches, are expert on the detail. Indeed, few know more on these matters than the noble Lord, Lord Tomlinson.

As I took the milk from my fridge this morning, I noticed a pack of bacon. The label stated, "Cooks and tastes like bacon used to". "What a comment", I thought, on 40 years of the CAP that we need to go forward to the past to try to put right the failings of intensive food production distorted by the wrong kind of European subsidies.

On the same theme, I watched a delightful television programme last night about a Devon farm where birds, wildlife and wild flowers flourished due to traditional farming practices, unchanged for 40 years. However, the land surrounding that farm was a desert of ripped-up hedgerows, of fields ploughed to the edges, eradicating habitats for mice and voles, and sterilised by pesticides and herbicides so that insects and birds could not survive.

Coming back from my rural idyll to politics, the fact is that European taxpayers--and certainly British taxpayers--are starting to rebel at paying what used to be three-quarters--now, thankfully, down to half--of the EU budget on farm payments which have helped to destroy our rural environment.

I suggest that we need to start from the big picture. I very much agree with my noble friend Lady Sharp that we need to look at the huge gains in peace, security and solidarity in Europe since 1957, but our goal now is to meet the further challenges to security, trade and

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globalisation, and to make the EU fit for enlargement both financially and politically, and thus able to call on the support of its citizens.

I suggest that we need to do three things. First, we need to decide strategically what functions the European Union should have and what the EU budget should fund. I follow the noble Lord, Lord Tomlinson, in talking about added value. Secondly, we need to decide how to get value for money. Thirdly--I put this last sequentially only because it flows from the previous two--we need to decide the best and the fairest way to pay.

We cannot really make lasting progress on the issue of EU spending until we settle what it is that we really want the European Union to do. The committee rightly stressed that it is crucial for our citizens to know what their stake in European policies and operations really is, via increased transparency about what we are paying and why. I and my party would go further and say that the time is ripe, even overdue, to write a constitution for Europe to define--and perhaps even in some cases to limit or, in the case of a common foreign and security policy to boost--the powers of the Union, and to define the powers of the national and regional tiers and the rights of citizens to show who is accountable to whom.

The European Union is seeking to decide the budget and the reform of the CAP and the structural funds without looking simultaneously at the necessary constitutional settlement and fundamental institutional reform that should accompany it. The two should at least be twin-track in order to make the European Union and the prospects for enlargement politically as well as financially stable.

We have rather treated our citizens with disdain, failing to justify or to explain the priority areas where EU action is justified. Going back to my bacon and to the farm, we have never had, nor did we ever explicitly seek, the citizens' agreement to pay for food mountains, destruction of wildlife, food from animals fed hormones and antibiotics, and large sums being paid to rich farmers while small and hill farmers go bankrupt. We certainly must not extend that system to the accession countries of eastern and central Europe.

However, we might well get the support of our citizens to an environmental clean-up in the new member states and to pay for the maintenance of the EU's rural environment via a system of direct payments, which meet economic, social and environmental goals benefiting the whole Community.

In the search for ways to placate public opinion about the EU budget, we have in my opinion taken a wrong turning. New little initiatives and pots of gold have been invented on a rather ad hoc basis to give the illusion of a "people's" Europe. That diverted attention from the true priorities of a citizens' Europe; for instance, eliminating the injury and insult of £750 million a year on subsidies for growing tobacco. The injury is that EU citizens are paying for damage to health, which they then pay to put right, but the insult is that the tobacco, being of low quality and unusable in the EU, is dumped on the third world.

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One of the frustrating aspects of the current trade disputes with the United States is that, although many of us feel that the US is being high-handed on bananas, GM foods, and hormones in beef and milk, the atmosphere has been poisoned over the past decades by resentment over the export subsidies to dump foods on world markets.

Also on the issue of political creditability, perhaps I may draw attention to an issue of significance to London with regard to the reform of the structural funds. I tried--misguidedly and rather ineptly, for which I apologise--to raise this matter on what I later realised was a Welsh Question and the House was understandably cross with me. The calculation on GNP per capita made inner London come out as the richest region in the EU. That is because the whole economic activity of the City of London is attributed to the residents of inner London boroughs, many of whom are the poorest in our land. That means that the £1 million bonus of a City trader living in Surrey becomes the notional income of a resident of a tower block in Islington, Hackney or Tower Hamlets. That does nothing to increase the political credibility, transparency or citizen acceptability of EU budget calculations, at least in London.

I turn now to value for money and follow what the noble Lord, Lord Tomlinson, said. I believe that on the very day last week when the Commission resigned, the Council gave discharge to the Commission for its stewardship of the 1997 budget, without any question or hesitation. So, while the European Parliament was exercising some clout over its insistence on a clean-up, the Council--including the British Government, I presume--preferred to look the other way. That rather gives the lie to the spin-doctored line of recent days about our Government's consistency and conviction on these matters.

That is why some of us are not convinced by the protestations about how good management requires the Commission to report more to the Council. It has cared only intermittently about value for money. The previous Conservative Government refused to accept majority voting for anti-fraud measures and insisted on the appointment of a weak Commission president instead of a strong one. The present Government have come only belatedly to the cause, with their political allies in the Socialist Group widely reported to have done No. 10's bidding in blocking censure of the Commission until last week.

Apparently--this is regrettable--the majority of governments in the European Union (of the centre Left, linking up therefore with the Socialist group as the biggest group in the Parliament) until recently put more store on not rocking the boat than they did on cleaning up EU governance. The report that we are debating cites Commissioner Liikanen's comment that, because member states retain only 10 per cent. of the traditional own resources collected for administration--that is, the agricultural and Customs duties--they do not regard that as sufficient incentive to tackle fraud. The Court of Auditors and the Treasury think that VAT collection by member states falls short by at least between £2 billion and £3 billion a year.

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I think that we ought therefore to hear a little less piety from the member state governments about the role of the Council--not least because most of the money disbursed from the EU budget is handed out by the national administrations and that is where most of the fiddles, especially on the agricultural budget, go on. One of the arguments for the co-financing of the CAP is to concentrate the minds of member states on making agricultural policy not only WTO-compatible and environmentally sustainable, but also free of fraud.

The fact is that, as the sub-committee said, scrutiny of EU expenditure needs to be on a continuous, rather than an occasional, basis. The attention of the European Parliament has been more continuous than that of the Council. Indeed, I am pleased to see that the Economic Secretary to the Treasury is quoted as saying:

    "the Parliament for many years has largely espoused the cause of budgetary discipline".

Those are reasons for agreeing with Professor Begg, who is quoted in the report as saying that the European Parliament is the "obvious democratic authority" to which the Commission should be accountable. Of course, the European Parliament must address the mote in its own eye--and I should declare an interest as an aspiring Member--but I am proud at least that my own Liberal group has been leading the charge to tighten control of MEPs' expenses, as it did the scrutiny of the Commission. The other governments could help by persuading France and Luxembourg to accept one site in Brussels for the European Parliament instead of lamely agreeing to a three-city travelling circus. That would save some £100 million a year.

If the Council wishes to do something else that is positive, it should agree to increase the powers of the Court of Auditors to investigate whether EU spending is achieving value for money. That is a body which, because it has been consistent in its scrutiny, has repeatedly refused to give discharges to successive EU budgets.

Finally, as I promised, I have much less to say about the technicalities of the fairest way to pay than about the surrounding politics. I know that, as the report states--I am sure that all noble Lords know this also--it is not politically feasible to ask the British public to give up the current rebate which caps our net contribution while wastefulness and fraud have not demonstrably been rooted out and while the CAP in particular is wrongly orientated.

For political reasons, throughout the European Union it would also be impossible to lift the cap on total EU spending, however relatively small the budget is at the moment, before all the possible avenues of saving and fraud-busting have been followed. We probably must move in the longer term to more citizen-based funding rather than to a system which focuses on the contributions of governments. It is ironic that the EU has slipped back de facto into a system of national contributions which it purported to get away from through the development of "own resources".

I note and accept the committee's opinion that the implications of moving to a system in which the European Parliament should be responsible for both

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raising and spending EU funds would be "profound", by which I believe it means, "too profound for now". In the long term perhaps a tax that met EU environmental objectives such as an energy carbon tax, could be a possible contender. In the shorter term we should at least try to link revenue to GNP per capita with the caveat that I made earlier about the effect of calculating that, particularly with a large Community hinterland.

I again thank the committee for its excellent report and its contribution to this extremely important debate.

7.50 p.m.

Lord Renton of Mount Harry: My Lords, like other members of Sub-Committee A, I join with noble Lords on both sides of the House in congratulating our chairman, the noble Lord, Lord Grenfell, on this, the first report we have produced under his chairmanship and also on the efficiency with which he drove us to produce a relatively complicated report in very quick time.

The report was embargoed for release at 0001 hours on Tuesday 16th March, within minutes of the moment when the European Commission offered its resignation. I wonder how the noble Lord felt when he awoke the following morning and realised that his report had hit the world at precisely the same moment as the disappearance of M. Santer and others. He must have pondered a little as to whether it was a good thing or not. If our report had come out a month later perhaps some of our recommendations might have been stronger. But it has had something of a cathartic effect on our consideration of the key issue of financing the EU; not just how it spends money, but how it raises it at this key moment in its history.

On one point I agree very much with my noble friend Lord Howell of Guildford. We disagree on other matters as regards the European Union. I agree, however, that the Union is, as he put it, at the Y point or junction in its history. It can either go forward, as a result of the events of last week, to greater success--which I hope it will do--or it will slip back and in some measure, in power terms, slowly disintegrate. It is important to consider this report today in the light of those circumstances.

It was consideration of the future that led us to decide very carefully that the present methods of "own resources" in raising money for the EU are simply too complex, too inefficient and too subject to fraud to continue. I am sorry that the noble Lord, Lord Harris, is not in his place. He chided us amiably. He spoke about the "amiable indulgence" with which we treated the EU's "shambolic" finances. Perhaps the noble Lord did not read carefully enough paragraphs 65 and 70 of our report in which we firmly draw attention to the incredible mess--there is no other way to describe it--in relying for own resources on VAT receipts in the individual countries of the EU.

The European Court of Auditors reported on the years 1991-93 that VAT collections from all the countries of the EU could be short by as much as 70 billion ecu a year. That is almost equal to the total spending of the European Union. It comes out clearly in our report that,

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when questioned, the Treasury officials did not have any answers. They did not know the figures and they could not tell us the precise why and wherefore of what the figure meant for Britain. They later sent a written reply, which is in our evidence. I defy some of your Lordships to understand precisely the content of that reply.

I make the point because it is an example of how domestic governments, including our own, have allowed this shambles of resources--the money that goes into the European Union--to continue under successive administrations for far too long. For me, it is the key point of our report. It is one reason why we concentrated so heavily on looking for alternative sources such as a GNP-based resource, possibly with the addition that a proportion of it would be GNP per capita rather than the totality of GNP.

Against that background, I am deeply disappointed by the reply that we received from the Economic Secretary to the Treasury, which the noble Lord, Lord McIntosh, who is to wind up the debate, kindly circulated. Noble Lords who have had time to read it will note that in paragraph 6, "Own Resources Decision", the Economic Secretary writes:

    "The Government acknowledges the problems of fraud in respect of own resources".
That is precisely the point we were making.

    "It continues to press for improved systems which reduce these. But it agrees with the Commission that 'the shortcomings of the system ... do not by themselves provide grounds to justify an urgent modification of the Own Resources Decision'".
Is that not precisely the sort of language and the shoving away of the importance of a matter that caused the commissioners to resign? It seems to me that here we have another example of a government being aware of the problem but simply not being prepared to tackle it.

I hope that the Minister in his reply will dwell on that point because it is a very shallow dismissal by the Government of essentially the most substantial point our report makes--other than that about our own rebate, which has been extensively discussed.

I would like to see the European Union moving to a source of funds which is clearly collected from individual taxpayers via the local tax authorities and clearly marked for European Union purposes. This is not unlike the way in which district councils at the moment collect on behalf of county councils and parish councils. That is stated in the rating Bill. The local tax authorities are being used for that purpose. In my opinion it is the only way in which we are going to solve the problem of the lack of transparency to which our report refers, and the lack of knowledge as to where and how European Union money is being spent.

The noble Lord, Lord Desai, referred to a figure of £155 per head as being the cost to each person in the European Union. If one asked on that lovely programme, "Who Wants to be a Millionaire?", how much the European Union costs and there were four answers to choose from, I am sure that the audience would have absolutely no idea at all whether to elect £10, £50, £5,000 or £155. But voters should know. That will only happen in the long run through a levy for specific European Union purposes, but using the local

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tax authorities to collect it and with independent national audit offices checking. Their reports would be debated by the European Parliament which would have powers, in my book, to sack individual commissioners, and senior officials as well, if they were found to be incompetent.

I mentioned the European commissioners. Who exactly are these great men and women? We are told that once again a heavyweight politician is being looked for to run the Commission. Indeed, the Prime Minister used those words in the House of Commons last week. Is not that precisely what Jacques Delors was? Is not that why he was so unpopular? Is not that why my good friend John Major did not want Jean-Luc Dehaene and M. Santer was chosen instead? And M. Santer said, amiably, that he intended to spend a great deal of time "not doing much" for which he was greatly applauded at the time.

Who could expect M. Santer to do any more than that? After all, he had been Prime Minister of Luxembourg and a very successful broadcasting minister there. Because at the time I was the United Kingdom Minister responsible for broadcasting, I met him several times and found him an amiable and competent person within that context; that is, the context of 330,000 people. Why was there ever any real expectation that he should go from running a country approximately the size of Brighton and Hove to running the European Union with 350 million people? Yet we are looking for another politician like him at the moment.

Names like Romano Prodi--the former Italian Prime Minister--and Wim Kok, the Dutch Prime Minister, have been bandied around. If we step back for a second and consider what is the real role of the Commission, it would be much better to send highly competent businessmen there or highly competent civil servants. Businessmen would concentrate not on the great strategic plans but on how to run Europe and how to obtain efficiency and more value of money for the shareholder--the voter. Someone like my noble friend Lord Sainsbury of Preston Candover or the noble Lord, Lord Butler of Brockwell would be suitable candidates. Certainly, if I look at the Treasury Benches opposite, delightful and witty people though they are, the only one I would recommend to be a commissioner is the noble Lord, Lord Simon of Highbury, in view of his record as a successful chairman of British Petroleum.

That is one of our problems at the moment. It leads me to take up the point raised by my noble friend Lord Howell of Guildford. Where do we want the European Union to go? I do not believe it is moribund at the moment; I am certain that it will recover from this shock. A weak branch has been pruned off and, as is the way with nature, stronger branches come where the weaker one has gone. But where I agree with my noble friend is that this is the time for serious constitutional reform in the European Union. It cannot happen overnight. It will not happen in Berlin. But it has to be in the long-term programme.

Along with that, I agree with the noble Lord, Lord Desai, that this is not the right moment to proceed with haste into welcoming another five or six members into

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the European Union. To me the constitutional change has to happen first. If 15 members cannot devise an effective, popular, comprehensible, non-fraudulent organisation, how on earth are 20 members going to do it? I would therefore like to see the constitutional boundaries clearly examined between the European Council, the Council of Ministers, the European Parliament, the Commission and national parliaments, making quite certain that those boundaries are properly drawn. If not, I accept that the European Union might topple under the very unevenness of its own weight.

The existence of the single currency makes the European Union much more important than it was. The single currency could well become the euro challenge to the dollar. I hope that that will happen. But I believe strongly in a limitation of the executive powers of the Commission, a serious enhancement of the legislative powers of the European Parliament and continuous independent audit by national authorities. I hope that that will be on the long-term agenda.

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