European Agreements: ECC Report

HL Deb 03 June 1991 vol 529 cc475-519

5.40 p.m.

Lord Aldington rose to move that this House takes note of the report of the European Communities Committee on European Agreements with Poland, Hungary and the Czech and Slovak Federal Republic (8th Report, HL Paper 35).

The noble Lord said: My Lords, the report resulted from an inquiry by Sub-Committee A, which was well assisted by the specialist adviser, Mr. Jim Rollo of the Royal Institute of International Affairs. Once again I want to pay tribute to all my colleagues on the committee whose experience and wisdom, as well as their tolerance of and kindness to their chairman, has been remarkable. And, once again, I wish to pay tribute to the clerks. This time we had two clerks, with a handover taking place in the middle of the inquiry. What more can any of us say about them? We did not suffer as a result; the clerks may have.

We were particularly aware that the inquiry was focused on the social, political and economic future of three countries which were until very recently part of the Eastern bloc. We greatly welcomed, therefore, the help which we received from the Foreign Minister of Poland, from the Hungarian Ambassador in London and from the Director-General of the Hungarian Ministry for International Economic Relations. We visited Prague, where we met members of the Czech and Slovak governments as well as of the federal government and also representatives of the House of the People and the House of Nations. To all of them this House owes special thanks, as we do to all who gave evidence.

All the evidence that we received led us to conclude that the rebuilding of the three economies of Poland, Hungary and Czechoslovakia and the full conversion of those countries to free democracies will be an enormous and daunting task. The European Community has a real interest in their success, in the same way as we believe that the three countries have a real interest in the successful development of the Community, which is not only the closest large market for their exports but also a major source of the capital which they so badly need for their economic growth.

The agreements on which the report is based are currently being negotiated between the Community and each of the three countries separately. Those agreements rightly provide, among other important matters, for the opening of the Community market to their exports over the next few years.

The initial speed of the economic development in the three countries, however, depends in large part on the amount of aid, loans and investment from the Western world, particularly from the Community and its member states. It also depends on the ability of each of the three countries to absorb the help which they are offered. However, we consider that the Community and the other countries of the Group of 24 will be wise not to overstrain the donor economies by too fast or too large subventions and loans or investment. Nor will the donor countries help the recipient countries by failing to co-ordinate and monitor what is being done and to regulate their help accordingly. However, I repeat that trade will be the key to rebuilding their economies.

Events reported in the press before, during and after our inquiry all lead to the conclusion that, if economic factors point to a steady pace of advance, political factors call urgently for the fastest possible pace of progress. Political stability will be put under strain as economic transition produces recently unknown levels of unemployment and offers little immediate improvement for the consumer. A growing degree of foreign private domination in commerce and industry may produce further political strain. The shorter that transition the less will be the political strain.

What are the objectives of the agreements? Their purpose is to create a climate of confidence and stability in order to encourage the reform process. The agreements seek to enable each country to play, and feel it is playing, a part in the wider process of political change in Europe. They seek to facilitate the transition to market economies and to encourage trade and investment. The committee supports all those objectives, as I am sure your Lordships will, too.

How many years will the process of reform and conversion take? We are clear that the economies of each of the three countries are likely to develop at different speeds. We hope that all three will be ready to complete a free trade relationship with the Community within 10 years, but we warn that that target may be too ambitious.

Much can be done, and is being done, apart from the relationships of the three countries with the Community. The Council of Europe is encouraging political reform. The committee hopes that the three countries will all soon become parties to the European Convention on Human Rights and will accept the right of individual petition to the European Commission of Human Rights and the compulsory jurisdiction of the European Court of Human Rights. We point also to the importance of encouraging political and trading links between those three countries and the former Comecon countries. We welcome reports of meetings between the three heads of government.

I shall now pass for a few moments to some of the specific points that we thought important in relation to the agreements and their background. First, we stated as our firm opinion that the preamble to each agreement should indicate the wish both of the Community and of the country concerned that each country should accede to the Community when the political and economic situation allows. We were told that that is controversial in some places, but I hope that the Minister will agree with us.

Secondly, we were concerned about the threat of large scale and perhaps mass migration east to west. We were quite clear that it would not be in the interests of any of the three countries for a substantial number of their workforce to emigrate to the Community; nor would it be in the interests of any of the member states of the Community if they did. The Community should therefore act with caution in allowing full, free movement of people, despite whatever may be the political pressures. One of the purposes of aid provided by the Community should be to help create such a climate that few people wish to leave.

We have a number of points to make about financial help. We are quite clear that financial support is essential now, and will remain so until at least the end of the century. There will be the need for continuing support for each country's infrastructure, certainly beyond 1992. Many of those infrastructure projects are unlikely to attract private sector support, at least in the early years. The modernisation of that infrastructure is essential if the economies of these three countries are to be competitive with the West. Indeed, the extent of modernisation necessary after the years of command economies may be difficult for many of your Lordships to comprehend. We stress that the help given towards modernisation in that way must be co-ordinated and monitored.

The next point relates to the change in attitudes and methods in these three countries following their conversion from command economies. We believe that that is at least as important as an improvement in or a renewal of infrastructure and plant. I spoke earlier of the importance of the ability of each country that is in receipt of financial support to make full use of it. This puts a spotlight on the training and know-how projects, both in the Community's PHARE programme and in the programmes of member states. Some of your Lordships may not know how PHARE is spelt. "P" stands for Poland and "H" for Hungary. We were impressed with all that we heard about the British know-how projects. There is a strong case for extending know-how projects which give good value for money and make the best use of the private sector in Britain in assisting those countries and the future of our private sector with them.

We have no doubt that there is a good potential for British commerce and industry in those three markets. We were impressed both with the facilities and advice which the East European Trade Council offers British traders and investors and with the enthusiastic support of Her Majesty's embassies in those three countries. However, Britain is not at present doing as well in trade or investment as some other countries.

The point was made to us that, although the ECGD's short-term credit facilities are in general satisfactory, the extended credit facilities of other member states are better and put our industry at a disadvantage. It seemed to us important that our export credit facilities should in general match those of our competitors. Poland is a difficult case, but if Britain is right about not wishing to add to that country's indebtedness at present, then other countries should surely be persuaded to take the same view, or there should be some agreement between all trading countries to scale their credits to what is practicable. That point may be thought to be tangential to our report, but the Select Committee has always been keen to ensure that Britain is as able as others to take advantage of Community-created opportunities.

I have left until this moment the question of private investment in each of these three countries which is most urgently needed by all three. The climate there must be right for that: the legal climate—their laws; the economic climate—their economic practices; and the political climate. Investment will not happen at once to the degree needed. When it does happen, it will bring with it not only foreign exchange but also skills, training and know-how generally. The opportunities for investment are long-term, not short-term.

It is rightly thought that the indebtedness of the three countries, particularly of two of them, is relevant to future investment and lending. Public sector indebtedness is now handled by the Paris club and there is hope that the debtor countries will not be left with an intolerable debt burden to governments and public institutions. However, we note the importance in that difficult situation, stressed by Hungary, of creditworthiness which is vital for securing new investment, and the will to pay old debts is not irrelevant to creditworthiness. Private sector debt—so far I have dealt with public sector debt—is in our view a matter for the creditor and debtor to arrange.

Before I come to the end of my remarks, I wish to stress once more that the committee agrees with the Commission and the Council that trade is as important as aid in the short term and in the long term, and that in the long term it is the only way in which these three countries can develop their economies in a competitive way. It is therefore right that the Community should open its market earlier than the full opening by the three of their markets. That will raise some sensitive issues for some member states and special arrangements may have to be made while the state aids in Poland, Hungary and Czechoslovakia are run down and their pricing arrangements are put on to a market economy basis. However, we must understand that in those command economy countries currencies do not operate and prices are not worked out in the same way as that to which we are accustomed. Agriculture also raises special problems in some areas and has a special importance for the earning of foreign exchange. A solution to all those special problems must be found.

Before I sit down I must say that I am sure that your Lordships will have other issues to raise in the debate and I look forward to hearing your comments. There are wider issues which will be in your minds. This is the second debate that we have had in recent times about the association of the Community with European countries that are not at present members of the Community. The proposal for the European economic area with EFTA was the first. There are fears among some people, including some of your Lordships, that by going at too fast a pace towards closer union in the Community, new aspirants to membership will find the difficulties of joining too great for them. There is no sign that that is so. Those who are not yet members are as aware as we are of the history of the Community and how it has developed, and of the step-by-step approach taken by the Community to strengthen its ability to be a world force for economic strength and peace. As I see it, it must be a comfort to these three countries with which the debate is concerned that the Community's economic strength is able to offer them help in their daunting task. It should be a comfort to all that the vision of the founders of the Community—the Six who signed the Treaty of Rome—should now lead to a new set of agreements with Eastern European countries to prepare them for eventual membership, however many years that may take. It is your committee's belief that the successful conclusion of those agreements will help each of the three countries to solve their undoubted, indeed daunting, problems, and offer new long-term opportunities too to the existing member states of the Community, including—very much so—Britain itself. I commend the report to your Lordships and beg to move the Motion.

Moved, That this House takes note of the report of the European Communities Committee on European Agreements with Poland, Hungary and the Czech and Slovak Federal Republic (8th Report, HL Paper 35)—(Lord Aldington.)

6 p.m.

Lord Bridges

My Lords, I was not a member of the sub-committee which prepared the report, but I venture to offer the House some reflections on this important subject, as I seem to have spent some years of my life thinking about the problems of central and Eastern Europe. In 1953 I was on the staff of our Mission in Bonn when the population of East Berlin rose in anger against the tyranny of the Socialist Unity Party. That was a cruel day in the post-war history of Europe. The terse, questioning telegrams that we received in Bonn from London, written in Churchill's unmistakable style, left no doubt that the Prime Minister of the day understood the terrible significance of what was taking place. June 17th became a red -letter day in the German political calendar as the Day of German Unity. I hope that it will be long so remembered.

Just a year later I found myself living in West Berlin as one of a small group of British officials studying the communisation of East Germany, the very process which is now being reversed with such pain. I shall never forget the talks which I had then with the many refugees of all kinds from the Soviet zone—farmers, engineers, priests, professional men—all people who had left their homes for the West in revulsion at what was happening. That human tragedy left an indelible impression on me. After that I spent four years in the Foreign Office dealing with the affairs of the Soviet Union and Eastern Europe. The saddest moment of those years was the crushing of the Hungarian uprising in 1956.

Those experiences gave me some idea of the attitudes, resentments and ambitions of the countries of Eastern Europe which are the subject of this report. The attitude of the Soviet Government and of the Russians themselves I was able to study more closely later when at the embassy in Moscow in 1969 and 1970. That was not perhaps the ideal time to live in Moscow. It was at the very height of the Brezhnev years of stagnation and soon after the Soviet military intervention in Czechoslovakia in 1968, an act on which the British Government had stated their view with an exemplary clarity and firmness not employed by many others. The result of our own official reaction to the Soviet intervention in Czechoslovakia was the relegation of our embassy by the Soviet authorities to the very outer periphery of the diplomatic circle—a doghouse shared only with the Chinese. Even so, I learned a good deal at that time about the Soviet attitude to Eastern Europe.

I judge the report to be an admirable survey of the issues that it considers. It is thorough, balanced and dispassionate. I have no critical remarks to make on its content but, given the personal experiences that I have just described, perhaps I may be forgiven for feeling that if the report has a fault it is that it is perhaps a shade too dispassionate.

On what it says I have two main observations. I wish to emphasise that this is a central and vital issue. How the Europeans will fare in the next century will depend in part on the way in which we respond to the challenge and our success in making these three countries (and I believe their neighbours to the East in due course) once again full members of the European family of nations. Secondly, there is the enormous problem of matching their aspirations with our possibilities. The report covers very fully the individual problems. But we should make no mistake about the very high and urgent expectations that exist in the three countries. Nor should we mistake the size of the contribution that will be required of us.

More precisely, I mention the following areas. There is the quantity of financial resources needed to transform the economies of just those three countries. The PHARE programme only scratches the surface and we must remember the heavy burden of existing debt, mentioned by the noble Lord, Lord Aldington, which must also be dealt with. Then there are the sacrifices that will be involved in this country and the other member states of the Community if we are to open our markets to imports of consumer goods in sensitive sectors such as shoes and textiles which have already suffered much in the cause of freer international trade. Will public opinion here accept the burden for that cause?

What of the dangers of mass migration? If pessimists are to be believed, an outflow of refugees on the scale of 1945 may be in the offing. How can humanitarian governments in the West balance their obligations to their own citizens and to suffering refugees in extreme need? There are already rumbles of dissatisfaction about our stringent visa requirements for Polish nationals who wish to travel to this country. I suggest that some clearer statements by the European Community as a whole in the context of the European agreements are required so that all may understand both what we are seeking to avoid and what we can hope to offer.

I ask whether we have fully understood the major transformation that is necessary in these three countries. After all, they seek to expunge 40 years of enforced collectivisation. New habits of thought and action must be engendered. It is an enormous and daunting task. We may expect progress to be patchy, uneven and often disappointing. Personally I do not anticipate a central European Wirtschaftswunder of the kind that was overseen by Chancellor Erhard in the Federal Republic of Germany.

Those seem to me to be some of the most difficult and central problems treated in the report. Their dimensions and difficulties need to be clear to us all.

There are some other broad issues that are not examined in detail in the report, understandably as they fall outside the range of the Community policies under examination, which I should also like to mention. There is the effect of those Community policies on the long-term structure of the European Community itself. If we assume, as I think we must, that the 12 existing member states reach agreement at the intergovernmental conferences now in progress, beyond that core of 12 full members we can see two wider circles.

First, there is the group of EFTA countries in the new European economic space—a free trade area with close institutional links with the Community. I assume that these negotiations will in the end succeed. Secondly, beyond that circle there is a further circle of those countries covered by the European agreements mentioned in this report—initially Poland, the Czech and Slovak Federal Republic and Hungary, but later perhaps extending to others. Again, beyond those two circles are the Community's existing associates—Turkey, the Mahgreb, the ACP nations covered by the Lomé agreements and so on. To make matters more complicated, we know that some but not all the EFTA countries are looking to the Community for full membership, as are some of the outer group of associates.

To my eye the structure looks unwieldy: difficult to manage and, above all, difficult to understand. There is, I suggest, some danger in having too many antechambers, each with conflicting and competing claims on the Community's generosity and resources and with uncertain ambitions for ultimate membership. I greatly hope that the inter-governmental conferences can pay attention to this wide and important problem. The architects of the structure should reflect carefully about its appearance, which should be as simple as possible and easy to comprehend from within and without. We do not want to create a series of confusing interconnecting dungeons, somewhat like the Barbican.

Above all, we need to be clear about who is responsible for the Community's external policies. It needs to be firmly established and understood by all that such responsibility rests with full members alone and is not shared with those in the two surrounding circles. That question is apparently already arising in the negotiations with the EFTA countries, and we need to be firm about the distinction. Of course the consultative arrangements envisaged in the European agreements can be useful in explaining Community policies and how we expect them to develop, but responsibility should remain with the full members. I underline that point because I suspect that there may be a natural tendency to blur the distinction in the negotiations, and that needs to be avoided.

Finally, there is what in shorthand I may call the vacuum problem. This arises because of the removal of barriers between East and West and the collapse of the Warsaw Pact. Poland, the Czech and Slovak Federal Republic and Hungary have regained their political sovereignty but lack a wider framework of collaboration in the field of political security, other than the CSCE. The CSCE has played an essential role in encouraging peaceful change and the respect of human rights. It was indeed the essential catalyst in the process that we have seen. But it is not exactly an instrument of day-to-day co-operation between states with strong common security interests. Its virtue is rather in the breadth of its membership, which is a different function.

We cannot yet judge whether the absence of any security umbrella will present problems in future years. But we need to recognise that this is a novel situation. We can now see a belt of East European countries which have severed their close military ties with Moscow and which would be hard put to protect their independence on their own. We can all recall what that meant in the terrible years of 1938-1939.

The reverse of the coin is the need to understand the feelings of the Russians. From their viewpoint, the Soviet state, under its present leadership, has written off the investment of many billions of roubles, and much else, spent in Eastern Europe over a generation. That was a painful decision for it, and those who took it had the courage to admit a catastrophic failure of policy. In no nation in the world are such decisions easy. Nor should we overlook the special sentiments which the Russians have for their Slav brothers and cousins in Eastern Europe, a dimension that we may ourselves overlook. Presumably the present leaders of the USSR expect their former East European allies to adopt more independent and more neutral policies. However, it remains to be seen whether they could countenance any form of multilateral association or other arrangements which the East Europeans might themselves wish to create in the interests of their own security.

The purpose of these remarks is not to suggest that there is any gap in the report but rather to supplement what I view as an admirable document by indicating what may be an area of policy in which some further careful work may need to be done. I should also explain that I do not see any current dangers, but I am mindful of the past and suspect that temptations may present themselves again to some in due course. For our part, the action may or may not fall to the European Community; and whatever it is that we undertake, we must remember that any imprudent or thoughtless action could be dangerous at a time when the political evolution of the Soviet Union is so uncertain.

I join with the noble Lord, Lord Aldington, in commending the report to the House. I hope that the European agreements will fulfil the expectations placed on them. As the committee recommends, they deserve our full support and their purpose should be fully and carefully explained to the public in this country.

6.16 p.m.

Lord Boardman

My Lords, as I am sure were other noble Lords, I was fascinated by the speech of the noble Lord, Lord Bridges. He was able to set the report against the background of his own considerable experience. I shall not attempt to comment on points that he raised except one. The noble Lord referred to the high expectations in the countries about which we are debating. I believe it is a very real danger that they may be expecting and hoping for far more to be provided and achieved than may be practical under present circumstances.

I was a member of the committee which prepared the report. We had the advantage, to which I pay tribute, of the wise and experienced chairmanship of my noble friend Lord Aldington. He led us wisely through the depth of the problems facing those countries. The report is of considerable value. It affects the lives of many scores of millions of people on either side of the old Iron Curtain. Their future must depend on how Europe and other Western countries treat tl-e economic and political problems that lie ahead.

In a brilliant exposition my noble friend Lord Aldington touched on many of the main areas of the report. I propose to confine myself to three. Those are: the problems of these countries earning the currencies that they need in the short term; the problems of dealing with external debts; and the know-how fund.

Perhaps I may first refer to the external debts. My noble friend Lord Aldington touched upon that and the other matters which I wish to raise. External debts produce a number of contrasts between Czechoslovakia, Hungary and Poland. The debts of Poland and Hungary are substantial. Poland has defaulted upon many of those debts and wishes to secure debt forgiveness. In contrast, Hungary has honoured its debts and has serviced them. From the evidence at the inquiry there was a difference of view on those two countries. Some witnesses believed that Hungary was mistaken in trying to service its debts. Others, including the London Chamber of Commerce, believed that it was right and in the interests of those countries to continue to do so. It pointed out—it is a point on which I agree—that such defaults could undermine a country's credibility and its chances of raising t le capital that it so badly needs in the future.

The debts of Czechoslovakia are relatively small. Again, its position is different. My noble friend pointed out that one of the matters that should be considered is the way in which the Paris Club—the international debt controllers —may be prepared to forgive or postpone payment of some of those national debts. That poses a problem. If debt forgiveness is applied by the Paris Club in the case of Poland, how will Czechoslovakia (which has no debts of any significance) feel on the subject? Will it not feel that it 11.s been badly treated? What about Hungary, which believes that it should honour its debts?

Different circumstances apply to each country. I had hoped to see some rescheduling of the debts and not debt forgiveness. Rescheduling would make it possible for the countries to balance their books within their immediate resources. It would then leave them with a long-term credit rating enabling them to raise the capital that they need for fresh investment.

I now turn to the export potential of these countries. Each has a real need to earn hard currency. Their former markets tended to be Russia or East Germany. For obvious reasons they are no longer the same markets. Where can these countries turn? They can turn to the Community. What can they sell? Their potential exports are the goods that are the most sensitive within the Community—agricultural products, textiles and footwear. We know from existing problems within the CAP that additional agricultural imports into the Community will present further problems. Yet the only short-term potential for those countries to earn hard currencies lies in exporting those, or similar, commodities. The problem relating to agriculture, footwear and textiles is extremely difficult, as was mentioned by the noble Lord, Lord Bridges. The issue is potentially divisive between the Community and these countries, and we hope that the Western world and the Community will be able to act. I hope that it will be possible to resolve the issue while avoiding the potential dangers that lie ahead.

I wish to comment about the know-how fund. My noble friend Lord Aldington referred to the value of the fund. The United Kingdom was the first country to operate the know-how fund in these countries. We first provided such a fund to Poland and that has been extended to Hungary and Czechoslovakia. The total amounts have not been large. In 1991 the amount was £15 million, which in national terms is fairly insignificant. The amount will be increased in the future. The funds are directed largely to areas where they can best be spent; into improving the management skills in those countries. They already possess considerable skills by way of craftsmen and so forth. However, after years of living in a command society they have lost the management skills, the accountancy ability, the legal systems and skills that are essential if they are to compete with the Western world. The know-how fund is now attempting to fill some of those gaps and to provide accountancy training and management consultants to try to pull the businesses together. It endeavours to use the skills already within the countries in order to produce competitive products for sale to the rest of the world. It seeks to help the transition from a command economy to a market economy. The funds provide a valuable role which, in a variety of ways, can reinforce the training in the English language and in management skills which is severely lacking at present.

In order to create an effective private sector those countries need such skills. There is no doubt that there are craftsmen, and so forth, whose skills should properly be harnessed with management ability to make effective economic units. However, a tremendous amount remains to be done. It is not only for their benefit but for ours that the change should be made as rapidly as possible. I hope that one of the objectives will be that those countries and the United Kingdom will obtain their fair share of the benefits to come.

6.25 p.m.

Lord Greenhill of Harrow

My Lords, during the war crimes debate I noticed that one of the criticisms made of this House by the media was a claim that speeches of Members were almost always self-congratulatory. It is perhaps true that congratulations are sometimes spread a little widely but in the case of this report they are fully justified. I must apologise for being unable to stay until the end of the debate. I have an engagement out of town and if my speech appears a little sketchy it is because I am racing against a railway timetable.

The introductory speech of the noble Lord, Lord Aldington, and the report deserve to be carefully studied, and I am sure that they will be both here and in Europe. We have good reason to thank the noble Lord and his qualified sub-committee for their rapid dispatch of such complicated business. In particular we were fortunate to hear the noble Lord, Lord Bridges, speak early in the debate. We were able to draw on his unique experience of the subject and to look into the future with some of the statesmanship that those who knew his father were accustomed to hearing.

I have little difficulty in sharing the opinions of the Aldington Report set out in paragraphs 100 to 115. I wish to comment briefly on one or two of them. The committee stated that the rebuilding of the economies of these three countries will be an enormous and daunting task. No one can dispute that. The task requires not only the efforts of friendly Community governments. More important and more difficult is the need for sustained efforts by the three countries themselves. They were unprepared for the suddenness of the success of their revolutions and were ill-equipped and ill-trained for the consequences. They were influential members of their societies which resisted and still do so. No outsider can easily solve their internal difficulties.

I do not know whether many noble Lords heard Dr. Klaus, the Finance Minister of Czechoslovakia, speak in London in March last year. I know that my noble friend Lord Roll did so. The Minister described frankly and vividly the extent of the changes required in his country. He insisted that there must be no half measures, no fudges, no compromises but only deep and radical changes. He concluded his speech by saying: We appreciate all kinds of support from our European neighbours but it is predominantly our task to create a free and efficient Czechoslovakia". That is indeed true; it is also true in respect of Poland and Hungary. Throughout the generations the three countries have produced people of talent and character. Therefore we can hope that with help those countries will have the necessary spirit and stamina to succeed. It is asking a great deal of them but there must be a risk that they will tire and lose heart if there is slowness of progress and they will seek scapegoats for failure. There are latent political problems within them which failure will bring to the surface. They will watch with anxiety the progress of the Community of 12. They will be alarmed if they see it plunging ahead and making it more difficult for them to join what may become an exclusive and envied club. There must be no reason for Eastern Europeans to doubt the Community's good will towards them and sincerity in due time to accept them as new members. However, they should not expect priority over, for example, the Scandinavians.

There appears to be still some overt and covert opposition within the 12, and certainly in the European Parliament, to expansion. The report of the noble Lord, Lord Aldington, rightly refers to the need of the three countries to retain their talented nationals and to deter them from impatiently seeking their fortunes in the West. Much will depend not only on the trade policies of the 12 but, in great measure, on the recovery of the failing Soviet economy. The USSR should be a natural market for those Eastern European countries and their goods. The report refers to that.

In his speech to which I referred, Dr. Klaus reminded his audience that one of the slogans of the Czech election of 1990 was, "Let's get back to Europe". He said that he preferred a variation: "Let's get back not just to Europe but to the rest of the world". Of course he is right; for example, the log jam in the GATT talks is one impediment to the recovery of Eastern Europe as it is to the rest of the world. The Community cannot be expected to shoulder the whole burden. It is a much wider responsibility to be shared with others.

Of course we wish to be satisfied that the United Kingdom is playing an appropriate part. The committee and the noble Lord, Lord Aldington, seem to think that it is not doing too badly but points to some areas in which we may do better. Such contacts as I have suggest that that is correct.

I should like to draw special attention to the work of the Voluntary Service Overseas organisation in training teachers of English and converting teachers of Russian into teachers of English. A rather surprising statistic is that there are 20,000 redundant teachers of Russian in Czechoslovakia who are ready for conversion. That work is to our mutual advantage and we wish it all success.

Perhaps I may digress from the subject under immediate discussion for a few moments. It is the present situation rather than the future, to which the noble Lord, Lord Bridges, referred, which worries me. My digression may be considered premature, but if it is I apologise. There is no doubt that the publication of this report is important. However, the revival of Eastern Europe is only one of the many problems facing this country and is not the most urgent.

This debate is a disturbing reminder of the formidable international agenda which faces our country in the immediate future. Are we not in danger of being manoeuvred into unwelcome and premature decisions? The next six months may well be crucial. Are we perhaps underestimating the problems within the IGCs? I do not know whether the latest news from Dresden helps or hinders. There have been some reassuring reports from some quarters but they have been qualified by impatient and somewhat ambitious observations from the Commission which from time to time assumes for itself in the IGCs the status of a national government. There are other developments which must be carefully looked at.

A recent comment in the Financial Times took my eye and is very pertinent. It referred to "protectionist policies" which are developing and reviving. There is talk again of "fortress Europe" in the form of some industries. The Financial Times remarked: If tie fortress looks like becoming a reality, the new French Prime Minister will be there with her cement mixer". It will be not much more than six months before important differences may emerge in the IGCs which will demand resolution. I am perhaps over-anxious. Are the political parties here prepared for those choices which may have to be made rapidly and with far-reaching results? How far are our parties here agreed on what is acceptable? Our negotiators would be greatly strengthened in the eyes of our Community partner; if they were recognised as having very wide domestic backing. We have seen that the Commission and others are not above exploiting our domestic politics.

One controversial area on the agenda ahead is the future of our defence policy. We are to debate that on 12th June and I must not anticipate the occasion. However, defence matters will be argued in the IGCs before the end of this year. With the role of NATO and WEU and the rival assessment of global threats, it would be reassuring to see a greater measure of consensus reached among us in spite of the approaching election.

Superimposed on the puzzle of the future of the Community and Europe are the massive and growing problems of the Middle East, Africa, the Far East and the world economy. With such an international agenda, one cannot but be worried. I hope that in his winding up speech the noble Earl will put our minds more at rest.

6.37 p.m.

The Earl of Bessborough

My Lords, although I was not a member of his committee—and perhaps because I was not a member—I must congratulate my noble friend Lord Aldington and his colleagues on their excellent report on these agreements. The Foreign Affairs Council chose the right countries with whom the European Community should first have closer relations. All three have decided to change their political systems from communist states to democracies and, as my noble friend said, their economic systems from command economies to market economies. Certainly we have a duty to help them with aid and access to our markets.

Generally speaking I endorse the Commission's paper proposing political dialogue, progressive movement towards free trade and the approximation of laws as well as economic, cultural and financial co-operation on to enable those countries to benefit from the single market, although I must admit that the amalgamation of laws will certainly prove to be a major problem.

I support, too, the Commission's concept of the three bodies which would comprise the institutional framework for the agreements. In my view that would help to establish the right conditions in which the rebuilding of the three economies can best be achieved and help create a climate of confidence and stability. The terrible damage inflicted on those countries by totalitarian regimes over the past 50 years cannot be overestimated. The challenge of sustaining and developing the fragile beginnings of democracy is huge.

Having visited all three countries both before and since the Second World War—Hungary quite recently —and having been reminded by the noble Lord, Lord Bridges, of that fateful year, 1956, when I presided in the Albert Hall over a massive all-party protest over the invasion of that country, I agree that, as the noble Lord, Lord Boardman, said, in different degrees they all lack people with experience of democracy and management skills in finance, commerce and industry in open markets. The danger of their most skilled people migrating to the West can be averted only through a commitment to help them raise their standard of living.

I agree also that the provision of financial and technical support is essential and likely to remain so at least until the end of the century, and that the various Western aid programmes need to be co-ordinated and monitored. It would be unwise to overstrain the donor economies by too fast or too large loans or investments. We should certainly draw on the experience of the PHARE operation—the Poland and Hungary Assistance for Economic Restructuring programme—as well as our own Government's know-how fund, which has been particularly successful. I agree with the committee's conclusion that a central clearing house for providing and monitoring aid to these countries should be established.

It is right that the committee should emphasise what was emphasised by my noble friend: that there are good potential markets for British exports to those countries but that some other countries seem to be benefiting from more favourable export credit guarantees. I endorse the committee's view that failure to harmonise export credit guarantees distorts the market as well as adding to the countries' indebtedness. I join the committee in welcoming the discussion on government and public sector debt by the Paris club and hope that agreement will be reached soon. I agree also that the need for those countries to attract private investment and the management skills and technology it brings is an urgent priority. Their financial, banking and accountancy systems all need to change if they are successfully to face the challenge of competitive free markets.

I recognise the leading role of the Community and the Council of Europe in helping to create the prerequisite conditions for the successful conduct of business. I am glad to say that as president of the European Atlantic Group I shall soon be presiding over a meeting to discuss the enlargement of the Council of Europe. As we know, Hungary and Czechoslovakia are already full members and Poland has applied to join. As I said recently in a speech in America, I fervently hope that an enlarged democratic Europe will become united. I believe that these agreements are the right framework for paving the way for the eventual accession of Poland, Hungary and Czechoslovakia to the European Community.

Moreover, as I have said in speeches on both sides of the Atlantic, I believe that those Eastern European states which have reasonably strong Christian democratic movements and perhaps liberal and social democratic parties as well as trades unions such as Solidarity, should be welcomed in an enlarged EC. Although I am not a Roman Catholic, yet certainly an Anglo-Catholic, I greatly welcome the Pope's present visit to Poland and the moral torch now shining in that country.

Finally, I should like to add that last Thursday, with my noble friend Lord Aldington, I attended the all day highly comprehensive conference on European monetary union. I agreed with my right honourable friend the Chancellor of the Exchequer—and indeed other speakers at the same conference—that convergence must come before the single currency. But I was a little disappointed in his slightly negative remarks on progress towards the latter, especially in view of the recommendations made by the committee of my noble friend Lord Aldington on European monetary union debated last November.

I was glad to hear from my right honourable friend the Chancellor of the Exchequer of his concern with the economic problems of Eastern Europe, especially regarding the dumping of agricultural products on a large scale. My noble friend Lord Caithness will surely endorse that view.

We must certainly not forget that through these agreements the EC may eventually be enlarged. Indeed, in ending his speech last Thursday my right honourable friend the Chancellor of the Exchequer said that opening our markets is the best way we can help the newly emerging democracies of Eastern Europe. He emphasised the need for competition in key industries in order to help ensure that newly liberalised price mechanisms are working correctly —two important stepping stones on the path to a market-oriented economy—thus allowing those countries to become full members of the international economic system and one day, I think we all hope, of an outward-looking European Community.

I thought that the views of my right honourable friend the Chancellor of the Exchequer on this matter were of great interest. All in all it is a most useful report and again I congratulate my noble friends, noble Lords opposite and those on the Cross Benches for the valuable work that they have put into it.

6.48 p.m.

Lord Roll of Ipsden

My Lords, I must begin by declaring an interest. The investment bank with which I am connected is currently advising the Polish Government on a number of economic and financial problems, some of which are covered in the report before us.

Despite what my noble friend Lord Greenhill said, I hope I may be forgiven if I say that we have once again been given an opportunity to express our admiration to the noble Lord, Lord Aldington, for an excellent report on an extremely important European issue, and to thank him for initiating this debate. On this occasion, as I had the privilege of being a member of the sub-committee, I had first-hand experience of the combination of wisdom and gentle firmness with which he conducted his work.

The report makes abundantly clear what a formidable task the three central European countries concerned are facing in the political and economic reconstruction on which they are at present engaged. It was, I suppose, understandable and perhaps inevitable that in the immediate wake of the tremendous revolution which freed these countries from the previous authoritarian political regimes and which broke the shackles of the command economy some rather exaggerated expectations had been entertained both in the West and in the countries themselves, and—at least to my mind—perhaps some rather unwise things were said at the time. One of them, for example, was that, now that those great historic cities Warsaw, Budapest and Prague are going to become a part of the great European family and tradition, it would be very unwise for the Community to push its further development too fast.

I do not think this is the occasion to debate the current preoccupations of the Community. The noble Lord, Lord Greenhill, has referred to the IGC, and the noble Earl, Lord Bessborough, has referred to some of the problems arising at present within the Community. I happen to have views on this subject which I have expressed on previous occasions and I will not go into them now; but if there is one thing which is clear from the report and which has been emphasised by the noble Lord, Lord Aldington, it is that a strong and developing Community can only be of advantage to the progress of the three countries concerned, and perhaps, eventually, also to other countries of central and Eastern Europe. Exactly what that means in particular terms I will leave for another time.

In some quarters it was felt that an avowed commitment to certain ideological principles of the free market and free economics would be sufficient to lift these countries out of the mire in which the command economy had left them, and that a kind of ritual repetition, provided it was loud and made often enough, of a few selected quotations from Adam Smith would, as it were, at one bound bring them into a—I use deliberately an academic rather than a political model —sort of Hayekian paradise. Well, we have learned that things do not happen quite so quickly or as simply as that.

What the report brings out extremely clearly is that there is still a long and difficult road to travel before these countries can be seen to have really become members of a democratic and free market economy. I became particularly aware of this last week when I was briefly in Budapest, and perhaps even more so during a slightly longer visit last week in Vienna. Vienna was called, rather aptly I think, by a pre-war statesman "the balcony of Europe", and you can certainly observe a great deal from that city. Somehow or other one had the feeling that, certainly in cultural and economic matters, they were hard at work wiping out 75 years —practically three-quarters of a century—since the disappearance of the old monarchy.

Certainly almost everyone one speaks to there—and I can tell you that people there in the three countries and in other countries in eastern and central Europe talk about this all the time, some more optimistically than others—emphasises the enormous difficulties that still lie ahead. While on the subject of Austria, perhaps I may say one word which is perhaps slightly peripheral to the theme we are debating tonight. It seems to me that there is a particularly good argument in favour of accelerating the accession of Austria to the Community in the fact that it would provide a particularly useful bridge to these three countries which are at present in the antechamber and trying to achieve association agreements with the Community.

The report we are debating covers the whole ground so admirably and so fully that I shall confine myself to only one general point and to two particular ones. The report stresses, rightly I think, that the rebuildhig of these three countries requires if not simultaneous at least carefully integrated progress on both the political and economic fronts. As always, it is very difficult in such a chicken-and-egg situation to say exactly where the primary emphasis and the first priority lie. I happen to agree very much with the report and with the points so strongly emphasised by the noble Lord, Lord Aldington, in his press statement, that there is an urgent need for the most rapid possible progress on the political front. Not only does any lesson that we care to derive from our own historic development of, say, 300-400 years ago in the complexity between political progress, democratic rights, legal developments and the development of markets and the economy, support this particular view, but it is quite clear not only that the progress of the domestic economy and the profound change of mental attitudes it requires are dependent on the indispensable emergence of the appropriate political, legal and administrative infrastructure but, as the report rightly points out, the ability to absorb the financial and other assistance coming from abroad depends very much on the same factors.

May I add just a few remarks on two particular matters? The first refers to agriculture, which was mentioned by the noble Lord, Lord Aldington, and more particularly by the noble Lord, Lord Boardman. For at least two of the countries concerned—Poland and Hungary—the ability to export increasingly their agricultural produce to other markets, including those in the Community, is absolutely crucial. Both the noble Lord, Lord Aldington, and the noble Lord, Lord Boardman, have rightly stressed that trade is at least as important as aid and perhaps, in the long term, even more important. I can think of no single aspect of external trade of these countries which would as quickly and effectively help them in their external payments situation and so on as an increase in their agricultural exports. We are all aware what a sensitive political subject that is; but it has to be faced, and if in the process it leads to a loosening and perhaps even a reform of the common agricultural policy, I think that many of your Lordships would regard that as a very desirable by-product.

The second point is investment. Privatisation—that very fashionable word—has of course a part to play and the import of foreign capital through investment in privatised industries and enterprises by means of joint ventures or otherwise is extremely important. But this is a very difficult process, if only because the valuation of these enterprises, on the sort of terms that we are used to in western economies, is an almost impossible task. If I am correctly informed, I understand that the firm which was advising Skoda —probably the biggest single industrial enterprise in Czechoslovakia—ended up by producing a value of nil. That may even have been an over-estimate. It was probably what I believe was mistakenly called "onerous property". I understand also that the arrangements recently made between Skoda and Volkswagen were in fact made without any valuation at all.

This simply illustrates the extremely difficult task of creating the very basics, the elements, of the market economy and the capital structure. However, while obviously the import of capital in one way or another —investment, the purchase of privatised companies and all the rest of it —is extremely important, it is also absolutely vital to create a domestic capital market if domestic capital formation is really to take off; and this is a very difficult task indeed because these countries are beginning not even from scratch but from a negative situation.

In this connection I should like to draw attention to the so-called "free" privatisation process with which Poland is at the moment experimenting. I regard this as a highly interesting experiment, whatever may come of it. It may appear paradoxical to encourage privatisation, that is to say private enterprise, by the means of a free distribution of shares—probably in the major part of the larger companies—to every single citizen. But it is very difficult to think of any other way which would as effectively and quickly produce private ownership of securities, and with it the possibility of creating a market and a capital market. It is a very big experiment indeed in turning the country towards a market economy. Perhaps it is the biggest experiment that can possibly be envisaged. A somewhat similar scheme is proposed in Czechoslovakia although I understand it will involve a small payment on the part of the recipients of the securities, rather than a totally free distribution.

These and similar experiments may, ideologically, appear somewhat peculiar, not to say unorthodox. Nevertheless they deserve a good deal of attention and, I would hope in the end, support from western countries, no less than a willingness to assist by the restructuring of debt and a provision of further financial aid.

7.1 p.m.

Baroness Young

My Lords, I should like to start by thanking my noble friend Lord Aldington and his committee for presenting a most important report. The relationship between the countries of the European Community and these new developing democracies in Eastern Europe must be one of the most important issues confronting Europe today.

It still seems almost unbelievable that Poland, Czechoslovakia and Hungary should now be free democratic countries. It must surely be very much in the interest of the west that they should remain so with all the difficulties which confront them. I read the report with great interest and, like other speakers, find myself in agreement with the summary of conclusions. I should like to comment on one or two of the conclusions further on in my remarks this evening.

The most important point which comes out is the first conclusion in paragraph 100, which refers to the incredibly daunting problem that these countries face in trying to cope with a new and fragile democracy while at the same time moving from a command to a free enterprise economy. Indeed, when one considers the problems which western democracies face when trying to cope with economic and political problems one can appreciate their problem the more. As other speakers have already said, there can be few, if any, people in these three countries who have had any practical experience of working in a democracy, or indeed of working in a free enterprise organisation. It may be argued that Hungary went as far as possible in its economy under a Communist government to try to find some small outlets for private enterprise. But for the other countries that was not the case. As other speakers have indicated, the problems are therefore immense.

The last time that I visited any of these three countries was in October 1989 when I was in Budapest. I arrived when the Communist party was meeting to decide its own future in Hungary, let alone what the whole political future might be for Hungary. The atmosphere was electric. Everyone to whom one spoke was excited and it was an extraordinarily interesting time to be in Hungary. However, I was concerned that there was a kind of feeling that achieving political freedom would somehow equal achieving riches; and that without any real understanding of how democratic institutions were going to work, let alone how the economies were going to be improved. All the right words were used, but the gap between using the words and really understanding what they meant was very great.

I therefore looked with great interest at this report, which goes on to analyse a great many of these problems in some detail. I should like to comment on one or two of the conclusions. The first and most important point is the rather obvious one that time does not stand still. It is very important that we should be constructive and positive in accepting the conclusions of the report and to do so as quickly as we can. If we look at the political problems—and this is the first point that is raised in the issue of the association agreement—a number of suggestions are made about how we can help these democracies. For example, in paragraph 74 the committee suggests that we could help by arranging parliamentary exchanges. I should be interested to know if my noble friend the Minister has any comment to make on that.

What actually has happened and what is proposed? I believe that one of the most valuable experiences is to be able to discuss with other parliamentarians the practical problems of the practice of democracy. For those in Poland, Hungary and Czechoslovakia, the practical problems of an official opposition seem to me to be quite considerable, particularly when that official opposition could quite well consist very largely of Communists or former members of the Communist Party. They are, after all, the losers in this part of the world in eastern Europe. Nevertheless, it is a powerful group and one that has been used to exercising power and influence.

The new democracies need all the support we can give them, particularly in view of the terrible economic difficulties which all three countries are currently experiencing and will continue to experience—not least a vast increase in unemployment. Coupling that with trying to make democratic institutions work will be very difficult.

There is one point that occurred to me which the committee did not touch upon, but as it is outside the terms of the proposed agreement I can understand why. There is a further problem for these countries in their democratic arrangements, particularly in Czechoslovakia—the ethnic minorities. If what I read in the newspapers is correct there are difficulties between the Czechs and the Slovaks. To add the kind of problems now being faced in Yugoslavia to both the political and economic problems produces yet another dimension. Perhaps my noble friend could comment on that as I should be very interested to know the Government's view. It is an aspect that must be of concern.

I was very interested to read the proposals about the Council of Europe. When I was in the Foreign Office I attended the meetings of the Council of Europe regularly. I am very pleased that the council now has a somewhat higher profile. I am particularly pleased that Hungary and Czechoslovakia have joined and that Poland is to do so shortly. It was the Council of Europe that paved the way for political thinking in Europe after the Second World War, coming long before the European Community was established. It could be very helpful in supporting these newly emergent democracies.

I was particularly pleased to see in paragraph 73 that the new countries are encouraged to become parties to the European Convention on Human Rights and to accept the European Court of Human Rights. That is fundamental to establishing and maintaining a democracy. The fact that they are linked into the Council of Europe, adding this greater opportunity to discuss with other western democracies, should be very helpful. On the political front, Community membership must remain a long term objective. However, the more one reads the report, especially some of the interesting tables of statistics, the more one realises the problems that exist on that front.

I turn to the economic problems. We have only to consider the difficulties that West Germany has had with East Germany to understand the magnitude of the problem confronting the economies of Poland, Hungary and Czechoslovakia. They are concerned that they may not get as much help as they would like either from the European Community or individually from Western countries. Almost every speaker has emphasised the importance of trade. I very much hope that the pressures from the developing economies in Eastern Europe will help to counterbalance those elements within the European Community which would like to see a kind of fortress Europe. That is not in the interests of the European Community, Eastern Europe or the world at large. It is something that we in this country, who have always looked to a large, open and free market in Europe, can encourage. I hope that we shall be able to use our expertise in those areas which the committee pointed out in paragraph 88. I refer in particular to banking, accounting and legal structures. I hope too that our experience of privatisation may be of value.

Finally, I was struck by the part of the report which discussed the whole area of training. As I said at the beginning of my remarks, one of the great problems is that n o one has had any experience of private enterprise. The most difficult task is to change attitudes. It is difficult enough to change attitudes here at home, as so many people have had to change, but to make this enormous change and to face up to a completely different lifestyle and new methods of though is an immense and daunting task. Perhaps some of the know-how funds or other funds can be used on training.

As a subsidiary but very important part of that, I hope that we can use our expertise in teaching English so that those countries will have what has become not only the lingua franca of Europe but of the world. That will be of immense help to people in both their democratic systems and in their economies. We have had a great deal of experience of teaching English as a foreign language. When I was in the Foreign Office I was always struck by the work of the British Council and by how much it was appreciated. We should get on with that immediately because it would be of positive help.

I greatly welcome the report. Like other noble Lords I want to see Hungary, Czechoslovakia and Poland remain free democratic countries in the sense that we understand that term. I want them to have flourishing economies. They share with us a common European heritage. We have seen a grossly artificial division across Europe over the past 45 years. These countries deserve our help but it will take time. It is always difficult for democracies to understand how long is required before such labours come to fruition. The committee has made a number of useful and positive recommendations which I hope will be acted upon.

7.15 p.m.

Lord Thurlow

My Lords, I warmly endorse the remarks of the noble Baroness in the latter part of her speech about the fundamental significance of mental attitudes and the great importance of this area being acknowledged and recognised as one in which positive steps must be taken. The noble Lord, Lord Aldington, referred in his introduction to the PHARE and know-how programmes. In my remarks I shall confine myself mainly to that field. Before returning to it I should like to say, not as a ritual but with very great sincerity, how much as a member of the subcommittee I appreciated the noble Lord's leadership, guidance, firmness, wisdom and indeed—what underlies the whole of the report—his enormous hard work. I should also like to endorse his tribute to our two extremely able clerks.

As the noble Baroness said in the part of her speech on political matters, there has been a gap between the original expectations in all of these three countries and the realities of the prospect of their problems being solved quickly. That certainly is the case in the area of training, attitudes and mental skills. A Japanese team recently went to Moscow to have a friendly interchange with top executives and managers in the Soviet Union to try to help them to understand something of Japanese business methods. They reported that the result was not initially one of appreciation and understanding but simply one of shock. The Russian executives could not understand what the Japanese were driving at. That is reflected throughout the command economy of Eastern Europe. They just do not know how far they have to go in changing their mental attitudes and taking on board new skills. One problem, as the noble Lord, Lord Boardman, and others have pointed out, is the total absence of most of the institutions and agencies in which their mental attitudes have to work. I refer to accountancy, banking, legal frameworks, costing and pricing, a credit system, contract law and professional standards. In those areas there is a vacuum which has to be filled. There is no quick route.

However, in my remarks I should like to suggest that there is a possibility for tackling the problem to which the noble Baroness referred. I suggest that this country can give a lead here, as we have done in the general field of know-how. The scale of the problem was summed up to the committee by a distinguished Polish economist. He stated that for every pound invested in the project, £2 must by spent on the training. When one considers the enormous amount of resources that each of the countries hopes to receive from Western sources, it is daunting, to say the least, to take this distinguished authority's advice that twice that sum will be needed for training. What a problem of absorptive capacity it is.

The area of management and professional training, technical assistance, technological and service skills comprises the whole universe of know-how. It is a different level of difficulty from that presented by the modernisation of plant and buildings. The individual must be matched to the training and the training to the future working and social environment. The first prerequisite is a new cast of mind; that is, new attitudes to free enterprise.

The Community has already devoted quite a considerable amount of effort and resources to the training field, as has been said by several noble Lords. For example, for Poland 14 million ecu has been earmarked for a four-year programme; for Hungary 5 million ecu has been set aside for a similar period; and, for Czechoslovakia, about the same kind of sum has been planned. That is an important, necessary and useful start. However, we must see these efforts in proportion. After all, the East European PHARE programme budgets for 500 million ecus; and, as the noble Lord, Lord Boardman, pointed out, the total training budget is of the order of 15 million ecus. But the budget for the Lomé countries—the ACP countries—is 14 billion ecus spread over a period of several years.

We can congratulate ourselves on a useful start; but we must not kid ourselves that we are yet doing anything like that which must be done. Indeed, it is small scale in relation to the huge requirements for creating new mind sets. At that pace we cannot reasonably expect the three countries to qualify for Community membership in anything like the period for which they hope. Moreover, every year that passes increases the risks, to which noble Lord have referred, of political reactions which may make the whole prospect recede.

Is there then any means of shortening the process in relation to the general problem of mind sets; that is, attitudes? That seems to me to be a key question. In other words, can a springboard be created to give the required new mental attitudes upon which any specialised and specific qualifications—namely, professional, technological or whatever—must be based?

I should like to suggest that there is a constructive possibility in the new techniques of accelerated learning. They are a British innovation and are being researched and applied in various contexts. This is being done primarily by the London Business School, which, as noble Lords will know, is acknowledged as being the best and most effective business training establishment in this country. It is also being applied by the universities of Glasgow and St. Andrews and, in a quite different possible application, a very massive programme is under consideration for Africa.

If those accelerated learning methods can be harnessed to the East European task, a core of trainers can rapidly be trained in the new mental attitudes in courses lasting about a month. They can then go back to train others, thus setting in motion a yeast-like process of cell proliferation in each of the countries to implant new mind sets.

The London Business School could, with earmarked funding on not a very large scale, quickly launch a programme. It has excellent credentials for such a role. Not only is the school acknowledged as the leader in the business management and training sphere, but it has also been involved in helping Eastern Europe for five years. For example, in Hungary it was recently selected by the know-how fund for a special linkage with the best university in that country. Moreover, in Poland it is collaborating with the French in programmes for training managers. In the Soviet Union the school has for some years been giving short courses; and countries and governments in Eastern Europe use the consultancy and research services of the LBS.

Therefore, we have here a vehicle. The LBS has developed its own so-called "Learning Centre" which applies these new methods. The strategy can easily be adapted for Eastern European needs in order to train cadres of trainers rapidly, thus giving them new enterprising attitudes and methods. They must underlie the whole Eastern European transformation. By virtue of learning centres set up on this model throughout Eastern Europe, there can be crash training of trainers to set in train a large expansion movement.

I mentioned that possibility in specific terms because it seems to me that only by such an innovative approach can minds frozen by the command economy for so long be thawed out fast enough to meet the political needs. It is not meant to replace normal academic courses and business attachments where there is time and opportunity for them; it is meant to supplement them.

In Eastern Europe there is enthusiasm, high aspiration and the desire to change. The Community has its own agreed policy under the PHARE and know-how programmes for aid. There is a potential match of need and resources. I hope that this country will be able to give a lead in establishing an accelerated learning project that could, by rapidly transforming mental attitudes over a wide field, make a very important and significant contribution to the metamorphosis to which we all look forward.

7.30 p.m.

The Earl of Buckinghamshire

My Lords, as a member of your Lordships' committee, I too should like to thank my noble friend Lord Aldington for his chairmanship of the committee and for making it great fun. I hope that the expert witnesses found the same situation. My noble friend has fully summarised the report, the committee's opinions and its views. I should like to draw your Lordships' attention to the six headings of the agreements. Six headings may be thought to be not many, but when we consider that they start with "Political dialogue" and run swiftly through "Free trade", "Co-mingling of laws", and "Economic, cultural and financial co-operation", one then has a feeling for the enormity of the task facing the Community and the three countries the committee considered. If one then adds the problems caused by the debt that has been run up, especially in Poland, and adds 40 to 45 years of communism and retrogressive economic systems, those difficulties can be further multiplied. The committee reported, made recommendations and expressed opinions upon those six headings.

I should like to concentrate upon one issue: Community membership. I do so for two reasons. The first—I had not realised that my noble friend would be saying this—is a controversial opinion. The second may be more cowardly on my part, but I recognise that other noble Lords with greater expertise than I have covered subjects such as trade, economic issues and training. I have mentioned that the issue is controversial. All three of the countries that the committee considered see full membership of the Community as their goal.

Interestingly enough, the Commission was reluctant, in these agreements at any rate, to make a formal commitment to that extent. Those of your Lordships who have read or will read our opinion will see that the committee suggested that the preamble to the agreements should state that the Community and the three countries concerned should state that they could join, if they so wished, when their political and economic situation allowed.

I had no difficulty with that statement. It is a general statement and has no time limit on it. Whether general or not, and whether it is a long time in the future, it is something that we should consider and explore carefully before we take it to its conclusion. In addition, we should consider whether the agreements form part of the stepping stones towards full membership. My view is close to the comments made in evidence by the MEP, Mr. James Elles. He said —I agree with the view—that no one within the Community had yet given serious thought to how a Community of 20 states would work. Discussion is continuing as to whether the Community should consider its widening before having completed what has been described as a deepening of the level of integration, or perhaps, vice versa, consider its deepening of the level of integration before its widening.

The process of deepening the Community has to proceed towards a greater level of completion before the membership is widened. As we have already heard tonight and in previous debates, membership of the Comm unity is widening with the Scandinavian countries in advance of Poland, Hungary and Czechcslovakia. Whether or not there is a discussion on the deepening question as against the widening one, the committee's view in a previous report was that the deepening of the Community was important. Mr. Leith Walesa of Poland said that they do not wish to see a slowing down of the integration of the Community. Mr. Antal of Hungary echoed that view. The noble Lord, Lord Roll, made the point strongly that the three countries welcome the thought of a stronger Community because, far from being a bar to them joining—a point which has been raised—they see it as an advantage to them, especially in terms of trade.

It goes almost without saying that the three countries have experienced great change in the past three years. That change has not been without pain or without causing stress within their communities. It is difficult for us to understand the extent of those changes and what they mean in those countries. One needs only to look at Poland which, since 1989, has sufferec a 40 per cent. reduction in real wages and a 30 per cent. reduction in industrial output (leading automatically to an unemployment rate of 30 per cent.) to grasp the potential for great stress and instability in those countries. If we link that to the fact that expectations have to be diminished—no one likes that —it all adds up to greater stress and instability.

Those countries face many difficulties. We in the West have to be positive in our assistance, not necessarily by writing-off off debt, by giving injudicious loans, but by enabling those countries to take advantage of the help we can give, to allow self help to become a reality. Those are easy words to say. It is mt.ch more difficult to resolve. My noble friend Lord Boardman has referred to the sensitivities of trade. The noble Lord, Lord Bridges, asked rhetorically whether we in the West are prepared to make sacrifices to promote future stability. We can see those sacrifices being made in Germany as West Germany assists with the modernisation of East Germany. If we take that further, we have no alternative but to continue to support the economies of the three countries as they strive to make the advances that we in the West have made since the last war. The agreements form part of that process.

I return to a point I made earlier. They are a stepping stone towards assisting those countries. The EC and the United States must ensure that the graffiti seen on the wall in Poland in 1981: The winter is yours—the spring will be ours", come to fruition in Eastern Europe. I hope that I have so covered the subject at least to give an indication of the concerns that we in the Community must face when talking about full Community membership. In closing, I commend the report to the House.

7.40 p.m.

Lord Wade of Chorlton

My Lords, following the trip that the Minister of Agriculture, Mr. Gummer, made to Hungary about 12 months ago, a company of which I am chairman—Marlow Wade—was invited to make a presentation to a seminar by the rector of Gödöllo University in Budapest on the marketing of food. It was explained that there was no money, but many people in the food industry were interested. They wished to know a great deal more about how to market food products. As a result, we asked the know-how fund to provide money for them and, as many noble Lords said, their people were extremely helpful. We were able to raise sufficient money to help Gödöllo University to invite 300 people, of whom 250 turned up, from a whole range of food industries throughout Hungary to listen to us speaking on how to market goods. I was able to take eight people from various countries in Western Europe who I knew were experts in the marketing of various varieties of food. We then held a three day seminar.

Following that first trip we received a tremendous response from many of the people there and I received letters from people in Hungary asking whether we could take the matter further. They wanted us to find people who would invest in businesses or form closer co-operation and turn our advice into practical effect. As a result, I went again to Budapest for a week in March. I met our ambassador and various ministers and was able to organise a further trip, again with the help of the know-how fund.

During the Recess I spent a week in Hungary with six businessmen from the UK—they were not all from the food trade—who were prepared to form business relationships with companies in Hungary. I shall restrict my remarks to my experiences in Hungary over the three visits and how we might learn about what is likely to happen in the future.

On the first trip many young people were present who were starting businesses and were involved in state organisations. As many noble Lords said, it was quite clear that they had no knowledge of business structures. Most of the questions were, for example, "What is a share?"—not PHARE. "What is a limited company?" "How do we get rid of a bureaucrat?" I was asked that question many times and I replied that we had been looking for an answer but had not yet found one.

The questions were simple and basic and it amazed us how ignorant people were. The managing director, chairman or general manager of the largest state farm had no knowledge at all of his profitability, of the income of his various enterprises or what his total wages bill was. He was running an organisation that farmed 20,000 acres, with many thousands of cattle, with pig units and so on. They had no record of what they did.

On my second trip, the most interesting man whom I met had recently been appointed to sell all the food industry businesses. I spent some time with him and asked him questions such as, "How many businesses have you to sell?" He replied, "I have no idea". I asked what kind of businesses they were and he had no idea. I asked, "Who owns them? How do you sell them?" He said, "We've not decided that yet. But this I can tell you: if somebody comes along and tells me what he wants we shall sell it to him". That is the view they all now have.

When I returned last week and met people in a whole range of companies, the dramatic change that had taken place even in the past six months was noticeable. They have now made a clear decision in government that they want to privatise everything. They are anxious that privatisations should take place with the use of Western money. The British are far behind any other country in Europe in regard to the potential and what is now happening in Hungary. There is a tendency for the British people who have gone there to get a deal rather than looking at the long-term prospects. There is a tendency to be approached by somebody who says, "I have a lot of pork or meat to sell". Last week we were approached by three people from a little village near Lake Balaton. One was the leader or mayor of the village, another two ladies were prominent in the running of the activities. They had 4,000 acres in the village and were desperate to find a buyer for their surplus products. Producers are being ripped off by the main wholesale, retail and transport trades in Hungary and all have surplus products to sell.

When one sees them, one realises that they have no idea what the marketplace is in the West as we know it, and that there is competition in choice among customers. They will not sell anything in the West unless it is of high quality, well packed and well presented. They have no concept of that; they expect that a wagon will collect a load of cucumbers, none of which is fit to eat. They are proud of their jams —some noble Lords may have eaten Hungarian jams. They said to me, "Isn't this wonderful jam?" One cannot tell the difference between one variety and another. They all look the same, taste the same and are packaged the same. For people who do not speak Hungarian, the names sound the same. People expect us to buy the products and they ask why we do not sell them in our supermarkets. There is a long way to go.

My noble friend Lord Boardman, and the noble Lords, Lord Bridges and Lord Roll, emphasised the role of agriculture. I cannot see how the Hungarian economy can grow at all unless the Hungarians find markets for their agricultural products. It is the key to the whole economic development of Hungary and other countries as well. For them to have any wealth creating activity they must buy in the basic raw materials from other countries but they do not have the hard currency for it. All they have is wonderful land which will grow an enormous quantity of food. Hungary and all similar countries are already net exporters of food. We cannot imagine how we can help them unless we resolve our own CAP problems, as the noble Lord, Lord Bridges, aptly pointed out.

What is happening at the moment is that prices of foodstuffs are falling rapidly. In addition, the Government are having to take strong steps to stop production. We talk about quota restrictions on milk in the UK but only two months ago they were told that they must drop their production by 15 per cent. To deal with the problem, the milk is not collected by the dairies. For two or three weeks, the farmer is left with it and has to pour it away. The same is happening with other products; prices are falling fast.

On the other hand, one could describe Hungary as the Klondike of the 1990s. The opportunity to create wealth by reducing the cost of existing levels of production is enormous. There is not a factory or enterprise where one could not reduce the labour force by 50 per cent. I have never seen so many so-called employed people who do nothing. There is a famous cake shop which some noble Lords may have visited in the middle of Budapest. It is the only shop that I have ever been in where there are always twice as many waitresses as there are customers. That does not mean that any of the waitresses are working; most of them stand around and watch the odd one who does work. That applies to every possible enterprise. I visited a dairy that makes approximately four tonnes of cheese a day. Such an enterprise here would employ about 10 to 12 people; it employed 90. But the interesting point is that it was making a slight profit, as the difference between the buying-in price of the products and the price the goods were sold at in the Hungarian market was such as to give them a much higher margin than enterprises in the West would expect to receive. If we in the West will pour products into Hungary and reduce prices, the dairies will go bankrupt, or else the price of milk in Hungary will have to come tumbling down. The only other alternative is that Hungary must find much more efficient methods of manufacture.

There are great opportunities in Hungary, particularly for young, active people who are flocking back there after years of absence. However, on the other hand, the vast number of people who work on the land and perform more menial tasks will lose their jobs or their wages will fall. There is a great danger of a two-tier society developing in Hungary that will be more akin to the societies that exist in South America than to those in Western Europe.

There is the matter of making funds available to those who will form the new privatised companies. I gained the impression that many people who now work in the state bureaucracy or in the state-owned businesses are looking for an opportunity to obtain a share in newly privatised businesses at very little cost with the aid of Western money. Those people will do well and will make a lot of money, but many others will lose out.

I agree with all those who have said that we must support Hungary. However, we must ensure that the money we provide helps in the production of goods. We must use the money to show manufacturers how to add value to their products. It is only through adding value to their products that they can market those products worldwide. We must be careful to promote those businessmen and entrepreneurs who want to make an impact in Hungary and to add value to their agricultural products.

There is considerable concern among many people in Hungary that the leadership of the country has not changed. Exactly the same people now run the country who ran it when it was a communist state. Those people have built up contacts and looked after their contacts. Many people in Hungary consider that that situation has not changed a great deal. The average Hungarian still feels ruled by a relatively small clique. Although there is now a democratic system in Hungary, there is no indication yet that new leaders who are motivated to create a truly democratic society have emerged. Hungary is still dominated by people who rather liked the former system but who feel that, at least on the surface, they must show signs of initiating a change.

I hope the Minister can comment on my next point. We need to invite more people from Hungary, Czechoslovakia and Poland to Britain so that they can understand what a market economy consists of. We must make funds available to invite to Britain the potential managers and the people who will become the leaders of those countries. I do not mean that we should invite the people who are now in charge of those countries but those whom we can identify as potential leaders. Let us open our doors to them and teach them what a market economy involves in terms of cho ce and opportunity.

Every time that I have been to Hungary I have found it an emotional experience. By nature I am rather an emotional person and Hungarians are also rather emotional. By the time we have drunk a few glasses of the excellent palinka that is produced there we become very emotional. We all cry and laugh together and agree that it must be right for us to draw closer:ogether. The Hungarians look to the British particularly for help in this matter. The Hungarians have a great sense of history and culture. I hope that we can provide the services and help that are needed to bring that country into Europe. I thank the noble Lord, Lord Aldington, and his committee for producing this excellent report, which I fully endorse.

7.55 p.m.

Lord Whaddon

My Lords, I trust that your Lordships' House will pardon the late insertion of my name on the Speakers' List. It was due to my delayed arrival back in the country. I must begin by declaring an interest, as for some 30 years I have been involved in trade between the UK and the three countries we are discussing. I have been involved particularly with Poland and I shall address most of my remarks to the situation there.

I add my welcome to the report. It is a workmanlike document and a most valuable aid in understanding the situation. I also welcome that wonderful event—the application of these three countries of Central Europe to become associates of the Common Market. That is a dramatic revolutionary turn in European history and something that future generations will look back on in wonder. The collapse of communism has, I hope, removed some terrible dangers which overhung the whole of Europe. However, ironically, the collapse of the system has also released certain dangers which were previously suppressed such as narrow nationalisms, ethnic differences and religious antagonisms. Those phenomena had been suppressed but are now coming to the fore. If the countries of central Europe are left floating loose, pursuing their own narrow nationalistic ends, that situation will be dangerous for the whole of Europe.

The conclusion of a successful series of agreements with the three countries in question is very much in the interests of Britain and of the whole of Europe. Polish ministers have been calling for a firm declaration from the Common Market that Poland will be accepted as a member when certain specified targets are achieved. It seems doubtful whether the Common Market can do that legally, but at the very least Her Majesty's Government and the governments of all the member states of the Common Market should make it clear that they welcome the approach that has been made and look forward to the full membership of those countries in the Common Market in due course. We must leave no doubt in the minds of those governments that we welcome their applications.

The report states that progress towards membership will depend on the continuing democratisation of the countries of Eastern Europe. That is understandable, but we must not forget that the converse is also true and that progress towards democratisation in Eastern Europe depends also on the development of a stable economy and the success of the applications of Eastern European countries to join the Common Market.

It was Bismarck who said that the big questions are settled relatively easily but the devil lies in the detail. There are plenty of devils to be found in the details we have to settle. One of the biggest is the Polish debt of 44 billion dollars. The decision of the Paris Club to recommend halving the debt is extremely welcome. Indeed we must face the fact that it is utterly impossible for the debt of 44 billion dollars to be repaid. The Polish economy is probably capable of servicing 8 billion or 10 billion dollars of debt. That is the limit. Therefore if we are to see any chance of success in negotiations the debt must be drastically reduced. The Paris Club has made a dramatic start in this matter but further measures must be taken.

We should remember that there are certain precedents. At the end of the last war America made a most generous and dramatic gesture to Europe in the form of the Marshall Plan. In particular, Germany was treated differently from the way it had been treated at the end of the First World War. What a great success that was. Seventy per cent. of Germany's pre-war debts were remitted. If we translate the amount of Marshall aid that was given to Germany into today's prices it comes to some 70 billion dollars. So Germany received a great deal of aid, and it was well worth it. European stability today is a great credit to the generosity of the Americans at that time. It is time that we adopted the same generous, long-sighted attitude to the countries of central Europe. The prizes will be as great.

The Poles are also looking at unorthodox methods that may be of use in reducing their debt, and in particular the exchange of industrial equity in return for debt. That was suggested in the British economic press about a year ago and was rather cold-shouldered by the Polish Government of Mr. Mazowiecki. The present Polish Government, however, takes a more hopeful view. I recommend to Her Majesty's Government that they take serious note of that possibility. It may be of use in reducing the debt to manageable proportions. It will also give our companies something for the money. It is also a means of introducing a considerable amount of know-how into Eastern Europe, as has been pointed out by many speakers.

In relation to UK direct aid a number of noble Lords have referred to the know-how fund. I must congratulate the Government on their wisdom and generosity in introducing that fund. It has been a great success and is money well spent. The scheme should be expanded. Apart from bringing Poles to Britain to study, we should also take the opportunity to send many British experts to work on short-term contracts in Poland. That is another great way of spreading our expertise and increasing Poland's know-how.

I suggest that non-governmental organisations have a part to play. I was surprised that I could not see in the report any mention of the role of NGOs. It may be there but I did not see it. The associations of engineers, accountants, bankers and other professionals and trade unions have a part to play. While it is tremendously important, government is only a small part of our society. The majority of our society ticks along very happily keeping as far away from government as possible. That is how the countries of central Europe will have to work in the future. Let us use the resources of our own non-governmental organisations as well as the facilities of government.

Turning to the trade pattern, the collapse of Comecon is exceedingly dangerous for the three applicant countries, and in particular for Poland because many of its factories worked solely on exports for the Soviet Union. That market has now disappeared. It was suggested recently in the European Parliament that it might be sensible to make an ecu credit available to the Soviet Union specifically for purchases from the countries of central Europe to tide them over this dangerous period. The Commission brushed the suggestion aside. I think that it was a little too hasty. Perhaps Her Majesty's Government would like to give a little more thought to that suggestion of the European Parliament.

It is a time of a certain amount of danger but also of tremendous opportunity. It is a time for high statesmanship and a time to reach out in generosity to welcome those countries of central Europe into association with the Common Market.

8.4 p.m.

Lord Thomson of Monifieth

My Lords, on behalf of these Benches I join with everyone else who has spoken in congratulating the noble Lord, Lord Aldington, and his committee on their report. My noble friend Lord Bonham-Carter was a member of the committee and would have spoken this evening but, sadly, at present he is unwell.

Over the years, from the very beginning of British membership of the Community, the reports from your Lordships' Select Committee on European matters have earned a high reputation as guides to the complexities of United Kingdom membership of the European Community. Through their detached and authoritative approach they have made a significant contribution to creating an informed climate of opinion in the country on issues which have often been divisive and emotional.

The subject matter of this report—the Community's agreements with Poland, Hungary and Czechoslovakia—is not itself divisive on the domestic front, but it is of immense importance, as all those who have spoken have emphasised, to our hopes for a stable and prosperous Europe. The historic collapse of the economic and political system of the Soviet bloc raised high hopes of progress to mixed economies and political liberty at the time when the revolutions took place but equally it has produced huge problems.

The noble Lord, Lord Wade of Chorlton, has just given us a racy, vivid and down-to-earth account of the situation on the ground in the Hungarian economy. I cannot begin to match him. I ought perhaps to make a declaration of an interest of a kind as a former director of ICI. My experience of Eastern Europe is through ICI. I was therefore rather struck by the written evidence from Mr. John Mitchell, ICI's specialist in the region. He described how, even in East Germany, which was generally regarded in the past as the most efficient and modern of the communist economies, the chemical industry is being largely wiped out in the switch to a market economy. Over two-thirds of the GDR's chemical industry is expected to disappear and what is left will become subsidiaries of major Western companies.

If that is the position in East Germany, with West Germany in a position to bail out its Eastern citizens, how much more difficult will the process be in Poland, Hungary and Czechoslovakia? Mr. Mitchell points out that the only production sector in which those countries have a real competitive advantage is food and agriculture. There they come up against the most protectionist aspect of the European Community, the common agricultural policy. The noble Lord, Lord Aldington, said in his opening remarks that trade will be the key to tackling those problems. My only mild criticism of the committee's report is that it is a pity that the committee was not a little more forthright. The report contains the rather anodyne sentence that: Some provision for imports of agricultural products from the throe countries needs to be considered within the proposed reform of the CAP". I agree with the noble Lord, Lord Roll, that anything that promotes the reform of the CAP would be of great benefit to those of us who believe in the importance of building an effective European Community.

On the political front and the creation of multi-party democracies in those countries, as many noble Lords have pointed out, the problems are gigantic. Even before 45 years of communism in Poland and Hungary there was not a strong parliamentary tradition. In Czechoslovakia there are deep problems between the Czech and Slovak republics. Indeed, as I found out when I took part in a British-Hungarian round table a while ago, in all three countries the minorities which were once contained arid suppressed by either the Habsburg empire or successive Russian empires are now vociferous and stirring. The noble Baroness, Lady Young, drew attention to that. It is a difficult dimension of the emerging problem.

The report rightly emphasises the gap between, on the one hand, national liberation movements, such as the trade union, Church-based Solidarity in Poland and President Havel's revolt of the intellectuals and, on the other hand, the creation of a multi-party system. There is a large gap between those two stages. After all, the parliamentary democracies of the West carried through the painful changes of their agricultural and industrial revolutions over a pretty long period of time and, for much of it, on the basis of a pretty limited parliamentary franchise. The committee pointed out that the shorter the economic transit on, the less will be the political strain. We all say "Amen" to that, but I suspect that, however well and wisely the West gives its assistance to East and Central Europe and to the Soviet Union, both the economic and political processes will take a good deal longer than we wish and will be fraught with many dangers.

As many noble Lords said, the report makes wise, realistic and above all practical comments on how the Community's European agreements can most effectively be implemented. As the noble Lords, Lord Wade and Lord Boardman, said, from the point of view of the United Kingdom national interest we should like to see British enterprise earn a significant share cif the opportunities for trade and investment. The know-how funds are of great importance and the Government have been praised by a number of participants in the debate for pioneering the know-how fund in Poland and extending such funds to other countries. I was about to say that we might be able to earn some international dividends out of our own domestic traumas over privatisation by offering some expert advice on this matter until I heard the noble Lord, Lord Roll, explain the difficulties of putting a price on Skoda. Nevertheless, we have a good that of experience in this country that could be highly relevant to the problems of transition in those countries and know-how funds are important in that respect

One particularly important point that has been emphasised by a number of your Lordships, including the noble Lord, Lord Boardman, and the noble Baroness, Lady Young, is the tremendous asset that we have in the United Kingdom in the fact that English is in effect the world business language. The noble Lord, Lord Greenhill, mentioned the useful role of Voluntary Service Overseas volunteers in Hungary. As a trustee of the foundation set up by the late Roy Thomson to train journalists in developing countries, I might perhaps mention the good work that the know-how fund has done by introducing East European journalists to the workings of a free and independent press. The British Council and the various specialist business language schools in some of our universities and colleges have an invaluable role to play in teaching English, provided that they are given adequate resources to do so by the Government.

The language advantage should help to compensate a little for the historically dominant position of West Germany in the trade of East and Central Europe. The figures in the report are striking. In Czechoslovakia, the United Kingdom's 5.9 per cent. share compares with West Germany's 40 per cent. share; in Poland, our 5.2 per cent. share compares with West Germany's 38 per cent. share; and in Hungary our 4 per cent. share compares with West Germany's 41 per cent. share. Perhaps more worrying is the fact that Italy and France have also done a good deal better than the United Kingdom. The Government must address themselves seriously to the reasons for that situation.

I content myself by making a rather different remark; namely, that the economic domination of West Germany in East-West trade makes it all the more important that Germany, now united, should be so committed to progress with the economic and political integration of the European Community. That raises the question of Community membership for those countries in Eastern Europe on which a number of your Lordships commented. In my judgment, the report recommends a realistic time-scale of at least 10 years for the three countries with which we are dealing in this debate to become ready to complete a free trade relationship with the Community, which is a considerable way short of full membership. The three countries dealt with in the report, still less countries such as Romania and Bulgaria, will simply not be ready for full Community membership for a long time yet. The report makes the useful and ingenious suggestion that the preamble to the agreements—the noble Earl, Lord Buckinghamshire, mentioned this point a few moments ago—should include a statement of intent about ultimate accession to the Community. That seems a useful thing to do, but in the meantime I agree with the noble Baroness, Lady Young, that the Council of Europe seems the more appropriate, wider and looser framework for encouraging political reform and progress in human rights in those countries. We welcome the fact that they are to become members of the Council of Europe.

As regards East Europe, I agree with the noble Earl, Lord Buckinghamshire, who appeared to argue —I put words into his mouth; these are my words, not his—that the so called dilemma between deepening or widening the Community seems unreal in relation to Hungary, Czechoslovakia and Poland. The noble Lord, Lord Roll, said that there was no evidence that the countries concerned wished the Community to halt its progress in order to make it easier for them to become members. In one of his wisest remarks towards the end of his speech the noble Lord, Lord Aldington, emphasised that it was a major interest of Poland, Czechoslovakia and Hungary to see the European Economic Community succeed.

In conclusion, our view from these Benches is that the countries of the EC will best equip themselves to promote prosperity and stability in Central and East Europe if they keep on course with their present plans to strengthen the economic and political cohesion of the Community.

8.17 p.m.

Lord Richard

My Lords, I start by congratulating the noble Lord, Lord Aldington, and his subcommittee on producing this report. I am also delighted to see my noble friend Lady Serota in her place because it is perhaps time that greater public recognition was given not only to this sub-committee's reports but to the reports which come from the select committee as a whole. I can only say that during my period in Brussels they were studied in the Commission which, in a sense, is where they are meant to be studied. What was said in the reports was read, marked, learned, inwardly digested and occasionally even acted upon. I gather that the position is still the same. Perhaps I may also congratulate the noble Lord, Lord Aldington, on this report which is timely, important, and encapsulates the issues with skill and a great deal of thoroughness. I read it with interest and found myself in agreement with a great deal—indeed, almost all—of its conclusions.

As a result of the fundamental political changes in Eastern Europe, it was inevitable that the countries in the region turned to the European Community for financial and technical aid to assist in their huge task of development and reconstruction. Following the series of trade and co-operation agreements already implemented, the association agreements now being discussed are rightly viewed as the second stage of a process which could eventually lead to full Community membership for Poland, Hungary and Czechoslovakia and, I suppose, for other countries of Eastern Europe when they reach comparable stages of appropriate development.

The noble Earl, Lord Buckinghamshire, made an interesting speech about membership of the Community for these three countries. When I consider that question I find myself faced with two perhaps conflicting opinions. When they are ready, clearly they should become members and there is not a great deal of harm in putting it in the preamble of the agreements that that would be our eventual intention. On the other hand, I should be very reluctant indeed to see a situation in which the Community in its present form went on with its political and economic development to such an extent that it created barriers for the newly emergent countries of Eastern Europe to becoming more closely associated with the Community itself.

If we end up with another divided Europe in which the division is perhaps different but which is nevertheless economically and perhaps politically real, I should regard that as a betrayal of the ideals which animated the founding fathers of the Community and the drafters of the Treaty of Rome itself. I accept, therefore, that we have to approach this matter with caution. On the other hand, the institutions are made for Europe and Europe is not necessarily easily adapted to the institutions.

When the Commission was authorised to begin exploratory discussions with these three countries it produced its own proposals identifying a number of areas for association agreements. They are formidable: political dialogue, free trade, the approximation of laws, economic co-operation building on the areas already covered by the trade and co-operation agreements, cultural co-operation and financial co-operation to facilitate structural reform.

The association agreements—or European agreements as they are now called—based on Article 238 of the treaty will have to be negotiated individually with each country. It is important to make that point. It seems to me quite impossible not to take full account of the level of political and economic reform which has been achieved in each country separately. This again is one of the major problems in the whole diplomatic exercise. The levels of reform reached in the three countries are by no means identical. Once again one is faced with the difficult problem of managing change in an orderly way. But here one is faced with the problem of managing change in an orderly way against a background which is indeed still distinctly uncertain.

It cannot be denied that the three countries are now in the process of fundamental transition. They are formerly communist states with command economies which are now attempting to develop democratic political structures and free market economies. As the noble Lord, Lord Aldington, said when he introduced this debate, it is a daunting task, particularly given the depths of the socio-economic and environmental problems facing each country. It is a daunting task too, as the noble Lord, Lord Wade of Chorlton, said, given the degree of perception in those three countries —he spoke only of Hungary but it is true certainly of Poland and probably parts of Czechoslovakia as well —of how to run a market economy and indeed how to understand even the most basic concepts involved. In my view, therefore, they require massive foreign aid and assistance to help facilitate the transition to free market economies and to the concomitant development of stable democratic political systems.

The countries differ, as I said earlier, so perhaps I might briefly examine how they differ and suggest what our approach should therefore be. Poland is the first European country to cast off communism and implement political and economic reforms. The Polish government's moves toward a free market economy have taken place against a background of severe and successive economic crises. Its efforts to control inflation have resulted in rising unemployment, lower output and lower living standards. It is hardly an advertisement for the free market system and the delights of our western democratic systems at this stage so far as the Polish people are concerned. What they seem to have seen is a diminution in their standard of living compared with that which they enjoyed under a command economy. It seems to be proving a traumatic experience for the Polish people. President Walesa has come under increasing pressure as a direct result of the reform programme. On top of that, Poland has to try to implement it with a huge external debt of around 45 billion dollars. The burden, if not in fact insupportable, is indeed extremely heavy.

Hungary, on the other hand, one of the leaders among former Warsaw Pact members, is attempting to reform its socio-economic and political systems. On the political side, parliamentary elections were held in May 1990 and a stable coalition government with a mandate for reform was returned. According to reports, the reforms have made modest progress. However, it is expected that the economic fall-out of the Gulf war, the move to hard currency pricing in CMEA trade and the escalating debt crises—per capita the debt seems larger than the debt of Poland —are all bound to retard further progress. Indeed, it is novi being predicted that unless the Hungarian Government undertake urgent deflationary steps, the economic situation will deteriorate rapidly.

However, on the positive side Hungary is a longstanding member of GATT, the World Bank and the IMF. It signed a co-operation agreement with EFTA in June 1990 and it has joined the Cairns agricu tural group. We shall have to see what that says for its agricultural relations with the CAP but the Cairns Group does not view the common agricultural policy with a degree of warmth. Significantly, however, some foreign investment has at last begun to flow into the country. General Electric has bought a controlling interest in the Tungsram light bulb company and General Motors has signed an agreement with the Raba truck company.

The Financial Times of 21st May carried an interesting article—very much along the lines of what the noble Lord, Lord Wade, had to say—about the difficulties of privatisation. It said that: Hungary, which has gone farthest in dismantling state control of industry, is therefore finding out first that the transformation is easier said than done. Transactions have to pass through the confusing legal, financial and administrative tangle left by 40 years of communist state control. One temptation is to cut straight through the knot, by distributing property for free, and without discrimination, to the entire population or to former owners. But Hungary…has opted for the deliberate way: genuinely selling state property rather than just spreading it around". The article then says that the decision has its costs.

It the quotes that are interesting. The article adds: Mr. Karoly Szabo, deputy managing director of the State Property Agency, the privatisation agency which bears the brunt of people's impatience [says] 'The process is far more complicated than we ever thought"". The article quotes Mr. Lajos Bokros the president of the Budapest Stock Exchange and board member of the SPA as saying, again somewhat despairingly: 'People think that privatisation is just a matter of making an advert: this is for sale"". The article states: In fact, every state company needs extensive legal, financial and organisational restructuring to prepare it for sale, Mr. Bokros says. 'Very few people know what is involved"". So the problems of transition from a state controlled economy to a market economy even in a country as westernised in its history, traditions and outlook as is Hungary are frankly immense.

Czechoslovakia, which I suppose is the country with the most advanced industrial sector in comparison with the other central European countries, has a low foreign debt of 6.9 billion dollars and a per capita debt of 431 dollars—nearly a quarter that of Hungary and less than half that of Poland.

Perhaps I may say that one figure that I heard tonight gave me considerable pleasure; namely, that there are now 20,000 redundant Russian teachers in Czechoslovakia. I am sorry for anyone who is made redundant. When I visited the country the Russians were still there. One could not help occasionally feeling sympathy for them as an occupying force, an alien intrusion, into a country which fundamentally did not want them. One heard the story of the little boy who came home from school one day. His father asked, "What did you do at school today, my boy?" He answered, "I came top in Latin, father." The father said, "Well done, my son. And what else?" The boy replied, "I came second in maths." The father said, "Well done my son. What else?" The son said, "I came second in music." The father said, "Well done, my son". "And, father" said the boy, "I came bottom in Russian". "Well done, my son!". A country with a fundamentally western orientation appears to have been distorted away from that basic orientation over 40 years.

If that is so, we have to ask ourselves what we can do in relation to these three countries. The report asks pertinent questions and answers them comprehensively. The PHARE programme—which is desirable, having been established to facilitate reform and to develop the private sector—now extends to Bulgaria and Yugoslavia. Its total budget was only 498.I million ecu last year. I believe that that may be increased a little this year. The draft Community budget for 1991 provided for 820 million ecu in direct aid. It would be instructive if the Minister will tell the House the Government's approach to the PHARE programme. Do they propose to put more money into it? Do they approve of an increase in the Community budget to that effect? Indeed, what contribution will Her Majesty's Government make to it?

I believe that the United Kingdom is entitled to credit for being the first country to establish the know-how fund to provide bilateral aid in this way. However, the amount of money involved is extraordinarily small. In 1989–90 £2.3 million was spent on know-how aid to Poland. About £15 million was spent on Poland, Hungary and Czechoslovakia in 1990–91. I am sure that the Minister will have anticipated from the course of the debate that he will be asked what Her Majesty's Government's attitude will be towards an increase in the money being devoted to the know-how fund. I am encouraged to believe by the smile on the Minister's face that he is looking forward to announcing a major increase in resources available.

On these Benches we welcome closer co-operation and relations with the countries of Eastern Europe. We accept that reconstruction and development in Eastern Europe requires massive aid from the West. We are committed to ensuring that Britain plays a full and effective role in the process of helping those countries to develop stable democracies and free market economies.

There are many issues in the report to which one could refer. The noble Lord, Lord Thomson of Monifieth, referred to the disturbing pattern of British trade with the three countries named in the Motion. I ask one question. The report highlighted the fact that ECGD cover so far as concerns Britain was not wholly comparable with that provided by our major trading competitors. The ECGD is to be privatised in this country. Even with all our experience of privatisation in this country—it is greater than that in Hungary, Poland and Czechoslovakia—can the Minister assure us that privatisation of ECGD will not be to the detriment of British exporters to the three countries named in the Motion?

Changes in Eastern Europe over the past few years have been phenomenal in pace and scope. It is perhaps the greatest shake-up in Europe since Versailles. Some would say that it is perhaps the greatest since the Congress of Vienna. Therefore, we should approach what is happening in Eastern Europe with sympathy and encouragement, recognising the extraordinary efforts that have yet to be made. But the prize of a free and democratic Europe extending from the Atlantic to the Polish border with the Soviet Union is so great that our policy, and that of our allies and partners, should be generous, co-ordinated and open-hearted. This may be one of those seminal moments in history which, if rightly handled, could bring a degree of peace and stability which our old and somewhat battered continent has rarely known. However, it demands a response which is positive and encouraging. Festina lente may be a good motto. I would only say: do not forget the festina when one is concentrating on the lente.

8.35 p.m.

The Earl of Caithness

My Lords, I, too, like all noble Lords, am grateful to my noble friend Lord Aldington for giving the House the opportunity to debate the European Community's relations with Poland, Hungary and Czechoslovakia. I pay tribute to the Select Committee on the European Communities for its sustained effort to produce once again such an authoritative and comprehensive review of a subject.

The committee's report is noteworthy for covering the wide scope of developments in the whole of Eastern Europe since 1989. I shall also range more widely than the three countries named in the Motion. We have come a long way in the past two years. Since then all East European countries have rejected the Communist model and are now implementing democratic and market based reforms. The Warsaw Pact is an empty shell, and COMECON has held its last meeting. Czechoslovakia and Hungary are both members of the Council of Europe and all Eastern European countries except Albania have joined the IMF.

The success of the European Community was, in large part, the stimulus for these changes, and the Community has led the West's response. There have been three stages in the development of Community relations with the countries of Central and Eastern Europe. First, we negotiated trade and co-operation agreements with all East European countries except Albania. These agreements seek to improve trade relations and facilitate the exchange of economic expertise.

Secondly, we developed the Community's aid programme. The centrepiece is the PHARE programme of project aid in the key areas of agriculture, environment, energy and economic and industrial restructuring. However, there is one other important area that my noble friend Lady Young and the noble Lord, Lord Thurlow, mentioned; namely, training, which is also covered by the PHARE programme. We share with them the importance that they placed on this subject. Some £350 million were committed in 1990. That is expected to grow to some £600 million in 1991 and over £700 million in 1992.

In addition, the Community has provided extensive food aid to Poland, Romania and Bulgaria and financial assistance to support economic restructuring and currency reform in Poland, Hungary, Bulgaria. Czechoslovakia and Romania.

The third strand of Community relations with Eastern Europe is the association, or European agreements as they are now called, which the United Kingdom first proposed in November 1989. The committee rightly described the objective of these agreements as, The creation of a climate of confidence and stability, the encouragement of political and economic reform, the transition to market economies, and the encouragement of trade and investment". Those aims are explicitly political as well as economic. Poland, Hungary and Czechoslovakia see membership of the Community as their long-term goal, and association agreements are indeed a milestone along that road.

The association agreements build directly on the provisions of the earlier trade and co-operation Agreements. In trade terms, the earlier agreements provided for the elimination of quantitative restrictions on those countries' exports. In association agreements we have the ultimate goal of free trade. I shall return to that important area later.

The areas of economic co-operation outlined in association agreements are extensive and provide for the transfer of expertise in areas such as industrial co-operation, industrial standards, agricultural cooperation, energy, environment, health and safety at work, tourism and customs co-operation.

The noble Lord, Lord Richard, mentioned the third most important element of the association agreements which is the help that the Community can give in bringing Polish, Hungarian and Czechoslovak laws into line with those in the Community. I reassure the committee that there is no compulsion for the three countries to approximate their laws to those of the Community. But as new laws are put into place it clearly makes sense for them to be based as closely as possible on Community laws if these countries want a closer relationship with the Community.

Finally, the agreements will provide for a political dialogue. I reassure my noble friend Lady Young that we take parliamentary exchanges as seriously as she does. We have organised, sponsored or paid for a wide range of visits to this country by Eastern European parliamentarians and visits by British parliamentary officials. I share my noble friend's concern that nationalist rivalry and economic austerity are dangerous bedfellows. That is why we attach such importance to the protection of minorities to be discussed at the CSCE ministerial meeting in Berlin on 17th and 18th June.

The committee notes in its report that for association agreements to be successful political reform and democracy are essential preconditions. That is absolutely right. That conditionality has underpinned the Community's approach to Eastern Europe. If democracy and free market economies are successfully established in these three countries, as we fully expect, the results of association agreements will be an important contribution to the new Europe. Poland, Hungary and Czechoslovakia have made clear I hat membership is their long-term objective. The British Government share that objective and look forward to the day when these countries can sustain all the obligations of membership. That point was stressed by my noble friend Lord Buckinghamshire.

I reassure my noble friend Lord Aldington that the objective will be acknowledged in the preamble to the association agreements. Thus, as the committee rightly identified, it will provide additional encouragement to the three countries to pursue their reforms. But the Community cannot prejudge what Poland, Hungary and Czechoslovakia may decide in their best interests at a further date. It will be for them to decide whether and when to make a formal application. But as the noble Lord, Lord Richard, said, our attitude is equally crucial. It would be quite wrong for any country in the Community to slam the door on them now.

The European Community's association agreements are only one means of assisting Poland, Hungary and Czechoslovakia to reach their objective of full integration into the European mainstream. One of the new tools at our disposal is the Group of 24. The G24 exercise was launched following the request made:o the Commission by the Paris Economic Summit in July 1989 to co-ordinate the West's help to Poland and Hungary. This effort has now been extended to cover Czechoslovakia, Romania, Bulgaria and Yugoslavia. I am pleased to say that the UK plays a very full role in discussions in Brussels and has taken part in fact finding visits made by G24 missions to Eastern Europe.

My noble friends Lord Bessborough and Lord Aldington reminded the House that the donor's role is but on' side of the coin. Increasingly the recipient governments are able to co-ordinate the various offers of aid. Thus, like my noble friends, we welcome the appointment of aid co-ordinators in Poland, Czechoslovakia and Hungary. It is right that as new governments in these countries grow in stature the focus for co-ordination will shift further towards the recipient countries. I am glad that my noble friend Lord Boardman, with his experience, raised the question of debt and some of the difficulties which each country has as a result of the different debt structures.

I noted that in paragraph 89 the committee welcomed the discussion at the Paris Club of the debt owed by the Eastern European countries. I am happy to report to your Lordships that the Paris Club has agreed to reduce the value of Poland's debt owed to bilateral official creditors by 50 per cent. This agreement reflects not only Poland's heavy indebtedness but is in recognition of its radical reform efforts.

My noble friend Lord Aldington picked up the point that the committee made in paragraph 91. It identified trade as an important element in improving economic activity. Improvements to these countries' trade access provide a more lasting and more effective source of support and growth in their economies than aid. Improved trade access is a vital component of the proposed association agreement and is particularly urgent now that trade within COMECON is contracting so sharply. The example of Poland's exports in 1990 is a case in point. Exports to the COMECON countries fell by 10 per cent. but that was offset by a rapid rise in hard currency exports. Polish and Hungarian firms are quickly developing the capacity to compete fairly in Western markets. In 1990 Polish and Hungarian exports to the Community grew by about 40 per cent. and 30 per cent. respectively. The British Government regard that as an opportunity rather than as a threat. The level of East European exports to the United Kingdom is still very low and totalled only £460 million last year.

There are areas in which East European exports are more competitive and could displace other exporters or even British producers. The noble Lord, Lord Roll of Ipsden, was not alone in mentioning one sensitive area; that of agriculture. He said that the ability to export in this field was crucial. My noble friend Lord Wade of Chorlton gave an example of some of the basic difficulties that first need to be overcome. We agree that the Community should be open to third country exports. But the Government will ensure that the opening of Community markets is done in a way which shares the burden equally between all member states.

As the report underlines, overall British interests are best served by Poland, Hungary and Czechoslovakia growing in economic strength and becoming bigger markets for UK exports. They can develop that strength only by trading in areas where they enjoy comparative advantage. We hope that the association agreements will achieve the delicate balance between allowing greater trade and providing the safeguards to avoid any one industry or member state suffering disproportionately.

In that connection several noble Lords mentioned the ECGD cover. As a result of those comments it sounded as though the ECGD requests were considerably in excess of the money available. That is not so. The demand for medium-term cover in Czechoslovakia and Hungary is low and well within the cover currently available. The availability of ECGD cover should not therefore be a reason for lack of success by British exporters. I shall return to that subject later in order to answer the point made by the noble Lord, Lord Thomson of Monifieth. No ECGD cover has been made available for Poland because it has been unable to service its existing debts.

It is probably true to say, however, that ECGD terms for medium-term cover are more restrictive than some other export credit agencies. It may be that other governments are not as prudent with taxpayers' money as we are. However, steps are being taken by ECGD and the Government to encourage other governments to ensure that risks are properly assessed, premium is charged at a realistic rate and interest subsidies are minimised. I am sure that all noble Lords agree that it is in no one's interest to repeat the mistakes of the 1980s and allow another unsustainable build-up of debt.

The committee referred to the help given by the East European Trade Council and British embassies to British exports overseas. I accept with gratitude the compliments paid to British embassies worldwide. However, it is true that those in Eastern Europe have witnessed the biggest changes in the past two years. More generally, the diplomatic service has moved quickly to re-order its priorities and to direct more staff resources towards Eastern Europe. In the period since 1989, 49 UK based members of staff have been redirected to work on Eastern European and Soviet matters.

So far I have concentrated on the help that governments and governmental organisations can provide for Eastern Europe. However, investment is a matter for the private sector. The committee was right to recognise that responsibility for attracting private investment falls to the governments in question. The key lies in their strength of purpose and determined implementation of reforms in face of economic difficulties. We hope that the recently established London-based European Bank for Reconstruction and Development with its private sector focus will be able to play an important role in creating the confidence required.

My noble friend Lord Wade of Chorlton was right to point out that there is more to it than making funds available. British investors must persevere like many of our competitors and look beyond just doing a deal. That is true for all markets throughout the world. Therefore, it did not surprise me that the noble Lord, Lord Thomson of Monifieth, asked what the Government are going to do. Surely with his experience in ICI a more pertinent question is: what is industry going to do? In its widest sense industry must respond to that challenge worldwide.

I was surprised that not even the noble Lord, Lord Richard, raised the matter of human rights, which is mentioned in the report. As no noble Lord did that, I shall do it. The British Government welcome the recent accession of Hungary and Czechoslovakia to the Council of Europe and their signature to the European Convention on Human Rights. Poland is expected to sign the convention later this year when it becomes eligible to join the Council of Europe after its general election. As regards accepting the jurisdiction of the European Court of Human Rights, we hope that all three countries will agree to be bound by the court's rulings, as we are in the United Kingdom.

Lord Aldington

My Lords, my noble friend said that nobody had mentioned human rights. He has largely repeated the words which I used. Perhaps he lost me in the middle of my speech. If he reads Hansard he will see that he and I agree 100 per cent., as does the committee.

The Earl of Caithness

My Lords, I apologise to my noble friend. Perhaps I was writing down an answer to one of his questions at the time. I know that my noble friend raised a point as regards ethnic minorities which I answered earlier.

I am grateful that the noble Lord, Lord Whaddon, welcomed the fact, as did the Select Committee, that the British Government have already made a significant contribution through the know-how fund. That now covers Poland, Hungary, Czechoslovakia, Bulgaria and Romania. The fund has now been running for almost two years and over 200 projects have been financed to date. The fund fully spent its allocation of £15 million in the past financial year and I am pleased to inform the noble Lord, Lord Richard, and the House, that the budget has been doubled to £30 million for this financial year.

The fund places particular emphasis on the financial services sector, management training—which will please my noble friend Lady Young—the development of small businesses and advice for dealing with unemployment. I was pleased to hear that my noble friend Lord Boardman agrees that those are the important objectives for the know-how fund.

The noble Lord, Lord Roll of Ipsden, drew attention to how the fund had provided critical help in the important process of privatisation in central and eastern Europe. The noble Lord, Lord Thomson of Monifieth, will be pleased to know that we have put our expertise to good use. The know-how fund financed the restructuring of the first four enterprises to be privatised in Poland, and advice is now being provided to the Polish Government on their mass privatisation programme. Advice is also being given to Czechoslovakian authorities on their proposed privatisation programme.

Finally, the committee referred to the importance of proper evaluation of assistance projects agreed under the EC PHARE programme. I am happy to tell your Lordships that as a result of consistent pressure by the United Kingdom the European Commission has agreed to include provisions for full and independent monitoring of all future PHARE projects and to earmark part of the budget for that purpose.

In conclusion, I thank all your Lordships who have taken part in this very important debate. It will provide a stimulus for the Government in the coming months and years as we continue to work for an open, democratic and free market based Europe. As all your Lordships have stressed in this debate, it is not an easy road, but the report is an important marker on the way.

8.54 p m.

Lord Aldington

My Lords, at the end of this fascinating debate, I thank the Minister for a carefully reasoned speech carrying his authority and showing the care with which he studied the report and with which he has listened to the debate. We are used to that from him. Perhaps I may say on behalf of the Select Committee that his speech to us was a reward for the report which we have commended to the House and we thank him for that.

Also, I thank all noble Lords who have studied the report and who have given the House the benefit of their views. I said that I was looking forward to the debate and to learning much from it. Indeed, that has been so right from the start when the noble Lord, Lord Bridges, gave us the benefit of his experience which, happily, some of us are able to obtain also outside this House. He put the report in context against its proper background.

I am obliged to all your Lordships. The two former commissioners who preceded the Minister made pungent speeches. I accept the chastisement of the noble Lord, Lord Thomson of Monifieth, with whom I work very closely outside the House, that the report used words about agriculture which appeared to him to be too anodyne. I remind the noble Lord and the House that Select Committee reports are only as good as they are and only have the authority which they have if they remain based on evidence and not on the passions of the moment. With those wise words, I repeat my thanks.

On Question, Motion agreed to.

8.56 p. m