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Lord Bridges: My Lords, before the noble Baroness sits down, with the leave of the House, perhaps I may suggest that she misunderstood what I was trying to say about security. Of course economic security is vital, but it is surely also important that a country in this part of Europe should be able to live securely within its own frontiers without fear of being gobbled up by its neighbour. That is what has happened in this part of the world for the past century or two. That is what I am seeking to draw to your Lordships' attention. I hope that that may clear up this misunderstanding. I happen to believe that a conventional military pact of the NATO kind is not at all appropriate to this area of Europe.

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7.10 p.m.

Lord Shore of Stepney: My Lords, it is my most agreeable first duty to congratulate the noble Baroness on her maiden speech. I congratulate her most sincerely.

Lord Barnett: My Lords, it was a good speech, but it was not a maiden.

Lord Shore of Stepney: My Lords, I thought that it was the noble Baroness's maiden speech. It covered the ground and I am sure that what she said about the CAP, and the eloquent defence that she put up for enlargement will have been greatly appreciated in all parts of the House.

I turn now to the report. I find myself substantially in agreement with a large part of the critique of what is basically Agenda 2000. The Select Committee's report is largely a critique and comment upon that document. It is a useful critique because the whole approach of the Commission, which authored the document, has been to try to reassure the existing 15 members of the Community that no real problem faces them as a result of the enlargement and the introduction of the new member states.

The Commission managed somehow to convey that reassurance by choosing a questionable growth rate of 2.5 per cent. per annum in the EU itself and 4 per cent. in the applicant countries. If that were achieved, the increase in own resources would be such that no serious problem would face existing members. It is extraordinary how neatly the increase in own resources, given those growth rates, matched the particular problems of existing members of the Community. It retained the ceiling of 1.27 per cent. That is hardly a sanctified sum, but nevertheless it retained that ceiling.

Secondly, the existing members can go on enjoying the cohesion and structural funds with a slight decrease towards the period 2003-2006. The extra resources generated are sufficient, apparently, to meet the needs of the much poorer countries which will be coming aboard during the period covered by the report. Finally, and this was a triumph, it even managed to say that, although the CAP would have to change in the period up to 2006, there would be increased expenditure under the CAP head for existing members, as the emphasis of the CAP moved from guaranteed prices to structural changes and the other part of the CAP.

I believe that it was the noble Lord, Lord Dahrendorf, who said that the greater difficulty in accommodating a substantial increase in the membership of the EU lay with the present 15. That is not to say, however, as I am sure he would not for a moment argue, that there are not serious problems for the applicant countries and the existing member states.

The applicant countries, as we have heard from different speakers, are poor. Compared with the average standard of living in the 15, they are woefully behind. We should not minimise the weight of the obligations that the acquis will impose upon the applicant countries. My mind goes back to when we first applied to join the European Community, as it then was. We had to accommodate--it was a difficult enough problem then

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to digest it--the, as it were, legislative achievement of some 15 or 16 years of Community life, together with the basic treaties (the Rome Treaty, the ECSC Treaty, the Atomic Energy Treaty) as well. But now here we are 40 years, as it were, after the main event, and the applicant countries have not merely to absorb the basic treaties, with which we had some difficulty, but in addition we now have the Single European Act, the Maastricht Treaty and the Amsterdam Treaty.

The noble Lord, Lord Dahrendorf, again quoted the figure aptly, but to achieve the same environmental and health and safety standards as exist in the Europe of the 15, and to which the applicant countries will be bound to adjust themselves, something like 2.3 per cent. of their GDP per year for 10 years will have to be spent on that exercise alone. There is no question of the task which has been set the applicant nations being in any way an easy one.

As for the 15 members states of the EU, I agree with and should like to reinforce the scepticism that my noble friend Lord Barnett, the chairman of the Select Committee, expressed about the achievement of their crucial growth rate. I looked up, quite naturally, what the growth rate has been in the 15 during the past two decades. I had to make some adjustment because all the members were not there. I take 1979-88 as the first decade. The GDP growth on average was 2.3 per cent. in the Europe of the 12, or whatever it was at that time. In the subsequent decade--that is, from 1989-98, and obviously making an estimate for the last year--the growth rate will be 2.1 per cent. on average.

We now have a document based upon a much more ambitious target of 2.5 per cent. That is a substantial difference. I wish to emphasise more strongly the distance that the EU has to go to make that growth rate not just achievable but credible. I looked also at the growth rates of the three major continental economies--Germany, France and Italy--for the past three years. I was struck when I found that the average growth rate during that three years in Germany was 1.4 per cent.; France, 1.3 per cent.; and Italy 1.2 per cent. That is a major difference between the assumed 2.5 per cent. upon which the credibility of the Agenda 2000 estimates depend.

It is worth considering why the growth rates have fallen so remarkably. I refer now to a document by the IMF entitled World Economic Outlook of October 1997. It is a recent document. It has this to say:

    "The unsatisfactory economic performance of the three major economies of Germany, France and Italy cannot be blamed on the external environment".

It continues:

    "The sources of weakness have been internal, and in fact domestic demand has expanded by less than 1 percent a year in these three countries combined over the past five years".

I come to the point which I know will cause great unhappiness to my noble friend Lord Barnett. Why have the German, Italian and French growth rates plummeted so much? We all know the answer, but many people do not have the honesty to face it--I am sure not my noble friend. It is the almost desperate effort of those three

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countries to meet the convergence criteria laid down in the Maastricht Treaty and to achieve below 3 per cent. GDP borrowing requirement by 1998.

Your Lordships should not dismiss that point--it is very serious. I know that on the whole this House is sympathetic to the European project and does not like to look too critically at some aspects of it, but this is a serious point. It is worth reflecting on whether all the pressure of compression of demand, which is well below their actual GDP, will change when we reach 1999 when the single currency comes into effect.

I am sure that that is the hope of everyone concerned with the problem of the growth of the European Union, but I can see no reason why it should be any better in 1999. First, the convergence reached with such effort--that is, below 3 per cent. GDP by 1998--must be continuing. A country cannot suddenly go above 3 per cent. If it does, it is in for trouble because there is the stability pact with its substantial impositions of deposits and fines. In addition, as was properly pointed out earlier, the world economy is not looking as healthy as we should like, particularly with the repercussions of the international financial crisis. Against that background and combined with expansion of 2.5 per cent., sustainable convergence seems to me to be almost impossible.

Therefore, there is no reason to believe not just that we are unlikely to achieve the 2.5 per cent. growth of GDP during the period covered in the report, but there is every reason to be seriously worried about a continuing pressure on internal demand which will affect the growth rate in the years which lie ahead. The main consequence of an inadequate growth rate has been the massive rise in unemployment in western Europe in the past few years and therefore we must turn our minds once more to the whole construction of economic and monetary union and see whether, having done without it for the past 30 or 40 years we cannot somehow stagger on in the future without it. I hope that there will be the most urgent reconsideration of that as the most major way in which we can assist in achieving a proper growth rate in the European Union.

Finally, as regards the consequences of being unable to achieve the growth rate that we need, we must re-examine the whole business of the financing of the Community. I do not believe that one can do a great deal with the funds which are already raised. Expenditures look unlikely to fall in the years ahead. We must examine the whole issue of financing and whether further financing resources can be released or found. We must examine the whole not-very-thought-through system of Community taxes which have grown up higgledy piggledy over the past 30 years.

7.24 p.m.

Lord Middleton: My Lords, I join other noble Lords in congratulating the noble Lord, Lord Barnett, and his Sub-Committee A on their admirable report. During the time I served on the Select Committee on the European Union it produced three reports on enlargement. Two were the work of Sub-Committee D during the time that

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I had the privilege of being its chairman. Therefore, I have an interest to declare in the subject. I find it especially gratifying that the line taken in this new report is wholly consistent with the line taken by our 1994 and 1996 reports. That line has been encapsulated in the report's opening paragraph:

    "If enlargement is successful, the people of Europe could enjoy conditions of security and stability without parallel in their history".

Speaking at the Madrid European Council two years ago, the then Prime Minister said that he believed that enlargement was the most important task facing the European Union. The promotion of enlargement was at the top of the previous Government's foreign agenda. I shall be grateful if in reply the Minister will tell us whether that policy objective is being given the same priority by this Government. If it is the case that the UK Government will continue to take the lead in working for enlargement, it must be recognised that, in the words of the report:

    "The enlargement now foreseen is a challenge of momentous consequences".

In the two reports for which I was responsible, Sub-Committee D concentrated on the challenge to enlargement presented by the common agricultural policy. We stressed the urgent need for CAP reform and told the Commission how it ought to be done. The report of the noble Lord, Lord Barnett, takes exactly the same line. He described CAP reform as "pivotal" to the financing of enlargement. Numerous other speakers today support that view.

Before dealing with the problem of the CAP, I should mention one other problem which must be overcome. The EU is almost fanatically protective when it comes to trade in agricultural products. We found that to be abundantly obvious when my sub-committee looked at the trade agreements with the CEE countries in 1994. Those countries were being treated abominably, and so far as I know they still are. As regards this trade, the old Iron Curtain still stands and remains virtually impenetrable by farm and food products from the east. That must be put right.

I return to the reform of the CAP, which is crucial if enlargement is to proceed. I understand that Agenda 2000 assumes with admirable confidence a reformed CAP by 2006, which will apply only to the present EU 15. Pre-accession aid is to be given to the CEE 10 and estimates are given. The report is not,

    "convinced that national governments have yet thought equally hard"--

that is, as hard as the Commission--

    "about the way ahead or faced up to the sometimes uncomfortable decisions which will have to be taken".

I am sure that that is right. But I fear that in respect of CAP reform some member states have thought hard and that there will be continuing resistance by some member states and by politically strong organisations within them.

I remember well a trip to Brussels during the previous inquiry of Sub-Committee D in order to attend a conference on CAP reform and enlargement. It was attended by representatives of all member states and CEE countries. After the representative of the French

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farmers' union had his say, I wondered why the Polish and Hungarian representatives, whom we had met previously in Warsaw and Budapest, did not hurry back home to tell their governments to forget about enlargement and seek refuge instead in some resurrected eastern alliance. They did not do so because desire for accession among the CEEC10 is immensely strong. Those countries are willing to show great patience. Nevertheless, the report is right in its final paragraph to utter a note of warning that delay imposed, for example, by an EU unwilling to reform the CAP might breed disillusion, putting the whole enterprise at risk.

The lack of a really robust set of recommendations for CAP reform in Agenda 2000 reflects the lack of enthusiasm on the part of some member states referred to by witnesses to the committee chaired by the noble Lord, Lord Barnett. When my sub-committee looked at the MacSharry 1991 proposals for CAP reform, we criticised them and said how it should be done. Those recommendations were endorsed by our own government and were produced as an option in the Commission's 1995 CAP reform document. But they were not adopted because they were too radical.

Agenda 2000 presents a new set of reform proposals which come a bit nearer to what the UK would like to see. Once again the Commission shies away from what is necessary because, quite understandably, it recognises that there will be almost guaranteed resistance from some member states.

The need for CAP reform seems to present the biggest challenge of all. I am led to believe that this Government--and I should be glad to have this confirmed by the Minister in due course--continue to adopt the robust line on CAP reform taken by the previous government. Therefore, I am sure that the Government will do all they can, but they will not receive much support in Council except from perhaps two or three other member states. The only hope is that sufficient pressure from the renewed round of WTO talks in two years' time may loosen up the logjam. Unless it does, the dire consequences of failure to achieve enlargement which are so well expressed in this report will follow.

This is a most stimulating report on the financial aspects of that enlargement, on which the future stability of Europe depends. It complements and extends the views held consistently by your Lordships' Select Committee, which have up to now been supported by all sides of the House. From what I have heard during this debate, in the main that support continues.

7.33 p.m.

Lord Hussey of North Bradley: My Lords, it is with some diffidence that I rise since I have not long been a Member of this House and for an even shorter time a member of Sub-committee A, to which I bring more enthusiasm than knowledge.

First, I must say, although this will be well-known to your Lordships, how much I have been impressed, not just by the wide and detailed experience of my colleagues but by the respect with which the committee is held universally. We do not receive many refusals if

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we ask anyone to come and talk to us. Much of that is due, no doubt, to the charm, experience and skill of our chairman. That is no surprise to me as he served long and patiently at the BBC under my chairmanship. I can only say that I have learned more in my seven months under his chairmanship than he learned in seven years under mine. Moreover, we are all indebted to the skilful work of our Clerk who has an unfailing eagle eye for the right phrase or telling quote.

The European Union and the part we play in it is the most important issue facing this country today. The prospect of enlargement of the existing 15 countries by a further 10 has been described by the Foreign Secretary as an historic opportunity which must be grasped to end the divisions which have soured our continent since the last war, and to enhance security and prosperity throughout Europe.

I was born in 1923. I am younger than some, although far from all, of your Lordships. My family, like virtually every other in this country, lost close relatives in the First World War. I sensed the increasing anxiety of that generation as it saw the inevitability of the Second World War. Although we were spared invasion, we suffered grievously and we should willingly pay a high price for a Europe which will reduce the likelihood of a third world war.

Of course, the history of our country is very different from that of our continental colleagues. The last invasion we suffered, as we all know, was in 1066, nearly 1,000 years ago. All our wars have been fought overseas--away fixtures, if you like. I believe we under-estimate the appalling memories of the many countries in Europe which have suffered invasion at least once every century, and many of them, like Poland and the Low Countries, more often than that. For them, there is no price too high to pay for stability.

In the first 50 years of this century, the threat to peace stemmed mainly from central Europe. But during the second 50 years, it came primarily from the east. The Community embraces already a large proportion of western and central Europe. The latest enlargement, including Poland, Estonia, Hungary, Slovenia and the Czech Republic, makes heavy inroads into eastern Europe. Dangerous and challenging boundaries are being eliminated. For that reason, if no other, their accession is hugely beneficial to the whole of Europe.

But what will be the financial costs? They are imponderable and the difficulties formidable. We look at the forecasts. Like many I have seen--and, quite frankly, like a few I have presented--they are extremely optimistic. The budget is very tight, but it may not be sufficiently tight. All expenditure rises alongside the Community's growth. The only thing that falls is the reserves. Growth rates are forecast at 2.5 per cent. for the Community and 4 per cent. for the accession states. That is not necessarily impossible. In 1995, the candidate countries averaged a growth rate of 5.2 per cent., more than double that of the European Union. But, as we all know, forecasts of growth rates are notoriously unreliable, not necessarily through any fault of the forecasters: they are subject to so many differing and unforeseen or even unforeseeable factors. The whole edifice depends on those targets being achieved.

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Like the noble Lord, Lord Grenfell, I too found the report of the European Parliamentary Committee disquieting. It stated that it believed that the projected growth of 2.5 per cent. was over-estimated and stated that the current ceiling of 1.27 per cent. of GDP for own resources was not necessarily inviolable, a view from which our Government and the governments of Germany, France and the Netherlands strongly dissent.

The budget depends on two issues: the first is the growth rate; the second is the reform of CAP and the structural cohesion funds which amount collectively to 80 per cent. of Community expenditure. In that context, reform means that some will receive less or others will pay more. It will be no surprise to your Lordships to hear that we have not detected any great enthusiasm for either of those policies, partly, of course, because of the startlingly contrasting interests of the northern and southern member states. It is a simple equation: if the growth rates are not achieved, either there are further cuts in expenditure or we increase our own resources to fund expansion. Solving that equation is--I use an adjective which has been used frequently this evening--a pivotal problem. One member of the Commission staff commented that the accession of so large a number of new applicants raised the question of whether the Union has the ability to carry through such an ambitious project, to tackle either the agricultural and cohesion policies, or to take the financial measures necessary for a union of 20 states to achieve its objectives.

On the other hand, there is a contingency reserve--what Commissioner Liikanen called "a margin for surprises". I am sure we all hope that the reserve turns out to be bigger than the surprises. Overall, the impact of past enlargements has been positive but they are not neutral; their impact goes further than simply extending the scope of the European Union. New members lead to new attitudes and new areas of interest. Incidentally, we must remember that the last two enlargements were eased by the raising of own resources, which is not at present on the menu.

I am an optimist, although the noble Lord, Lord Desai, may think that I am a romantic. I also hope that this enlargement will be positive. In my opinion, there is no alternative way to achieve stability, cohesion and prosperity in Europe. Whatever the difficulties and uncertainties--and some of these have been exposed with startling clarity by your Lordships--I believe that the effort must be made. The history of the European Union is the history of awesome difficulties in some unlikely fashion being ultimately resolved. We all believe and hope that this will now happen again. It is certainly in all our interests that it should.

7.42 p.m.

Lord Elis-Thomas: My Lords, there has been a nice mixture of optimism, realism and scepticism in today's debate. I am sure that that is down to the quality of the report which is before us. I should like to add my thanks, as a member of the European Communities Committee, to the sub-committee and in particular to my noble friend Lord Barnett. Of course, my noble friend is so

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far mainly famous for his excellent formula, of which I suppose I am a personal beneficiary. I am certain that he will become equally famous throughout the EU for the incisive nature of these reports. That is a serious compliment and I trust my noble friend is aware of that.

I should like to emphasise that my contribution will be on environmental standards and the cost of compliance with them, arising out of the points made clearly in paragraph 91 of the opinion of the committee. The committee emphasised that the:

    "way ahead should be for maximum help to be given to the applicant countries in terms of advice and access to investment capital and for accession to be followed by transitional periods which may need to extend over ten or more years".

My worry is that that objective of ensuring compliance with the environmental acquis communautaire over 10 years, using the target figure that has already been mentioned--for example, in the case of Poland, an increase of 2 to 3 per cent. of GDP just to meet that level--may not be realised and that that in itself will create disaffection and concern both within the applicant countries and within the existing 15 countries.

In the whole area of sustainable development, we face changes of attitude and of implementation which have been very difficult to overcome so far in the 15. We are in danger of trying to apply standards of environmental management and targeting in the five that we are not yet successfully implementing in the 15. In particular, when one looks at the area of sustainable regional development, it must be clear that we need a combination of resources from the commercial/private sector, as well as that significant amount of public investment which is always required in order to ensure infrastructural standards. In some of the calculations set out in Agenda 2000, it seems to me that we are in danger of forgetting that necessary balance between public resources and private investment, especially in levering for successful development.

In addition, there are the serious costs of enforcement of the environmental standards. We have already seen within our own experience in the 15 how difficult it is to get consistency of enforcement of such standards. We need to ensure that in the whole area the five have the benefit of the pioneering work of the European Environment Agency in Copenhagen, which some of us had the pleasure in visiting last year, along with other members of a sub-committee.

When we consider the resources which will be required to meet the environmental objectives, it will be seen that it will require investment from World Bank sources and from the private sector. There is a tremendous opportunity in investment in environmental sector technology in order to improve standards. That is a major opportunity for manufacturing companies in the existing 15 in partnership with the applicant countries. Indeed, we have the benefit in Bridgend in South Wales of one of the most advanced companies as regards the development of cellular technology for solar energy. That is merely an example of the way in which the developing technology in the 15, in partnership with the five, can create employment opportunities throughout the expanding Union.

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However, that means that we need to have ways of thinking about sustainable development throughout the whole Union which go beyond the approaches that we have taken in the past. It is in that context that we must see the shifting of resources from structural funds and regional development in the existing 15 into meeting environmental and other objectives in the five not only as a widening of European Union standards but also as a deepening of our own technological skills, especially in the environment technology industry.

I am concerned that the targets for transfers set out in Agenda 2000 will be difficult to achieve. I know that I am beginning to sound like a Eurosceptic, so I shall try to conclude my remarks on a more jolly note in a few minutes. But looking at the cuts suggested in Agenda 2000--namely, 0.5 billion ecu in agricultural policy, which is a 1.2 per cent. reduction, and also at that 1 billion ecu per annum cut in structural funds, which is a 3 per cent. cut--which are intended as transfers into accession states, I foresee political difficulties not just within the agricultural sector but also within regions in the 15 as regards obtaining political agreement for such reductions. When one looks at the transfer of funds of 10.5 billion ecu in PHARE, that again will require a clear targeting if it is to be successful in its implementation.

Therefore, when we consider what is set out in Volume I of Agenda 2000--namely, an attempt to create a twofold approach by way of partnership with the European Union and long-term realistic strategies for alignment within the accession states--and when we look at the proposal for the matching of domestic and foreign financial resources, they all seem to me to be a little aspirational. I want to see the UK presidency taking a lead as these negotiations develop seriously to ensure that funding is in place, not only matching funding from the current EU resources and from the own resources of the accession states but also from within the private sector throughout the Union and Europe for developments of that kind. If we do not get that leverage and that balance, these targets will be worse than aspirational; they will appear unachievable.

As we try to adapt our own sustainable development strategies, the integration of the environment along with other economic and social policies, and as we extend that to the accession states, that will require an imaginative approach in terms of implementation. In doing that it is important for us to pay tribute--as the noble Baroness, Lady Young of Old Scone, did--to the achievement of the accession states in biodiversity and nature conservation, which certainly puts to shame the achievement of many of us in the 15.

There are environmental gains and benefits from enlargement. However, I must issue a warning that on the current performance I do not think we have sufficiently assessed the amount of expenditure involved or the extent of the task ahead. I add my warning to that given earlier by the noble Lord, Lord Dahrendorf. I hope that the Government will take this matter seriously as part of the initiatives of their presidency. It might indeed be called "Declaration Cardiff" because it looks these days as if that is about all we shall get in Cardiff.

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7.51 p.m.

Lord Shaw of Northstead: My Lords, I, too, wish to congratulate the two maiden speakers today not only on the speeches that my noble friend Lord Garel-Jones and the noble Baroness, Lady Young of Old Scone, made, but also on the fact that they will have realised that enlargement is a continuing process. We have had earlier debates on this matter and we shall certainly have many more. I look forward to hearing from them in those future debates. The more our debating team is strengthened, the better.

At this stage of the debate it is almost inevitable that one will overlap with some of the points that have already been made. I shall try to keep that to a minimum. However, I am bound to repeat something that others have said; namely, how much we have appreciated the leadership that we have always enjoyed from our chairman. I welcome the fact that he has managed to persuade the committee to produce a report so quickly. This morning I heard certain critical comments from a noble Lord who is not present this evening. He criticised the speed with which we had worked and said how much better the report would have been had we taken a little more time. I disagree with that view. As I say, this is not the first report, and it certainly will not be the last, on the financial aspects of enlargement. It is important that we state a critical view--it is bound to be critical--as quickly as possible to try to urge a closer appreciation of the problems connected with enlargement.

The opening paragraph of the report states,

    "Enlargement of the European Union to bring in the Countries of Central and Eastern Europe is no longer a dream".

That may be so. The report continues,

    "there is now a practical and immediate opportunity to set a course which will re-shape the political, economic and social life of the whole continent".

Opportunities arise but they are not much good unless they are adopted and driven forward. The whole purpose of our inquiry is to see how we can change opportunity into practical steps towards realising that opportunity. I have noted a strong feeling that the member countries have not yet got down to spelling out the tough decisions and consequences that are bound up with any such enlargement, particularly the financial consequences of enlargement, on the individual national economies involved.

One has only to look at the present working of the CAP in that connection. This has been considered several times by my noble friend Lord Middleton, who has had much experience of these matters when serving on his committee. Paragraph 87 of the report states that,

    "The CAP has long been in need of reform",

and that such reform is,

    "pivotal to the financing of enlargement".

Yet, as our chairman has said, we are told that it is no use talking about changes in the CAP until after the German elections next year. That is true, but, of course, those are not the only elections. Elections will take place from country to country. Someone will always find it

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inopportune to discuss the CAP unless we are careful and unless there is a will to bring about the change. That will not be easy.

Similarly, changes are also required with regard to the structural and cohesion funds. Whatever benefits may derive from the reform of those funds, and however necessary they may be, they will not be achieved easily. The reforms and disciplines connected with enlargement must be spelt out clearly because, once enlargement takes place, it is much more difficult to change the conditions that have been set out than it would have been to get them right in the first place. However, there is a practical problem here even without enlargement. As regards the CAP, the structural funds and the cohesion funds, necessary changes must be agreed between the existing 15 members whether or not enlargement takes place. I am not quite sure whether there will have to be two stages, with the existing members agreeing on changes and then discussing them with the applicants, or whether there should be one stage of negotiations.

However these problems may be tackled, there has to be a willingness for the present 15 members to provide agreed assistance to the applicants. Equally, there has to be a willingness by the applicants to ensure that such assistance is properly used. That leads me to something that has not been mentioned so far but which I always return to because I think it is so important--I am afraid that I have mentioned it probably too many times in this place--namely, the financial discipline in the Community itself. The Court of Auditors' annual report for the financial year 1996 has just been published. Paragraph 0.8 on page 8 states:

    "Almost all chapters of this Report (and five special reports to be taken into consideration for the 1996 discharge) include observations on administration and control weaknesses which demonstrate how far the development of appropriate systems of accounting and financial management, in particular in the Member States, has failed to keep pace with the expansion of Community activities and with their diversified nature".

We have to face the fact that in the Community as it now exists there is far too much misapplied aid and downright fraud. In presenting his annual report to the MEPs the president of the Court of Auditors, Bernard Friedman, has told us that the court had covered many irregularities and cases of fraud amounting to 5.4 per cent. of the 1996 budget, which itself was 77 billion ecu. That amounts to a total figure of fraud of 3.7 billion ecu. If my mathematics are right, that is about £2.5 billion. The president continues that the court was not able to give the Commission a clean bill of health for its management of funds.

The truth is that, although we have strengthened the hands of the Court of Auditors and the Commission, much still needs to be done to ensure a proper control of Community funds. In seeking enlargement we do not want to open the door to further misuse of EU funds. We have to remember that member states are responsible for the handling of some 80 per cent. of EU funds and are themselves in large measure responsible for the proper

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management of them. That is why at paragraph 95 of the report we stress the importance of developing,

    "strong, capable and honest administrations in all the Member States and applicant countries. The judiciary and the civil service are key institutions whose capabilities will determine the effectiveness of the implementation and enforcement of Community law and practice".

How good it was to hear the Polish representative stressing the great steps Poland was taking to improve its administration and Civil Service.

Enlargement clearly will demand a steady progress and a continuous encouragement. In no way can it be a quick-fix operation. One has only to remember that it will take 25 years or so at reasonable rates of growth for the CEECs to bring their average per capita GNP up to roughly half that of the EU 15, we state at paragraph 15.

I fully support my noble friend Lord Dahrendorf in his more cheerful view of events. It is good to have a cheerful view; we are somewhat critical. Nonetheless, it is right to emphasise that the greatest spur to progress in those applicant countries is that we keep alive the hope that they will come into the Community. Towards that end, I am much in favour of something that we mention in the report; namely, the idea of a European conference at which we can continue dialogue with those applicants. We can keep the hope alive and progress towards entry within their view as well as our own.

Finally, I have always stressed the paramount need for financial regularity if the long-term success of the European Union is to be secured. But the other great need is to retain a flexible approach to the problems that must continually arise as we go forward. I am glad to say that I believe that such an approach has a good deal more general support than might often be supposed. In support of that, I conclude with three quotations. First, at the CBI conference on 10th November 1997, William Hague stated:

    "Let us not have debates about who is pro or anti European. We should all be pro European. Pro about a Europe that is flexible, not rigid; that is about diversity not uniformity; that is outward-looking, and does not turn itself into a fortress".

The second quotation is by Joachim Bitterlich, Chancellor Kohl's national security adviser. At a recent German Government conference in Berlin he said:

    "I am not an integrationist. I look at what works".

Finally I cite Dr. Hans Von Ploetz. He made a wonderful witness before the inquiry. He is the top civil servant at the German Foreign Office. He was speaking at the same conference in Berlin. He said:

    "After Maastricht, Germans were no longer prepared to let power flow down a one-way street to Brussels. The burden of proof had shifted.

    Now we have a British element--if it ain't broke--don't fix it".

8.5 p.m.

Lord St. John of Bletso: My Lords, first and foremost, like all other members of the sub-committee I wish to thank the skilful leadership and the skilful charm of the noble Lord, Lord Barnett. I wish also to join in the thanks for the able guidance of our clerk, John Goddard. I was heartened when I heard the opening comments of my noble friend Lord Bridges: he

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thought that the report was essential reading for anyone who had an interest in Britain's presidency of the European Union next year. It is an extremely interesting report. Like the noble Lord, Lord Hussey, I considered myself to be one of the most junior and naive members of the committee. It was a steep learning curve for me.

There is clearly an overwhelmingly strong case for the advantages of enlargement of the European Union in terms of peace and security as well as economic growth and development in Europe as a whole. I say that as one of the younger noble Lords who has been fortunate enough not to have been involved in a world war. It is a small price to pay. However, it is clear from the report that there are major financial and political hurdles to overcome, and that the timetable outlined in Agenda 2000 is unlikely to be met. As the Economist in a recent article headed "Welcome to Europe" stated,

    "it would be hard to find a European project that arouses so many suspicions and yet produces such beneficial results".

The report highlights a number of substantial adjustment pressures, both political and economic, that accession countries will have to face in order to comply with the acquis communautaire, including the enormous challenge of promoting environmental conformity with European Union standards which is likely in several countries to have a crippling effect on their GNP. The point was made by the noble Lord, Lord Dahrendorf, and my noble friend Lord Elis-Thomas. The noble Lord, Lord Dahrendorf, mentioned that Poland would need to spend 3.2 per cent. of its GNP for 10 years to achieve the environmental acquis. It is not just the money to be spent on seeking to achieve the environmental acquis, but also the challenge of the enforcement of the environment acquis.

Of course the first questions posed by the sceptics of enlargement are these. Who pays? How much? How will it affect our national economies? Paragraph 11 of the summary states,

    "National governments, conscious of their electors and their approaching elections, will not wish to pay more to, or receive less from, the Community Budget than they do at present".

The point has been made about the forthcoming German elections. Clearly a key to the success of the exercise will be the need to stimulate sustained economic growth if the Community policies are to remain affordable. The figure of 2.5 per cent. has been cited. As a consultant to Merrill Lynch, I asked our chief economist whether or not that figure is achievable. While noble Lords might feel that economic predictions are unreliable, I am pleased to say that the chief economist of Merrill Lynch assured me that, even though he is a Euro-sceptic, he felt quite confident that the economic growth rate of 2.5 per cent. was achievable. Reform of the CAP is, in the words of the report,

    "pivotal to the financing of enlargement".

What is evident from the report is that the relative poverty of central and eastern Europe will impose unpopular extra demands on EU farm spending and the budget for regional aid. In fact, many believe that

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the biggest obstacles to EU enlargement are the existing 15 countries. I again cite the noble Lord, Lord Dahrendorf. He said,

    "The real obstacle is what present members fear will happen to them".

It is apparent that enlargement is entangled with the rest of Europe's unfinished business--namely, the single currency and the need for reform of the CAP. However, ahead of the forthcoming Luxembourg European Council meeting next week, it is encouraging to see that the enlargement debate is moving to centre stage.

While the Copenhagen criteria provide a sound screening process for applicant countries likely to be admitted to the European Union, it is important--as the noble Lords, Lord Barnett and Lord Grenfell, mentioned--that those applicant countries that did not qualify for the first phase should be encouraged to be admitted as soon as possible and not feel snubbed, thus creating potential divisions in central and eastern Europe.

I welcome the Foreign Secretary's recent announcement that, when Britain holds the EU presidency next year, it will host a special European conference to which all applicants--I stress all applicants--for membership will be invited.

While the Copenhagen criteria and the acquis require new members to take on board most EU regulations and to observe the Maastricht financial disciplines, I, like most noble Lords who have spoken today, am concerned that, if that is rigidly applied, it will not only lead to lengthy delays in new members joining the Union but also impose on applicant countries economic, monetary and environmental costs inappropriate to their need for rapid economic and political transformation. I believe that only if the EU is flexible about these pre-conditions and reasonable transition periods are allowed will the full economic and political potential be tapped and costs of enlargement contained. I stress that CAP reform is essential.

I have read estimates that up to £50 billion could be needed to integrate the five potential members in the first phase compared to the relatively low cost of NATO enlargement. I have not seen the figures for NATO enlargement but I imagine that they are substantially lower than those for economic enlargement.

A key point made by several of the witnesses, including Mrs. Hubner, head of the European Integration Office in Poland, was the importance of foreign direct investment into the applicant countries, such as Poland. Mrs Hubner mentioned how foreign direct investment into Poland had resulted in the promotion of political and economic reform and the adoption of the acquis. Should the timetable for applicant countries joining the EU be delayed too long, the potential result could be a drop in foreign direct investment in the applicant countries, which could have devastating effects. It is to be hoped that, in the words of Commissioner van der Broek:

    "It is not the if, but the when of the applicant membership that is important".

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In conclusion, although the attraction of NATO's defence guarantee is obvious, after decades of Communist misrule, what embattled citizens want most of all is economic stability, and for that they will look to the European Union. Those unimpressed by the historical opportunity for Europe should think of the practical benefits. In the words of the recent Economist article:

    "The new democracies of Central and Eastern Europe need to shake up and deregulate their economies in order to prosper in a tough competitive world, whether they manage to join the EU or not".

If the enlargement process is postponed or delayed, the success of this much needed political and economic enterprise will be at risk. Our target must be a stable Europe that is open to the world.

8.15 p.m.

Lord Randall of St. Budeaux: My Lords, I believe that the report we are debating this evening is a good one. It was prepared in what seemed to me record time in order to be available for the EU Council meeting in the next few days in Luxembourg.

The report is special for me because it is the first substantial piece of work in which I have participated since being introduced into this House in October. I challenge the claim of the noble Lord, Lord St. John, to be the baby of the committee; I believe that I am. The calibre of the committee impressed me immensely. It would be tasteless to draw comparisons with the other place where I spent 14 years, but I should like to say how highly I regard this kind of committee work which shows the value of your Lordships' House in our parliamentary system.

The members' profound knowledge of the workings of the EU, particularly the financial aspects, and their experience and judgment made this for me an exciting and challenging project. Our chairman, the noble Lord, Lord Barnett, upon whom praise has been heaped this evening, played a key role. He created just the right sort of ambience for a complex project of this kind. Sometimes we were deeply analytical and serious; on other occasions we had a good laugh. Our chairman must take great credit for the report. Perhaps I should say that the rumour that the report will be officially called the "Barnett Formula Mark 2" is quite untrue.

I associate myself with the comments of the noble Lord, Lord Barnett, about the committee Clerk, Mr. John Goddard, who did an extremely good job. The report could not have been produced so expeditiously without his superb help and guidance.

One of the main political reasons for enlargement is to diminish the threat of war or conflict from those countries to the east of the EU border. Security of the European continent must, in my view, be a top political priority for the European Union. Consequently, enlargement must proceed and be effective, although it will be very costly. Those high costs will lead to great political pressure to limit the scope of enlargement or to delay its progress. If that is allowed to happen, aspiring member countries could become disillusioned, with very

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worrying consequences. We could be risking the security of Europe. None of us should forget that the war in the former Yugoslavia is an example of how close conflict can be to us in the European Union, even in the 1990s. We should never take our national security for granted. We must always be vigilant. We should never forget the enormous loss of life, both military and civilian, amounting to about 60 million people, in the last two world wars. Many were children. The waste of lives was indescribable.

I passionately believe that enlargement is the best tool at our disposal for reducing the risks of war and conflict in Europe. Enlargement results in the coming together of nation states and their becoming institutionally bound to the EU. But that binding process is not just limited to the institutions of the EU. It also includes NATO. I am pleased to see this joining of the EU and NATO going hand in hand.

It is encouraging also that so many countries wish to join the EU. Those countries accept that before they become eligible to join they have to meet certain standards; for example, in terms of human rights, democracy, institutional reform and the environment. Those strict requirements are laid down in two key EU documents; namely, the acquis communautaire and Agenda 2000. The conditions are very stringent and demonstrate the huge difference between the EU 15 countries and those in central and eastern Europe wishing to become members of the EU, referred to in the report as the CEEC 10.

The report we are debating today illustrates the difference between the economic performances of the EU 15 and the CEEC 10. The statistic quoted by a number of speakers is the one which makes reference to that part of the report which says that to bring the average GDP per capita of the CEEC 10 to just half that of the EU 15 would take about 25 years. It is an extraordinary statistic.

What all this adds up to is that enlargement is absolutely vital to ensure the security of Europe but at the same time the preparation of the applicant countries to meet the mandatory conditions will be very costly and will take perhaps a generation to complete. The commitment required from the EU 15 countries will be enormous, but we must not be deflected from the path of enlargement.

How do we move forward? Several things need to be considered. First, the member states of the EU 15 need to be fully aware of the scale of the financial commitments that are going to arise from the enlargement programme. I attended the Labour Party European conference a week or so ago in Eastbourne, where one very informed MEP described enlargement as,

    "a make or break issue for the European Union."

That is a very strong statement. Is it reasonable? The committee felt that the financial perspective of the European Union for the period 2000 to 2006 was such that the budget allocated to enlargement would be very tight. There is a very limited built-in contingency in the budget, to which my noble friend Lord Shore referred.

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Next, the political pressures within the EU 15, particularly from Spain and Portugal, to allocate additional structural and cohesion fund money, will create conflict when it comes to allocating funds to the applicant countries of the CEEC 10 and Cyprus. That conflict will have to be reconciled. The CAP budget is unquestionably the single largest source of money which, if diverted, could fund enlargement. The Commission and the Council of Ministers have brought forward plans for CAP reform, which is very welcome. However, that reform on its own is inadequate. The CAP budget must be substantially reduced.

The question that arises is whether such substantial reductions in the CAP budget would be achievable. The committee felt that political pressures from elected Ministers are such that member states would not countenance such reductions, certainly in the foreseeable future. In addition, the committee felt, after interviewing various witnesses, that the possibility of increasing the Community budget by raising the EU GNP ceiling from 1.27 per cent. was remote.

My own view on funding is that since many of the applicant countries are proceeding with privatisation programmes which potentially can free up enormous sums of money and other valuable resources, then those countries should be encouraged to use as effectively as possible some of those resources to attract private financial institutions to invest in their countries on structural, environmental, social and other costly projects which must be carried out in order that such applicant countries can join the European Union. I stress, however, that such a potential contribution from these countries to enlargement should not diminish the EU 15's commitment to helping them make good progress in joining the EU.

I think the House of Lords committee has done a worthwhile job in highlighting some of the financial and political dilemmas associated with enlargement. I hope the council meeting in Luxembourg will give careful consideration to how those dilemmas can be dealt with.

8.26 p.m.

Lord Wallace of Saltaire: My Lords, this is an excellent report and we have had an excellent and expert debate upon it. I pay tribute to the noble Lord, Lord Barnett, for the amount of work he has done and the speed at which it has been reported. I have a healthy respect for the European committee in this House; indeed, I also have a long family association with it. Michael Wheeler-Booth used to delight in reminding me that my wife was one of the first ever witnesses to the committee when it was formed and that he had given her a double gin and tonic to steady her nerves before she started her evidence.

I was once a special adviser to the committee and, if I remember correctly, it was on the subject of enlargement which meant Spain, Portugal and Greece at the time. I held the then chairman, Lord Trevelyan, in great awe. As I recall, the entire committee went to Brussels with its special adviser and met a number of commissioners and had an excellent lunch. So something has gone wrong between 1978 and 1997 in

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the way that things happen now. As it is rightly said, we travel in twos and threes, carefully selected on these occasions.

As a new member of the Select Committee I have been parachuted into the chairmanship of the junior sub-committee, if I may so describe it. The third pillar is now one of the most sensitive and active areas of the European Union. We were told, when two of us were allowed to travel to Brussels in July--I went with the noble Lord, Lord Kingsland--that a third of the paper currently going through the Council's secretariat and more than a third of the meetings were now on the third pillar. Papers are coming out on the impact of enlargement, on justice and on home affairs and--heaven knows!--asylum, immigration and organised crime. That is a large number of issues which we are trying, in our small way, to investigate.

What I most liked about the report was the balance it achieved between the strategic objectives and the hard detail. That seems to me to be the most important thing about approaching enlargement. The noble Lord, Lord Desai, talked of not getting over romantic about this subject. But there are powerful interests at stake in making a success of enlargement. I remember in the mid-1980s--as I am sure the noble Lord does--the Cecchini Report on the costs of non-Europe, which powerfully argued the case that completing the single market through the 1992 programme was in our clear economic interest. One can imagine how one would now set about a report on the costs of non-enlargement.

We were spending a great deal more on defence up until 1989 than we are today. As my noble friend Lady Ludford pointed out, we are spending a great deal on Bosnia, having failed to manage the transition in Yugoslavia. The Germans and the Italians in particular are spending a great deal on half a million refugees from Yugoslavia, Albania and elsewhere. So there are costs in non-enlargement as well as in enlargement. There is also certainly a moral obligation, which we all feel, that many of these countries have suffered from the results of World War II and the failure of the western powers to resolve the consequences of World War II. There is also the question of what we mean by a European community or a European identity. In this respect one has to talk in rhetorical, romantic and emotional terms. The pace of enlargement, the way in which we lock the peoples of these countries into a broader European community, European society, European family of democracies, European market and European economy, matters. That is why the pace at which we approach the process of enlargement matters.

In his opening remarks, the noble Lord, Lord Barnett, said that he did not quite understand what was meant by the regatta principle. As a young man I belonged to a rowing eight. The concept is entirely clear to me. In modern Olympic regattas, eight crews start at the same time but one or two of them reach the finishing line long before the slowest ones. But watching this process, I have a different image. It is what I used to do--tideway rowing. You rowed very fast down the Thames when the tide was with you and back extremely slowly. I fear that what we are doing with these countries is asking

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them to row up the tideway against the tide. It is important that we should provide a rather warmer flow of water than we are currently providing.

It is the characteristic style of west European governments in approaching European negotiations, to become lost in the detail. That, unfortunately, is the way in which the European Community was designed and is the way in which all governments, including our own, tend to behave. The record of the Commission on enlargement, as on most other matters, is slightly better than that of member governments. Agenda 2000 is a creditable report. It sets out a number of hard choices which most member governments do not want to accept. I do not think it is too strong to say that most member governments are in denial over enlargement. They want to put it off for as long as possible. They come up with phrases like "first reform, then enlargement", meaning that they are not too sure about reform of agriculture, institutions or whatever it may be. Attitudes in Germany are affected by the high and unexpected costs of unification. Attitudes in France are affected by the tremendous crisis of society, state and economy through which the country is going. If we look at our own record, I remember a former British Minister of Agriculture proudly announcing in another place on the conclusion of the Europe agreements that he had safeguarded the interests of Scottish raspberry growers in the course of the negotiations. That is going a very long way down into detail when talking about the future stability and security of Europe.

I find it very saddening that the Community as a whole has taken so much less generous an attitude to this enlargement than it did to the Mediterranean one. We were willing to increase spending for Greece, Spain and Portugal. We were not put off by the extent to which Portugal was an undeveloped country--more like Romania than the Czech Republic in 1977-78. Portugal has made a tremendous success of being in the European Union since then. We were also extremely generous to Spain. We ought to be reminding the Spanish Government of that now as they set out to do their best to block all economic and financial generosity to the new entrants. We are in severe danger, as Polish Ministers have said on many occasions, of asking the applicants to adjust--and they are adjusting remarkably rapidly and well--without being willing to adjust ourselves.

Perhaps I may remark on a few points which the report did not flag. The costs of the future stability of Europe do not stop with EU enlargement. Most governments have their own national programmes. Most generous are the Germans who have given a great deal of bilateral assistance to Russia and the Ukraine. We have our own small programme. The Know-how Fund is not particularly large, but from what I have seen in central and eastern Europe, it seems to be one of the most effective training programmes. Various noble Lords have mentioned NATO enlargement, the cost of which has now been reduced to within the range which the US Senate is prepared to accept. There is also the

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question of Turkey and of stabilising those other countries which will not join within the foreseeable future or may never join--Ukraine and Russia itself.

I recall at the Barcelona Conference in November 1995 the announcement of a very large package of aid for the Mediterranean countries which I thought at the time was unlikely ever to be disbursed and I assume--perhaps the Minister in replying can tell us--has not yet been disbursed. It was to be of the order of two-thirds of the assistance provided for the Europe agreement countries over the next 10 years.

How do we pay for this? We should not get hung up on whether we can expect 2 per cent. growth or 2.5 per cent. growth. Incidentally, my understanding is that the Polish economy grew by between 6 and 7 per cent. last year. So some of them are doing better than expected rather than worse than expected. If we are to be tough about how we pay for it, we have to insist--I hope the British Government and presidency will set out to insist--that governments graduate from the structural funds, that the cohesion funds must shrink, and that Ireland, having done extraordinarily well--8 per cent. of GNP and now rapidly approaching the same GNP per head as the United Kingdom--must of course graduate away from the structural funds. So must much of Spain, and so, necessarily, must much of Britain. I shall regret no longer having such things as that wonderful notice we have had for the past 18 months as one walks down to the station at Saltaire which says,"Your new footpath, paid for by the European Union", and all those little badges one sees scattered across northern England. But perhaps that is what we shall have to do without in future.

We also need to reform the Union's own resources. The committee's report just touched on that. One of the biggest scandals in the European Union is that Denmark is still a net beneficiary of the Union budget. I also regard it as deeply hypocritical that the Dutch have suddenly discovered that the European Union costs them money since they have now at last become a net contributor. Various people, including the leader of the Dutch Liberal Party, now go around saying, "We cannot afford to pay any more". Clearly, the Dutch, as a relatively wealthy people, ought to be paying more.

We need to have a wider definition of burden sharing. I have just seen a paper prepared for some transatlantic discussions on burden sharing which links together how much each European state is paying towards the European Union budget, towards development assistance and towards defence. Placing things in that wider context is not only fair but is also of some advantage to this country in the overall picture since we are one of the larger payers on defence. But we shall achieve that kind of redefinition only if our political leaders are prepared to redefine the issue and if we can place the details within the wider context. What distresses me most about the governments of western Europe, our own included, is the failure of imagination, the failure to understand that we are engaged in the reconstruction of a wider Europe and the construction of a stable democratic and prosperous Europe, and that it is worth spending a certain amount of money in order to achieve that larger goal. Rhetoric--even

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romanticism--has a role to play in catching the public imagination and in persuading politicians of all parties and the broader public that this is a goal worth pursuing and an investment worth making. We need to have our political leaders making speeches on that at home as well as abroad.

This is a challenge for the British presidency. It is something we may hope to see in the statement of objectives of the British presidency which is due at the end of this week. If leading Europe means anything in terms of language, this is the direction in which the United Kingdom should be leading it. That message should be addressed very clearly to the rest of the European Union as well as to the British public.

8.40 p.m.

Lord Higgins: My Lords, I join with all those who have spoken in this debate in congratulating the noble Lord, Lord Barnett, and the members of Sub-committee A on producing something which clearly is a remarkably helpful report, particularly so given that it has been produced in a short time on the eve of the Council meeting in Luxembourg. I hope that those at the meeting will have the opportunity of receiving the report. Perhaps the Government will consider ensuring an adequate supply of the document in Luxembourg--one might even suggest that copies of this debate should also be available. If one were convening a conference to discuss these issues on a Europe-wide basis, then perhaps one should take into account that many or even all of those who have spoken today have such a degree of expertise that their views are of considerable importance in dealing with what is an immensely difficult problem.

Everyone who has spoken has come out strongly in favour of enlargement, with the possible exception of the noble Lord, Lord Desai, who had some qualifications. Equally, everyone has recognised that there are immense difficulties regarding the financial arrangements.

Perhaps I may be parochial for a moment and take up a point made by the noble Lord, Lord Boardman. For the past three Parliaments, as chairman of the Liaison Committee in the House of Commons which consists only of chairmen of Select Committees, I have had the rather unusual task of allocating the very scarce funds available for overseas travel. The result is that I probably do not have a friend left in the place. I have always taken the view that, if a Select Committee is travelling, if at all possible--and I know that the noble Lord, Lord Shaw, will agree with me--it is very important that everyone on the committee should travel together. If it is the case that in this House limits are imposed whereby only two or three go, that is an absurd economy and something to which this House should give attention. It is not simply that if some go and others do not, the ones left behind do not understand exactly what the situation is, but also they do not have the opportunity of getting together and taking part in discussions. Therefore, I urge those responsible to look at this matter very carefully indeed.

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I congratulate both the maiden speakers. My noble friend Lord Garel-Jones brought to the debate his experience at the Foreign and Commonwealth Office. He has always had a very clear view on the issues that we are discussing today. We congratulate him for that. The noble Baroness, Lady Young of Old Scone, made a speech which was perhaps a little more controversial than is sometimes the case with maiden speeches.

All those who have spoken have made very important contributions and have recognised that this is a matter of the utmost importance. The previous Conservative Government did so; they were among the first to call for enlargement of the European Union and the Conservative Party vigorously supports enlargement. Enlargement will undoubtedly enhance the security and prosperity of everyone in Europe and we want it to be successful, sustainable and affordable.

Perhaps I may now pick up a point made by the noble Lord, Lord Wallace of Saltaire, regarding the jargon. This is a subject which is slightly bedevilled by jargon. There seems to be a distinction between whether it was a five-plus-one kind of arrangement which the committee favoured, or a so-called regatta approach. My experience of regattas is confined to sailing very small sailing boats rather than rowing. One can have a regatta of two kinds. There is one where everyone starts simultaneously (which I gather is what the jargon implies) but there is also the regatta with a handicap and where some start ahead of others.

If we are to have a five-plus-one system where some have a start, then it is tremendously important that the time difference and the handicap which the others suffer is not so great that they become disillusioned, despondent, and one might almost say dangerous. The noble Lord, Lord Grenfell, made a very powerful speech on that point. He stressed how important it was that we should ensure that all potential applicants should feel that they are involved in a process which, whatever the timing may be, is one in which they are participating. As has been pointed out by the noble Lord, Lord Barnett, it may be that those who start at the back reach the finishing tape before those who start ahead of them in the first stages.

The report refers briefly to institutional reform and particularly whether there should be a change in the number of commissioners and the voting on the council. That is not primarily what we are concerned with tonight. We are concerned primarily with the question of costs. Three possible sources were identified in the report, although the noble Lord, Lord Shaw of Northstead, managed to produce a fourth--namely, if fraud, and so forth, were dealt with properly by the Court of Auditors, one might find an amount of about 2.5 billion ecu, a not inconsiderable amount, could be put towards the objective that we are seeking to address this evening.

As regards growth, the noble Lord, Lord Shaw, dealt with it in very considerable detail. Clearly, the assumptions which have been made may turn out to be invalid. Therefore, that is a very serious problem. Similarly, on the own resources issue and raising the limit, the report stresses the very real political

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difficulties arising from that matter. The other source mentioned was of savings on agriculture or on other funds.

In that context I pick up one particular point. The committee stresses very much the size of the task ahead of us. In its opening paragraphs it stresses that,

    "The enlargement now foreseen is of a different order of magnitude from any that has happened in the past. It is a challenge of momentous consequence".

That is certainly the case. The report continues,

    "National governments, conscious of their electors and approaching elections, will not wish to pay more to, or receive less from, the Community Budget than they do at present".

So there is here a very real problem. It is hoped that the Council of Ministers meeting in a few days' time will do something to help. It is true that national governments have not recognised, as the committee does, the sheer scale of the enlargement undertaking. I quote from the report at paragraph 28. The committee emphasises very clearly the size of the problem. The report states,

    "Using figures for 1995, if enlargement brought in to the existing Union of fifteen Member States all ten of the applicant countries of Central and Eastern Europe, the Union's population would grow from 371.6 million to 476.9 million; and the area of the Union would expand [enormously]: both population and area would expand by roughly one third".

I believe that that gives us some idea of the scale of the problem.

The report continues--and this is important--

    "In terms of GDP per capita and of the proportion of the workforce employed in agriculture the differences between the EU 15"

and the 10 are enormous. The difference in purchasing power is pointed out. If one took the figure in 1995 as 100, the figure for the applicants is only 30. The percentage employed in agriculture was 5.3 per cent. among the 15 countries and 22.5 per cent. among the 10. That is very important.

Coming to this matter fresh (as I do in a way which members of the committee do not) as I have listened to the debate I have been a little puzzled. Many noble Lords have said that the important thing is to make economies in the CAP. That is certainly an important issue and perhaps I may expand on it for a moment. When the question of Britain first joining the EEC, as it then was, arose--and on balance, I came down strongly in favour--it seemed that there was a trade-off between the advantages of the single market for most things and the disadvantages of the EEC with regard to agriculture. It has always been a great puzzle that any first-year economics student would have no difficulty in explaining the appalling problems which arise from the present system of agricultural support through the CAP but, however overwhelming those first-year economics arguments may be, politicians have never taken any notice. As an economist, I have always regarded that with great regret. In this context, the figures that I quoted earlier are important. The number of people employed in agriculture will increase enormously. Therefore, the political pressures on the agricultural side will also increase considerably.

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We are left with a strange situation which I do not think the committee fully addressed. On the one hand, we are saying that we must find economies in the CAP in order to finance enlargement; but, on the other hand, those who are applying for membership believe that there will be great advantages in joining the CAP. However, the voting pressure, if I may put it that way, will be to spend more, not less. I found no analysis in the committee's report of how that will balance out. I found no reference to how the reduction in the cost of the CAP for existing members relates to the likely increase in costs for the new members.

Paragraph 51, on page 15, contains a most interesting statement by Commissioner Liikanen, pointing out the disruptive effects which would follow the application of the present CAP to Poland: agricultural income would go up by 47 per cent. "overnight" and investment would move from services and industry to agriculture where, given the strict quota system for production, the price of land would be forced up:

    "it would fully collapse the structure there"--

that is, in Poland. I shall not expand the argument any further, but I do not think that we have given sufficient attention to the relationship between the CAP for the existing members and how things might look if enlargement is eventually successful, as we hope.

Generally speaking, I very much welcome the move towards a more efficient CAP with lower consumer prices, a move towards world market prices and a move to direct income aid. However, I still hearken after the system of support that we had in this country before joining the EEC which did not put up consumer prices and where we knew exactly what it was costing the taxpayer and the consumer. Despite the excellence of this report, I believe that we shall still need to consider such issues in greater detail on a future occasion.

I turn now to the move towards economic and monetary union. The committee did not deal with this in great detail, but I think it is true to say that the move towards economic and monetary union has, as the noble Lord, Lord Shore, pointed out, had a serious effect on the level of economic activity in a number of other European countries as they seek to meet the Maastricht criteria. My own feeling is that it is important to remember the fundamental argument against the single currency, which is that one is giving up for all time the major means of adjusting for differential movements in costs and prices. If one goes ahead without an adequate degree of convergence, one will find either that there is perpetual unemployment in some areas or that one has to make massive subventions from one country to another. If that is so, I fear--and this is a personal view--that if the Union goes ahead on schedule and with the present degree of convergence, there is a serious risk that it will not work and that it will break down. As has already been pointed out, that would be disastrous for the prospects for enlargement and for our economies generally. I feel that the great pressure to go ahead towards economic and monetary union for, I think, political reasons, should be viewed, in the context of enlargement, with considerable concern.

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If the single currency goes ahead and does not break down, clearly some countries will be members while others are not. That poses a problem with regard to the unity of the Union. Clearly, those members which are now applying to join EMU, or which wish to join, will find the problems facing them in the foreseeable future very difficult. The report points out the stark reality of the extent to which those countries are out of line with the other 15. That is a cause for concern, but at the same time it will be a very long while before they converge sufficiently for them to be able to join a single currency if, indeed, it goes ahead and if it is successful.

Finally, I believe that all noble Lords who have spoken are in favour of enlargement. The report has been helpful in highlighting the real problems that we face, but perhaps we should recall the words of the noble Lord, Lord Dahrendorf: we need to press on with this in a direction which we believe is essential and important for our future security as a country, and despite all the difficulties, do all that we can to solve them.

8.57 p.m.

Lord Whitty: My Lords, I begin by echoing the widespread thanks that have been paid to the committee for its thorough, clear and exceptionally timely report. I thank also my noble friend Lord Barnett for his cogent exposition of the report. The reputation of your Lordships' House and of its Select Committees is continuously enhanced around Europe, even at the highest level, by the quality of such reports. This is a great addition to that record.

I am delighted to add to the congratulations paid to the noble Lord, Lord Garel-Jones, on his maiden speech in this House. It demonstrated his vast experience of European matters which will doubtless inform and enlighten the House in the months to come. I even agreed with much of what he said.

I pay very special congratulations to my noble friend Lady Young of Old Scone for her forthright and effective maiden speech, giving an environmental dimension which was perhaps absent from some of the other contributions. When I was general secretary of the Labour Party and we were trying to increase the party's membership, I was constantly reminded that the Royal Society for the Protection of Birds had three times as many members. The Labour Party has since increased its membership, but the RSPB still has three times as many members. I do not think that that has anything to do with the British public's preference for cuckoos over canvassing; it has more to do with the quality of the RSPB's chief executive.

Enlargement is one of the most awesome projects facing us in the modern world. The UK Government, like their predecessors, support enlargement of the Community. I agree with the noble Lord, Lord Wallace, that the European Commission has done extremely good work in pointing out the difficulties and the strategy in Agenda 2000. The Government endorse the Commission's recommendations and agree that there are five countries ready to begin formal accession talks.

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During our presidency we shall work to secure the opening of those accession talks. I refer to the five central European countries plus Cyprus.

At the same time, the Government believe that the enlargement process should be all-inclusive; it should include the other applicants. The European conference proposed to be held in February should be open to all applicants who aspire to EU membership. A reinforced pre-accession strategy is required to ensure that all applicants remain fully engaged in that process. For example, countries like Slovakia could, with relative ease, catch up with some of the so-called first wave applicants. In the case of Slovakia, much is in its government's own hands. Principally it is the lack of democratic and political credentials that blocks its inclusion in the first group. In other cases it will be more difficult. Very strenuous efforts will be required to deal with economic, environmental, administrative and legal matters in Romania, Lithuania and Latvia. Despite the terrible recent economic performance of Bulgaria, it is possible that during the process of negotiations that country can catch up.

Therefore, the European conference is not a one-off event but an inclusive process. Earlier my noble friend Lord Barnett showed a regrettable lack of knowledge about voting techniques. That has been put right by noble Lords on two Front Benches opposite. The regatta approach requires that everyone starts at the same time if at different speeds. It is beyond the elite of European politicians to find an appropriate sporting term for the alternative which is to start at intervals. Without indulging in puns, we thought that motor racing and pole position were relevant here. However, perhaps motor racing is not the most favourite topic on this side of the House at the moment.

Nevertheless, the process is clear. As my noble friend Lord Grenfell and the noble Lord, Lord Dahrendorf, emphasised, those who are not in the supposed first wave are still part of the process. It is very important that whatever sporting term is used everyone is in the race. Therefore, the other five countries, including Turkey--in a slightly different capacity--must participate in the conference.

Enlargement can enhance peace, democracy, stability, prosperity and human rights; it can stimulate economic growth and competitiveness both for the west and eastern Europe. It can reduce potential migratory pressures. Although it will cost money, it can engage substantially in the environmental clean-up that is needed in eastern Europe. But there is a cost. As my noble friend Lord Barnett and others said, we cannot meet the costs of enlargement without radical reform of the way in which the European Union currently does business. No one is ever enthusiastic about paying more, and that applies to both governments and people. But I believe that there is a universal understanding among the governments of Europe that enlargement will have a net cost for almost all existing member states. The concern is to keep that cost to a sensible and affordable level and to ensure that no single member state faces a disproportionate burden.

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To keep the costs affordable we must put the European Union's policies and institutions in a fit state for enlargement. National governments have very difficult decisions to make. For example, it would not be sensible or affordable for the common agricultural policy in its present form to be extended to the new members, even over a long time scale. For the reasons explained, it is not in the interests of Poland to increase the income of the Polish agricultural sector which that country recognises is in need of restructuring and modernisation. Therefore, one is talking about long time scales for transition but also about reform within that time scale domestically inside existing European Union countries. All of this means that the Agenda 2000 negotiations are even more difficult than discussions on any previous EU financial package.

There are some in this country who believe that any increase in cost is to be condemned. We reject that view. Despite its budgetary costs, enlargement is likely to be a good deal for the UK even if the reckoning is kept to economics. The benefit of trade with burgeoning new markets in the east will outweigh the budgetary cost. More importantly, there is a common realisation of the wider security, economic and military benefits of enlargement which mean that ultimately all existing member states will be prepared to face up to the financial cost. However, that financial cost must be managed and limited. To do that will require policy reform.

The Commission's Agenda 2000 has been examined by the Council of Ministers for the past few months. That examination has revealed broad, although as yet not unanimous, agreement that radical reform of the Union's agricultural policy and the structural funds is needed. The political will to make those changes is increasing but it is not yet fully there. Both the committee and noble Lords have commented upon the CAP. The Government are absolutely committed to radical reform of the CAP. As my noble friend Lady Young and other noble Lords pointed out, there is no point in exporting the cost and the damage that the existing CAP can do to eastern Europe.

The Government agree that EU funding will need to be augmented by resources from the international financial institutions. We agree with the committee that the building of strong, honest and democratic institutions should be given high priority. We also agree with the committee on the need for further institutional reforms as soon as possible and the importance of private investment and trade and capital flows.

However, there is one rather substantial area of disagreement with the conclusions of the committee. I believe that it is a matter of tactics rather than strategy. We agree that the own resources ceiling is not likely to be increased above the 1.27 per cent. of Community GNP for the period beyond 1999. But we also believe that, provided the decisions are taken on policy reform, that ceiling will prove adequate. We have not yet reached that ceiling. A very substantial growth in the process and a very substantial underspend in some of the budgets now and, as the noble Lord, Lord Shaw

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of Northstead, pointed out, adequate application of the Court of Auditors' recommendations would find further money within that budget.

Therefore, we cannot agree with the report's conclusions that we should now decide to have a review of the own resources ceiling before the year 2002. There are different ways in which the Union can deal with the financial challenge of enlargement. The first is to postpone enlargement purely on financial grounds. But if additional resources must be found the Union has the choice of increasing total resources or making the existing total go further. We believe that by suggesting a mid-term review of the own resources ceiling, the committee is ostensibly trying to keep open both options. We believe that that would put off reform rather than accelerate it.

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