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Lord Skidelsky: My Lords, I thank the noble Lord for giving way. How does he address the issue that unemployment may be a regional phenomenon which does not conform to the jurisdiction of national budgets?

Lord Taverne: My Lords, if it is a regional phenomenon, it will correspond to the question of national budgets.

Lord Skidelsky: Across frontiers?

Lord Taverne: My Lords, in national terms it will be a matter for national governments. The other aspect of the

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matter which is pointed out in the study is that if one looks at the experience of the countries which tied themselves to the deutschmark--particularly Austria and the Netherlands--one sees that there were times when they suffered from differential economic growth and when they needed differential fiscal policies which they managed to carry out perfectly well while tying themselves to the single currency, in their case the deutschmark. I do not want to discuss this study in detail but I believe it makes an extremely convincing case for saying that there is no need for a strong central budget. It seems to me therefore that although this was not a matter for the committee's consideration, it is something that one ought to bear in mind when looking at the total budget. There is no reason to suppose that in EMU the central budget must be greatly increased.

9.55 p.m.

Viscount Bridgeman: My Lords, many noble Lords have spoken with expertise about the report of the committee, as one would expect, and in view of the lateness of the hour I will be brief. I, too, wish to add my congratulations to the noble Lord, Lord Grenfell, on the excellence of the report. As noble Lords have reminded us, it was produced in a very short time. Through no fault of the committee, its timing is unfortunate, coming as it does on the eve of the Berlin Summit, a subject to which I shall return.

The report emphasises one or two points--for instance, that reform of the CAP must not be used as an excuse by certain member countries to frustrate the enlargement of the Union under Agenda 2000. Intrinsic to the budget reform is the reassessment of the cohesive and the structural funds. It must be a matter of no disagreement--certainly in this House and throughout the Union--that it is quite inequitable, even grotesque, that countries having achieved convergence should continue to receive cohesive funds. Structural funding is more politically sensitive and the report was right to confine itself to the observation that any adjustments here must be seen as equitable.

Several noble Lords have referred to the question of co-financing the CAP. The committee had two reservations with which we agree. First, the level of support given by each member state must be centrally agreed. Giving discretion on the make-up of any shortfall to individual states could open all sorts of soft subsidies, which is protection by another name. Any co-financing must be accompanied by degression, though the Treasury's misgivings on any substantial net benefit to this country must be noted. We also agree that there are very pertinent concerns that co-financing must not be used to mask the real basic root and branch reform that the CAP needs.

My noble friend Lord Skidelsky and several other noble Lords--Lord Tomlinson, Lord Howell, Lord Renton and Lord Randall--referred to the need for accountability in the Commission. We were interested to hear the suggestion of my noble friend Lord Renton of Mount Harry of a hypothecated tax for the Union to be collected by member governments. Transparent, yes, but who is to fix it? Surely there is no alternative to the Commission centrally? Is it uniform; are there not shades

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of the community charge here? The fixing of this charge would need to be transparent and, crucially, understood by the average citizen. However, it could have the important, possibly political, effect of surprising the average citizen in the Union by informing him or her, in practical terms, of just how small his or her contribution is, a point referred to by the noble Lord, Lord Desai, and, from a different perspective, by the noble Lord, Lord Taverne.

Accountability is a thread running through the report. My noble friend Lord Shaw in particular, has drawn attention to the significance of the coincidence of the resignation of the Commission and the issue of this report. We look forward to hearing from the Minister whether Her Majesty's Government intend to take advantage of the unique opportunity presented by the report of the Court of Auditors, and the subsequent resignation of the Commission, to institute accounting and reporting controls, so ably flagged by my noble friend.

I return to the central point of the debate, the treatment of our budgetary rebate. Many different contributions have been made today and I wish to quote an emphatically non-exclusive example of two opposite views: those of the noble Lords, Lord Barnett and Lord Williamson. The coming conference in Berlin will rightly be regarded by Germany, as President, as a unique chance to air its understandable grievance at the level of its contribution, though it is worth bearing in mind the words of the noble Lord, Lord St. John of Bletso, that the coming accession of the CEEC countries will present a unique preferential market to Germany. That point should be made at the conference. Germany will not want to be distracted by the events of the past week.

In many ways this report has come with unfortunate timing. Quite understandably, in the time available, the committee was not able to come up with alternatives to the present system. I would draw your Lordships' attention to the rider in paragraph 18 of the report that it would be regrettable if an inviolate stance were taken on the level of contribution which would prejudice the reform of the CAP or the enlargement of the community.

Therefore, from these Benches--I echo the sentiments of my noble friend Lord Skidelsky--we should like to give the Prime Minister and his right honourable friend the Foreign Secretary our support in holding basically to the present structure at this time. That is important. In this connection, it was interesting to hear the surmise of the noble Lord, Lord Grenfell, that the rebate would probably be continued, though perhaps attenuated. I was certainly interested to hear his accompanying remarks on Spain and Italy. There will certainly be the usual panoply of special pleading and horse-trading at the conference.

If the report is read, as I know Select Committee reports are read in Brussels and throughout the Union with great respect, as a deeply thought-through discussion paper, it will have done a great service to this country and to the Union in addressing the problems of the Union in the next century.

Once again, I thank the noble Lord, Lord Grenfell, and his colleagues. From personal experience on a sister committee, how right he was to include the Clerk in his thanks. They all deserve the gratitude of the House.

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10 p.m.

Lord McIntosh of Haringey: My Lords, I welcome the opportunity to respond to what has been a most interesting and varied debate. I welcome the fact that many elements of the report, which was produced so ably by my noble friend Lord Grenfell and his colleagues, echo the views of the Government. There are obviously matters on which we disagree but, like the noble Lord, Lord Taverne, I believe that many of those differences are on tactics rather than on principles.

The noble Lord, Lord Renton of Mount Harry, referred to the precise timing of the report. I do not know whether he was suggesting that the Commissioners resigned because the report came out at 01.00 hours on Tuesday morning. One has to be careful about causality in these matters. The timing of the debate is significant because later this week, as is well known, the heads of government of the 15 members of the European Union are meeting in Berlin to seek agreement on the financing of EU policy reform over the next financial perspective, covering the years 2000 to 2006. Obviously, this negotiation is of great importance. I agree with my noble friend Lord Grenfell that the report is still relevant. It is certainly the case, as the Government said in their response to the report, that it will be taken seriously into account in our preparations for Berlin. On that point, I disagree with the noble Viscount, Lord Bridgeman.

The issues that will be discussed in Berlin are broader than the remit that the committee set itself in the report. The committee has been concerned with the revenue side of the budget, but the debate in Berlin--and it has been the case quite properly in the debate today--will also be about the expenditure side of the budget--the noble Lord, Lord Hussey, referred to that point--and how Europe spends our money.

Other issues have forced themselves onto the agenda: the appointment of a new Commission, whether temporary or permanent; the improvement of financial management under the control of the Commission; and discussion of the broader economic reform agenda. I was challenged on those points by my noble friend Lord Randall, the noble Baroness, Lady Ludford, and other noble Lords. I do not think that it can be my responsibility to broaden out the debate, which is supposed to be about the financing of the European Union, into the wider issues. But it is the case that in preparing our stand in Berlin, we plan as always to work constructively with our partners while remaining committed to defending British interests.

Before I leave that point, perhaps I may say a word or two on accountabililty and transparency. Those matters were raised by a number of noble Lords. They were mentioned by the noble Lord, Lord Randall; and the noble Lord, Lord Boardman, seemed to think that there was nothing about these matters in the Red Book. In our response to the committee's report, we agree that transparency is important. We publish an annual White Paper on European Community finances; we publish in the Red Book estimates of net contributions; and of course we welcome the scrutiny which both Houses of the UK Parliament provide. Improving financial management

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and strengthening the fight against fraud were the priorities of the UK's presidency of the European Union last year, and they remain the priorities.

I now turn to the UK abatement. Perhaps I may set out our position, which does not differ from that of the committee by as much as some noble Lords make out, although there was some fairly strong disagreement among noble Lords on this point. The UK wants to see a fair financing system for the European Union. We recognise the broad principle that wealthier member states should contribute more to the EU budget and poorer states should be net recipients. But the structure of EU financing means that that is not the case. The UK remains, after the abatement, the fourth or fifth largest net per capita contributor to the EC budget, despite being only the ninth, tenth or eleventh most prosperous, depending on the measure used. For example, we pay three times more per capita than France, yet France is wealthier than we are. So the UK abatement is in place because of the inequity which is present in the system of contributions.

The root cause of the injustice is the low level of Community spending in the UK. In 1995-97 per capita spending in the UK was 55 per cent. of the EU average. The UK receives an even lower share of per capita common agricultural policy spending--just 47 per cent. of the average over the same period. It is that divergence on spending levels which means that the abatement remains fully justified.

The committee recognises that fact. I quote:

    "We accept that, without the abatement ... some way of remedying the situation would need to be found".
The noble Lord, Lord Williamson, whose baby this is and who is glad to have its paternity acknowledged after this period of time, confirmed that point. The problem of the UK's large contributions will remain for as long as the fundamental problem of inequity of spending continues to exist.

With the majority of other member states, the Government have actively supported a number of ways of controlling EU spending, including stabilisation of the budget and reform of the expensive and economically inefficient common agricultural policy. I shall say more on both those matters in a moment.

The fact remains that, after stabilisation, CAP reform and enlargement, the UK will continue to contribute more to the EC budget than a number of member states with a higher capacity to pay. So there is no justification in the claim that the UK Government should negotiate the UK abatement as part of an overall settlement.

I now turn to the issue of whether the abatement should be on the negotiating table. This is the area of the debate where there is wider disagreement between the committee and the Government. The committee's report suggests that the abatement should be on the negotiating table.

Last week, I was able to send noble Lords taking part in this debate the Government's response to the inquiry. In it, we explain clearly why we disagree with the report on the subject of putting the abatement on the negotiating table at Berlin, on the basis that, savings of a reformed CAP, stabilisation of the budget, and increased receipts would make up the value of the abatement.

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Perhaps I may explain why in our view that cannot be the case. As the Government's response spelt out, CAP reform will reduce the amount spent on intervention prices, but the amount spent on direct aids to farmers will rise. The Government cannot therefore predict with any confidence that CAP reform will have a significant effect on the UK's net contribution.

Stabilisation of the budget, the second proposal, is vital to large net contributors. However, the UK does not receive the full benefit of stabilisation because the abatement works as a corrector mechanism. The UK receives only one-third of the benefit it would otherwise receive from stabilisation. This illustrates the purpose and reasoning behind the abatement. It is not a set amount paid to the United Kingdom regardless; it is a self-correcting mechanism. Here again, we were grateful for the definitive contribution of the noble Lord, Lord Williamson. It is a self-correcting mechanism which corrects an inequity to the UK which arises from the EU financing system. If that inequity did not exist, there would be no reason for the abatement. So long as that inequity remains--and stabilisation would not correct it--the UK abatement will remain justified.

The committee also suggested increasing EU expenditure in the UK as a possible solution to our contributions imbalance. But a massive redistribution would be required of an order which could not be contemplated in the Agenda 2000 negotiations. If we put aside the CAP and the structural funds, we would have to receive virtually all the rest of the available funds if we were going to go any way towards sorting out the imbalance.

So let me be clear. There is no possible outcome to the Agenda 2000 negotiations which could compensate the UK for forgoing the abatement. Even if I find myself on the same side as my noble friends Lord Stoddart, Lord Bruce and Lord Shore of Stepney--a most unusual situation for me--I am afraid that they are right and those noble Lords who are serious about putting the abatement into the negotiating procedure are wrong. So the Government will resolutely defend the abatement. I am grateful not only for the support of my Eurosceptic friends, but for support from a number of noble Lords from all sides.

My noble friend Lord Tomlinson probably knows as much as the noble Lord, Lord Williamson, and more than any of the rest of us about it. He is right to say that we must continue to reform the policies of the European Union. He mentioned CAP reform, co-financing and degressivity. I might add the better targeting of structural funds, which was referred to by my noble friend Lord Grenfell. The Government are among the strongest advocates of European Union policy reform.

Perhaps I may say something briefly about the own resources decision. Paragraph 58 of the report suggests that the financing of the European Union on the present basis could continue only if all member states were content. I cannot accept that; it is an incorrect assumption from which to begin. The correct assumption would be that changes to the financing of the European Union could happen only if all member states agreed. So long as not all member states agreed, the current financing basis would continue.

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In her answer to Question 122, the Economic Secretary to the Treasury was quite clear on the point. One would see a small improvement in equity, but to achieve it one would have to go through a rather large and painful process of negotiation. One would have to get a new "own resources" decision which would have to be unanimous. In turn, it would have to be ratified through the appropriate procedures in each member state. In our case, that would mean a fresh Act of Parliament. It is for that reason that we agree with the Commission's assessment in its paper last year. Despite the many valuable contributions which have been made on new possible alternative sources of revenue--the problems with the traditional own resources element, the need for the Cohesion Fund money to be thought out again, since many of the Cohesion Fund recipients meet EMU criteria, the better targeting of structural funds, to which I referred--they do not overcome the profound difficulty of achieving a reform of the own resources decision and the rather limited results which would be available to them.

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