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Amendment, by leave, withdrawn.

5.45 pm

Lord Hunt of Wirral moved Amendment No. 8:

“(i) Article 1, paragraph 15, inserted Article 9A TEU, first paragraph, first sentence, the words “and budgetary”;(ii) Article 1, paragraph 17, inserted Article 9C TEU, first paragraph, first sentence, the words “and budgetary”; and(ii) ”

The noble Lord said: Since I became involved in the issue of European unity when I became a member of the European Movement in the 1960s, looking back over those 40 years, one of the clouds that has hung over my vision of a peaceful and prosperous Europe has been the European Commission's handling of its financial accounting. I hope that in this debate we will focus on the budgetary affairs and the new procedures, which have been outlined, and examine how they could improve or make more complicated the structure within which the European Union will operate.

Noble Lords will know that the budgetary affairs of the European Union are a source of considerable concern to the people of this country, to the Government, I know, to many of us and to the European Union's own Court of Auditors. In November last year, the European Court of Auditors refused to sign off the EU's annual accounts for the 13th year in a row. It found that material errors had affected between 60 and 85 per cent of the European Union’s entire budget for 2006.

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Aside from the apparently deep-seated problems of mismanagement and alleged fraud in the budget's implementation, there is also the whole question of the misallocation of resources. The common agricultural policy still represents about 40 per cent of all European Union expenditure. Despite all the talk of reform, the specific elements of the CAP that can distort market conditions continue to represent about a third of all European Union expenditure. The Government themselves and many Members of the European Parliament participating in this debate have always made it clear that EU spending needs real and fundamental reform. Of course it does, but how best should we proceed? Despite all the talk of reform, we do not appear to have made the progress that many of us had hoped for.

In Global Europe, which was published last October and which bore the signatures of the Prime Minister and the Foreign Secretary, they said:

They continued,

They reminded us:

the Government concluded,

So we have heard all those ambitions of the Government. They want to change the European Union budget so that it is fit for the 21st century. They want to restructure the budget so that less is spent subsidising agricultural production and more is spent on scientific and technological research and development. The Government also always stress that they want to ensure financial discipline in the use of money under the EU budget.

Against that background, perhaps we can pause for a moment and judge what the Government are presenting to us. It is difficult to understand why the Government have agreed to a measure, which we are being asked to ratify, that transfers so much control over the European budget away from the Council of Ministers to the European Parliament. In this treaty they are also presenting us with a complicated structure that I do not think will produce the financial discipline that we all seek. That is why I am moving this amendment. It seeks to exclude from ratification the new overarching provisions of the Lisbon treaty that refer to the European Parliament’s budgetary power.

The biggest change to specific budgetary procedures comes in the replacement Article 272 in what is currently called the Treaty establishing the European Community but which will be known as the Treaty on the functioning

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of the European Union if the Lisbon treaty enters into force. This deals with the procedure for drafting and adopting the annual EU budget. Let us remind ourselves of the existing procedure, which many of us find rather unsatisfactory. The current Treaty establishing the European Community makes a distinction between EU expenditure that is defined as compulsory under the EU treaties and expenditure that is not compulsory. Non-compulsory expenditure represents around 60 per cent of the total EU budget and compulsory expenditure around 40 per cent. Compulsory expenditure is effectively the common agricultural policy. Non-compulsory expenditure is just about anything that is not agriculture.

Under the current Article 272, the European Parliament can propose what the treaty calls “modifications” to expenditure that is defined as compulsory under the treaties. On the other hand, it can propose what the article calls “amendments” to expenditure that is defined as non-compulsory. The Council can reject the European Parliament’s modifications to compulsory expenditure and the European Parliament cannot reinstate them when the revised budget is sent back from the Council to the Parliament for final adoption. On the other hand, acting by a majority of its component members and three-fifths of the votes cast, the European Parliament can overturn alterations to amendments the Parliament wanted in areas of non-compulsory expenditure. The EU budget is then finally adopted.

In other words, at present the European Parliament has the final say over non-compulsory expenditure whereas the Council has the final say over compulsory expenditure. However, under Article 272, the European Parliament does have the power to veto the entire budget and ask the Commission to restart the whole process from scratch with a new proposed budget, exercising what has come to be called the nuclear option.

What do the Government find wrong with this existing procedure? Under the new provisions we will move to replacement Article 272, where there is no distinction at all between compulsory and non-compulsory expenditure in the EU budget. The European Parliament will therefore be able to propose amendments to anything in the budget, including to what used to be called compulsory expenditure, which means the common agricultural policy. If the Council does not agree in the first instance on the European Parliament’s amendments there is then formed something called a conciliation committee. In this committee the Council and representatives of the European Parliament have to agree a joint text of the budget. If they do not, the whole budget falls and the Commission must then present another draft budget. Both institutions, therefore, get a new power to block amendments to areas of the budget that they do not have the final say on in the current treaty. The Council is able to block amendments that the Parliament wants in relation to non-compulsory expenditure and the Parliament is now able to block changes that the Council wants over compulsory expenditure.

All else being equal, I thought at first sight that this would seem to be a better deal for the Council as currently non-compulsory expenditure is a greater share of the overall budget. However, the new budget

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procedure contains other changes that make it easier for the European Parliament to assert its wishes over the Council. The representatives of the European Parliament in the conciliation committee act by a simple majority. This is in contrast to the current treaty provisions under which the European Parliament has to vote by a majority of all its members and three-fifths of the votes cast to overturn Council changes to the Parliament’s amendments to non-compulsory expenditure. Therefore the Lisbon treaty makes it easier for the Parliament to block Council wishes in what would now be termed non-compulsory expenditure. By contrast, under the current treaty, the council votes by qualified majority to overturn European Parliament changes to compulsory expenditure. Under the Lisbon treaty’s new provisions, it continues to vote by QMV in the conciliation committee.

My conclusion, therefore, is that the Lisbon treaty does not make it easier for the Council to overturn the European Parliament. The Lisbon treaty’s procedure following the conciliation committee is also very significant. If the representatives of the European Parliament and the Council reach agreement in the conciliation committee, their budget agreement still has to be approved by the respective full institutions. It is here that the Lisbon treaty’s empowerment of the European Parliament in relation to the Council is at its most apparent. If the European Parliament rejects the budget, acting by a majority of its component members, the whole budget falls and the process has to start again from scratch. This is equivalent to the nuclear option that the European Parliament currently has under Article 272.8 of the TEC.

The Lisbon treaty makes it easier for the European Parliament to exercise this power. This is because the current treaty says the Parliament has to command the majority of its component members and three-fifths of the votes cast to invoke this veto. The Lisbon treaty’s replacement article requires the Parliament to vote only by a majority of its component members. On the other hand, if the Council rejects the budget but the European Parliament approves it, the budget will be finally adopted on the basis of the joint budget produced by the conciliation committee. On top of this, however, if the European Parliament votes by a majority of its component members and three-fifths of the votes cast, it can insert any of the amendments to any part of the budget it made prior to the conciliation committee.

In summary, if the European Parliament and the Council ultimately disagree on the budget and the Council does not wish the budget to be adopted, the Lisbon treaty allows the European Parliament to assert its preferences over the entire budget, which will then be adopted. Under the current treaty Parliament can finally overrule the Council only in areas of non-compulsory expenditure, which does not include the CAP. So the Lisbon treaty also makes it easier as well for the European Parliament to veto the entire budget, frustrating the wishes of the Council.

6 pm

So where are we? I think that we are facing what will undoubtedly become a much bigger European Union budget overall. As the history of European

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Parliament decisions shows, it tends to be the biggest spender of all the EU institutions, and typically it does its best to reverse limitations on spending introduced by the Council. One has only to look at the process for drawing up the 2008 budget, where the European Parliament sought a total EU budget that was much higher than the Council’s draft budget. Indeed, the Parliament budget was even higher than the Commission’s original proposal.

One effect of all this, on which I would very much welcome the Minister’s comments, is that we may now see a continued over-allocation of resources to the common agricultural policy, expenditure which the Council can currently control, but no longer if these changes go through. By way of example, in the drafting of the 2008 budget, when it came to the heading largely comprising the common agricultural policy, the Council sought a total expenditure of €36.542 billion, whereas the European Parliament sought €36.995 billion, an increase of €453 million. I worry, therefore, that the other detailed changes which the Lisbon treaty makes will, in the Government’s own words, erode financial discipline in the arena of a much bigger EU budget.

The Council currently adopts the EU financial regulations that set out how the EU budget will be implemented and the accounts presented and audited, and decides the procedure for adopting rules governing checks on those overseeing the budget’s implementation, with consultation only by the European Parliament. However, under the Lisbon treaty the adoption of these rules will move to co-decision, giving the European Parliament the power to veto the Council’s wishes. When the same changes were proposed at the time of the earlier negotiations the Government opposed them. They said:

We need to know from the Government what has changed. What has given rise to this recommendation in this treaty? As I understand it, David Miliband, the then Secretary of State at Defra, and Paolo di Castro, the Italian agriculture Minister, signed a joint communiqué on 19 March last year on the Italian and British shared position on the future of the European agricultural policy, and soon afterwards David Miliband suggested that his recent discussions had indicated that the UK agenda for CAP reform had “growing support”. It is really hard to understand how that can possibly be true with these Lisbon treaty changes. They will make it more difficult for the UK to address the clear and serious problems of the EU budget. Indeed, I think it will be much harder to tackle those concerns, and that is why I beg to move.

Lord Williamson of Horton: I made a declaration of interest at the start of the Committee stage and I do not think I need to repeat it now. I know that the noble Lord who moved this amendment is a bold noble Lord, and it is certainly very bold indeed to strike out of the Bill the entire budgetary powers of an elected parliament, which would be the consequence of the amendment, although he has

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spoken on some other matters. The European Parliament has had powers over the setting of the budget for many years, and I am one of those who believe that the changes proposed are an improvement. Part of the problem in the past has been that agriculture expenditure is too high. It has been under the control of the Council, and over many years agriculture Ministers have determined a very large part of that expenditure. In the amended system, they will not be able to do that on their own. I think that that is very satisfactory.

The budgetary role of the Parliament is only part of the steady increase in the democratically elected Parliament’s control of legislation and the budget over many years. Originally it was largely advisory, and the role in setting the budget, as the noble Lord pointed out, was strictly limited by the exclusion of the so-called obligatory expenditure, principally on agriculture and largely out of the control of the European Parliament. In earlier treaties the European Parliament increased its responsibility as co-decider on legislation over a much wider range of matters. I would say that those changes have now been largely completed, and if the Treaty of Lisbon is ratified, almost all legislation and the budget will be decided jointly by the elected representatives of the people in the Parliament and the representatives of the member states in the Council. Over a period of time that is likely to lead to a greater sense of financial discipline and the allocation of resources in a better way.

In my view, for democratic reasons it is surely right to support the change in the decision-making procedure on the EU budget, and it is worth noting that when the Ministers controlled it, we all said that expenditure on agriculture was far too high. That will be changed by a change in procedure. While we know that agriculture takes over 40 per cent of the budget, I would like to stress that the figure does not really paint a complete picture of the budget of the European Union as part of the total public expenditure of the member states in their national budgets. The figures are striking and I think that they should be brought out. Certainly for the past 20 years, the European Union budget, which we are discussing in this amendment, has represented about 2 per cent of the public expenditure of the member states of the Union. The published figure for 2006 showed that the EU budget represented 2.1 per cent of member states’ general government expenditure, the remaining 97.9 per cent being spent by member states on education, health, welfare, defence and the many other elements of public expenditure that we know all about.

In the Lisbon treaty, as I said earlier, the European Parliament will take over responsibility jointly with the member states and the Council for European Union agricultural expenditure. This is important and I think it is an improvement, but I would like to make it clear that what we are talking about represents only around 1 per cent of member states’ total public expenditure. I do not think that we should delete from the Bill, as proposed in this amendment, the budgetary responsibilities of the European Parliament.

Lord Maclennan of Rogart: In the previous debate, the contribution of the noble and learned Lord, Lord Slynn, elevated our discussion by reference to his very

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great experience. I think that we can listen with similar admiration to the views that have just been expressed by the noble Lord, Lord Williamson of Horton. In his own personal experience, he has observed the process of budget making at close quarters, and I am bound to say that I prefer his judgment that it is more likely that agricultural expenditure will be brought under control with the new proposed disposition than that which has relied on the judgment of the Council of Ministers.

Indeed, it is strange to hear the noble Lord, Lord Hunt of Wirral, suggest that a movement towards greater democracy, in giving the European Parliament more parity of influence in both compulsory and non-compulsory expenditure, is unwelcome. That is particularly strange, having heard the speeches made on the previous amendment in which we were assured that what was being criticised was not the excessive law making of the European Court of Justice, so much as the inability of the European Union to amend its decision-making procedures in a more effective, democratic way. I want only to make the general point that co-decision making over all budgetary expenditure seems to me both logically sensible and democratically more accountable than the present arrangements and, if one looks at the representation of districts in the European Parliament, clearly alters the balance very considerably in a direction which is not likely to lead to greater looseness of control over other expenditure.

The very fact, as the noble Lord, Lord Willamson, said, that this is such a tiny proportion of public expenditure makes it imperative and very much in the interests of the European Parliament that control is exercised in a way that renders expenditure effective, targeted and visible. That is what will result from these beneficial amendments.

Lord Kinnock: I was intrigued by the repeated references of the noble Lord, Lord Hunt, to the prospect of what he called a bigger budget for the European Union as a consequence of the changes being produced in the Lisbon treaty. I can certainly understand why he makes the detailed arguments but I cannot follow him in that particular argument. I should just like to pursue it for a moment.

At present, as the noble Lord, Lord Williamson, highlighted on the basis of his very great experience, the European Union budget is around about 2 per cent of total public expenditure of the member states of the European Union. Sometimes it is a little less than 2 per cent, sometimes it is a little more, and it has been thus for decades. That budget is also equivalent—or has been for most of the past several decades—to about 1.15 per cent of the total gross national product of all the member states. It is actually slightly lower than that now as a consequence of the last budgetary exercise undertaken by the Council in 2004 and concluded under the British presidency. Eighty-five per cent of the budget—again a decades-old figure which is still valid—is spent in the member states. Indeed, most of it never leaves the member states and is obviously a book transaction in any case. That is entirely how it should be.

The fact of the matter is that in the reform treaty, despite the alterations to which the noble Lord, Lord Hunt, drew attention in decisions about the allocation

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of the budget, the total of the budget remains in the hands of the member states in the Council. There is no power on earth—other than by the decision of those member states in the Council—that can produce an increase in the total of the budget. I find it very interesting that within that total there will be a new dynamic that involves the Parliament in decisions relating to so-called compulsory expenditure, which, as the noble Lord, Lord Hunt, said, is overwhelmingly the common agricultural policy.

Having discussed these matters with European parliamentarians and Westminster parliamentarians for many years, I take the view, as the noble Lord, Lord Williamson, does, that the CAP budget will be a great deal more liable to amendment, reduction and re-orientation, because of the introduction of authority from the elected Parliament, than previously, despite the reforms that have taken place, when it has been the sole property of the Council and the agriculture ministers. Part of the impetus in the Parliament to make changes in the CAP and the common agricultural fund will come from the fact that it shares the view—it is certainly a majority view in this House and in comparable Parliaments elsewhere in the European Union—that too great a proportion of the total budget is still going to particular forms of agriculture support. That will produce a pressure on the CAP.

6.15 pm

Secondly, there are, as the noble Lord, Lord Hunt, rightly said, other ambitions for different priorities within the Parliament. There is a strong view—this has been the case for several years—that Community expenditure on research and development, consistent with the ambitions of the Lisbon strategy of 2000, should be much bigger. The budgetary exercise in 2004 cut to €19 billion the proposed €31 billion budget over the seven years of the current budgetary period proposed by the Commission. I did not think that that was a sensible direction in which to move in circumstances in which we are repeatedly told that the greatest source of effective competitiveness in the globalised economy is knowledge, scientific and technological prowess, and innovation. I simply think that that is worth investing in. The will of the Council, rightly representative of the elected governments, prevailed and democratically that is how it should be, however much I regretted the outcome.

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