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Mr. Cash: The right hon. Gentleman has legal qualifications that far exceed mine. Article 44 says:

Therefore, the same principle applies in the second paragraph of article 44 as applied to economic and monetary union. So the gravitational pull is exactly as the right hon. Gentleman has described it.

Denzil Davies: That is the object of the arrangements. I should not have thought that non-participating states would wish to interfere and impede. They could not do so, anyway.

On indirect taxation, the document states:

presumably in relation to enhanced co-operation. Perhaps the Under–Secretary will tell us in his winding-up speech whether the British Government are included in that majority in relation to indirect taxation. I hope that we will be told at the end of this debate, in the interests of plain speaking and transparency.

Mr. Michael Connarty (Falkirk, East): My right hon. Friend seems to be saying that what we are talking about

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is a ruse to get round something that is currently protected by unanimity. What evidence can he give us that there could be a change in taxation policy by a group of countries that did not require unanimous support from the rest of the European Union? I have seen nothing in the treaty saying that.

Denzil Davies: I have the best evidence in the world. The Deputy Secretary-General of the European Commission does not write frivolous letters to a so-called high representative. These people are top cats.

Mr. Connarty: The speculation or writings of a member of the Commission do not constitute a treaty or a change in the law. I am asking for a specific reference to a change in the law that would allow unanimity to be knocked aside by this arrangement for co-operation.

Denzil Davies: I am giving my hon. Friend a specific reference, although I am sure that he will get a better answer from the hon. Member for Stone. The answer is quite simple—enhanced co-operation is allowed in all the areas covered by these treaties.

We do not have much time. The Commission has been pretty fast—this document, its priority for the future, was produced on 1 June. It is addressed specifically to outflanking the veto.

Mr. Hendrick: Why are these matters of such concern to my right hon. Friend? Clearly, the terms are not binding on member states that do not wish to take part in enhanced co-operation. If a member state chooses to set an income tax rate of 15 per cent. and other member states wish to follow suit, why is that of such concern to my right hon. Friend? It will not be binding on this nation state to co-operate in that fashion.

Denzil Davies: I never said that it would be, but I think that it is. My hon. Friend should not dismiss enhanced co-operation so lightly. It enables a group of states to move ahead, and we must address ourselves to the effect that that would have on other states outside. The Deputy Secretary-General of the Commission makes the point clearly that if benefits were produced for participating countries, non-participants would be motivated to become involved.

Mr. Cash: The right hon. Gentleman is, as ever, plumbing the depths of the matter. The concentric circles plan, which applies across the board to all areas affected by enhanced co-operation, is the master strategy for this purpose. I refer the hon. Member for Preston (Mr. Hendrick) to article 44 on page 14 of the treaty of Nice:

Therefore, by definition, the others are excluded. It continues:

There are hidden traps in that statement as well, because of course the acquis applies to all the other states.

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7.15 pm

Denzil Davies: The hon. Gentleman speaks about traps. However, on my hon. Friend's point, let us suppose that Germany, France, Italy, Spain and four other countries decide to harmonise their direct taxation and rates, starting by harmonising structures. In fact, let us suppose that they start harmonising corporation tax, which is of great importance and concern to British companies trading in Europe. Is my hon. Friend saying that we can forget about that? Is he saying that Britain would not be under any pressure to join? Of course Britain would be under commercial and economic pressure to join those eight countries.

Mr. Hendrick: Will my right hon. Friend give way?

Denzil Davies: In a moment. My right hon. Friend the Foreign Secretary and other Ministers said that they fought a great battle in Nice and preserved the veto on taxation. I am not sure how much of a battle there was, frankly. Clearly, Ministers were fighting some battle and were determined to assure us of it. I suspect that there was not much of a battle in Nice about taxation. I also suspect that quite a few member states, including France and Germany, would not be unhappy about moving towards some kind of harmonisation of direct taxation.

Mr. Hendrick: Will my right hon. Friend give way?

Denzil Davies: I will give way to my hon. Friend in a moment; I will try to develop my argument first. Many states may wish to harmonise corporation tax and its structures and then move to harmonising rates, in order, as they see it, to foster and enhance the single market.

I also believe that the movement towards enhanced co-operation in taxation will come partly—perhaps mainly—because of the real problems of the euro. I do not want to introduce the euro to this debate, but there is something fundamentally wrong with it at the moment. Whenever it falls, we are told that it is because of this poor fellow who is the governor of the European central bank, who has been much maligned, or that it is to do with American corporations bringing money back from America. All sorts of different reasons are given and when they are dispelled, others must be found for why the euro is not looking the dollar in the eye. The euro will not look the dollar in the eye until the split between monetary and fiscal policy in the euro area is repaired. That can be achieved only with more rules on expenditure and a move towards the harmonisation and unification of taxation. It makes no sense to have a currency to which certain elements of fiscal policy relate, just as deficit spending and borrowing relate to some extent. The other area of fiscal policy—taxation—is completely outside the ambit of the euro area and the euro. Therefore, I have no doubt that pressure will be brought to bear. European Ministers have said so, and I think that they are right.

Mr. Hendrick: I thank my right hon. Friend for giving way again. He talks about members co-operating and says that they will take advantage of any benefits from such co-operation. Is that not the case with the euro? The eurozone has been created; the euro exists. Member states joined the euro with the view that it would benefit their economy and nation. What is wrong with that? We can choose whether to join or not but we are under no pressure

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to do so. It will be a decision of this nation state. Whether member states wish to co-operate in other areas is a matter for them.

Denzil Davies: We are not, as my hon. Friend seems to think, living in a totally isolated world. The very existence of the euro puts pressure on us to decide whether to join. At the end of the day, the decision will, of course, be taken by the British people and the House, but the economic pressures are considerable and they have been for some time. The Government have tried to resist those pressures as much as they can because they want to ensure that the conditions, whatever we may say about them, are fulfilled.

Mr. Chris Bryant (Rhondda): As far as I can see, my right hon. Friend's argument leads him down anti-democratic byways. He seems to be arguing that because the euro might be of benefit to others and that that somehow creates a gravitational pull in any of the areas of enhanced co-operation to which reference has been made, we should therefore exercise a veto over what others do. That seems to be fundamentally anti- democratic.

Denzil Davies: I was not even arguing that. I was merely explaining, as does the gentlemen who wrote the paper on future priorities in taxation, that it will be possible for certain countries to get together and create a euro-area in taxation. The point that I was then trying to make—my hon. Friends do not seem to believe it—is that the pressures on a British Government as a result of the market and of commerce to join such a euro-area of enhanced co-operation in taxation will be considerable. That is the only point that I am trying to make. If my hon. Friends do not believe that, it is a matter for them. The Commission has spotted—it will have thought about it beforehand—a way of outflanking the national veto on taxation.

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