Future Financing of the Community: ECC Report

HL Deb 15 March 1984 vol 449 cc884-941

5 p.m.

Lord O'Brien of Lothbury rose to move, That this House takes note of the Report of the European Communities Committee on the Future Financing of the Community (12th Report, 1983–84, H.L. 126).

The noble Lord said: My Lords, this report by the European Communities Committee has been completed by Sub-Committee A with help from four co-opted members from the sub-committee on agriculture and with outstanding support from staff and specialist advisers. We are also grateful to all those who gave evidence to us, particularly those who did so both orally and in writing.

Concern about the future financing of the EEC has been growing for many months. Just over a year ago, the Commission published a Green Paper on the subject and followed this in July 1983 with a memorandum to the Council of Ministers which discussed the wider issues involved and made draft proposals regarding the Community's own resources and future financing. It was at this time that your committee decided that they should undertake the study of this fundamentally important subject. They did so in the knowledge that it was beset by controversial issues which occupied minds in all member states so completely that the longer-term future of the Community received little attention.

A principal aim of the report before your Lordships is to restore a proper balance between the productive development of the Community in the future and the problems which now beset it. Those problems are obviously of great political importance, and the committee did consider whether it would be helpful to issue an interim report before the Athens Summit last December. This would inevitably have been a rush job while our studies were still incomplete, and I am glad that we did not pursue the idea, particularly in the light—if that is the right word—of the fiasco of the Athens meeting.

Nevertheless, we were well aware that a report, however deeply considered, which appeared after the political decisions had been taken would serve little purpose. I am glad therefore that at the cost of driving the committee and its staff rather hard we were able to publish the report on 1st March and to have this debate before the Brussels Summit on 19th and 20th March. Whether anyone will be influenced by what is said in the report or the debate is another matter. I confess that I was disappointed by the almost total lack of interest by the press in the report, despite our efforts to brief them. No doubt Fleet Street's own troubles in that week were partly responsible. I suppose had we strangled a Treasury witness we might possibly have had some attention—but whether favourable or unfavourable of course I cannot say.

While anxious that the report should be timely, the committee were equally concerned that it should be informative, so that the opinions expressed and the recommendations made could be adjudged in the appropriate context. This is why the report is rather long: but I hope, nevertheless, that it will be found to be easy to read and to understand.

As I said earlier, the long-term future of the EEC has been much in our minds. We felt it important therefore to retrace our steps, reminding readers of the original aims of those who created the Community, as enshrined in the Treaty of Rome, and of what it has achieved so far. We then looked at the future and to the possibilities for fruitful development which it holds. No doubt deeper and more detailed studies can and will be made. We did the best we could in the time available, and I hope that the evidence we have taken and what we have written in Parts 2 to 6 of the report will help those who come fresh to the subject.

It is all too easy to become defeatist about the future prospects of the EEC because of the intractability of current problems. Certainly they have to be solved if there is to be a future, and perhaps that is the best assurance that in the end they will be, if not next week then some time later this year.

If the present causes of acrimony can be removed by agreements reasonably satisfactory to all member states, the way should be open to a more positive and creative attitude towards the fruitful development of the Community with all the encouragement that this should give to the 270 million people who live within it. We should beware of being starry-eyed about the future in which, at best, progress will no doubt be painfully slow and sometimes halting. But we need to regain momentum and your committee believe that this is possible.

The subject of our inquiry was the future financing of the Community—that is to say, we had to ask ourselves whether the resources available to the Community were and would remain sufficient to permit fulfilment of all EEC policies which now or in the foreseeable future will require to be financed from the Community budget. Many matters impinge on this question, some directly and others indirectly. The argument about the need for a permanent arrangement to secure a fair distribution of net contributions to the Community budget for each member state comes within the latter category, on the assumption that redistribution implies no change in the total revenue accruing to the budget.

Other matters have a direct bearing on the adequacy of the budget revenue. Of these, the common agricultural policy is the most important. It currently absorbs some 65 per cent, of all budget revenue, its demands on which are increasing at the rate of about 30 per cent, per annum. Other policies like regional development and social needs take small amounts by comparison with agriculture, but such funds are nevertheless growing. There is an urgent need to accelerate that growth with the aim of narrowing the disparity between the economically prosperous and more impoverished regions of the Community. New policies also need to be developed in many areas, notably in the field of scientific research and technological development.

If Spain and Portugal secure entry into the Community by 1st January 1986, as now seems probable, extra budgetary expenditure totalling perhaps as much as 9 per cent, of the present total revenue looks like being necessary. Additional demands on budget resources are therefore in close prospect. It is questionable whether they can be met from economies in present expenditure. It is one thing to slow down the growth of CAP expenditure, quite another actually to reduce it. A more efficient use of budget resources generally would help, and here the work of the Court of Auditors is most valuable and should be supported.

Taking all such considerations into account and the evidence given to them, the committee concluded that an increase in the resources made available to the Community for budgetary expenditure will have to be agreed before long. Early action is made more imperative by the long process of ratification of such decisions by national governments. The committee are not in favour of short-circuiting this procedure, feeling that national governments should have the opportunity, say, every five years, of reviewing the course of Community finances.

Nor are the committee in favour of accepting a proposal for the increase of EEC budgetary resources in advance of the solution of current problems; namely, the containment of expenditure under the CAP and the construction of a mechanism to ensure that net budgetary contributions by each member state are fair in relation to their economic circumstances and remain so. If these two problems are not solved coterminously with an increase in budgetary resources, they never will be. The increased resources will simply go into the agricultural pot and compound the problems we already face. With this emphatic caveat, I turn now to consideration of ways in which the two problems might be solved. The agricultural problem is clearly the more difficult of the two. Various methods of containing agricultural expenditure were proposed in evidence to the committee. Many were defective, partly because they depended on resolute action which in the past has been notably lacking when the need arose.

The committee eventually became convinced that a fixed limit on the amount of agricultural support expenditure was the only mechanism which would achieve the necessary degree of restraint long-term. This could be reinforced by appropriate commodity-by-commodity restraints, such as a reduction in cereal prices, which the Court of Auditors very convincingly claimed would produce substantial savings.

The committee looked at the procedure for price fixing and its history to date. They noted that it took place in what amounted to a purely agricultural forum, in which wider considerations, such as the interests of consumers and taxpayers, appeared to take second place. They recommend that Ministers of Financ be associated at all stages with such negotiations in future.

Finally, the committee considered the thorny questions of fair net contributions to the Community budget. They support the general rejection within the Community of the concept of the juste retour (or fair return), under which all members would get out as much as they put in. There is no hope of harmonising or equalising economic development in Europe by that route.

The concept of a fair net contribution to the resources of the budget, having regard to the economic strength of each member state, is an entirely different matter, and on this the committee strongly support the position of Her Majesty's Government. Since it has been accepted by the Council of Ministers in so far as refunds to the United Kingdom have been authorised for the last three years, it is difficult to see where the obstacle lies to a long-term solution, particularly when it was declared during the negotiations for United Kingdom entry that if unacceptable budgetary situations arose for particular member states, the very survival of the Community would demand that the institutions find equitable solutions". I should guess that those words are going to be put to the test in the not too distant future.

Lord Bruce-Gardyne

My Lords, will the noble Lord allow me to intervene? I apologise for interrupting him, but I have studied with great interest what is said in paragraph 103 of the committee's report and I wonder where the word "budgetary" occurred in the context of what were unacceptable situations. I thought that the reference in the original text was to "unacceptable situations". Where did the reference to "budgetary situations" come from?

Lord O'Brien of Lothbury

My Lords, I am unable to take up that particular point of the noble Lord. An "unacceptable situation" is an unacceptable situation—which I guess is what Her Majesty's Government think the present one is.

Having considered various proposals of national governments and the Commission laid before them, the committee came to the conclusion that they had seen nothing as good as the proposal of Her Majesty's Government for a safety net, whereby only countries with a GDP higher than an agreed level would be net contributors to the budget. They did, however, favour an elaboration of this proposal suggested to them, which would ensure that those countries with a GDP below the agreed level would be assured net beneficiaries. So enlarged, this scheme would solve the budgetary problems of the United Kingdom and Germany on the one hand and those of the poorer countries—Italy, Ireland, and Greece—s on the other.

To conclude, your Lordships will have seen that the committee's recommendations, independently arrived at, follow very much the line taken by Her Majesty's Government, to which we believe it is very important that they hold. If they do so successfully, there can be argument about whether the Community will then soon need further resources. The committee believe that it will, because their overriding message is that the Community must progress and develop if it is to fulfil even some of the ideals and aspirations of its creators and the many later supporters of them. My Lords, I beg to move.

Moved, That this House takes note of the Report of the European Communities Committee on the Future Financing of the Communitv (12th Report. 1983–84, H.L. 126). —(Lord O'Brien of Lothbury.)

5.14 p.m.

The Chancellor of the Duchy of Lancaster (Lord Cockfield)

My Lords, the speech of the noble Lord, Lord O'Brien of Lothbury, in introducing this debate has been particularly penetrating and constructive, not only in analysing the present situation and the problems we face, but also in pointing the way forward. The establishment of the European Community was one of the greatest flowerings of the human imagination. It was one of those rare occasions when mankind had a vision of the future and gave expression to that vision in concrete form: that out of disaster should come triumph, and that out of decay should come new life.

Nearly forty years have passed since that disaster was brought to its end. More than 25 years have passed since the new beginning in the Treaty of Rome. Twenty-five years is a brief span in human history—much longer than the empire of Napoleon lasted; much shorter than the empire of Rome. During these 25 years much has been accomplished. The Six have become the Nine; the Nine have become the Ten; and soon, we hope, the Ten will become the Twelve.

Output has expanded; trade has grown immeasurably, prosperity has increased. We travel abroad more freely; our goods circulate more easily. Democracy has been entrenched; the frontiers of tyranny pushed back. Even in foreign affairs the Community has begun to find a voice of its own; and that voice has begun to be heard. These are not just significant achievements; they are great achievements. Of course there are problems, and indeed failures—great problems and important failures. But when we contemplate our problems, when we look at our failures, let us do so in recognition of the backdrop of success against which we should see them.

We as a country have benefited from our membership of the Community. But the other members of the Community have benefited from our membership even more. Our exports to the other members of the Community now total £26 billion a year. The Community's exports to the United Kingdom total £30 billion. In the case of manufactured goods the disparity is even greater. Our exports to the other members total £15 billion. Their exports to us total £22 billion. So that on manufactures we have an adverse balance of payments of £7 billion; or putting it the other way round, the other members of the Community have a favourable balance of trade in manufactures with us of no less than £7 billion.

British membership of the Community has given the other member states free access to the United Kingdom domestic market. This is of immense value to them, and they have certainly taken advantage of it. This is something our partners in Europe need to bear very much in mind if they are ever led to question the value of British membership of the Community.

As the report which is the subject of our debate this evening indicates, the greatest of the problems facing the Community, the problem which straddles over the whole breadth of the way forward, is that of financing the Community. For this reason the report of your Lordships' Select Committee is particularly apposite. It is both valuable and timely. Next week the European Council meets and these questions must form the most important item on the agenda. The elections to the European Parliament (the Euro elections) are in June, and it would be for the common good that these matters should by then be behind us.

Central to the problem of finance is that of the common agricultural policy. It is a major absurdity that the whole future of the Community could be placed at risk because of the demands of the agricultural lobby in Europe. What we have and what we must fight to preserve is a European Community, not just an economic Community; still less an agricultural Community. There is a proper place for agriculture in the scheme of things, but it is entirely wrong that it should have been allowed to pre-empt the centre of the stage in the way that it has.

It is no more important—and, indeed, many people would claim it was less important—than manufacture or trade. It is for these reasons that we have said that there must be a strict financial guideline for agricultural expenditure. It is bad enough putting the cart before the horse, as the common agricultural policy does, but to put an oversize cart before an overworked horse is likely to lead to the whole lot careering downhill.

Here there are at last signs of willingness to make progress. The agreement reached by the Council of Agricultural Ministers on Tuesday of this week on tackling the growing milk surplus is, as my right honourable friend the Minister of Agriculture said in his Statement yesterday: a historic step forward in bringing sanity to the common agriculture policy". [Official Report. Commons, 14/3/84; col. 402.] Let us hope that it is, as it must be, the harbinger of other effective measures to come.

But in drawing attention to the absurdities of the common agriculture policy, let us not allow our natural indignation to rub off in criticism of our own farmers. They have, over the years, achieved remarkable progress in terms of output and efficiency. We now produce some 70 per cent, of our total requirements of food in this country. We have the most efficient agriculture in Europe and it is, indeed, the very fact of our efficiency which makes the common agricultural policy, which caters essentially for the smaller and less efficient farmers, so unfavourable to us in budgetary terms. But we do need to recognise that the adjustments needed will be just as painful for our farmers as for farmers everywhere. The sacrifices which have to be made are necessary and inescapable.

Perhaps I might now turn in more detail to the subject of the Government's approach to the current negotiations and the prospects for next week's European Council. My right honourable friend the Prime Minister will be pressing for firm arrangements on budgetary imbalances and on budgetary discipline. Without such arrangements, we have made clear that we are not prepared to consider any incrase in the Community's own resources.

On budgetary imbalances, we are seeking an arrangement which would, in the words of the Stuttgart declaration, avoid the constantly recurrent problems between the member states over the financial consequences of the communitiy's budget and its financing". To achieve this, we need a corrective mechanism which fulfils five criteria. First, it must measure our budgetary burden correctly, taking full account of boths sides of the account. Second, it must provide relief in accordance with member states' ability to pay as measured by relative prosperity and gross domestic product. Third, the corrections required must be made on the revenue side of the budget. Fourth, the solution must last as long as the problem and be incorporated in the own resources system. Finally, the solution must operate in respect of 1984 and subsequent years. We believe that the Government's proposal for a safety net would satisfy these five criteria. We have yet to see any other proposal which does so satisfactorily. I am glad that the committee endorses the safety net in its report.

On budgetary discipline, we regard it as essential to establish effective control over the rate of growth of agricultural and other expenditure. The management of the Community's resources must be based on the same strict rules as those governing the management of public finance in the member states. Expenditure must be determined by available revenue and not vice versa. The difficulties of the present agricultural price-fixing negotiation merely add to the vital necessity of achieving proper discipline. We are looking for two specific improvements. First, as I said before, we want to secure the adoption by the community of a strict financial guideline which holds agricultural expenditure markedly below the rate of growth of the own resources base and which binds the Commission and the council during the price fixing. Second, we would like to see agreement on the establishment by the council at the beginning of the budgetary procedure of a "budgetary envelope" for the overall budget, binding all three Community institutions. We will be pressing next week for the adoption of arrangements on these lines in principle, with the details of how they are to be embodied in the Community's procedures to be subsequently worked out by the Council of Ministers.

On the Community's own resources, we are simply not prepared to consider any increase until satisfactory arrangements for a fairer sharing of the budgetary burden and for more effective control of agricultural and other expenditure are agreed. In this context, I strongly endorse the conclusion of the report before us, which says: Agreement on an increase"— that is, an increase in own resources— must not take precedence over the solution of the problems of the excessive and accelerating demands of the common agriculture policy and unbalanced net payments to the budget by member states". The noble Lord, Lord O'Brien, in his speech, very rightly underlined this point.

We will be approaching the summit next week in a positive spirit, concerned that it should "relaunch" the Community, to use the currently popular phrase, and put an end to the internal difficulties which I referred to at the outset of my speech. The effort made by all member states to reach agreement on milk production at this week's Agriculture Council shows what can be achieved if the political will is there. We hope and trust that this political will can be extended to cover next week's Council as well.

Next week's Council is of vital importance for the Community as a whole. Member states are faced with what are the most crucial decisions of the decade. It is all too easy to say that the choice is between stagnation and progress: but this is an excessively simplified view. The present system, with its imbalances between different sectors of expenditure and as between one country and another, is not a stable system, so that stagnation would contain the seeds of its own destruction. Nor is progress without reform possible, either, because without reform the imbalances which produce instability would grow worse and produce even greater instability. If you have an unstable system, you have to root out the causes of that instability. That is what we aim to do.

The future of the Community rests in the hands of the member states—not in our hands, not in anybody else's hands, but in the hands of the Community collectively. That is the measure of the importance of the summit and the measure of the challenge which faces the Community.

5.30 p.m.

Lord Barnett

My Lords, I should like to begin by joining the noble Lord the Minister in congratulating the noble Lord. Lord O'Brien, and his committee on a most excellent report with a first-class analysis which I personally found very useful and helpful—especially the tables. While I share his regret that it was not more widely recognised. I hope that it will become more widely recognised for the excellent report that it is. I would also like to join the noble Lord the Minister in congratulating the noble Lord, Lord O'Brien, on the way in which he introduced the debate today.

I wish to turn immediately to the key question raised in the report: namely, whether we should allow the vision which founded the Community—which has been referred to by both the noble Lord the Minister and the committee in paragraph 137—or even the wider vision of the new Messina, referred to by the Leader of my own political party recently, to be lost by constant haggling over comparatively small sums of money. In seeking to answer that question I come immediately, as did the committee, to two issues which lie at the heart of the problem: first, the common agricultural policy and the budget generally; and secondly, the imbalance between member states.

I shall deal first with the question of the CAP upon which the noble Lord the Minister also rightly dwelt in some part of his speech. The committee—in my view quite rightly—referred in paragraph 139(ii) to: The dangers of an over-rigid approach". One does not need to be an agricultural expert—and I certainly am not one—to be aware of the impossibility of achieving anything near an exact balance between supply and demand. It is difficult enough in industrial goods, even in money, about which the noble Lord, Lord O'Brien, knows considerably more than I do; it is certainly impossible in farm produce, given the vagaries of the weather and the many other problems that affect the production of agricultural products.

So those who now speak so glowingly of the agricultural system before we joined the EEC would perhaps at least agree that even that was not an ideal system, as indeed it could not be. On the other hand, we must also agree with the Minister and the committee that the present common agricultural policy, which produces vast surpluses at huge cost—which is well brought out in the report—is a nonsense which must be ended. The question which is more difficult is how we end it.

The committee discussed various options. The three main options which the committee discussed were restrictive pricing policies: a system of guarantee thresholds, whereby excessive production would lead to a reduction in prices the following year; and what it described as "super-levies" on production beyond fixed quotas. To put it mildly, none of those will be easy to implement. The Commission and the United Kingdom Government propose overall limits, and the committee agree.

Anyone who has studied what has happened in the Community since we joined and indeed before we joined is hardly likely to be optimistic that we shall obtain total unanimity at the summit meeting that is to take place soon. I join with the noble Lord the Minister in congratulating the agricultural Ministers on recently reaching what appeared to be an agreement on milk production. But it is important that such an agreement should prove real and lasting. In the light of past difficulties, speaking for myself I would want to study the detail before I would be convinced that what was achieved the other night (and late into the night) will actually prove to be real and lasting.

We have seen already the instant response, not of the European farmers—to which the noble Lord the Minister referred—but of our own farmers and the short note that they have dropped some of us about the problems that they face. So one would have to be very careful indeed about recognising the difficulties of obtaining the kind of agreement that some of us would like to see, indeed that I imagine many of us would like to see.

Apart from the reaction of our own farmers, we also know that there are likely to be one or two similar reactions from the French and German farmers. So we know something about the extent of the difficulties. But I personally would accept, as the committee did and as the Government do, the idea of overall limits or, indeed, a mix of any one or more of the other proposals to which the committee refers. The trouble is—and we have to recognise it—that it is not what I or the committee could accept, but what can be achieved with other member states that will be at issue here. It would be foolish to expect anything other than a compromise of some kind.

I know that the word "compromise" has become something of a dirty word in more than one context recently. I personally have no wish to become involved in personal arguments between the present Prime Minister and a predecessor. But there is nothing to be ashamed of in the word "compromise". Indeed, we should not involve ourselves in either local or national politics, let alone international politics, if we are totally unwilling to compromise. A politician should not join a club, and certainly not a cabinet of a democratic government, if he, or even she, is unwilling to compromise occasionally. It is the extent of any given compromise and the general circumstances that are always a problem, and it particularly applies in the case of the common agricultural policy.

The trouble with the CAP is that there is so little room for real compromise if we are to achieve a lasting solution. The committee in my view were right when they said at paragraph 95, "A binding constraint is … needed". On the other hand, we must recognise the political difficulties of others in the EEC in agreeing to such binding constraints. For my part, providing we can get a binding agreement that meets our long-term objectives in a relatively short period of time, we should be generous so far as transitional arrangements are concerned.

Before I leave this particular part of what I hope will be a brief speech I should like to add a personal note. Paragraph 139(iii) to which the noble Lord, Lord O'Brien, also referred in his speech, says that Ministers of finance should be closely associated with Ministers of agriculture in the negotiations. I agree that that would be a very sensible proposition. But, as one who has attended joint ministerial meetings of finance Ministers and agriculture Ministers, I must tell your Lordships that it will not necessarily help very much. My personal experience stems from a joint meeting where the West German Agriculture Minister—a certain Herr Ertl—was a very well-known FDP member of the coalition in the West German Government. Whatever the Social Democratic German Finance Minister wanted, he needed the FDP Agriculture Minister to stay as well. I am afraid it did not help very much to have both of them present. The problem did not become any easier. Nevertheless, I welcome the idea—

Lord O'Brien of Lothbury

My Lords, I hesitate to intervene but I think that the committee, in making this point, did not mean that the two should sit side by side at an international conference on the subject, but that the finance Minister should be associated all the way through the prior discussions so that his views would be fully taken into account when the agriculture Ministers, for example, were to meet around the table.

Lord Baraett

My Lords, I am obliged. Of course, that happens now; certainly in the Government which I had the honour to serve the finance Minister did have a major say in what the agriculture Minister was able to do during an agriculture Ministers' meeting. But, as I have said, we should not hope for too much in these circumstances no matter how bright and brilliant and commonsensical finance Ministers may be.

I turn now to the second key issue; namely, the question of imbalance. For my part, I certainly agree with what the committee says in paragraph 99 that we should reject the idea of "juste retour". That is certainly no way to enable the Community to proceed satisfactorily. But, equally, I agree that it is wholly unacceptable to maintain the unfairness that exists at the present time. The unfairness is well brought out in the tables, and, as is also shown in Tables 3 and 5, it applies equally to West Germany, although at least the Germans have the consolation of having the highest percentage share of GDP in the Community, apart from Denmark.

However, while insisting on a better balance, we should be careful to put the problem into perspective. Your Lordships should be grateful to the committee for doing that, because Table 4 shows that our net payments in 1983–84, on admittedly what is called "stylised", but not unreasonable, assumptions, would be some £402 million, and that at a time when our gross domestic product is in excess of £300 billion. Therefore, I really think—and I hope that your Lordships will agree with me—that it is important to put the matter into that kind of perspective.

Against that background I am more confident of a solution to the problem of imbalance than I am to the question of the common agricultural policy. But just what should the detailed solution be? For my part, I do not know what we shall be able to achieve, but I think that the noble Lord and his committee were right to dismiss, as they do in paragraph 106, "restructuring". They discuss other possible mechanisms, which are well set out in paragraph 107. Like the committee and the Government, I personally prefer the "safety net". But provided that there is reasonable fairness, we should be ready to accept that dreaded word "compromise", because we almost certainly will have to, and I am sure that the Government will have to.

I am far less confident of achieving anything other than a poor compromise on the common agricultural policy—a compromise which I suspect may well be unsatisfactory. For as the committee clearly recognised in paragraph 98, the problem of containing common agricultural policy expenditure is politically highly sensitive in all member states.

Therefore, I conclude by returning to the question that I posed in my opening remarks: should we allow the great vision which founded the Community to be lost because of an inability to agree on changes in the common agricultural policy? As I have said, I believe that the question of imbalance is a much smaller issue, and it should be perfectly possible to agree a satisfactory compromise solution.

My answer to the question must be that the very future of the EEC itself is in jeopardy if a real and lasting solution is not found to the worst nonsenses of the common agricultural policy. The House must be indebted to the committee for so clearly showing how a solution can be obtained. On this I would only emphasise that an inadequate, patched-up compromise will not do. In any event, one is bound to say that, however much, from the very beginning, I and others desperately wanted the Community to succeed, I always knew that the great vision would be clouded by the practical politics and the practical policies of national interest. I have said that in your Lordships' House on another occasion. Frequently I found it to be so when I sat round those ministerial Council tables. It will not get easier with the accession of additional member states. But that is just one more vital reason to get it right now. If we do, it will still take many years to re-create the vision of the Community founders.

To the question which I raised at the outset, as to whether we should allow it all to be lost by haggling over comparatively small sums, I give an immediate answer. In my view, it is better to work for a lasting solution now, even if it involves an immediate crisis, rather than to settle for a bad compromise which will keep the Community in permanent and recurring crisis. So until we get a binding and lasting solution to the common agricultural policy, I agree with the noble Lord the Minister that we should not support an increase in own resources or an increase in value added tax.

I do not like to see Heads of State spending summit after summit in perpetual wrangling over the common agricultural policy and our imbalance when there are so many big issues for them to confront. So I wish them success at the next summit. The committee has helped them—if only they would read the document. It would be tragic for all of us if they fail. There is much worth fighting for. On that I cannot do better than end with some words from the article by my own party leader, whom I quoted at the outset of my remarks, who said: Our future, like our past and present, lies with Europe for historical and geographical reasons … The inspiration of the EEC as an organisation to bind and stabilise the democracies of Western Europe was—and is—decent and desirable. I say, "Hear, hear" to that, and I hope that at the next summit the leaders will keep that and the original great vision in mind. They have my good wishes for a successful meeting.

5.47 p.m.

Lord Gladwyn

My Lords, I must begin by congratulating the noble Lord, Lord O'Brien of Lothbury, on what seems to me, and on what I am sure seems to all of us, an excellent report. I should also like to say how much I agree with the last speaker, that if we are to enter into any kind of negotiation, and particularly this kind of negotiation, we must be prepared to compromise; that is to say, we need not necessarily stick to our original thesis or proposals, whatever they may be. I do not know if that is the policy of the present Government, but I only hope it is.

I was also pleasantly surprised by the general tone of the remarks made by the noble Lord, Lord Barnett. I only hope that everything he said was in entire agreement with his leader in the other place. I hope that he cleared his speech with him and that from now on that will be the policy of the Labour Party.

I began composing this speech which I propose to inflict on your Lordships in a state of considerable gloom a day or two ago. As I think I said when we last discussed the broad subject of the future of the Community, including the best means of financing it, it looked as if little, if any, progress had been made on the great outstanding difficulties for so long under discussion; namely, the reform of the common agricultural policy and our own contribution to the budget.

Since then, unexpected agreement on a really substantial limitation of milk production has to some extent lifted the clouds—on the assumption, that is, that Prime Ministers and heads of government will be able to enforce it over what I must say will probably be the dead bodies of all the farmers concerned, but more especially those in Ireland and in France But there still remains agreement on the vexed question of the MCAs—the monetary compensation accounts— satisfaction on which might admittedly moderate agricultural fury across the Channel. Let us hope so; we can only wait and see. I hope that the noble Lord who is to wind up the debate will confirm that there is some faint hope of progress being made even on the MCA side.

Anyhow, all still depends upon the outcome of the momentous European Council meeting next Monday, and all "Europeans" will just have to keep their fingers crossed. I can hardly imagine that the latest breakthrough on milk production will be welcomed as a portent by the majority of the Labour Party in this country, whose policy at the moment (unless I misunderstand it) is to get out of the Common Market as soon as possible and then to negotiate some new kind of association with, I should have thought, a very remote prospect of success. That is what I understand the policy to be and what I am told it is.

Lord Molloy

My Lords, if the noble Lord will give way, perhaps I may correct him; I am sure that he would not want to mislead the House. What he has just said has not been uttered by any outstanding and leading member of the Labour Party. We believe that if the Community is to be all that the Treaty of Rome says it should be, then we must all get together and put it right and get it out of the squalid mess in which it is now.

Lord Gladwyn

My Lords, of course we have to get together to resolve these difficulties. Nobody disputes that. But as I understand it, the policy laid down by the Labour Party is that our membership of the Common Market is not good in itself under the present conditions; that it must be totally reformed; and therefore we must get out of it and negotiate something better. That is how I understand it to be. Perhaps I am wrong, and I stand to be corrected.

In the meantime, we can, I hope, join in congratulating the committee sincerely on producing a report which sets out the issues with admirable clarity, even if not all noble Lords can associate themselves (as I am sure is the case) with the conclusions. Personally, I can say at once that I for my part associate myself with all the conclusions, subject to a couple of points with which I shall deal in one moment. More especially I should like to commend paragraph 137(v) in the hope there expressed that agreement on the two major outstanding points should open, it says, a new era in European co-operation in which our country should play a prominent and enthusiastic part. It also suggests, which is surely common sense, that given such agreement we should at once become complete members of the European monetary system. I can only hope that the Treasury will, at long last, hoist that one on board should agreement be forthcoming on Monday next in Brussels, or even partial agreement, for that matter.

Basically, the report obviously rests on the classical thesis, as I would call it, which I believe a majority of your Lordships, or perhaps all of your Lordships, can share; namely, that there should be no agreement on our part to any increase in the funds now available until there is also agreement on the two major outstanding difficulties. But it also suggests—and this is something which may not be generally acceptable; I do not know whether it is even acceptable to the Government—that once these difficulties have been overcome, and as soon as they are overcome, there should be such an increase in the general funds. That is what I think the report suggests.

What appears to lead the committee to this conclusion is the pretty obvious fact that the extension of the Community to include Spain and Portugal, which most of us would welcome on political grounds, will involve expenditure bringing the budget, even after a reform of the CAP, over the limit imposed by existing funds available. That, unless I misread it, is the conclusion of the committee. But I think it is also inferred that an increase in what are called the ressources propres is in itself desirable if only to make better use of regional and social funds and to lay the foundation of some much needed industrial policy, to say nothing of the funds needed to arrive at a pooling of research. This no doubt is what the report means when it speaks of, "a new era of positive European co-operation".

Thus there are really only two points on which I myself would venture to question the general attitude of the committee. The first is a rather minor one, perhaps; namely, the matter dealt with in paragraph 138(ii), which lays down that: The procedure for provision of further increases should not be transferred from national parliaments to the Council and European Parliament". Here I must say that I agree with the British Members of the European Parliament, Lord Douro and Mr. Jackson, who were interviewed. It is not altogether clear whether or not their views on this point were shared by other British Members of the European Parliament, but I hope they were. They argued that such a new procedure would not entail an open-ended commitment because of the safeguards of the budgetary machinery at present existing, and the accountability of the European Parliament towards the electorate; that is the direct accountability of MEPs.

Surely the MEPs are right. What is the point of electing them at all unless they are given, along with the nominated council, of course, this kind of very limited responsibility? No doubt this issue, as the report says, could become an emotive one here, as perhaps no doubt in France and Denmark, though not in any other Community country as far as I can see. But so far as Britain is concerned, I believe that, given agreement on the outstanding issues and the spirit of enthusiasm which, as the report suggests, that would engender, any Government here determined to make progress towards the goals which they accepted themselves in Stuttgart would be able to overcome predictable opposition in Parliament—for instance, by Mr. Enoch Powell or Mr. Teddy Taylor, or any of the other isolationists in the Tory Party. After all, Mrs. Thatcher has an enormous majority in the other place and would in any case have the support, I think, of the 27 Alliance Members, to say nothing, no doubt, of a few rebels from the Labour Party as well when the crunch came.

My second point is perhaps of greater significance. It has to do with the committee's broad view of the best way to revise the present system of calculating the United Kingdom's contribution to the budget, which of course theoretically is admittedly unjust and out of all proportion from a practical point of view. On the other hand, the so-called "safety net" which appeals to the Government, and is recommended by the committee, though no doubt perfectly justified logically, would seem to reduce our contribution from a theoretical and astronomical sum of something like £2 billion or so—though, of course, much less in practice as a result of the various reforms and revisions of our liability which have taken place in the last 10 years—to, as I understand it, a modest £300 million.

I repeat that this, as a claim, may be perfectly logical, but is it desirable? I believe that our current liability for 1983, taking into consideration the £475 million refund which is being held up by the European Parliament pending agreement on the outstanding difficulties, is about £633 million. Not only would I not quarrel with something of that order of magnitude if it formed part of a long-term agreement which might conceivably come up for revision in, say, five years' time, but I would even be prepared to accept something slightly higher for the following reasons.

In a general way I feel that a tough line, however logical, would be both unproductive and, indeed, unbecoming. Does it really matter all that whether our net contribution works out at £600 million, or even, say, £650 million, as opposed to the £300 million for which it looks as though we are sticking out for now? After all, if no agreement is reached in Brussels owing to our refusal to contemplate any such obligation, and if for that reason only—the CAP having once been settled, or more or less settled—we refused to allow an increase of, say, 0.4 per cent. in the VAT element in the Community's resources, would not the amount that we should stand to lose as a result of some gradual collapse of the Community, or alternatively as a result of our virtual exclusion from it (for either of which events we should certainly be held responsible, rightly or wrongly), come to far more financially than the extra £300 million or so that we might otherwise agree, or have to agree, to turn into the Community chest? I only ask the question.

Besides, I have always rather suspected our argument that we are one of the poorer countries in Europe. In so far as we are by a strict comparison of various GDPs, depending on how they are calculated, considered to be "poor", it is largely our own fault for producing goods more expensively than our neighbours owing to an outdated trade union structure, labour difficulties, and often poor management as well. If all this changes—as the Government say it will change during the next few years if they have their way, and we must all hope it will—there is no reason why we should not eventually be as rich as France and Germany are now.

It is also a fact that owing to oil we have a very healthy balance of payments that is likely to continue for many years, perhaps for ten years. For that reason alone we are regarded on the continent by our less favoured partners as already "rich" rather than "poor".

Thirdly, our claim to special treatment because we are so poor must surely be qualified by our preference for importing much food and fodder from outside the Community, which in itself necessitates a higher contribution to the common funds than would otherwise be the case.

Lastly, we should never forget that in 1955–56, by our own deliberate choice, we allowed the Common Market to be created without us. Had we not withdrawn from the Messina negotiations there is considerable reason to suppose that we might, before Suez, have had agreement on terms of membership much less onerous from the financial point of view. When we did come in—of course, it was not our fault that we failed to do so six years later—it meant that our partners had to contemplate abandoning some of their accrued advantages in order to admit us. So, in a general way, we should not complain overmuch if we are now asked to subscribe rather more than is sometime described as our "fair share" of the necessary finance.

I repeat: I wonder whether the Government have really thought out the long-term financial implications of any collapse of the Community, or, alternatively, of our withdrawal consequent on some repetition in Brussels of the appalling fiasco in Athens last December. We can only hope that our present leader will at least survey the prospective extent of the fall before she decides, if she does, on what might be called logical patriotic grounds, to step over the edge.

6.3 p.m.

Lord Seebohm

My Lords, I too, must congratulate the noble Lord, Lord O'Brien of Lothbury, for the way he has handled this complicated report and investigation. I should also like to congratulate him, on behalf of the Select Committee, on how well he has put our case forward to the House today. I think the time has come for short speeches, and I do not propose to make a long one. I shall not go over any of the ground that the noble Lord, Lord O'Brien, dealt with so ably, but I want to make certain comments, particularly why I think that it is absolutely essential that the resources of the Community should be enlarged.

First, we have to put into perspective—the noble Lord, Lord Bamett, has done extremely well—the extent to which the payments we are making are a real burden. I point out, as we do in the report, that the total refunds were equivalent to about £7 a head in the United Kingdom. That is to say, if a family of four paid this amount that would be less than half the cost of a television licence. Furthermore, I think I am right in saying that the additional subsidies made by national governments are greater than the whole of the CAP. Taking these matters into consideration, we cannot consider our contribution to the CAP as being a heavy, unbearable burden weighing down on our shoulders.

To return to the need for more resources, one of the most important objectives of the Treaty of Rome, second only to the elimination of war, was expressed in Article 2, where it says that it must, have as its task an accelerated raising of the standard of living and closer relations between the states belonging to it". In order to do this, the regional fund and the social fund, among other things, were established to assist the more backward nations to raise their standards of living nearer to those of the more prosperous nations. These two funds, useful as they are, have remained pathetically small. Since 65 per cent. of the entire income of the Community is absorbed by the CAP, that does not leave much over for these necessary funds. I believe that these funds will need to be substantially augmented if they are to produce appreciable results in the long term, and will be even more strained now that Greece is in the Community—and we shall probably admit shortly Portugal and Spain. On these grounds alone, I am convinced that once some sense has been introduced into the CAP—there seems to be a little hope about that now—and some fairness into the assessment of members' contributions, the additional own resources of the EEC are fully justified.

I believe also that now is the time to have both these questions settled. We do not want a compromise on the second point about the fairness of our contributions while the matter is still hot. If we give way now it will be a long time before it is solved. Having said that, I should like to point out to your Lordships that what we are talking about today is only one of many of the various matters that have to be decided if the EEC is to survive. I trust that your Lordships will not consider it out of context if I enlarge on this for a few minutes.

The report we are debating is only one of a whole series that the Select Committee has produced on the problems of the Common Market. In 1981 there was an inquiry into the internal market. Only a few weeks ago we debated the report on the EMS. I shall deal very briefly with these two matters. The problems of the internal market described in our 1981 report are even worse today than they were then. I hope the Government will feel able to co-operate fully now with the proposals of the European Parliament to try to move some of these obstacles out of the way and to put these matters right.

Exactly three weeks ago today I attended a conference in Brussels called by the European Parliament's Committee on Economic and Monetary Affairs, chaired by the President of that Committee, Jacques Moreau, to discuss this problem of the internal market. The object of this conference was to bring together all the national governments as well as the European Parliament to see whether there could not be some consensus of opinion between the national governments and the European Parliament on what should be done. I was glad to say that when I was there all national parliaments were represented by one or, mostly, two people, apart, unfortunately, from the House of Commons, from whence nobody appeared. This, I am afraid, was noticed and was the subject of comment in the full session.

We were informed by the president that the cost of frontier delays alone and the procedures that go on at frontiers were costing about £ 12 billion ECUs. This is more than the total cost of the CAP. These delays were putting a cost of between 5 per cent. and 10 per cent. on all goods imported across frontiers.

While we were in Brussels there was the protest by lorry drivers on the Italian frontier, which brought the whole topic very much into focus and was the subject of considerable discussion. I hope that while this matter is still hot in people's minds our own Government might take it up and press for some reform at the frontiers. It seems as if there might be some ganging up by the customs officers to protect their own status and employment, and so on, to make the matter as awkward as possible. Most lorries are held up for between 10 and 20 hours. Passengers and ordinary people in their private cars might have to wait hours, apparently for no reason—because they open neither the bonnet nor the boot at the end of the period—before they are let through.

I wish to say a few words about the EMU, but not to go over the same ground we debated before. Things have happened since then, and I have the advantage of looking at a graph that was obtained for me by the noble Lord, Lord O'Brien, from the Bank of England. It showed the relationship between sterling and the ECU from 1979, when it started, and after the crazy petro-currency period, when the pound went to 2.40 dollars. It settled down about the middle of 1981 and, in fact, the situation has been very different. According to the graph, the relationship between sterling and the ECU at the end of 1981 was about the same as it was at the end of 1983. There have been some ups and downs in the meantime, but they seem to match each other pretty accurately. I should have thought that if we had been in the EMU, with a certain amount of support from the other member states, and if we had been in the exchange rate mechanism, we should probably have survived and might have done something to encourage not only our reputation and position in the Community but also, possibly, the use of the ECU.

This is a subject in which I have always been interested. As a banker, one of my reasons for being so enthusiastic about the Common Market was to get ultimately to a common currency, just as America has in all her states, so that the movement of capital, goods and people would become realistic. It was interesting to read a report in the February issue of Banking World, and also to read an article on Tuesday in the Financial Times, on what they called the "up and coming ECU", which showed that predictions that its use would be limited and its life short-lived had been proved completely false.

The rapid progress of the ECU since 1979 has confounded these cynics. In fact, I believe I am right in saying that there are now 18 banks at which one can open a deposit account or a current account in ECUs. They have a clearing system between them which works quite well and, possibly, it is not all that far off when one might have an ECU in one's wallet. I know that recently both the Soviet group and the Americans have insisted on having their deals and papers calculated in ECUs.

Those are just two points that I have dealt with very briefly, and I hope that the Minister in reply will make some reference to these matters because they are all in line with the other subjects that have been discussed today. I do not believe that there is much use in talking about increased resources, and so on, unless some other problems are dealt with at more or less the same time and in the near future.

The other matters which were discussed in Brussels were all the things that have not happened, such as a common standard in all sorts of matters; for example in insurance and banking and, particularly in technology—which so far, in spite of Article 100 of the treaty, has not come about.

I shall not delay your Lordships any longer, but I believe that unless we deal with some of these obstacles we in the Community will preside over an orderly decline in prosperity instead of what is now there for the taking: increased prosperity and a successful Community future.

6.13 p.m.

Lord Bruce-Gardyne

My Lords, I should like to join with other noble Lords who have congratulated the noble Lord, Lord O'Brien, for introducing this subject today so lucidly, and also for the admirable report of the committee which is the subject of our debate. I should also like at once to offer my apologies to the noble Lord, Lord Ardwick, and my noble friend Lord Cockfield because it is possible, owing to a longstanding dinner engagement for tonight, that I may not be able to stay until the end of our debate. But I shall be very careful to read their remarks. If I may refer briefly to what the noble Lord, Lord Seebohm, has been saying about the EMS, I read carefully the previous report from your Lordship's committee recommending that we should take our place in the European monetary mechanism.

I must confess that I had then two reservations on that report and they have not been changed by subsequent events. The noble Lord, Lord Seebohm, said that if we looked at the relationship between sterling and the ECU over the past two or three years, it suggested considerable stability—as it did. But what had went on before was vast instability. I confess that I was unable to follow the conclusion which the committee reached in its report that we had no reason to fear that such instabilities would not occur in the future as a result of huge fluctuations in oil prices. That is a confidence which I find difficult to share.

The second problem that one has is that if one tends to believe—as I admit I believe—that a pre-condition for a return to stable prices and low inflation in this country is the observance of domestic monetary discipline, then we have to face the fact that on occasion the obligations of membership of the monetary mechanism may conflict with the preconditions. For both of those reasons one must think carefully about that proposition. That apart, like other noble Lords, I found many aspects of the report that we are discussing very constructive, and to my mind they are matters to which the Government should certainly pay careful attention in the course of the imminent meetings which we now face.

I would not go along with the noble Lord, Lord Barnett, although I agree with a great deal of what he has said. I thought he was a little rough on the proposition that finance Ministers should be drawn into the negotiation of the agricultural pricing review each year. I ventured to say on a previous occasion in your Lordship's House that leaving this to the agricultural ministers is rather like asking the Borgias to do the catering. Of course, I accept (as the noble Lord suggested) that what the committee is recommending would not get the Borgias out of the kitchen; but, at least, it would mean that there were a few guardians of the peace to keep an eye on their behaviour. I should have thought that that was a positive advance.

I agree with the committee rather than with the noble Lord, Lord Gladwyn, on the desirability of retaining in the long term the ultimate control over the budgetary process in the hands of national governments rather than the European Parliament. The noble Lord said that now that Parliament is directly elected, it can be expected to be financially responsible. I must say that I should have thought that only a Member of your Lordship's House who had never experienced the vagaries of an elected Chamber could hold to the belief that elected representatives could be trusted to be responsible in matters of finance. That is a point where I suspect that even the noble Lord, Lord Barnett, might not necessarily 100 per cent. disagree with me.

There are, however, two aspects of this report about which I must say that I had doubts. It is purely to those that I want to refer in my remarks this afternoon. The first proposition which I worry about is the proposition that, providing we are sensible, reasonable and show a spirit of compromise, our partners will recognise—and indeed do recognise—that we face what, in the words of the original agreement for the Community was referred to as "an unacceptable situation". In the first place, I intervened during the remarks of the noble Lord, Lord O'Brien, because I noticed in paragraph 103 of the committee's report the references to the declaration in the course of negotiations in 1972 that, if unacceptable budgetary situations arose … then 'the very survival of the Community would demand that the institutions find equitable solutions'.". I do not know where the word "budgetary" came from. I have a feeling that it was not in the original agreement. However, that is not my main point. My main point goes to a considerable extent along the lines of what the noble Lord, Lord Gladwyn, was saying. It is that I really question whether our partners in the rest of the Community accept that the situation that we confront is an "unacceptable" one or one that is in any way unpredictable at the time we joined the Community.

I might have chosen, 10 years ago, to join the national farmers' club. I might have decided that within that great institution it would be nice to have a large proportion of piano tuners, of land owners, indeed, even of Members of your Lordship's House. But if at the end of 10 years of my membership I discover that these things have not happened and that essentially the national farmers' club has remained a preserve of what Peter Simple calls the Seth Rontgens of our countryside, and then I went to the secretary and said: "I want to have my subscription halved", I think I know what the answer would be.

Of course we were entitled to believe when we joined the Community that the balance between expenditure on agriculture and other estimable purposes which we had closer to our hearts, such as (shall I say?) rundown coal pits in Scotland or Scott Lithgow on the Clyde, would change away from agriculture. And it has not happened; but because it has not happened I do not believe that our partners accept that we are therefore entitled to claim that the balance of payments within the budget is fair and equitable and that we must have a permanent solution.

Of course, they have agreed, as the noble Lord, Lord Barnett, pointed out, to some intermediary payments in the last two years. They have done so, if I may say this to your Lordships, in the hope that perhaps we would then go away and stop boring them about our penury. But that is a vastly different matter from agreeing that we enjoy the full privileges and responsibilities of membership but pay as if we were some out-of-town or country member. I do not believe there is any likelihood of long-term agreement on that basis.

My second reservation about the committee's report concerns the suggestion—and this must come first, of course—that provided that we can get agreement on basic long-term budgetary share-out arrangements and provided that, above all, we can get some binding commitments on restraint of agriculture budget spending, we should recognise the need for the Community to have additional resources.

The other day, when I met Commissioner Tugendhat, I said that to my mind an agreement to increase the subscription of the Community at this stage was a little like a man who has a son with what the Americans call a drinking problem and who gives him a substantially increased allowance on the basis of an undertaking that he will keep away from the booze. If that happened I think we would say that he was out of his mind. I find it hard to believe that if we agree to an increase in subscriptions we are then going to get the lasting kind of reform to the agricultural expenditure which we expect and which I believe is indeed essential.

I would submit to your Lordships that this is not entirely a matter of speculation. Last weekend, before we had the news of the outline agreement on capping the butter mountain, my right honourable friend the Minister of Agriculture was reported as saying: It must be clearly understood that we have got to live within our means". Fine! He then added: Of course, if the summit were to decide that additional resources were available, that would be a different matter". Of couse it would; and if we agreed to increasing the subscriptions I believe we can write off the prospect of achieving a long-term reform of the Community's agricultural financing system.

Why did we get this agreement—and I agree with the noble Lord, Lord Barnett, that we should read the small print very carefully—to cap the butter mountain and ostensibly reduce the gap between our butter output and the consumption of dairy products by about half? I suggest that we got it wholly and exclusively because the money was running out. If that awareness had not been there, there is no evidence at all to suggest that we would have got that sort of agreement in the past or that we are likely to get it in the future.

I conclude on a note of some pessimism. I fear that I do not see much likelihood of an agreement next week on long-term budgetary or agricultural reform. It seems to me pretty unlikely that we are going to get the refund to which we believe the Community was committed at the Stuttgart meeting last year. I have said before, and will say again, that I see a risk that we should then be tempted to embark on the process of withholding contributions. I must say that I believe the consequences of that would be extremely grave. We should note what Monsieur Chirac said the other day: Perhaps the time is coming when it would be best for the United Kingdom to withdraw, at any rate temporarily from membership of the Common Agricultural Policy and effectively from the Community as such". I do not think that was necessarily just an idle threat. I think it is one that we could face if we are not very careful. I would hope and pray, rather than seeking to insist upon a budgetary settlement for which I believe our partners can see no case, that we would insist upon the issue on which we have an overwhelming case: that is, that there can be no increase in the VAT contributions. We should use that as the lever to get the fundamental reforms of the agricultural system which the whole Community—not just us—needs and which I believe we will not get without it.

6.26 p.m.

Lord Brimelow

My Lords, I read with interest the article which the noble Lord, Lord Bruce-Gardyne, published in The Times yesterday. He has made substantially the same points to your Lordships this evening, and he will find before I have finished that I am in substantial agreement with him. But before I get to the gist of my speech may I deal with the question that he has raised twice already this evening? He asked how it was that in paragraph 103 of the report there was reference to, if unacceptable budgetary situations arose". I was not a member of Sub-Committee A and therefore not concerned with the drafting of the report; and when I read it in typescript the same question occurred to me. However, when I saw the Minutes of Evidence I thought I had found the answers. In Answer 20, paragraph 2, on page 8 of the Minutes of Evidence, these words are quoted in full: should unacceptable situations arise within the present Community, or in an enlarged Community, the very survival of the Community would demand that the institutions find equitable solutions". Therefore, the noble Lord was quite right to ask where the word "budgetary" came from.

If we go back to the beginning of that paragraph we see that in 1978 the Government of this country pointed out that it was going to become a substantial net contributor to the budget. That places it in the budgetary background. It was in reply to that that the Commission paper argued that adjustments in Community expenditure, other than in the area of agriculture, would result in a better balance. The paragraph ended with the important assurance that I have quoted—in other words, the whole context was budget. Paragraph 103 is summarising, and the word "budgetary" comes outside the quotation marks. But, in the context, I think its use is entirely fair and justified.

The title of this report is Future Financing of the Community. As a theme, the future financing of the Community is indeterminate. It is indeterminate as to duration, as to the number of countries which will eventually participate, as to the growth and the ultimate size of the budget, as to the sources of revenue, as to the objects of expenditure, and as to the division of expenditure between the Community budget and the national budgets.

When a subject is so indeterminate in many of its aspects, it does not lend itself to a once-and-for-all analysis. It calls rather for a succession of reviews as circumstances change and as new problems appear, and I hope that this report will be only the first of a series.

As the noble Lord, Lord O'Brien, pointed out, it is set in a broad context: a context of hope that one day the development of the Community and of its finances will be fruitful and fair. But the report concentrates on the narrower issue of the present crisis and the steps that have to be taken in the immediate future to remedy the problems which have arisen.

As an exposition of what everybody ought to know about the present crisis, may I say, as a reader and not as an author, that I find the report quite admirable, and I join in the congratulations which have already been expressed to the noble Lord, Lord O'Brien, the members of his committee and the specialist advisers who helped in the preparation of it. If I have a reservation about the report—and I share some of the reservations already expressed by the noble Lord, Lord Bruce-Gardyne—it is that, if anything, the report is too persuasive. It is very well constructed, and it is carefully worded. The reader is carried on from one point to another, and his attention is not drawn to the really difficult questions which will become consequential if the recommendations of the report are eventually accepted.

The value of the report, as I see it, is that it provides a yardstick for the assessment of what has already happened in the Council of Agricultural Ministers and in the Foreign Affairs Council, and it will also provide a yardstick for the assessment of what happens next week at the summit. Summits come and go, and they usually disapoint expectations—and I share the doubts already expressed by the noble Lord, Lord Bruce-Gardyne. But the problems go on, and we now have a very useful yardstick to hand.

I ask your Lordships to consider the Council of Agricultural Ministers. It is still in session; it resumes tomorrow, and so it is too early to make a final assessment. In relation to milk, it has taken a first step—a step in the direction recommended in the report. But by the criteria of the report, and equally by the criteria of previous reports by the Select Committee on farm prices and on the control of surpluses, that first step is totally inadequate. It has not capped the butter surplus, which will continue to grow; it has merely reduced the rate of growth. Expenditure on the common agricultural policy will continue to increase, and it cannot be met within the present limits of own resources. Already the Irish Government, according to the press, are asking to be allowed actually to continue increasing their milk production.

The Agriculture Ministers have given no grounds for believing that they are prepared to accept the view, expressed in paragraph 99 of the report, that what is needed is, a strict limit on the cash available each year from the Community budget. The criteria set out in the report relate to what ought to be agreed early in 1984, by which the authors of the report mean before the end of the present month, if a satisfactory basis is to be created for the future financing of the Community. In the field of agriculture, it already seems that that is unlikely.

Before I pass on from agriculture, may I comment that the protests already being made by dairy farmers, not only in this country, draw attention to two questions that are relevant to the future financing of the Community but which the report, with its emphasis on immediate problems, has left aside. First, to what extent will the governments of member states regard the diminution of farm incomes as politically acceptable; and, secondly, if they wish to limit that reduction, to what extent will they be prepared to meet the cost of so doing from national funds? Already quite a large part of the public expenditure on agriculture comes from national rather than Community funds, so the problem is one of proportions and practice rather than principle.

But there is a question of principle, and it was raised by the noble Lord, Lord Mottistone, in the course of oral evidence, when he asked whether an increasing share financed from national budgets would be compatible with the principles of the Treaty of Rome and, in particular, with Article 39. He received no answer of substance; and, indeed, the answer that he did receive implied that the question has not been considered. This is just one example of the larger long-term issues which the report, given its concentration on the immediate needs of the situation, did not tackle.

In paragraph 107(iv), the report comes down in favour of the United Kingdom's proposal for a safety net. In the context of a report which concentrates on next steps, I do not dissent. But I regard safety nets as a short-term expedient rather than as a suitable basis for the long-term financing of the Community. Even here, however, there are already signs of trouble. Yesterday, the noble Lord, Lord Trefgarne, informed this House that at the Foreign Affairs Council on 13th March two member states had been unwilling to approve the adoption of the regulations which will make possible the payment of the 1983 refunds due to this country. The noble Lord, Lord Gladwyn, elicited confirmation that the two countries were France and Italy, but this House did not elicit information as to the motive of those two governments. Could it be that their motive is to put pressure on our Government to secure advance agreement to the principle that the own resources of the Community should be increased? If such pressure is being brought to bear on the Government, I hope that it will be resisted with total intransigence.

The noble Lord, Lord Barnett, spoke of the need for compromise, and I agree that there is a need for compromise. But if pressure is being brought on us to depart from the agreement at Stuttgart, that the questions of control of common agricultural spending and budget inequalities should be considered and decided at the same time as the question of own resources, then I think that our resistance should be total, and I welcomed the very clear and explicit words used by the Minister in his opening statement.

This brings me to the third recommendation of the report in paragraph 139(i); namely, that Provided that solutions to the problems of excessive CAP expenditure and budgetary imbalances are reached at the same time, a decision to increase own resources, by means of raising the one per cent. VAT ceiling, should be reached early in 1984". That wording did not incorporate an exact figure for the increase in the VAT contribution. If by the time of the summit it is clear that agricultural spending as a whole is not being adequately restrained, or if we are still in difficulties over refunds and our net budgetary contribution, we should be limitative in our approach to the problem of increasing the Community's own resources. The readiness of the Community to mend its ways seems to be directly related to its shortage of funds.

May I make one last point. A safety net will not in itself limit the growth of Community expenditure, only our net contribution. But the size of the total Community budget is relevant to attempts in the member states to keep total public expenditure within limits. It is also relevant to and potentially incompatible with the last of the recommendations made in the report; namely, that the Community budget, after it has been brought under control, should have a redistributive role and should play a part in promoting the convergence of the economies of the member states. That is another of the large and long-term issues which this report has not examined in depth. I repeat, then, my hope that this report will be only the first of a series.

6.42 p.m.

Lord Roberthall

My Lords, in a debate of this nature where we are discussing a report it is difficult to think of something to say which has not been said already. I was very much struck by a remark of the noble Lord, Lord Cockfield, that some of the things which are happening now are happening in a way which is decreasing the stability of the Community. That remark ought to be borne in mind when we consider all the problems. Largely with that in mind, may I say a few words about each of the problems.

First, let me say a few words about the common agricultural policy. I have no doubt at all that it is necessary to amend the CAP in such a way as to ensure that the problem does not grow worse and worse every year, which is what has happened so far. If the CAP is looked at in terms of what ought to be the general objectives of the Community, it is now a monstrosity. The Community is trying to widen the market in order to improve the forces of competition. At the same time, the farmers are completely safeguarded from the effects of competition of any kind. This is because of the political problem, caused mainly to France and Germany by the small farmers.

However, the result in all of the developed countries of the world of trying to stabilise the incomes of farmers is affecting this country, too. The price is fixed to cover the cost of the small, inefficient farmer. This means that the efficient farmers increase their output and consequently their profits. This has resulted in the present position—the generation of large surpluses which swallow up a large part of the Community's funds. Those surpluses have to be either stored at great cost or dumped abroad. This policy is not only expensive; it damages the least developed countries, by reducing the price on the world market of the products that we import, and is very difficult to defend because of the discrimination which the developed countries exercise. And it is damaging our trade relations with the United States.

Therefore I agree strongly with the committee's recommendation that a limit must be placed on the total amount which is spent upon agriculture. I ought to mention that I was a member of the committee. Nobody minds certain safeguards for agriculture. However, a solution to the CAP has been continuously put off and each year the problem grows worse. It cannot be healthy for the Community to refuse to face a problem which is growing worse and worse. One can say that the amounts involved are not very large. Indeed, I shall say that in the next part of my speech. However, any problem which is growing faster than the means available to deal with it will ruin us in the end. It is very bad for the Community that we are not facing up to the problem.

Secondly, let me turn to the imbalance of our contributions. I do not believe that Her Majesty's Government have handled this problem as well as they ought. They have allowed us to drift into a completely indefensible position: how much, in monetary terms, do we put into and how much do we get out of the Community? At the moment we are arguing about £400 million, and £400 million is less than half of one per cent. of Government expenditure this year. It is an amount which the Chancellor of the Exchequer would hardly notice in terms of the difference between what he might expect to get from a tax and what he actually receives. The image of the Community is being damaged; it is felt by the public not to be fair to Britain. Of course, everybody who is on the losing side of any bargain adopts that attitude.

We ought to have put our case in a much more general way. We ought to have pointed to the enlargement of the Community and its acceptance of the three very small countries and said that it is impossible to expect them to pay more than they will get out of the Community. The balance between what is paid and what is received is one which no country which is sufficiently developed to be able to run an income tax system would dream of achieving. Although it could never be achieved, it is lipped in the direction of paying according to your ability and receiving according to your need. Although this cannot be made to work inside a country it could be made to work inside a community of countries. We ought to have said that we must face up to the problem and introduce a progressive tax system.

The report suggests that the tax system should be based on an assessment of the national income, but in a progressive way. I believe that this is the right solution. We ought to say that this is what we want and this is the direction in which we believe the Community ought to proceed; let there be a formula of this kind and we will accept whatever it may be. Even though we may agree on that we might still think it unfair. We all think taxes are unfair but we will pay our shot. In particular, I think it is a great pity that the country has been made to think of it in terms of trifling sums, which makes it a completely wrong approach—you get out what you pay in.

That leads me to the question of the increase in the contribution. I think it is very unwise to talk about dying in last ditches and taking a final stand, but I think we at least should argue very stongly in this way. I am inclined to think that if we have a sticking point it ought to be the common agricultural policy, because if it goes on this way it damages and weakens the Community and prevents it from getting enough money to do the constructive things which are necessary, and which are now done in only a very small way.

I think we ought to be perfectly willing—if we get a stopper on the common agricultural policy—to contemplate an increase in the funds of the Community. We ought to bear in mind that the cost of it is trifling in comparison with our total funds. Talk about spoiling the ship for a ha'p'orth of tar! I think we ought to get away from the idea that it is wrong to spend any more than we can possibly help on the Community. I consider that our whole future, and the future of the other members of the Community, is bound up with its continuation and its success. If we object to it, it should be because we are objecting to something which is moving us in the wrong rather than in the right direction.

What a disaster it would be if the Community broke up or ground to a halt. We ought not to think about the value of the Community in terms of £400 million or what we get out of it. There ought to be much more stress on its general importance to us, and both the noble Lord, Lord Barnett, and the noble Lord, Lord Gladwyn, made remarks in the same vein. We are spending a great deal of time, energy and bad temper on sums which are trivial in relation to the main issue.

6.54 p.m.

Lord Tranmire

My Lords, I thank the noble Lord, Lord O'Brien, for his very clear, brief and penetrating introduction to this Motion. I should also like to congratulate him on its timeliness: the day before what will be a crucial meeting of the Agriculture Ministers. In four days there is going to be a vital summit meeting at which this will be reported—which will be more fortunate than has been the lot of the other reports on the future financing of the Community. We have here a trilogy. We started off with the Stuttgart Report of the Court of Auditors which came out in October; then the House of Commons EEC Committee brought out in November the report on future financing, and ours came out quite recently.

I found those three reports of tremendous value, but I want to say that if we are looking at the future financing of the Community one of the first things we have to examine is the evidence of financial management by the Commission and the Community. I have been very disturbed by the evidence on the actual financial management which I read and listened to in that sub-committee. The Stuttgart Report looked at the Guarantee expenditure in the last decade, pointed out that it has tripled and explained that it was largely due in their view—the view of the Court of Auditors —to the fact that the budget was expenditure-determined, and that at European level there was no function corresponding to that of a Minister of Finance in a national administration. That is very like the report which the Select Committee of the House of Commons gave in 1980 when it was looking at financial control. They said that to speak of financial control over Guarantee expenditure was largely meaningless. The Stuttgart report pointed out that it took five to six years after the end of the year in question for accounts to be cleared. When they are actually cleared, what happens?

Look back to the 6th Report on financial control and you will find that in the year 1977 the admitted frauds and irregularities came at that time to 9½ billion EUA, but of this 9½ billion less than a quarter was recovered. The explanation was that only two countries admitted frauds and irregularities. One was the United Kingdom and the other was Germany. Some of the countries did not agree what were irregularities.

On the structural side, the Stuttgart Report says that control of plans for aid for farm modernisation remains illusory. It is unsatisfactory that since the Court of Auditors were appointed there have been a great number of reports on the mismanagement of the finances, but this has never been dealt with during that period.

As the noble Lord, Lord Brimelow, said, this is only part of the pattern of the aid for agriculture in the agriculture expenditure. We had before us in the subcommittee Dr. Harvey from Newcastle University who told us that from the Commission's own evidence national aid was larger than the aid from CAP. When we asked him to give details of that in oral evidence, he said that the Commission had a study group for examining it but they had not disclosed their conclusions.

Thanks to the diligence of our chairman and the penetrating nature of his questioning, our inquiry was very complete. We covered a great deal of ground. But when we invited the Commission to give evidence before us it declined to give oral evidence or submit to questioning. I think that was extremely unfortunate because it would have been valuable to have had the Commission's replies to some of the points made in these other reports, such as the Stuttgart report I have mentioned.

There are a number of worries on this. Noble Lords will see on page 10 of the report the position of Italy in recent years. Italy's contribution has changed very much. Italy changed suddenly from being a contributor to being in benefit in 1977. After that it increased its benefit from the Community by 100 per cent. When the Treasury was asked in oral evidence to give an explanation, the reply, given on page 37 of the report, was that, the Italians have been extremely successful, over a run of years now, in building up their receipts from the Community budget. The main area where they have been successful is in persuading the Community to adopt new Mediterranean programmes for agriculture. So whereas in the mid-1970s and, indeed, in the late-1970s the Italians were still net contributors to the budget, with the help of these programmes mainly they have turned themselves round into a position where today they are the biggest net recipients from the budget by a long way". As an illustration of that we were given in the Stuttgart report the example of tobacco. In the Community there are 85,000 tobacco producers, of which 60,000 are in Italy and 25,000 are in Southern France. The tobacco subsidy in 1982 came to 622 million ECUs. That is a fairly substantial sum. To put that into perspective, exactly twice the amount that was spent on research throughout the whole of the Community has gone to 85,000 tobacco growers. We were told the reason was that the price of tobacco was three times the world price. For that reason I think that before we agree to any increase in contribution we must obtain some undertaking on a better financial management by the Commission and an improvement in the system of the common agricultural policy.

On that point may I make two remarks. The Government are to be congratulated on yesterday's announcement but, as was said, it is only a first step. It is very important that it should be followed up with other measures. As regards milk, I hope that my noble friend Lord Cockfield will deal with this when summing up. I understand that the co-responsibility levy will continue this year and then a supplementary levy will be brought in. At the moment with the co-responsibility levy all the other member states—particularly France and Germany—have exemptions that cut out most of their smaller farmers, whereas in Britain there are very few exemptions. Therefore, the co-responsibility levy is very unfair to British farmers. The great advantage in the supplementary levy which was announced yesterday is that there are to be no exemptions, although the Irish are trying to get complete exemption; on which I understand Mr. Jopling has reserved our position. Therefore, the milk situation is only a first step. It is not all that satisfactory because of the co-responsibility levy.

What is vital is the cereal position. Mr. Lelong, the President of the Court of Auditors, came to see us. He was a most impressive witness. He reminded us that in 1971 the United States decided on a change in policy to bring its cereal prices into line with world prices. This meant it could keep the whole of the agricultural economy working reasonably, bearing in mind that cereals are, in the main, raw materials for the meat and milk markets. We are now well divorced from the world price. Mr. Lelong said that if the Common Market agricultural policy could get back and do what America had done and bring cereal prices down to the world price level, in his view it would benefit 95 per cent, of farmers in the Community and would harm only 5 per cent. who are probably the biggest farmers and could afford that reduction in income. I ask the Government to think about this before tomorrow's debate. There is not much time.

I believe that is the solution. We suffered in the common agricultural policy. One of the reasons it tripled was that when America changed its policy it added to the cost of exporting our cereal surpluses from the Community and it also cost us more to support the milk and livestock farmers. Therefore, if we could change back the agricultural policy and cut cereal prices down to world prices we would be doing three things. First, we would be saving many millions in the budget. Secondly, we would undoubtedly be helping the small farmer who relies on buying cereals for his meat and livestock production. Finally—and not least—we would be helping the hard-pressed consumers of food throughout the Community. I believe that deserves attention.

7.10 p.m.

Lord Kaldor

My Lords, I think I must repeat what most other speakers have said. We are all very grateful to the noble Lord, Lord O'Brien of Lothbury, and his colleagues. They deserve our thanks as well as our congratulations for the work which they have put into this report, including the painstaking examination of numerous witnesses. The report discusses in some detail the rapid and uncontrolled growth of expenditure resulting from the common agricultural policy and the inequities which follow from that, particularly for this country. As a result, as the report says, our net contribution to the Community comes to about £20 a year per head of the population, although our real income is below the Community average. Denmark, the richest member of the Community, receives a net benefit of £32 a head.

Expenditure under the agricultural price guarantees has risen so fast—by around 15 per cent. a year—that the limits on expenditure set by the so-called own resources of the Community have now been reached and therefore have to be extended if the existing guarantees are to be fulfilled. This gives us a certain lever in that the resources cannot be enlarged without our agreement, and, as the report suggests, we could couple such an agreement with a reform of the principles on which the contributions to the Community are based and establish as a general principle that the contributions should reflect the ability to pay off the different member states, just as in the case of ordinary taxation.

There are other commendable suggestions in the report. I do not wish to go into them all because of the lateness of the hour. If I understood it right, one of the suggestions is, at paragraph 98, that a limit should be imposed on the amount of subsidised production, and output over and above that limit should be sold in the free market—in the world, I presume. Since the report was written, yesterday or the day before the Community agreed for the first time to introduce a limit on the amount of milk which it is willing to buy at guaranteed prices. This will be administered by a system of quotas extending down to the individual farms or dairies which produce the milk. How this will work in practice is very difficult to say. My feeling is that long-term remedies cannot be sought on these lines.

But the more fundamental questions concerning the long-term reform of the CAP—indeed, whether that policy should have a long-term future at all or whether it should be gradually liquidated—were not within the terms of reference of the report; yet I feel that this is the time when attempts should be made to examine the basic principles of the CAP and to see how far they are consistent with, or should form an integral part of, the economic unification. The original purpose of the CAP was to secure the continued prosperity of Europe's food producers and give the benefit of assured supplies and uniform food costs to Europe's consumers. This was to be attained by the creation of a common market which removed all barriers to trade, given adequate protection from competiton from outside, which implied that stable internal prices should be isolated from the fluctuating prices in the world market.

However, from the very start there was a confusion between the idea of a common market as a means of securing the best price for the consumer, through free and unhindered competition of the producers, and its artificial shadow—the idea that you can secure the hallmark of a common market (namely, a uniform price) by the most extreme forms of market intervention. That has the very opposite effect of what a common market was meant to imply; namely, it eliminates competition or protects producers from it. Whereas in the absence of market intervention free trade would cause low-cost French producers to invade the relatively high-priced German markets, and thereby bring about a situation in which production is more highly concentrated in low-cost areas at the expense of high-cost areas, the actual arrangements do the very opposite. Both low-cost and high-cost producers are encouraged to produce as much as they can, and if the resulting production exceeds consumption, the surpluses are dumped abroad or else made into a mountain.

If the same principles were applied to a manufacturing industry—say, motor cars—it would mean that German or French cars would no longer threaten British car producers, since the authorities of the Community, by virtue of a common automobile policy, drawn up as a perfect analogue to the common agricultural policy, would buy up all the cars which remained unsold when they left the factory gate, so there would be no incentive to sell cars in more distant areas. Japanese cars of course would be kept out altogether by the application of the principles of the variable import levy. The variable import levy is a more deadly form of protection than any other. It is always fixed in such a way as to keep out imports altogether, so long as there is domestic production which can satisfy the market.

However, in the field of manufacturing, where economies of scale are so prominent, and where a rising market share brings cumulative advantages and a falling share imposes cumulative handicaps, there are no such arrangements. We have butter mountains but we do not have motor car mountains. Failing any such arrangement, I suggest that entry into the market served to accelerate Britain's decline both absolutely and relative to our Common Market partners. It is true that our exports to Europe have been rising faster than to non-European countries, but our import of manufactures from Europe rose faster still, so that today, as the noble Lord, Lord Cockfield, said earlier this afternoon, we are importing one and a half times as much in manufactures from the Common Market as we are exporting to them.

Gone are the days of the "glad confident morning", when White Papers of successive Labour and Conservative Governments commended entry into the Common Market by holding out a promise of a rosy future entirely based on the rosy and greatly enhanced prospects of manufacturing industry. The Common Market would provide—and I quote from the White Paper: in effect a much larger and a much faster growing 'home market' for British industry than exists at present or would otherwise exist in the future. There would be substantial advantage … on account of these 'dynamic effects' which … assuming British industry responded vigorously to these stimuli, would be considerable and highly advantageous … The acceleration in the rate of growth of industrial exports would then outpace any increase in the rate of growth of imports; the growth of industrial productivity would be accelerated as a result of increased competition and the advantages derived from specialisation and larger scale production which in turn would accelerate the rate of growth of national production and real income". All of these are quotations from Cmnd. 4289.

That was written 13 or 14 years ago. It should be compared with the pathetic little reference to manufacturing in the present report, in paragraph 25—it was the only reference to manufacturing I could find in it—which says that, though there is a deficit on United Kingdom trade with the Community in manufactured goods, most of the causes of this decline in the United Kingdom trading position occurred before accession to the Community, reflecting the long decline in the United Kingdom's manufacturing competitiveness worldwide". But what about the "dynamic effects" of our entry into Europe that was supposed to have changed all that? There is no mention of that in the present report.

Incidentally, I cannot help mentioning that the statistical advice at the disposal of the committee definitely leaves room for improvement. It is simply not true to say that, most of the causes of this decline in our trading position"— meaning the deficit in the trade in manufactures— occurred before accession to the Community". The facts are that prior to the year of accession in 1973 the United Kingdom was in surplus in manufactured trade with the other EEC countries in every single year, except perhaps 1972, when we were in approximate balance; we had a very small surplus. For many years there was a comparatively small deficit in the trade with Western Germany, but this was more than offset by a surplus in trade with other members.

Nor is it correct to say, as the report suggests—I quote again from paragraph 25—that, within the Community this decline has substantially levelled out in the last 10 years". The facts are the very opposite. Our deficit in trade in manufactures rose from 276 million, or 9 per cent. of exports, in 1973 to 1,615 million or 15 per cent. of exports, in 1978; then to 2,743 million, or 23 per cent. of exports, in 1981; and then to 7,910 million—1 am subject to correction, but it is rather larger than the 7,000 million suggested by the noble Lord, Lord Cockfield—or 52 per cent. of exports, in 1983.

So our trading position has progressively worsened. This is not a matter of "flattening out", as the report suggests, but, on the contrary, it is a matter of "accelerating decline". All the figures that I have quoted are from official British sources, and if any noble Lord wishes to inspect them I have deposited a copy in the Library—

Lord Hankey

My Lords, will the noble Lord give way for a moment? If it is the noble Lord's intention to blame the Common Market for our industrial failure, is that really fair? Do we not have to take account of the colossal decrease in productivity in the United Kingdom while our workers were encouraged to quarrel about nothing but pay, and so on? We passed legislation which enabled anybody to do anything with complete impunity in British industry.

Lord Kaldor

My Lords, I do not know what the noble Lord is talking about. I wish to say merely that prior to our entry into the Common Market, our manufacturing production increased quite substantially. In fact, the 20 years before 1973 were years of the highest rate of growth of manufacturing production in the whole of British history, and since that time our output has stagnated.

What are the reasons for that? Obviously, one cannot blame the Common Market for that situation; one can only blame British industry for not being able to compete with the Common Market. But I think that the noble Lord is somewhat one-sided. If I understood him correctly, he puts the blame on the working classes. I think that the deficiencies of our management were more responsible for that—

Lord Hankey

My Lords, I beg the noble Lord's pardon for interrupting him a second time. I am really blaming our politicians for passing laws affecting industry which did not encourage the increase of productivity and which led to the disastrous decline of our performance inside the Common Market.

Lord Kaldor

My Lords, I accept the correction. I do not think that we can pursue this point at the moment, but I should be glad to hear precisely what kind of legislation the noble Lord has in mind.

Anyhow, the hopes that were held out at the time that we first applied for entry into the Common Market have not been realised. We were told that although costs were going to be high, and although our food would cost us much more, our manufacturing industry would derive such a large benefit that our standard of living would be very much higher than it possibly could be if we stayed outside. In the event the effects were good in agriculture and very bad in manufacturing industry. But the effects on agriculture could have been secured at a much lower cost to the consumer. Indeed, they were largely secured under the previous system of guaranteed prices.

Nobody has raised in the debate the question: what are the advantages of our being in Europe, and staying in Europe? Most noble Lords on both sides of the House, I gather from the tone of the debate, are in favour of our continued membership of the Common Market. But nobody has said why. The main advantage, it is now suggested, is political. Membership gives us a seat at the high table, which I dare say is important, though I do not think that it is so important for defence, where NATO is a much more important instrument than the Common Market. But if we spend the time at the high table in continuous quarrelling, as we have done in recent years, and are likely to do for years to come, is this a good introduction to the creation of a United States of Europe, or a bad one? I suggest that one could plausibly argue the latter.

If we stay in Europe, we must ensure, by fresh institutional arrangements, that we derive some genuine benefits from membership and not just costs; and these could come only through fresh "ground rules" governing trade in manufactured goods, as well as trade in agricultural products.

7.29 p.m.

Lord Ezra

My Lords, the special importance of the report which we are debating today, and on which the noble Lord, Lord O'Brien, and his sub-committee have rightly been congratulated, lies in the clarity and brevity with which they have set out the problems now confronting the European Community; and in my few remarks I propose to follow the example of their brevity.

Noble Lords who have already spoken have dealt in depth with the major issues—the issues particularly of the common agricultural policy and the contributions to the Community's budget. I should like to concentrate my remarks on Part 7 of the report which deals with future developments. I believe that the attempt now being made to resolve the difficult financial problems of the Community provides an admirable occasion to review the priorities facing the Community in the future. These are set out clearly in Part 7.

The Community has changed very much indeed since the common agricultural policy was set up in 1963. What has happened particularly is the massive recession through which all our countries have gone and which therefore raises a major structural problem. The report in Part 7 refers to the structural funds, the regional and social funds in particular. There is now an over-riding structural problem to be faced within the Community which, in its most visible and unfortunate aspect, takes the form of 13 million unemployed people. There have been massive reductions in some of the most important labour-intensive industries such as shipbuilding, textiles, steel, coal, heavy engineering and construction. There has been a major move into more capital intensive activities, particularly service activities. There has been the impact of high technology. There has been the impact of imports of goods from the newly emerging industrialised countries.

All these things, I believe, now need to be given a much greater priority in the future thinking of the Community than has been done hitherto. I hope therefore that, at the start of this important conference to take place next week, the heads of state and government will turn their attention to the priorities that we should be tackling before they turn their attention to how we should reform our finances. If we do not know what we are going to spend the money on, it is hardly worth arguing about the money. Secondly I believe that there is a big task to be done—the noble Lord, Lord Seebohm, referred to this—in making sure that the internal market begins to function as it was originally intended to function.

I am pleased to note, from many statements and speeches made by Her Majesty's Govenment's Ministers, both in this country and in Europe, that they, too, attach great importance to this. It was very noticeable at the time of the lorry drivers' strike that our attention was drawn, as the noble Lord, Lord Seebohm, emphasised, to the vast amounts of money that are lost as a result of the frontier difficulties within the Community. These frontier difficulties should certainly not exist by now. There are many other impediments of a non-tariff nature with which we are all familiar.

The third area of priority, I believe, is that of research and technological development. The report admirably points out that if you add up the totality of the research effort undertaken by the various countries of the Community, it far exceeds that of either the United States or of Japan. But in effectiveness, it gets nowhere near to them. In other words, we should be rationalising and combining. A good start has been made with the ESPRIT project to which, I am glad to note, the Government have finally given their approval. We need to be introducing more joint projects of that sort in the high technology field. If we pursue them separately, our effort will get nowhere compared with the giant strides now being made in America and Japan. If we combine, we can make much greater progress.

Finally, there is the area of enlargement. This is undoubtedly going to cost money. But the whole intention of the Community was that it should progressively extend to comprehend as many of the countries of Western Europe as possible. So we have to face up to that problem. I hope, as I said at the start of my few remarks, that, at the beginning of the conference to be held next week in Brussels, a review of the priorities is undertaken and agreement is reached upon them before the heads of state and government begin to tackle the difficult financial issues.

7.35 p.m.

Lord Maude of Stratford-upon-Avon

My Lords, I should perhaps begin by saying that my promotion in the batting order is due to the fact that my noble friend Lord Bessborough was unable to stay. I should also perhaps start by saying that I am aware that my qualifications to intervene in the debate are not strong. I have never claimed to be a Euro-expert and still less a Euro-fanatic. I suppose that my attitude, since Britains' accession, could best be described as that of one who has gritted this teeth and hoped rather despondently for the best. I find myself particularly indebted to the noble Lord, Lord O'Brien, and his committee. Their report has helped to increase my knowledge, to widen my understanding and, often, to clear my somewhat befuddled mind.

If I have one criticism to make of the report, it would be that it seems to me to err on the side of rationality. That may sound a perverse criticism. One would obviously expect a committee of intelligent men and women to produce a rational and intelligent report. But the fact is that I cannot see that any of the decisions which have been made over the years and which have led, for example, the common agricultural policy into its present position, have been rational in any degree. They have been political expedients, fudged out generally in haste at the last moment but showing no signs of any rational policy or any appreciation of where the expedients were ultimately going to lead us.

We sometimes shrink I think from really understanding why the situation is as it is, and why sensible agreements have been impossible. Let us just for a moment consider what the Community is. The Community is very far from being a collection of similar or like-minded people. It is a collection of countries that differ widely in size, in population, in type of economy, in type and scale of agriculture, in prosperity and in size of national product. What is perhaps even more important is that at any given time the Community will contain countries whose governments are pursuing widely different internal policies on widely differing principles. There will be some countries with governments of the right, some with governments of the left; some with governments that are busy inflating their economy, some with governments that are busy deflating their economy.

Most important of all perhaps is the fact that none of these countries has elections at the same time. This is perhaps a matter that economists have tended not to notice or to give sufficient weight to. At any given time, there are some governments which have just got past elections and which are willing to take a chance and risk a little unpopularity, while other governments are just approaching elections and cannot afford to risk offending a substantial body of their constituency. It has always been obvious I think that it was never going to be possible to achieve any sensible agreement on the restructuring of the common agricultural policy until the money ran out.

I absolutely agree with the noble Lord, Lord O'Brien, with his committee, with my noble friend the Minister, and with other noble Lords who have said that it would be absolutely fatal for Her Majesty's Government to agree to any increase in own resources until it is quite clear that a genuine restructuring of the common agricultural policy is under way, and that it will work. I agree with the noble Lord, Lord Brimelow, that the agreement that has been reached on dairy products is very half-hearted. As he said, it will not prevent the output and production costs of dairy products from continuing to rise, and it goes only a little way towards solving the problem.

However, while I am dealing with the agricultural policy, I would go a litle further and re-emphasise what my noble friend Lord Tranmire said about cereals. We have become hypnotised with the dairy problem—the butter mountain, the milk powder mountain, and so on. But what we have not sufficiently realised is that the cereal question is having a devastating effect in distorting the agriculture of this country at least, and it is even having an adverse effect on the environment and ecology of this country.

In the past, countries—and this country in particular—have subsidised farmers and/or consumers for various reasons. The first reason was that it was desirable to keep people on the land and to enable them to make a decent living on the land because agricultural and rural life are part of our society and of our way of life. Secondly, it was desirable to retain some kind of price stability and to even out the distress which might be caused to farmers by alternating surpluses and deficits. But, thirdly, it was done for strategic reasons—it was desirable to keep a reasonable self-sufficiency of production of foodstuffs in case of war or other emergency.

We had an example of that in the 1930s and during the war. It involved the maintenance of a substantial reserve of fertility in the soil of our country. In other words, during the 1930s, when we continued to import large quantities of cereals from overseas, many of our farmers simply put their land down to grass and got by on the milk cheque. It was a quite common response. When the war came and our sources of cereal supplies were either cut off of they were difficult to transport, it was then possible to plough up thousands of acres of fertile pasture land with years of stored fertility in them and to produce from them yields of cereal crops which had never been achieved previously.

The situation is now very different. We have seen a spread of cereal production in this country—a form of prairie farming in some areas—which is quite foreign to the nature of our land. This has resulted, as my noble friend Lord Tranmire has said, in a very serious increase in the feedstuff costs to livestock and dairy producers. So long as we continue to concentrate solely on the dairy problem and ignore the cereal problem, I believe that we shall be intensifying and extending the distortion of our agriculture which has been gradually coming about.

I would conclude by saying once more that we are, in my view, never going to get any agreement on the re-financing of the Community or on the restructuring of the common agricultural policy so long as there is the slightest hope in the minds of governments of other countries that an increase in own resources can be secured without it. It is essential that that be made clear.

The noble Lord, Lord Barnett, has spoken about the need for compromise. Of course there is always a need for compromise in politics and in international relations. But a compromise in this connection would in my view be fatal. I agree entirely with the noble Lord, Lord Seebohm, that Community own resources will have to be increased and, in the end, increased substantially—particularly in the light of possible enlargement. But there is no way in which we shall solve the problems if we yield on the increase of own resources before we get the assurances that we need. I hope that Her Majesty's Government have made up their mind firmly to stick by this resolve.

7.46 p.m.

Lord Hankey

My Lords, this is an arcane and esoteric subject where angels would certainly fear to tread if my noble friend Lord O'Brien and his very able committee had not illuminated it. We get a certain amount of mud slung at the House of Lords, but I do just wonder how many other legislatures can produce from their own members a committee including two ex-governors of the national bank—in our case the Bank of England—several former economic advisers to the Government and other members with such distinguished backgrounds and experience in banking, finance, industry, administration and government. The composition of this sub-committee is really remarkable and so is its report.

Certainly there is nothing superficial about this report and I think it really concentrates on the main issues and supports its conclusions with plenty of detailed evidence. I entirely support the report's conclusions. We have heard some suggestions in this debate that the report might have dealt with wider questions. In my experience when one goes into negotiations it does pay to fasten on the points which can be settled, and keep wider considerations, however interesting intellectually, for further and later treatment.

First, I want to thank the noble Lord, Lord Cockfield, for his most useful speech which I thought threw an admirable light on the considerations which we have to bear in mind when embarking on these negotiations. Our delegation, led by the Prime Minister, will be going to Brussels very soon to discuss these difficult questions. They deserve, and I believe they do enjoy, our complete support on all sides of the House. Nothing we say or do in this debate should hamper them in those negotiations which are clearly vital to this country, to the European Economic Community and to the economic and political health of the "New Europe". I shall say a special word about that at the end of my remarks.

I support the main conclusion of the report that there should be agreement on solving the problems of the common agricultural policy's excessive pricing and over-production before, or simultaneously with, a solution of the imbalance in net contributions and the provision of more own resources for the Community. It would certainly be a mistake to settle any one of these without the others. The noble Lord, Lord Maude, knocked that nail in very hard and effectively.

I think that it is particularly important to settle the agricultural problem before Spain and Portugal become members. According to the OECD statistics, about 25 per cent, of Portugal's population is in agriculture and about 18 per cent, of Spain's. That represents a formidable section of the electorate in both countries, and we have learnt to our cost in Europe how hard it is for any government to make necessary but unpopular changes in those conditions.

Fortunately, the percentage of the population in agriculture has been falling continuously in many EEC countries. In Germany it is now about 5 per cent. and in France 8 per cent. In the United Kingdom it is, of course, only about 2.8 per cent. That is another reason for our being tactful in our handling of the problem, however firm we are, and I hope that we shall be very firm very politely. We really do need better relations on all these questions with our partners in Europe, and I agree with what has been said about the eventual necessity for some sort of a compromise.

I think that the recommendation in the report that the Ministers of Finance should in future be associated more closely with the Ministers of Agriculture is excellent. I do not think it matters very much how it is done, but the EEC should not allow itself to fall into the hands of any one pressure group, as it has done over agriculture, with disastrous financial results.

There is no doubt that in any general settlement we must eventually secure agreement on raising the level of the Community's own resources, presumably by the VAT rate, as the report suggests, but only when we know that it will not be wasted in financing even larger agricultural surpluses which have to be sold at a loss. I am delighted to hear that the Ministers of Agriculture are making a real approach to solving the problems associated with excess milk production and the associated mountains of butter and other milk products. I hope that this goes through.

This brings me to the question of sharing burdens and adjusting net contributions. I very much hope that the United Kingdom "safety net" proposals, perhaps with the modifications suggested in paragraphs 120 to 122 to help the poorer member nations, could form the basis of a solution to this awkward problem. It has caused acrimony and criticism most damaging to the EEC and probably quite out of proportion to the actual sums involved, as some of your Lordships have noted.

However, I believe that it is absolutely essential to take account of the gut reactions among our people, and I hope that the Government will pursue the problem firmly. It would be really dangerous to underestimate the effect that this irritating question could have on the attitude of our electorate to the EEC, especially if and when irritation is deliberately stimulted by the Left-wing militants. I believe that there is here an argument which our negotiators could validly use with their European colleagues. But no doubt they all have similar problems.

However, please let us remember that the burdens to be adjusted have to be calculated in national currencies and exchange rates. The pound is now worth only about 60 per cent. of its absurdly high value in dollars in 1980. The pound's variation in European currencies has been less and has been obscured by inflation across the Continent. But every time any considerable change occurs, it cannot fail to throw doubt on the validity of any agreement that we may have made about burden sharing.

Therefore, I urge that, as part of the deal we now make and as a condition of it, we agree to become full members of the European Monetary System. I entirely agree with my noble friend Lord Seebohm on this. We already co-operate very closely with the EMS, and I suspect that as things now stand we have most of the trouble and not many of the advantages. I can assure your Lordships that uncertainty about the exchange rate is a major impediment and embarrassment for our businessmen everywhere, especially for our exporters and importers and for all who have to conclude contracts abroad.

I believe that this change would be a major asset for our economic recovery. The EMS has not been unduly rigid and in recent years has dealt efficiently with many awkward questions. After my experience of OECD, I have no doubt that the British can help even more than they already do if they become full members. That would be to the advantage of all of us and I believe that the change would be very welcome to our partners on the Continent.

May I emphasise here that, if our economic recovery is to continue, it is vital that our business community should be able to rely on stable conditions. If exchange rates, interest rates, commodity prices or taxation rates, rules and conditions or, indeed, industrial relations are unstable, then boards of directors, farmers or any authority you like to name will hesitate to make the investments which we all need and will usualy put off a decision until a situation becomes clear.

I hope that the negotiations in Brussels will lead to more stability, not less, because otherwise I am sure that our economic recovery in Europe and in this country will suffer. In this connection may I say from these Benches how very helpful I think the Chancellor's Budget is likely to be for Britain's economic recovery. We really do need a European settlement of the future financing of the Communities to complete the picture.

Finally, I want to make a major point of policy. The good health of the European Economic Community is, I am certain, of major importance to all of us in Europe. I entirely agree with what my noble friend Lord Roberthall said about that. If the EEC were to founder, its demise could not fail to shake confidence all over the world—in North America, in Africa, in Asia and beyond, as well as in NATO. I believe that those would be the sort of circumstances in which some major miscalculation in the Kremlin, or among its hangers-on, might threaten the security of world peace.

It is time that the nations of the EEC settled these relatively small, if very irritating, questions and began to take much broader, strategic, forward-looking views. We are bound to cause a good deal of acrimony over the problems of financing the EEC, which really must now be settled. But let us balance this by ourselves promoting an approach to broader, strategic, forward-looking developments in the EEC. The report makes some valuable suggestions about this in paragraph 137, all of which I support. However, I conclude by leaving with your Lordships one final germinal thought. The European Economic Community is already an economic giant. Must it always remain a political pigmy?

7.58 p.m.

Lord Molloy

My Lords, I, too, should like to congratulate the noble Lord, Lord O'Brien of Lothbury, and the members of his committee on producing this extraordinarily valuable report, which, by and large, I support. What I found particularly good about the report was that it compelled one to think and go beyond the terms of reference to which the committee had to adhere. I believe that that is the acid test of a good report, and it did that. When the noble Lord, Lord O'Brien, moved his Motion in his expert way, he said, quite rightly, that this report was easy to read and easy to understand. That is certainly so. If one has read it and understood it, one is compelled to agree with the conclusion that the EEC is in a mess. That is where we have to start our thinking.

We were also encouraged by the remarkably good speech that we heard from the noble Lord, Lord Cockfield, from the Government Front Bench. If we despair too much, we should perhaps take heart from the example he gave when he said that we cannot build Utopia in one year or even 10 years, but we have to struggle on until we can begin to see it taking shape. I hope that the noble Lord holds those views on other economic issues that apply to ordinary people in this country, because they are very good views indeed.

Arising from one of the remarks made by the noble Lord, Lord Cockfield, I have always greatly criticised the EEC for its concentration on farmers—I have never met a poor farmer in my life—and its concentration on bankers—and the same applies to them. I have never heard of a banker being in a dole queue; I have never seen a farmer with his pitchfork signing up for some special assistance. They get it poured on them. This is what ordinary people know is unfair about the EEC.

Many of us on all sides of the political firmament want it to be a success. Speaking personally, I was opposed to our entry. It does not give me much encouragement to realise that all the things which, before we went in, I said might happen have in fact happened. I wish it were possible to say that they had not happened, but they have. That catalogue has been listed in Lord O'Brien's report today. We have to think deeply where we are going. We do not want to do as we have been doing over the past 10 years—enduring the frustrations of a broody hen sitting on a china egg.

We have heard all the arguments which still go on, and which started seven or eight years ago, about the gobbling up of funds by the CAP, of the beef mountains and the wine lakes. I went to have a look. I realised that the finance for the housing to put these beef mountains in, and these tremendous contraptions for saving the wine, could have wiped out half the homelessness of Britain, France or Belgium if that money had been spent in that way. So I said to myself that there was something wrong here, and that is what ordinary people say. This is underwritten in this magnificent report.

Our mistake has been in trying to be reasonable people—both our continental collegues and ourselves. We have nurtured the problems instead of trying to resolve them. In consequence, here we are in 1984 realising that this dream is slowly turning into a nightmare, when two-thirds of the budget this year will be allocated for farm spending to keep up the income of about eight million farmers and their farm workers. Everybody who works in every other industry—digging coal, making electricity, building houses (when they are allowed to come off the dole and do that)—says, "What about us?" The nurses, doctors, specialists in the health service, say, "What about us? What is special about the farmers? We know we have to eat, but if we do not eat they will not have the need to grow anything and will not get any profits". It is this simple thinking of ordinary folk which quintessentially is where our minds ought to be concentrated.

We also have to acknowledge—and this is where I thought Lord Cockfield's speech was so important in bringing back the idealism—that there is much bitterness within the Commission and in the EEC generally. At Athens, for example, the meeting of the foreign and finance ministers almost looked like a match between that body and the Brussels Commission. The umpire and the proposer recommended—that is, one of the Brussels commissioners—that the basis of each state's budgetary balance should be calculated differently in order drastically to reduce by one half Britain's real budgetary imbalance.

I would say that that was plain cheating. Therefore, I agreed with Commissioner Tugendhat when he said that the gentleman was suggesting that we should cook the books. He must have been an economic masseur of some sort. The President of the European Commission declared last month that member states must contribute more or, said Mr. Gaston Thorn, the regional and social fund would have to be plundered. In the view of a former leader of the Tory group, the entire Commission should be sacked.

Then I read today in the British press that Mr. Gaston Thorn says that we will require £1 billion more to make the EEC budget a reality. It is this sort of thing that we have to try to understand and see where on earth we are going. What has the membership of the EEC done to help our nearly 4 million unemployed? What has it done almost to bring about a strike in our National Health Service? There is something wrong somewhere. Is it because we have left too much to economists with these funny terms, "macro 1, 2 and 3", whatever they are, and neglected the real purpose of why the EEC was created, as the noble Lord, Lord Cockfield, said, which was to deal fundamentally with the humanities?

The proposal that the British Government are, or will be, submitting in the near future about the safety net I think is all right, but it can be regarded as only a temporary measure. What we are not doing is to try to resolve the most serious abscess on the body politic of the EEC, which is CAP expenditure.

The Select Committee agrees that the increase in Community resources will soon be necessary. I believe that that must be so. That is logical. If we are going to get on better and better, do more and more things for ordinary folk, and not concentrate on farmers, then we need more money. I would welcome the day when we had a debate in this House because, having taken the principle of the Good Samaritan and made it a reality in Great Britain, it was now going to be made a reality in the 10 or 12 countries of the EEC. Then we shall be making something real of the European Economic Community.

It is a return to this sort of thing that is important, based on the future financing of the EEC, which Lord O'Brien's committee has been examining—and I believe the report ought to be made a standard textbook in the next year or two so that we can examine just how far we are going—and, allied to that, the principles enunciated by the noble Lord, Lord Cockfield. If a partial solution is based on, as it was once described, a binding and permanent system to limit national contributions to the central funds in relation to national gross domestic product", I shall have to reread that to find out exactly what it means. I think I have some idea. What we have to be able to say is that, whatever these things might really mean in economic parlance, the ultimate objective is to raise the standard of life of ordinary people so that we can remove from them the horrifying question of whether the EEC is a dream or a nightmare.

During the referendum I am bound to say that the antis—those of us who were opposed to entry to the Common Market—were much nearer the truth than the pros. Nevertheless, the people of our island race determined that we should go in, and we have gone in. All that has happened is not because of our entry, but the EEC has limped from one crisis to another and resolved very few of them, and is constantly shouting out for crutches to help it along. We must try to get back to the fundamentals of what we were told we could achieve by entry into the Common Market.

One of those was not merely a widening of the boundaries of that great principle of the National Health Service, but also that we would develop more and more cheap, wholesome food, together with the fact that everybody could afford to buy it because they would be in full employment, and we are not. We have many more of our families in Great Britain this evening, while we are debating this in this House, who are worried and sick to death because the husband or the bread-winner is now entering the second or third year of being on the dole. I wonder whether the Commission in Brussels is concerned about this. They ought to be, and we must be.

There are many other things I should like to have concentrated on, but much has already been said. I have to make a criticism of the Government because they have lamentably failed to get more from the social and regional funds which would have raised the status of the humanities aspect a little more. We have seen in the Common Market and in this country this hostility towards training for women. This has meant that we have forgone some £30 million which we could have had since 1979. At the same time we must realise that Government control on local authority spending has prevented local authorities from obtaining money from the social and regional funds for job creation and for training purposes; for an attack on unemployment, particularly an attack on the unemployment of our youth, which must almost be a criminal offence for us to put up with. We have suffered from this myopic madness where sheer incompetence has compounded doctrinaire stubborness.

On 14th February there was a debate in the Strasbourg Parliament on a draft treaty establishing a European union—the so-called Spinelli resolution. Among other things the treaty would remove the power of national governments to use the veto on matters of vital national interest, would take away from national parliaments the control over entries in the Community's own resources and would increase the European Parliament's legislation on budgetary powers. The distinction between compulsory and non-compulsory expenditure would be abolished so that the Parliament would have the power, within a fairly generous upper limit, to increase not only social and regional spending but also agricultural spending.

The facts were that these proposals have been supported on the one hand and condemned on the other. I believe they are a real challenge to the direction in which we are to go. Are we prepared to surrender some of our democracy to be better off for a short time? That is a difficult question, but I would be in favour of rejecting it and trying to find another sensible way. I believe that the ultimate objective should be a budgetary system which reflects the member states' net contribution to their ability to pay, that is the relationship of GDP per head. The United Kingdom is now the fourth poorest member state and must demand—I believe that the Prime Minister is right to demand and she is supported by the leader of the Opposition—that we should now obtain modest net benefits. We should seek to move towards the preamble of the Treaty of Rome to ensure harmonious development by reducing differences between the various regions.

The first move to obtain this needs a drastic reduction in the CAP share of the budget. That must be followed by, or run concurrently with, an increase in the social, regional and industrial spendings. The ordinary people in Italy, Germany, Belgium, France and Great Britain understand the regional, social and industrial spending and that would be a bulwark of morale against the threat of the evilness from the East. I do not suppose that ever enters the minds of the economic commissioners. It ought to and I hope that our Government will use their influence because that is vital and shows how high I place social, regional and industrial spending. In helping to obtain this, we should first reduce food surpluses by imposing substantial cuts in support prices for products in structural surplus. We should then shift the burden of support from the farmers through the consumer to the tax payer. The necessity of member states to support their own farmers would bring a sense of realism and open up new options for the future of the CAP and the EEC in general.

In conclusion, I want to say a few words about the European Parliament. I appreciate the hard work that MEPs do, members from all parties, but are they really getting to grips with the problems? Are not their constituencies in our island far too large? If an ordinary person wants to get hold of his Member of Parliament, nine times out often he knows who he is and where to get hold of him, but with these massive European constituencies I think we have made a grave error. I believe we were far better off when we sent members from this Chamber and from another place to represent Great Britain in the European Parliament. It was a better system than the so-called direct elections. I remember one momentous occasion when my noble friend Lord Bruce of Donington threatened the whole Commission that if they were not prepared to examine the views put forward by the British delegation he would have them examined by the British Parliament and he would call in aid the oldest parliament in the world. That had an effect. Members of the European Parliament cannot do that. I do not suppose that we have the joint meetings that we ought to and we might consider those in the future. We have to do this because we need better co-operation between parliaments, better understanding, better appreciation of control which could lead to the ideals of the founding fathers which the noble Lord, Lord Cockfield, quoted so well. That could mean a brighter future for the peoples of the member states. I believe it would also make a massive contribution to the moral defence of Western Europe, something that we could all cherish. That should be taken into consideration.

These things together mean that henceforth we must call for social justice to be the major flank of the policy of the EEC. If we work for that I believe we can make it not only a success, but a success that we recognise which would bring cheer to the hearts of everybody in Western Europe as well as in our own country.

8.16 p.m.

Lord Kilmarnock

My Lords, at this hour on a Thursday evening your Lordships will be relieved to hear that I have cut most of the decorative preamble from my speech. But I cannot refrain from saying that this report, for which we are so grateful to the noble Lord, Lord O'Brien of Lothbury, and his subcommittee, is one of the more important reports produced by the EEC Committee of your Lordship's House. I do not say that all the other 200-odd red books produced by that committee have not had their importance and relevance, but this draws on and refers back to others in the series and presents a coherent approach to where the Community should be going in terms of new development; the sort of things that the noble Lord, Lord Ezra, was talking about.

We find in part III a summary of the past and future political and economic benefits, though if the Community disintegrates there will be no economic benefits and it is doubtful whether the tender peripheral growth in political co-operation which the noble Lord, Lord Brimelow, sees as the main benefit, will survive. All this makes the need to resolve the present crisis in Community relations, centering largely on the budget, of great importance. This clearly is of a different order of magnitude from previous crises, partly because of the Athens failure and partly because the series of ad hoc refunds requiring yearly renegotiation have created an atmosphere of acrimony—a word used twice in the Committee's report and I think the noble Lord, Lord O'Brien, used it once in his speech—in which no healthy partnership can survive.

While rejecting the juste retour concept in favour of a mildly redistributive approach leading to a convergence of member states' economies, the Committee shows through the tables 1 to 5 of Annex 2 both the unfairness of Britain's contribution and net returns in relation to our GDP and the haphazard form in which such redistribution as occurs takes place. The anomalies of the system are well illustrated in paragraph 116 from which we learn that Italy, which is the third poorest member state, gets less than half the net benefits per head received by Denmark which is the richest, and Greece receives about one third of the net benefit received by Ireland, although it is significantly poorer.

In essence there are three interrelated problems to be solved. There is the control of CAP expenditure, there is the permanent correction of unbalanced net contributions like ours and the obvious need to increase the Community's income or own resources if any viable schemes, such as ESPRIT, for example, are to get off the ground or if the long deferred entry of Spain and Portugal is to take place.

Under one of these headings, the CAP, the meeting of agricultural ministers on 11th to 13th March as we heard yesterday, made modest but definite progress on the milk quotas and the butter subsidy. This is to be welcomed but at the same time it has to be said that the Commission has, over several years, advanced proposals on CAP reform which has been largely ignored. For that reason I very much welcome the recommendation made in paragraph 139 (iii) that Ministers of Finance should in future be closely associated with these negotations so that other and more general interests may be represented. The noble Lord, Lord Barnett, had doubts about this but I think the noble Lords, Lord O'Brien, Lord Bruce-Gardyne and Lord Hankey, had the better of that argument.

It is wrong, as the committee said, that the interests of the farming community should totally outweigh those of consumers and taxpayers. There is, in the committee's words, all-pervasive support that no other branch of European industry enjoys. This is all the more open to criticism when the numbers employed in farming in the 10 member states have declined from 17 million to 8 million in the past 20 years. The agreement of the agriculture Ministers is only a tiny step forward. It is therefore worth looking at some of the mechanisms proposed in the report for a more general re-designing of the budget.

On the agricultural side, the committee are sceptical of quotas and super levies on their own and they back the Government's line that there should be a cash limit on CAP expenditure. The committee recognise in paragraph 98 the political sensitivity of this issue in all member states but they are right, in my opinion, to advocate in paragraph 96 that the adverse effects of such policies on disadvantaged farmers should be mitigated by direct income aids, presumably through the social security system.

Let us look at the possible mechanisms advanced by the committee to achieve wider and more lasting budgetary reform. They rightly say that such reforms cannot be brought about merely by operations on the expenditure side or on the incomes side. They want unbalanced contributions to be corrected by a safety net based on the GDP of each member state; but they point out the difficulty of comparing GDPs at fluctuating market exchange rates. It is interesting to learn in paragraph 112: Exchange rates movements have largely determined the apparent increase in United Kingdom GDP per capita from 75 per cent Community GDP per capita in 1978 to 98 per cent in 1982". The Commission has proposed an average of two indices, but the very existence of this technical problem is surely yet another argument for our joining the EMS, under which such comparisons would be much easier and the complicated system of MCAs could be phased out.

On the incomes side, the committee refers to the Commission's ingenious proposal to modulate or adjust the VAT contribution by relating it to an individual member state's shares in agricultural production, modified to take some account of relative prosperity. Modulated VAT, as envisaged by the Commission, would be on the basis of three indicators: the share of member states' final agricultural production; the GDP per head in each country; and each country's share in the Community's net operating surplus. So long as the total agricultural expenditure exceeded 33 per cent. of the total budget the difference between that and the actual proportion of agricultural expenditure would be financed through the modulated VAT. The bottom tranche of expenditure would be financed in the normal way; so that if agricultural spending amounted to 60 per cent. of the budget, then 27 per cent. would be financed through modulated VAT. This alone would not be sufficient (and the Committee said so) to eliminate the German and United Kingdom problems; but, in combination with other measures, it could be very effective. Although it did not find favour at Athens, I hope that the Government have not rejected it. It would achieve two related aims. It would reduce the imbalance in contributions and provide a fair basis for an increase in own resources. I should be most grateful to the noble Lord, Lord Cockfield, if he will comment on that when he comes to wind up.

This brings me back to the committee's firmly-stated conclusion in paragraph 138(i): For the Community to develop fruitfully and dynamically an increase of its financial resources will soon be necessary". It is not only a question of the threat of bankruptcy nor of the barriers to any form of joint industrial research and development, for without more money the entry of Spain and Portugal will become virtually impossible.

As a Hispanophile and, to a modest extent, a Hispanist, I want to dwell for a moment on what we call enlargement. This unemotive, factual word does little justice in the case of these two countries to the heartening and praiseworthy political progress that they have made in recent years. Of course, we pay lip-service to the need to strengthen and underpin democracy, and so forth, and we recognise that membership of the Community will contribute powerfully to this end. But I wonder whether we have taken on board the quite remarkable achievements of the King of Spain and the post-Franco Spanish Government in steering their country between the reefs of terrorism and militarism.

True, the British Government's record has not been bad. Even the difficult Gibraltar question has not weakened our commitment in principle to Spain's entry. Only yesterday the noble Lord, Lord Trefgarne, after repeating a Statement in this House, went on to say (at col. 745 of Hansard) that the Government would be prepared to countenance a modest net contribution to achieve that particular outcome. I believe he was referring to the Spanish and Portuguese entry to the Community. But Portugal and Spain have been candidates since March and July 1977 respectively. How long can a country eager to integrate with Europe be kept outside the gates; and if that gate is never opened, where will that country go instead?

On the economic side of enlargement, I wonder whether the threat to our interests has not been exaggerated. I do not deny the difficulties over Mediterranean products, but I repeat my view that small farmers disadvantaged by a stricter CAP are proper subjects for relief by expanded regional and social funds and to some extent by national social security policy assistance. On the industrial side, following trade agreements in 1970 and 1976 Portugal and Spain have had access to the Community market and the effect of their exports has been very largely absorbed. Spain now ranks tenth among the industrialised countries of the world. Does not that, too, provide us with opportunities? Given the well-known appetite of Spaniards for latest brands of consumer goods, I should have thought that there could be a considerable dynamic effect on our economy following their entry. But there will be no enlargement and no dynamic effect if there are no new resources.

I would remind the House of what a number of noble Lords have said about the relative size of the money that we are talking about. The noble Lord, Lord Seebohm, referred to a cost of £7 per head to the citizens of this country. We have heard also that the size of the Community's budget in 1983 represented less than 1 per cent. of the Community's GDP and about 2 per cent. of total public expenditure in the Community. There is another point the committee made which no one else has mentioned so far this evening, and which should not be overlooked. It is that hostile British opinion has been moderated. This was one of the lessons that emerged from the last general election. Let us not forget that.

Finally, in case my approach should be thought to err on the side of wetness, I should like to call in aid the Financial Times leader of the 12th of this month, which made some hard-headed, practical suggestions. In return for a durable system of compensation in place of the traditional annual haggle, it argued, the United Kingdom should be prepared to settle for smaller proportions of compensation than in the past. The article went on to assert that a similar trade-off must come into play over any increase in the Community's resources. The Commission has proposed that the VAT ceiling should go up from 1 per cent. to 2 per cent. Several member states want a much smaller increase. Those are perfectly reasonable negotiating positions. The much-used axiom about not going naked into the council chamber commands general agreement; but this does not mean that the only alternative is a suit of armour with rusted bolts.

8.29 p.m.

Baroness Seear

My Lords, we on these Benches have been dyed-in-the-wool supporters of the Community since the day when Monnet and Schuman were first bringing the Community to birth. First, in many ways this report and this evening's debate have been a cause of very great encouragement. The speech of the noble Lord, Lord Cockfield, brought applause unexpected, perhaps, from the noble Lord, Lord Molloy, and also applause from these Benches. We are not often all three in agreement. That makes for a pleasant change.

In the opening paragraph of the noble Lord's speech there was none of the traces of the Gaullism which have so often marred the speeches on the Common Market when they come from those Benches. Even more surprising and encouraging was the speech of the noble Lord, Lord Barnett. I had not realised how seriously I had misread the Labour Party Manifesto at the last election, and the news that the Labour Party is so strongly in support of the Community must give us all cause for good cheer—until, of course, I heard the noble Lord, Lord Kaldor, The noble Lord had read the Labour Party Manifesto in much the same way as I had. Once again I do not often find myself in agreement with the noble Lord, Lord Kaldor, but on this occasion it seemed that his interpretation and mine were much closer together than is usually the case. As for the noble Lord, Lord Molloy, I was still left uncertain at the end of his speech whether he was on the side of the Community or whether he was against it; but I take it that the Front Bench spokesman is the real representative of his party and therefore we must assume that the Labour Party—at any rate today in this House—is in full support of the Community.

When we look at this Report of the noble Lord, Lord O'Brien, and his extremely able committee, we realise that it takes people of real brilliance to make a subject as complex as this appear simple and straightforward; and that is what this report has been able to do. When we look at this report and we listen to the debate, I think the important thing is to recognise the difference of scale and importance of the opportunities and the potential of the Community in comparison with the problems which at the moment we are facing. The problems are with us now; they are real and they fill our minds. But the potential of the Community is on an altogether different scale. We must either go forward in the full development of the idea of the Community or the Community will fade away. There is no standing where we are at the present time. As I remarked in a debate on a similar subject not long ago, at the moment we are almost getting the worst of all worlds in relation to the Community. We are not reaping its benefits but we are paying its costs.

The future potential of acting together to face the problems which alone we cannot possibly face is something on which we must focus our minds throughout all these discussions. As regards the political potential, because we have had perhaps slow but real political success, we tend to overlook what has really been achieved in this part. And so far as we have failed to take advantage of the economic possibilities of the Community, to a very large extent this is our own fault. The market is there: the 270 million people are there for us to sell our goods to. If we fail to do so, it is not the fault of the Community but the fault of ourselves, because we have not been able to adjust to the demands of the Community and to win those markets in fair competition with other members of the European Community. That is our fault not theirs.

We have not taken advantage of the stabilising influence of joining the EMS. Here I join with other colleagues in saying that surely now is the time—and this appears also in the report of the noble Lord, Lord O'Brien—for us to enter into the EMS and gain the long-term economic advantages that such membership will give because of the stability it can bring, without which there cannot be any real economic progress.

So against the potential of the European Community, economically and politically, what really is the scale of the problems which we are now facing and which have got to be solved? As has been said again and again, it is the problem of the CAP and the problem of the British contribution. May I say just one word in support of this much-maligned CAP? Of course it has got out of hand and of course it needs to be reformed; but do not let us forget that it has enabled a reconstruction of agriculture in many countries of Europe without the evil social consequences that such reconstruction would otherwise have had. If the noble Lord, Lord Molloy, says that he has never seen a poor farmer, it is a pity that before the CAP he did not see some of the peasant farms of South-West France and the Massif Central, where there was a level of poverty which he would have found very hard to match anywhere inside the United Kingdom. It has been possible for the countryside throughout Europe to do that reorganisation and to save depopulation because of what the CAP has been able to do. It has largely done that, but it has made many mistakes in the process and therefore it is surely high time that it was reformed and that the proportion going to the CAP in relation to the other areas on which money should be spent should be drastically changed.

Also, of course, so much would not have gone to agriculture, as my noble friend said in his speech when he opened the debate from these Benches, if we had been there when the Community was being formed. The emphasis on agriculture would not then have been so great and the emphasis would have shifted, as it should shift now, to the social, economic, industrial and other fields. So the changes in the CAP, we all agree, must come; and that is the immediate fight.

There is also the question of our contribution which needs to be met, but—here I am only underlining what other Members have said—the amounts of money involved are chicken feed in relation to the scale of the opportunities in the EEC in the long run. I would say that in part it is a matter of attitude. Nearly every Member, and certainly the noble Lord, Lord Cockfield, has said that there can be no increase in our contribution and there can be no increase in own resources until these matters have been settled. Why not put it the other way round? Why not say: "There will be an increase in own resources. We will increase our own contribution once these other issues have been settled"? It means exactly the same thing but the tone is totally different, and the tone of our voices, and particularly the tone of the British voice when we talk at the summit next week, is enormously important.

We have been discussing these issues here in Westminster, but many of your Lordships know that when this is being looked at in Brussels the approach of the British has been seen as arrogant and grasping and "anti-Communaute" and has failed to show an appreciation of what the Community is really all about. I am not for one moment going back on the importance of insisting that we get these two problems solved, and rightly solved, or denying that anything much is wrong. But if only we can show our enthusiasm for the development of Europe, our determination to make our contribution and to do so in such a way as to convince our partners that we really are members of a European Community and not just a member fighting our own corner, then the chances of success would be a great deal better.

8.38 p.m.

Lord Ardwick

My Lords, I was a member of the sub-committee whose report we have so intensively discussed today and I am proud of the work that we did. I am grateful for the skill of the special adviser and the clerk, working against a deadline to bring order and clarity to a difficult and emotive subject. I am also profoundly grateful for the leadership of our chairman, the noble Lord, Lord O'Brien. This report could very easily have been turned into one more angry demand, with detailed justification for a lower British contribution to a scaled-down Community. It is the opposite of that. It is even-tempered throughout and it begins on a positive note. May I say that I was delighted to hear the noble Lord, Lord Cockfield, catch that mood himself today. It was a generous, hopeful and creative mood.

The Report begins by saying that a unanimous decision is needed to place further resources at the disposal of the Community, but stubborn obstacles impede this decision. While the problems of the increasing cost of the CAP, and the failure to find a long-term solution of the problem of net contributions towards the Community's financing remain unresolved, it is difficult to develop the Community positively and creatively and to agree upon the financial resources required in future.

The noble Lord, Lord O'Brien, stressed the positive and the creative sides of the report. If only this spirit had informed Britain's approach to the problem from the beginning, if only this message had gone out with every speech calling attention to the injustice that was being done, then the journey to a solution might have been no shorter but it would certainly have been much smoother.

One of the difficulties has been that the very question of membership of the Community has been part of the domestic political argument, and the Conservative Government have been able to win favour with both pro-and anti-marketeers by pitching their demands on their European partners in harsh terms. But now we are in a new period. The election is behind us, and even the old sceptics in my own party recognise that we are in the Community for some years ahead at least, and that we would be wise to make the best of it. Our policy has been questioned. What I am saying is that it seems to me to be a developing policy.

One of the positive factors, in which I take great pleasure, is that my party is establishing closer, more comradely, relations with the very positive socialist group in the European Parliament. I was a member of that group for four years, in the days when we had a nominated Parliament; and the British Labour Members, instead of having an agreed national policy, instead of having a caucus, were members of the socialist group as individuals and free to express their own views. Those who started out as sceptics may not have changed their views fundamentally. Nevertheless, they were very different people, with very different attitudes to Europe, at the end of their period of service.

One of the current hopes of the socialist group in the European Parliament is that one day the member nations will agree to co-ordinate their policies for economic growth. We have all learned from sad experience that no nation alone can attempt an expansion of any vigour without running into trouble. The French were the last to learn that bitter lesson. But there is in Europe among European socialists—and not only among the socialists, but among other groups, too—the knowledge that moving forward together can be far less dangerous than attempting expansion alone. One day that expansion must be attempted. We cannot live for very long with this appalling unemployment that spreads from this country right across Europe.

On the eve of this critical summit, the air is loud with the lamentations of ardent old Europeanists, as well as with the sharp cries of the critics and the sharp cries of the defenders of the status quo. The ardent old Europeanists long for the days when the Community had strong political leaders, with an evangelical zeal for European union. Those days, I am afraid, are long past. They belong to the golden youth of the Community, when the leaders were able to contemplate—such was their self-confidence—monetary union in about 10 years' time. They did not even bother to think out the difficulties ahead of such an ambitious attempt. All they said was that reason would follow the path that faith had prescribed.

This was the Community of faith that we entered; and then, almost at once, came the oil shock and the consequent recession, of which the noble Lord, Lord Ezra, spoke a few moments ago. The moment we went into the Community, the golden age ended and the dynamism went into decline. Every Government in the Community faced difficulties at home. Some of them experienced crisis after crisis and were under threat, particularly those based on rather fragile coalitions. There was unemployment, there was inflation and governments were in trouble. Ministers had the greatest difficulty in the Community in doing anything other than defend their own immediate and short-term interests. Of course, the old rhetoric remained for some years. It gradually died away; but the action to support the rhetorical hopes was lacking or was minimal.

We have seen recently—I think we have learned something of the mood of Europe—the anger and despair of the European steel workers as their old industries have to be cut down. We have seen them turn their anger on Brussels, as though the Community was the cause of the very problems that it is trying to rationalise and to smooth out. We have even seen the anger of the French farmers; and other farmers, I suspect, will follow their example in the next few days. A week or two ago, we saw the stubborn fury of the lorry men—as the noble Lords, Lord Seebohm and Lord Ezra, have reminded us—frustrated by the national customs officials who were behaving as though their country was not part of a free trade area.

The consequence of all this is that the Community has slowed down its development. It has been slow to discard its tariff barriers. It has not been able to create its regional and social policies to balance its agricultural policies. The linked problems of fair contributions and the CAP, in one way, are just another set of the problems which the Community has not yet had the heart and the will to solve. Yet these last ones, the ones we are discussing today, are special problems—key problems—because, as the report points out. the Community cannot get the resources it needs for creative development until these problems are settled.

The Community has of course made some modest progress, as the noble Lord, Lord Cockfield, pointed out. Even in these years of difficulty, the Community has developed the regional and social funds considerably, if not nearly enough. It has created the EMS and the ECU. It has used its giant economic strength to reach trade accommodations with the Americans and the Japanese, and it has developed its external political co-operation quite considerably. I remain hopeful. I cannot believe that the Community will fail to solve both these problems. I cannot believe that the Community has no future, except slow disintegration and a heightening of national barriers between member countries. Indeed, I see us now at a turning point in the history of Europe.

We are in the early days of a new industrial revolution, based on a variety of new technologies. Surely, the lesson is clear enough to all the statesmen of the member nations that, unless the Community shares its research and development, and unless it fosters joint companies with the whole of the Common Market freely available for their products, then we shall be left far behind America and Japan. In the transition, as the old industries recede and the new ones emerge, Europe—the Community—must do all that a community can do to minimise the subsequent unemployment.

But not only are we on the threshold of a new industrial age. The political scene is developing on new lines. The best Europeanists have also been good Atlanticists, but the United States has thrown up a succession of presidents whose loyalty to the alliance is not seriously doubted, but whose political wisdom does not match their military strength. It is more and more essential to put the European political voice, a united voice, into the alliance. Doubts have grown in the past two or three years, when a combination of a nuclear arms race and hostile rhetoric has frightened many of us in Europe. The result has been to create what is called a peace movement of formidable size and some political influence. The West European nation do not have an identical view, even about the grand strategy of the alliance. But there is a general interest in preserving or restoring detente with the massive power on the community's eastern frontiers.

New ideas of defence are developing, all of them very different, from the simple faith in nuclear superiority to the simple faith in nuclear disarmament which we have known in the last 25 years. The Community has always prided itself on being a civilian community, not the European wing of NATO. But new ideas are now stirring about a defence community. They will require a great deal of anxious thought. I mention this only to make the point that there is nothing static in Europe. Europe is on the move. European thoughts are moving in new directions. We must hope that the leaders of the community will take courage, solve the most pressing of their problems and try to make the next 10 years more creative than the past 10 have been.

8.51 p.m.

Lord Cockfield

My Lords, with the leave of the House, I will endeavour briefly to reply to at least some of the points which have been raised in the debate—perhaps not briefly enough, having regard to the hour of the night, but certainly too briefly having regard to the importance of the contributions which have been made to the debate.

This is one of those rare but memorable occasions when a subject has been illuminated not by political disputation but by careful, thoughtful analysis of the problems which arise. A great diversity of views has of course been expressed, but that perhaps is as well. However, the one point which has come through so very clearly is the widespread support for our membership of the Community. It is not quite unanimous support, but certainly widespread support, and it is very deeply felt. I share this support for our membership; but just because we support our membership that does not mean that we ought to accept terms which we believe to be unsatisfactory. Nor does it follow that if we take, as we propose to take, a strong line in the defence of our national interests, this could lead to the stagnation or even the collapse of the Community. What the noble Lord, Lord Ardwick, said on this point was of very great importance. The Community does have great strength. It is very important that it should develop, and that it should go ahead. It is a Community where there does exist a very great community of interest among the members.

In my opening remarks I made the point that we have benefited very greatly from our membership of the Community. But, equally, other members of the Community have benefited very greatly from our membership. So there is a basis of community interest, out of which a solution could and, indeed, must emerge.

A number of noble Lords—in particular, the noble Lords, Lord Gladwyn and Lord Barnett—seemed to suggest that our present level of contributions was not an excessive burden. The noble Lord, Lord Gladwyn, even seemed to contemplate the possibility of an increase. The sums involved are not inconsiderable. In 1982, our net contributions before refunds amounted to approximately £1,200 million, and about £550 million after the refunds. Our net contributions for 1983 are likely to total £1,100 million, and around £700 million after taking into account refunds. The fact that they are not large in relation to our total GDP does not alter the fact that they are large in absolute terms; nor is there any reason why, irrespective of what the figures are, we should pay an unfair proportion or should accept a situation where CAP expenditure is allowed to increase without restraint. These are perfectly legitimate points to make, and they do not reflect in any way upon our commitment to the Community.

There was, I regretted to see, a streak almost of pessimism about the ability of the Community to solve these problems. Frankly, I do not agree. The noble Lord, Lord Brimelow, referred to the agreement which had been reached at Stuttgart. This clearly illustrates that at bottom there is a will to solve these problems. This point was underlined by the noble Lord, Lord Ardwick, in his concluding remarks. The 1 per cent. VAT ceiling on own resources cannot be increased without the agreement of all 10 member states.

The 1 per cent. VAT ceiling did in fact constitute an integral part of the terms on which we joined the Community. It dates from the 1970 own resources decision, which has treaty status. This is the answer to my noble friend Lord Bruce-Gardyne. It is simply not a matter of our wanting to alter the rules. All the other member states want to alter the rules, too. This is where the pressure to increase the 1 per cent. VAT ceiling comes from. It is perfectly valid for us to say that if the rules are to be altered they need to be changed in a way which meets our requirements as well as those of other members.

The noble Lord, Lord Brimelow, very properly made the point that willingness to tackle these problems was directly related to the availability, or perhaps I ought to say the non-availability, of money. My noble friend Lord Maude of Stratford-upon-Avon equally made it clear that no real reform was likely until the money had run out. That, of course, is the position which we face today, and it is equally why we are determined that the 1 per cent. VAT ceiling should not be increased unless and until the crucial points which I set out in my opening speech are met.

I take entirely the point that the noble Baroness, Lady Seear, makes about the tone in which things are said, but I need to enter one reservation on that point. It is crucial that there should be no misunderstanding of what the position is here—and there have been instances in the past of such misunderstandings having arisen.

Inevitably this takes one to the CAP. There is and, indeed, there has for a long time been general agreement that the cost of the CAP must be controlled. Efforts have been made, but unfortunately so far they have failed. It is quite right for the noble Lord, Lord Barnett, to talk about the difficulty of controlling agricultural expenditure. That is precisely why we want an overall limit embodied in the Community's budgetary arrangements which binds the commission and the council in price fixing.

A number of noble Lords raised the question of the inclusion of finance ministers in CAP negotiations. We ourselves in the past have argued this point, but it did not find much favour with other member states. For the future, the most important point is to agree on the strict financial guideline. It is in this way that finance ministers would be able to exert pressure on the price negotiations, and this would be embodied in the Community's precedures. But we do not rule out some role for finance ministers as an adjunct to a satisfactory and binding guideline.

Still on the question of the CAP, a number of noble Lords—the noble Lords, Lord Brimelow and, later, Lord Molloy—raised the question of the possible financing of the CAP by individual national members. This possibility was raised by the President of the Commission, M. Thorn, in the European Parliament on 14th March. We have made it clear that the object is to secure control over agricultural expenditure. There may eventually be a case for national responsibility for some aspects of the CAP which currently fall on the community budget, but we will oppose national financing as a temporary expedient simply to bale out the CAP. The major problem is to solve the CAP. It may then be that one can move on to other measures as well.

It is perhaps an indication that there exists real hope of progress that agreement was reached this week on measures to deal with the growing milk surplus, which has been one of the biggest threats overhanging the Community. It is perfectly true that an additional supplementary levy—in addition to the co-responsibility levy—will be raised for a limited period of one year. This was the point raised by my noble friend Lord Tranmire. We share his views; we do not like the co-responsibility levy. It has, in fact, proved ineffective in milk production and it falls more heavily on the United Kingdom than on some others. We agreed to the 1 per cent, really as a quid pro quo for the transitional arrangements which have been made, I may say, very much in order to protect our own farmers, to ensure that the full reduction in the tonnage of milk will not occur until next year and that this year there will be substantial progress—but not towards the full amount of the target. That results in additonal expenditure. The agreement was that that additional expenditure should be financed through the supplementary levy. That arrangement was, in fact, negotiated really in the interests of our own farmers.

My noble friend Lord Tranmire, as well as my noble friend Lord Maude of Stratford-upon-Avon, raised the question of cereal prices. I agree that there is a serious imbalance between the cereals and livestock sectors of the CAP. The Commission have long paid lip-service to the need to improve what is called "the hierarchy of prices". We are seeking in the current negotiations to achieve some hard decisions on cereal prices and, ultimately, the objective must be alignment with world prices.

A large number of noble Lords—the noble Lords, Lord Gladwyn, Lord Seebohm and Lord Hankey, and the noble Baroness, Lady Seear—all advocated our joining the European monetary system. We have had three debates in your Lordships' House on this particular subject. I had the duty (I will not say the privilege) of replying to all three of those debates, and I hope I may be forgiven if I do not now embark upon another debate on the European monetary system. Briefly, the position remains that Her Majesty's Government keep the question of membership under review. Several factors which bear on decisions—including the special position of sterling as a result of the United Kingdom oil production, and the status of sterling as a major trading currency—will have an important bearing on any decision in this field. Interestingly, there has not been much recent pressure from our partners for us to join the exchange rate mechanism.

The noble Lord, Lord Seebohm—and the same point was made by the noble Lord, Lord Ezra—pressed very strongly for progress in developing the internal market. We ourselves regard this as a top priority. We have pressed very strongly for progress on three important aspects in this respect. First, there is the question of frontier formalities. This is what is called "frontier facilitation". Secondly, there is the question of services, particularly insurance, air fares and so on. This is a matter in which I took a very considerable personal interest when I was Secretary of State for Trade. Finally, there is the question of the removal of non-tariff barriers, of which standards and standards requirements are an example. On these points we entirely share the views expressed by most noble Lords.

We agree also with the point made by the noble Lord, Lord Ezra, about the great potential for industrial co-operation across national frontiers. We welcome in particular his remarks on ESPRIT. We believe that this kind of co-operation in research and development of the new information technologies is exactly the kind of enterprise which the Community can help and encourage.

I entirely agree with the noble Lord, Lord Molloy, that unemployment is a major problem which faces this country and the other countries of the European Community. We have had a number of interesting and penetrating debates on this subject in your Lordships' Chamber. My views on this are well known. We all share the same objective. Where a difference of opinion occurs from time to time is on the means which need to be deployed to secure what is, after all, a common aim.

The noble Lord, Lord Kilmarnock, raised a most interesting point about modulated VAT. None of our Community partners—nor, indeed, the Commission itself—has talked about modulated VAT recently. We do not reject the project out of hand, although it is a very complicated concept and the rationale for it is open to debate. We believe that the best way of correcting our unfair contributions to the budget is via the safety net, since it would relate our contribution to ability to pay. Modulated VAT would not. in fact, achieve that result.

In conclusion, perhaps I may just say this. Of course, as we all recognise, we face very considerable problems in this field. These problems are greatly accentuated—as my noble friend Lord Maude of Stratford-upon-Avon has said—because of the sheer diversity which exists between the individual member states. Despite this disparity, there is a common interest shared by all the members of the Community. All members will benefit from success, but, equally, all will suffer the penalty of failure. It is this community of interest which offers the best hope of success.

I am grateful to the noble Lord, Lord Hankey, for what he said about the negotiations. We enter these negotiations with determination—a determination which reflects not just our own interests but the interests of our fellow members as well, because success is success for all of us.

9.8 p.m.

Lord O'Brien of Lothbury

My Lords, at the conclusion of this debate, may I on behalf of the committee thank all those noble Lords who took part in it. All made impressive contributions to what I think will be agreed was a high level of debate in which political tub-thumping played little or no part. On behalf of the committee I should like to thank all noble Lords for the generous tributes paid to our report. Perhaps especially I should thank the noble Lord. Lord Molloy, whose munificence alone will send the committee away with a song in their hearts. I also thank the noble Lord, Lord Brimelow, who lucidly answered the point raised by the noble Lord, Lord Bruce-Gardyne, which I had fudged. I am grateful to him for his intervention. He is the sort of man who is so lucid and perceptive at all times that in an ideal world he ought to be on all committees.

I also thank the Minister, the noble Lord. Lord Molloy—

Noble Lords

Oh!

Lord O'Brien of Lothbury

My Lords. I apologise to the noble Lord. Lord Molloy. It will be very embarrassing for him. I thank the Minister, Lord Cockfield, for his two magnificent contributions. His splendid statement of Government policy at the beginning and his fielding of the difficult questions at the end gave shape and substance to our debate. The members of the committee are very glad to find that they are marching in step with what amounts to a bi-partisan foreign policy, judging from the contributions of the noble Lord, Lord Barnett, and the noble Lord. Lord Cockfield. I am glad also to find that, despite varying views, as one would expect, on the value of the European Community, virtually all noble Lords support the views expressed by the committee, which the Government also share.

The noble Lord, Lord Cockfield, spoke about the exchange rate mechanism of the European monetary system and his participation in three debates on that subject already. Let me assure him that those debates have not ended. The protagonists will still be after him. All I should like to say this evening is that, although many people have spoken about compromise. I am sure no one wants a fudge on these two important points which the committee believe must be satisfactorily settled before any question of an increase in the Community budgetary finance can be agreed. It must be a real settlement not a fudge. I am sure the Government know that as well as anyone.

In conclusion, on behalf of the whole House I should like to give the Government our best wishes for a successful conclusion to their forthcoming negotiations.

On Question, Motion agreed to.