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Orders of the Day

European Communities (Finance) Bill

[1st Allotted Day]

Considered in Committee, pursuant to Order [this day]

[Sylvia Heal in the Chair.]

Clause 1

Extended Meaning of "the Treaties" and "the Community Treaties"

2.51 pm

The Economic Secretary to the Treasury (Ruth Kelly): I beg to move, That the clause stand part of the Bill.

The purpose of the Bill is to enable the United Kingdom to give effect to the new own resources decision amending the arrangements for financing the Community budget agreed at the 1999 Berlin European Council.

Clause 1 provides for the new own resources decision agreed by the Council of Ministers on 29 September 2000 to be added to the list of Community treaties in section 1(2) of the European Communities Act 1972. This addition will allow payments made by the United Kingdom, pursuant to the decision, to be charged directly on the Consolidated Fund, under section 2(3) of the 1972 Act.

The new own resources decision that we are considering is little changed from the 1994 own resources decision, and any changes made to the decision are financially neutral for the United Kingdom. Our net contribution to the EU budget will not change as result of what we are considering today.

The changes were rather technical in nature. The main change arising from the decision is to allow for an increase in the amount that member states can retain against the cost of collecting the traditional own resources. That amount was increased from 10 per cent. to 25 per cent.

Secondly, the decision allows for a staged reduction in the maximum call-up rate of the VAT-based resource, from the current 1 per cent. to 0.5 per cent. in 2004. Thirdly, it maintains the ceiling for own resources at 1.27 per cent. of EU national income. It simplifies the calculation of the UK's abatement, removing unnecessary and redundant calculations. However, as the recitals to the own resources decision make clear,

the abatement—

Finally, the decision adjusts other member states' shares of the financing of the UK's abatement, in order to meet concerns raised by Germany, the Netherlands, Austria and Sweden, with no effect on the UK.

In line with the precedent set in previous own resources decisions, the UK agreed to forgo windfall gains arising to the UK from the changes to the financing of the EU budget and from a change in the treatment of

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pre-accession aid that will occur on enlargement. We achieved a position that was, as my right hon. Friend the Prime Minister described,

and ensured that amounts currently abated will remain abated under the new decision.

The own resources decision implements parts of the wider reforms agreed at the Berlin Council that are an important step forward for the EU and good for the UK. That Council secured declining expenditure in the 15 EU countries over the financial planning period. It stabilised expenditure as a proportion of gross national product, thereby paving the way for a successful enlargement. It achieved no increase in the own resources ceiling. It secured the UK abatement, fully intact, and took steps in the right direction on policy reform.

The Bill shows the huge benefits of Britain's constructive engagement with the EU. It shows that by taking a leading role in reform and working together with other member states, we can achieve outcomes that are good for the UK and good for the EU.

Mr. Howard Flight (Arundel and South Downs): Our usual complaint about financial legislation in recent years is that it has been too long, obscure, often wrong and with too much to amend. Our problem today is that the Bill is virtually impossible to amend. I had considered proposing a sunset clause to make the Bill conditional on adequate reform of the common agricultural policy in a given period of time, but I felt that that tactic would not work. However, I shall revert to the crucial question of CAP reform later.

Parliament can really only say yes or no to the Bill, because it is the Council decision of 29 September 2000, following Berlin, which, in essence, contains the detailed legislation. Before I focus on the CAP, the crucial issue that underlies clause 1, I want to speak about article 9 of the Council decision. We debated the matter at some length on Second Reading, as it enables the EU to propose the implementation of direct taxation.

The House will recall that when my right hon. Friend the Member for Wokingham (Mr. Redwood) and I objected to article 9 on Second Reading, we were advised by the Economic Secretary that there was nothing to worry about, as no such proposition would ever arise. I cannot resist pointing out that the words were scarcely out of her mouth when up popped Belgium—backed by Germany—proposing to replace EU revenues paid by national Governments with an EU-wide system of taxation. It is therefore wrong to say that such a concept is not on the agenda: it is on the agenda, and is contained in the EU decision that we are considering today.

I congratulate the Chancellor on his robust opposition to that concept, and on the effective lecture that he gave to the EU, in which he urged other nations to get on with supply-side reforms of capital and labour markets. Did that lecture enjoy the full support of the Prime Minister? I should like to know. It is well known, in euroland and the City of London, that the Chancellor is strongly opposed to euro membership—indeed, he is now referred to as the Eurosceptic Chancellor. But is the policy being followed on the euro the Prime Minister's or the Chancellor's?

On Second Reading, Opposition Members made the point that there is no free lunch, and we asked the Economic Secretary what would be the cost of forgoing

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our windfall on Euro enlargement. She replied that the cost would be of the order of 220 million euros, but in such language that it appeared that she was saying that it would be a one-off loss. However, I am pleased to state that, in subsequent correspondence, she has made it clear that the loss will be in every year that we give up as part of the deal.

The main impact of the Council decision is the shift from VAT-based contributions to GNP-based contributions. I asked the Economic Secretary whether the definition of GNP to be used would be the official figure, or whether it would include estimates of undisclosed economies. The Economic Secretary has advised me that the official figures would be used in that context.

Why was it deemed appropriate, when considering how the Maastricht targets could be met, to take GNP figures for the different EU states that included estimates for undisclosed economies, on the basis that some countries had much larger black economies than others? Why has it been decided now that it is not necessary to calculate fair contributions where the GNP element has gone up? I point to that inconsistency, and to the fact that in terms of Maastricht, the rules result in those with larger undisclosed GNPs contributing less than they should.

3 pm

I have raised the rather fundamental issue implicit in the Council agreement that 1.27 per cent. of GNP is a sufficient transfer payment to make a common currency work. In the United States, for example, transfer payments are of the order of 11 per cent. of GNP. I have received no answer to this question, which was important in terms of the Council decision and the economic prospects for the euro. The Government must focus on this matter.

I have noted that the Chancellor has added another item to his economic tests for the euro—that of success. Clearly, the euro must be a success before the right hon. Gentleman will even think about it. However, it is important to ask whether the transfer payment arrangements—which have been set in stone by the Council decision at 1.27 per cent.—are sufficient in terms of economic analysis for a common currency to work.

Mr. Edward Davey (Kingston and Surbiton): Has the hon. Gentleman read the European Commission's analysis that said that, within member states, there are fiscal transfers between different regions, such as in the UK between London and the south-east and Scotland? When one is analysing the importance of fiscal transfers as an adjustment mechanism to compensate for the fact that we are losing the currency as an adjustment mechanism, one must take into account the fiscal transfers within each existing member state because the differences between regions within each member state may be as big as those between member states.

Mr. Flight: I am aware of that study, which has some relevance in other parts of the world that share a currency. But one must look at the transfer payments of individual countries within the EU because this matter goes beyond Scotland versus the south-east and reaches the whole economy in terms of competitiveness and cost structure. Many costs are determined on national bases by trade union agreements and so forth. I am calling for a study of the territory, including transfers within individual

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economies as well as among them. I am not aware of a convincing analysis to suggest that the level of transfer payments that the Council decision has set stands up. It may do, and I am not pre-judging the situation, but it is clear as a matter of theory and practice that the euro will not be a success unless that is the case.

The main underlying issue raised by the clause is enlargement and the CAP. The discussions in Berlin, and the Council decision emerging from them, were all about changes in the financing arrangements to enable enlargement and modest reforms to the CAP to be included. Is enlargement by 2004 for real, or are we living with another politically convenient deceit? The Opposition support enlargement because a larger and more diverse EU clearly holds out the prospect of the Union's remaining an association of nation states trading freely among themselves.

Enlargement will be impossible if the CAP is not reformed significantly. Despite the fact that there are plans for further reforms in the next two years, there is insufficient time to effect those by 2004 to allow enlargement to occur. Are we dealing with a conspiracy—deliberate or otherwise—to delay enlargement, or with extremely bad management?

I wish to refer to the history of those discussions at Berlin, which led to last year's Council decision. The European Council agreed that there would be a series of reforms under Agenda 2000 in the crucial policy areas of the CAP, the budget and regional policy to pave the way for enlargement. It was clear that the 1992 reforms of the CAP, while meeting the demands of GATT, would not be sufficient to prevent further pressures at subsequent trade negotiations.

The 1999 CAP reforms, in conjunction with the later Council order, were held at a time of crisis and preoccupation with Kosovo. As a result, they were substantially watered down and not properly pursued. If the agreement reached in Berlin was regarded here as a success, the world could be forgiven for wondering what a failure would look like. The most significant feature of the reform has been that the depth of the price cuts has been subsequently reduced.

The main impetus for reform was budgetary, and the level of the budget had been agreed before the reform negotiations on the CAP. The first reform would have exceeded the budget; the second appeared to meet it. At the time, the United Kingdom, along with Sweden, was leading calls for reform and suggested that even the original 2000 proposals did not go far enough. It is not clear how the Government can say today that all that emerged was satisfactory.

The UK was a member of what was known as the London Club or the Gang of Four, who wanted to see the quota system abolished and the milk market liberalised by 2006. However, the result was that these will be increased in 2005-06. In terms of the arable sector, the United Kingdom, along with Denmark and Sweden, wanted to end set-aside.

The irony is that, even by the admission of German Ministers, further reforms will be needed to comply with the demands of enlargement and the next world trade negotiating round. The 1990 reforms in no way met that either. The reality was that the millennium round

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collapsed before reaching agriculture and great pressure was removed as a result, for the time being. If enlargement goes ahead, all professional analysts have commented that extending the CAP in its present form will be unworkable. At one stage, Fischler had thought that there would be a solution, with price supports changing to income supports. Then, the new entrants would not need to cut prices and would not even have to be brought into the CAP. However, this suggestion was perverse; why should a farmer in East Anglia get subsidies while a farmer with a similar-sized farm in Poland does not?

I shall focus on the options because we rarely deal in this Chamber with the issues and how the CAP might be reformed. The first designated area of possible reform has the unpleasant euroland name, degressivity, which in simple English means the reduction of direct payments over time. It involves the replacement of price support with direct payments and then the reduction of the latter in time.

Allowing a fixed time span ensures that budget costs rise but then fall again and avoids the potential problems associated with extending CAP payments to member states, which the European Union could not afford to be given to farmers who had not experienced falling prices in the first place. Allegedly, that system would offer the best route to contain budget costs.

That approach was opposed by Germany and supported by France and the United Kingdom. France introduced it to counter the move towards co-financing, which Germany had proposed. Furthermore, France proposed the reduction of direct payments by between 1 per cent. and 3 per cent. each year, with exemptions for small farmers. The UK proposed 4 per cent. cuts across all direct payments. Estimates at the time showed that cuts of 3 per cent. a year for all payments would save about 4.5 billion euros over seven years. Cuts of 3 per cent. in arable payments and 1 per cent. in other sectors would save about 3 billion. In its most extreme form, the reduction could eliminate direct payments over a fixed time period. It would mean that, while the initial costs of enlargement would be high, in time they would be reduced.

The removal of the price supports would have had the beneficial consequence of solving the export subsidy problem. Not only do export subsidies cost the EU a substantial sum: they have caused the depression of world food prices, which has affected third-world economies particularly severely.

The second proposed approach to reform has been called co-financing or repatriation, which is sharing the CAP budget costs between EU and national budgets. That would involve removing part of the funding of agriculture from the EU budget and handing it to national Governments. It does not, therefore, necessarily reduce the overall cost and it could increase policing costs. Support for that approach went along the lines of net beneficiaries versus net contributors. Germany proposed it to try to reduce its contributions and the UK opposed it at the time because we felt that it would be likely to distort the single market.

Additionally, that approach is unpopular with farmers, who expect to get less as a result. It would solve the problem of what to do about enlargement, as it would be up to the countries concerned. Many of the central European countries do not want agricultural subsidies because they want to reduce their agricultural sectors.

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Repatriation failed as an idea in 1999 and it looks as though it will fail again as the other reforms have failed sufficiently to reduce the level of prices, making the option extremely unattractive to beneficiaries such as France and Ireland.

The third approach, which again has a nasty Euro name—modulation—is about targeting support to smaller farms and limiting payments to particular farms. The concept is that total aid payable per farm could be capped or compensation above certain thresholds met at less than a full 100 per cent.

The UK opposed all forms of modulation essentially because of the size profile of our farms. Capping the amount that could go to any individual farm would hit the UK the most. That approach was first proposed in 1992 and again in the early stages of the 1999 reforms, but it was blocked on both occasions. To a lesser extent, under the rural development project, countries could divert a fraction of their receipts to other projects, such as agri-environmental projects and afforestation, but only a handful have taken up that option, including Britain, where it has accounted for only 2.5 per cent. of the money distributed through the CAP.

In essence, none of those proposals has got anywhere. I mentioned them to put them on the record because that is all that is on the record. It is all very well to talk of the need for CAP reform, but how is the policy to be reformed if the Council decision that we are asked to approve today is to work?

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