Lords Sitting of 14 July 1992

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Worcester.

Lord Archer of Sandwell
The Right Honourable Peter Kingsley Archer, QC, having been created Baron Archer of Sandwell, of Sandwell in the County of West Midlands, for life—Was, in his robes, introduced between the Lord Mason of Barnsley and the Lord Judd.

Lord Younger of Prestwick
The Right Honourable George Kenneth Hotson Younger, having been created Baron Younger of Prestwick, of Ayr in the District of Kyle and Carrick, for life—Was, in his robes, introduced between the Lord Sanderson of Bowden and the Lord Colnbrook.
The Duke of Grafton—Took the Oath.

Jubilee Line Extension: Policy
3 p.m.
Lord Underhill Lord Underhill asked Her Majesty's Government:
What is their current policy towards the proposed Jubilee Line extension.
The Minister of State, Department of Transport (The Earl of Caithness): My Lords, the Government's policy remains unchanged. Unless and until the private sector contributions are assured we see no prospect of authorising the start of construction. We therefore continue to look to the private sector to make its contribution so that the line can proceed.
Lord Underhill: My Lords, is it appreciated that the failure to conclude a firm agreement with Olympia & York is regarded by many people as deplorable, particularly in view of the fact that a 500-strong project team is already engaged in preliminary work? In the light of recent reports, can the noble Earl say definitely whether or not it is the intention of the Government to obtain leases or purchase property from Olympia & York in Canary Wharf in order to transfer civil servants? If the Government do so intend, is it not ironic that we use public money to help private developers undertake the scheme?
The Earl of Caithness: My Lords, I am sure that the administrators of Canary Wharf wish to proceed as quickly as possible to finding a potential buyer. With regard to the noble Lord's further point, the Department of the Environment is in touch with various developers in Docklands. Any proposals made will be carefully considered.
Lord Tordoff: My Lords, what efforts are the Government making to overcome the planning blight which undoubtedly results from uncertainty over whether the line is to be built?
The Earl of Caithness: My Lords, that is why the administrators are working hard to find a purchaser.
Lord Sefton of Garston: My Lords, is the noble Earl aware that London Underground has decided to start work on the 17th of this month? Does that indicate that London Underground is as much out of touch with the Government as the Property Services Agency?
The Earl of Caithness: My Lords, I can assure the noble Lord, Lord Sefton, that London Underground is fully in touch with what is going on. The works have been authorised because, if they were not to be done and the Secretary of State gave approval to start construction, London Underground Limited could not stick to its 53-month construction programme.
Lord Sefton of Garston: My Lords, does that mean that the work is starting on Monday?
The Earl of Caithness: My Lords, I did not hear the noble Lord's question.
Lord Sefton of Garston: My Lords, I shall speak a little louder. Does that mean that the work is to start on the 17th, as illustrated on the posters displayed around Parliament Square, and that therefore Parliament Square will be closed to traffic on that day?
The Earl of Caithness: My Lords, the noble Lord is not wrong in saying that works will commence.
Lord Underhill: My Lords, in the light of the noble Earl's statement, can he say who will meet the cost of that development work?
The Earl of Caithness: My Lords, the work was programmed well in advance and is already accounted for in the budget. If the work does not proceed the ultimate contract will be delayed.
Lord Tordoff: My Lords, will the noble Earl answer the noble Lord, Lord Sefton of Garston? Will the work start on the 17th?
The Earl of Caithness: My Lords, yes, that is what I said.
Lord Sefton of Garston: My Lords, the Government are just as confused as they were in stating that there was an agreement with Olympia & York in regard to the Jubilee Line when it did not in fact exist..
The Earl of Caithness: My Lords, the Government are not confused. I have made myself perfectly clear.
Lord Stoddart of Swindon: My Lords, is the noble Earl aware that his short answers to relevant questions are confusing the House? We want to know whether or not work will commence on the 17th: what the status of that work will be; how long it will continue; and whether or not it will continue to completion.
The Earl of Caithness: My Lords, I repeat for the third time that the noble Lord, Lord Sefton, is right in saying that the works will commence. They will take place during the Recess and be completed before the House resumes.

Interest Rates
3.4 p.m.
Lord Jay Lord Jay asked Her Majesty's Government:
Whether they will now ensure a substantial reduction in United Kingdom interest rates.
The Earl of Caithness: My Lords, the Government will continue to set interest rates so as to keep sterling within its ERM bands and to bear down on inflation.
Lord Jay: But, my Lords, as the Government's action two years ago in fixing the sterling exchange rate at an uneconomic level has had the predictable and indeed predicted result of ever-deepening depression, rising unemployment, a balance of payments deficit, penal interest rates and a paralysed construction and housing industry, have the Government yet learned any lessons?
The Earl of Caithness: My Lords, the noble Lord is entitled to his opinion. The fact of the matter is that since we joined the ERM the trade deficit with the European Community has fallen from £11 billion in 1990 to just £2 billion in 1991.
Lord Harmar-Nicholls: My Lords, yes, but is my noble friend aware that while all reasonable people would expect the Government to decide themselves where their influence should be brought to bear on what the rate of interest should be, in the meantime medium and small businesses are finding the present rate almost intolerable? Is he further aware that it could well be that those businesses will be pushed into a position whereby they will not be around to make their vital contribution when the turn round comes and we want to start expanding again?
The Earl of Caithness: My Lords, I am sure that everybody understands, and particularly every business, that inflation has been a key to many of this country's problems. A resurgence of inflation would be far more damaging to investment than high interest rates.
Lord Desai: My Lords, is it not the fact that having decided to stick to the ERM the Government are being rather timid about cutting interest rates? Therefore, does the Minister agree that the Government have failed once again to seize the opportunity which they had in the three months after the election?
The Earl of Caithness: My Lords, no, I do not believe that the noble Lord is right. I believe that the Answer that I gave at the beginning is the right way to tackle our problems. I shall be enlarging on that in the debate which is to follow.
Lord Hailsham of Saint Marylebone: My Lords, would my noble friend gently remind his critics that,
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nice as it would be to believe the contrary, it is not possible to kick-start one's own car with one's own flat battery? Similarly, does my noble friend agree that it is not possible to pull oneself up by one's own boot straps?
The Earl of Caithness: My Lords, my noble and learned friend is right in that the highly international climate in which we trade and do business means that account has to be taken of other countries.
Lord Stoddart of Swindon: My Lords, as regards the Government's present policy, can the noble Earl say for how much longer we have to wait and what more we have to stand before the policy works? Can he say what level of unemployment the Chancellor of the Exchequer is prepared to tolerate before he reduces interest rates and gets some demand into the economy? If he does not do that, is the Minister aware and does he agree that we will be in a slump of 1929 proportions?
The Earl of Caithness: My Lords, the biggest threat to employment in this country is inflation. That has been the problem in the past. This is instructive for the noble Lord: since France last realigned in 1987, prices have risen there by less than 18 per cent. In Germany the figure is not far off 15 per cent. In the same period in this country prices have risen by nearly 40 per cent. That is the biggest threat to employment.
Lord Boardman: My Lords, does my noble friend agree that if sterling were to he devalued a higher charge would be demanded in interest by those who are expected to hold it?
The Earl of Caithness: My Lords, my noble friend is absolutely right. It is a point which those who criticise what we are doing often fail to take into account.
Lord Ezra: My Lords, if it is not possible to reduce interest rates substantially in the near future for external reasons, can the Minister say whether the Government will be contemplating other measures by which the economy can be stimulated?
The Earl of Caithness: My Lords, we shall be shortly discussing the remainder of my right honourable friend the Chancellor of the Exchequer's Budget proposals which will do a great deal for the economy.
Lord Marlesford: My Lords, while congratulating the Government on reducing the rate of inflation to 3.9 per cent., does my noble friend agree that our steadfast membership of the ERM is a necessary external discipline? Does he further agree that the Government are at a stage in the political cycle at which is particularly good to resist the siren voices which urge reductions in interest rates, which might well lead to a short-term recovery, but which would then rekindle the flames of the inflationary psychology which has been the curse of Britain for 25 years?
The Earl of Caithness: My Lords, my noble friend is absolutely right. It is extremely important that we keep the pressure on inflation. It would be totally

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inappropriate to accept that inflation of 4 per cent. or 3.9 per cent. is adequate in this country when everybody else in Europe and, indeed, in the rest of the world is saying that it is far too high.
Lord Peston: My Lords, this is an extremely interesting macrocosm of the debate that we are about to have which I shall refrain from taking part in for the moment. However, I hope that the noble and learned Lord, Lord Hailsham, stays to hear me speak about kick-starting the economy because I shall deal with that point. Will the noble Earl clarify his answer to my noble friend Lord Jay? He said that we keep interest rates where they are in order to keep sterling within the bounds of the exchange rate mechanism. Do we take that to mean that if we were to lower interest rates the Government's view is that sterling would simply collapse?
The Earl of Caithness: My Lords, from what the noble Lord said I was not sure whether he was not going to take part in the debate that follows having listened to it at this stage or whether he was not going to take part in the Question. What I said was that the Government will continue to set interest rates so as to keep sterling within its ERM bands.
Lord Peston: My Lords, just to clarify his answer, does not the noble Earl agree that he must be saying that, were we to cut interests rates according to the so-called siren voices, sterling would collapse? That is the state of the British economy at the present time, is it not?
The Earl of Caithness: My Lords, if we were to cut interest rates we would be cutting them below German levels and it would therefore be expected that the pound would have to appreciate.
Lord Williams of Elvel: My Lords, did the noble Earl say,"appreciate" or "depreciate"?
The Earl of Caithness: My Lords,"appreciate".

Second World War: Commemorative Services
3.11 p.m.
Lord Boyd-Carpenter Lord Boyd-Carpenter asked Her Majesty's Government:
Which British victories over the Germans in the 1939– 45 war they regard as appropriate for a commemorative service in London on their 50th anniversary.
The Parliamentary Under-Secretary of State, Ministry of Defence (Viscount Cranborne): My Lords, the Government are planning a commemorative service to mark the 50th anniversary of the end of World War II in 1995. This will be a national event involving the country as a whole. In addition, the services have selected three World War II events for special commemoration on their 50th anniversaries. Arrangements have been made to enhance existing annual commemorations and the costs incurred are being met from within existing budgets. The RAF
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commemorated the 50th anniversary of the Battle of Britain with a service at Westminster Abbey in 1990. The Navy will be commemorating the 50th anniversary of the Battle of the Atlantic with a service at Liverpool Anglican Cathedral in 1993. The Army has chosen the 50th anniversary of the Battle of El Alamein for special commemoration and, as your Lordships are already aware, commemorative services will be held at El Alamein on 25th October. The Eighth Army Association will also be holding a service at Westminster Abbey on 14th October which will be attended by Her Majesty the Queen. The Government and the Ministry of Defence will also be represented.
Lord Boyd-Carpenter: My Lords, does my noble friend accept that those who have been pushing hard for proper commemoration of the Battle of El Alamein will be gladdened by the latter part of his Answer, especially now that we know that the service to be arranged will be graciously attended by Her Majesty the Queen, with all the admirable feeling that that induces?
Viscount Cranborne: My Lords, I am very grateful to my noble friend. If I may say so, this is yet another example of the power and influence of your Lordships' House at its best.
Lord Taylor of Gryfe: My Lords, does the Minister agree that it might have been more appropriate and more sensitive if the questioner had referred to victories over the Nazis and their allies rather than to the Germans who are now our allies and fellow members of the European Community?
Viscount Cranborne: My Lords, my short experience of this House tells me that my noble friend Lord Boyd-Carpenter is more than able to frame his own Question in his own way.
Viscount Montgomery of Alamein: My Lords, does my noble friend accept that his Answer will be widely welcomed by all the many widows and families of the service people who participated in that great campaign in the desert but who, obviously, are unable to travel to the desert? The fact that they can attend a service at Westminster Abbey will be much appreciated by a huge number of the public.
Viscount Cranborne: My Lords, I am particularly grateful to my noble friend for those remarks. Your Lordships will be well aware of the special interest he naturally has in the matter. I accept what he says. I would however point out that a number of widows will be travelling to the commemoration in the desert.
Lord Ennals: My Lords, is the Minister aware that many of us—including, I am sure, many who took part in the Second World War—do not really want to celebrate any victory over the Germans; we want to celebrate peace and the foundation of the United Nations? Let us remember, but let us not ostentatiously remember.
Viscount Cranborne: My Lords, I always listen to the noble Lord, Lord Ennals, with keen attention. The Second World War was one of the most important

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battles against tyranny in the history of this nation. As a result, the fact that we won that battle is, I think, a matter for celebration as well as for commemoration.
Lord Boyd-Carpenter: My Lords, is my noble friend aware that the victory now to be so appropriately commemorated was a victory over the Germans and that the Germans supported the Nazi regime until the last moment when Hitler very appropriately killed himself? Therefore, is he aware that the Question is accurately framed and that it is a pity to cloud it with references to the Nazis when the victory was, in fact, over the Germans?
Viscount Cranborne: My Lords, if he will forgive me, I do not have the great advantage of my noble friend Lord Boyd-Carpenter of even having been alive during those years. However, I have taken the opportunity of an extended education to read some appropriate history books and I know that my noble friend is well known for the accuracy of his observations.
Lord Williams of Elvel: My Lords, does the noble Viscount recognise that in almost all of the battles, especially El Alamein, there was a strong and effective contribution from members of what was then known as the British Empire, now the Commonwealth? Can we have an assurance from the Government that representatives from the Commonwealth will be suitably invited and suitably treated at any commemorative service?
Viscount Cranborne: My Lords, I am very happy to be able to give the noble Lord, Lord Williams of Elvel, the assurance that he requests.
Lord Jenkins of Putney: My Lords, is the noble Viscount aware that it was very important throughout the war to make a distinction between the Germans and the Nazis and that it is still important in peace to do the same?
Viscount Cranborne: My Lords, it is important, of course, to draw a distinction between Nazis and Germans. We are well aware—again, in my case, from the reading of the history books—that there were people in Germany who opposed the Nazis, but there were also very large numbers of people who were not members of the Nazi party but who fought hard on the Nazi side.
The Lord Bishop of Worcester: My Lords, does the Minister not agree that an occasion of commemoration—a national occasion—is also a great occasion for a re-dedication to the causes of both peace and justice in the world and that the larger the congregation on these occasions the more people will take part in that re-dedication?
Viscount Cranborne: My Lords, I am happy to be able to confirm—as I know that the right reverend Prelate will agree—that over the past 13 years Her Majesty's Government have made a greater contribu-tion to peace than almost any member of CND.

CAP Reforms and Fraud
3.18 p.m.
Lord Campbell of Croy Lord Campbell of Croy asked Her Majesty's Government:
Whether they consider that the proposed revision of the common agricultural policy is likely to lead to a reduction in the levels of fraud against the Community reported in 1991.
The Earl of Strathmore and Kinghorne: My Lords, CAP reform will reduce the scope for fraud in a number of sectors. We will also be working to ensure that the detailed implementing measures contain controls to minimise the risk of fraud.
Lord Campbell of Croy: My Lords, I am grateful to my noble friend for that encouraging reply. Is it the Government's intention during the United Kingdom presidency to make a determined effort to eliminate this fraud? Can my noble friend comment on the phenomenon of moving olive trees which, if reports are correct, would have made even Macbeth dizzy after his experience with Birnam Wood?
The Earl of Strathmore and Kinghorne: My Lords, the Government are always concerned to reduce fraud in all sectors. We shall make use of our presidency to push forward our concerns. In particular, we are aiming to have fraud fully considered at the ECOFIN council in September. As for the latter part of my noble friend's question, I have, indeed, heard about transportable olive groves. On the subject of olive oil, a register and specific control agencies have been set up in the producing member states.
Lord Bruce of Donington: My Lords, will the noble Earl give the House an assurance that the Government will give the most careful consideration to the report of the Court of Auditors (Opinion No.2 of 1992 of 15th May) which, contrary to the impression given by the noble Earl in his reply, suggests that the facilities for the continuation of fraud may well be much greater under the new CAP reforms than before? Will he see to it that due attention is given to this matter and that the appropriate representations are made to those members of the Commission in Brussels who do not yet appear to be taking it seriously?
The Earl of Strathmore and Kinghorne: My Lords, I shall certainly give the noble Lord an assurance that the opinion he stated will be fully looked at. These criticisms were based on the Commission's original proposals. The measures in the final package were a considerable improvement on those. They will be easier to administer and less open to fraud. For example, regional base areas in the arable sector will be simpler to administer than the individual base areas proposed by the Commission, and will provide a ceiling on spending.
Lord Hooson: My Lords, does the noble Earl agree that, by and large, the more complicated the regulations the easier it is to carry out fraud? Does he not further agree that one of the problems of the common agricultural policy is that it is so detailed?

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The more detail one has the greater the scope for fraud. Would it not be better, as has been suggested from these Benches on a number of occasions, for the Government to press for the Commission to confine itself to the broad lines of policy and leave the regulations to internal administration?
The Earl of Strathmore and Kinghorne: My Lords, once the Commission has introduced detailed implementing rules, it will be for member states to ensure that the new schemes are properly implemented and controlled. The Commission proposal for a Community-wide integrated administration and control system will, if agreed in a suitable form, help ensure full and effective implementation.
Lord Hailsham of Saint Marylebone: My Lords, would not a few successful prosecutions be of assistance?
The Earl of Strathmore and Kinghorne: My Lords, there certainly have been some prosecutions, but I do not have the figures with me today.
Lord Gallacher: My Lords, can the noble Earl tell the House whether the Council of Economic and Finance Ministers is proposing to consider further the Court of Auditors' special opinion on measures to combat fraud under CAP reform and whether such consideration will take place before the proposed measures begin in the autumn of this year?
The Earl of Strathmore and Kinghorne: My Lords, the draft text provides for the integrated system to apply from 1st January 1993 in the case of annual statements and aid applications, and from 1st January 1994 for other matters. It is not yet clear whether agreement on the framework regulation—and the more detailed implementing arrangements which have yet to be introduced—can be reached in time to allow introduction by 1st January 1993.
Lord Mackie of Benshie: My Lords, does the noble Earl agree that frauds by olive tree growers are absolute peanuts—if that is the correct expression—compared with the money which is achieved by swindling in the export subsidy market? Secondly, can he tell us how many extra civil servants the Ministry of Agriculture, Fisheries and Food, the Department of the Environment and other government departments will need to apply the new diverse and numerous regulations?
The Earl of Strathmore and Kinghorne: My Lords, perhaps I may answer the noble Lord with a statistic. In 1991 574 irregularities were reported in the EC as a whole. The amount involved was £47 million and the amount recovered was £6.56 million. In answer to the second part of the noble Lord's question, I am afraid that I do not have the figures for that either.
Lord Williams of Elvel: My Lords, the noble Earl has said quite frankly that he does not have the figures on a number of subjects. As I understand The Companion to the Standing Orders, Question Time has the purpose of eliciting information from the Government. Therefore, in reply to his noble and learned friend Lord Hailsham of Saint Marylebone,
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can he find out how many prosecutions have been made, and in regard to all the other questions on which the noble Earl has failed to give information, will he kindly write to noble Lords and place copies of the letters in the Library?
The Earl of Strathmore and Kinghorne: Yes, my Lords.

Cattewater Reclamation Bill
Read a third time, and passed.

Finance Bill
3.25 p.m.
The Earl of Caithness: My Lords, I beg to move that this Bill be now read a second time.
Not surprisingly, there has been much discussion in recent weeks about the health of the economy, and in particular about whether the encouraging signs that followed the election are being translated into an upturn in activity. It is never easy to form an accurate picture of the current state of the economy from published statistics and surveys, let alone to predict exactly when a turning point in activity has been reached. Even so, recent economic indicators do provide more grounds for optimism than some commentators wish to acknowledge. Figures pu-blished earlier today showed, disappointingly, that manufacturing output fell in May. In the first quarter manufacturing output is now estimated to have been ½ per cent. higher than in the fourth quarter of last year, and despite May's fall was still higher in the latest three months than in the previous three.
There have also been tentative signs of revival on the high street, with retail sales increasing, albeit fairly modestly, in April and May. Estimates by the Society of Motor Manufacturers and Traders suggest that vehicle registrations in June were up on a year earlier for the third month running.
Unemployment continues to rise, as would be expected given its status as a lagging indicator of activity, but the average increase over the three months to May was the smallest since the three months to September 1990.
These more hopeful signs from the real economy have been reflected in survey evidence suggesting substantial increases in both business and consumer confidence. While consumer confidence may have fallen back a little as post-election euphoria has died away, it remains much stronger than was the case prior to the election. Indeed in the past two months the EC/Gallup measure has been at its highest level since the end of 1988. It was very encouraging to note that a survey published only last week by the Institute of Directors showed a further slight increase in confidence about the economy, following the sharp increase recorded in the wake of our election victory. Moreover, only yesterday we saw welcome signs of recovery from the CBI survey of financial services.
Talk of a post-election boom, to which the Government never subscribed, may well have been overdone; but there is every reason to think that

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recent prophesies of doom are equally exaggerated. The Government are certainly not complacent; the hardships caused by the recession are very well understood as is the desire for tangible evidence of recovery. But the evidence we have supports the Government's belief that recovery will become firmly established during the course of this year.
Lord Harmar-Nicholls: My Lords, my noble friend has twice referred to evidence. He has passed on opinions that people have expressed. What is the evidence that there is an increase of any kind in the general success of industry?
The Earl of Caithness: My Lords, I am sorry that my noble friend did not hear me when I was quoting evidence earlier in my speech. But if my noble friend cares to read the Official Report, I am sure he will see what I have said.
If the exact timing of an upturn in activity is still unclear, no such uncertainty surrounds the progress that has been made in bringing down inflation. From a rate of almost 11 per cent. when we joined the ERM in the autumn of 1990, headline RPI inflation has now fallen to below 4 per cent. lower than the headline rate of consumer price inflation in Germany or the EC as a whole. Further, our rate excluding housing costs is now below the latest EC average for the first time since 1986. Earnings growth and underlying producer-price inflation have both been at their lowest for over 20 years in recent months.
That improvement in our inflation performance has allowed the Government to reduce interest rates by 5 percentage points since the autumn of 1990, narrowing our interest rate differential with Germany to its lowest for over 10 years.
We have been able to do that, while, at the same time, satisfying our ERM commitments which, supported by a firm fiscal stance, now lie at the heart of our anti-inflation strategy. Indeed, those who argue that membership of the ERM has worsened the recession are wrong to assume that interest rates could have been reduced further had we not chosen to participate without detrimental consequences elsewhere. In particular, we would have had to have been willing to accept a substantial depreciation in the value of sterling. To do that would have been to abandon the fight against inflation, and the short-term boost to competitiveness would soon have been eroded by rising prices.
The devaluations of the 1960s and 1970s, far from providing any sustained boost to exports, were associated with the continuing decline in our share of world trade in manufactures. Devaluation offers at best a temporary easing of the symptoms of our economic ills, not a cure, and to repeat that recipe would have been nothing short of folly.
A number of commentators have recently suggested a devaluation of sterling within the ERM, arguing that that would allow a cut in interest rates. As my right honourable friend the Chancellor of the Exchequer pointed out in his speech last Friday, that is an option that simply does not exist at all. Now that
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we are in the ERM, the differential between our rates and those of other participants largely reflects the market's view on the likelihood of depreciation.
To argue that rates could fall after a devaluation, one has to believe that the markets would see one's devaluation as reducing the chances of a further one. It is far more likely that they would take the view that a government willing to take the easy way out once would probably do so again rather than take the more difficult course of following through the commitment to achieving permanently low inflation.
It is the defeat of inflation on a lasting basis that is our objective. All too often in the past we have seen inflation fall only to relax our guard and let inflationary pressures build up again.
The clear lesson of our post-war economic performance is that allowing significant inflationary pressure to develop before throwing on the brakes to squeeze it out of the system has led to more pain and less economic growth than could have been achieved had preventing such pressure developing in the first place been given greater priority.
The Government have learnt that lesson. We believe that the ERM is the best framework in which to tackle those problems. When we joined it we said that it was not a panacea; but through it not only are we determined to break the inflation psychology that has done so much harm in the past, but also make the UK a truly low inflation economy in the future. The transition is a difficult and painful one, but the prize is also great: a real increase in the sustainable growth of our economy over the medium term. Only by making that transition can we fully capitalise on the substantial supply-side reforms that have already helped transform our productivity performance.
That prize is within our grasp. If we lose our nerve and let this opportunity pass us by we shall not quickly get another one. Neither is it likely that our competitors in Europe will make a similar mistake, as they too have learnt the lesson of Germany's success.
Those who argue that we should give up the fight against inflation because the pain is too great should consider where such policies would take us. History shows that devaluation cannot bring us non-inflationary growth. If we were to resort to such a policy again, we would be increasingly isolated in having been unable to face up to the need to defeat inflation.
That is what underlies the Government's determination to remain within the system at the current parity.
Having set the scene of the present economic situation, I turn now to the Bill itself. In a normal year the Finance Bill would generally legislate for most, if not all, of the measures announced in the Chancellor of the Exchequer's Budget Statement. However, the short Finance Bill which was presented to us in March legislated for the main announcements in the Budget, including the 20 per cent. rate of income tax which applies to the first £2,000 of taxable income for everyone. For nearly 4 million people,20p is now their marginal rate. The cut follows the reductions from

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June 1979 in the basic rate from 33p to 25p and the measures that we have taken at the higher end to improve incentives.
The Bill that we have before us today completes the legislation founded on the Budget Statement. I hope that it will be helpful if I set out the main measures in it.
Perhaps I may start with the indirect tax measures. There are a number of provisions here which are needed to prepare for the introduction of the single market on 1st January 1993. These include Clauses 1 to 5, 8, 14 and 17 and Schedules 1, 2 and 3—nearly 70 pages of legislation. These are, in general, technical changes to excise duty and VAT and some related changes to the Customs and Excise Management Act 1979.
The Bill also proposes to get rid of a tax. Clause 6 abolishes the excise duty on matches and mechanical lighters as from 1st January 1993.
Clause 7 will exempt members' clubs and similar societies from the liability to bingo duty and also removes the burden requiring them to keep records. That measure will take effect from 3rd August this year.
Clause 10 will clarify Customs powers to search aircraft at small aerodromes and other landing sites. For the avoidance of doubt, an aircraft can be considered "airborne" if it is in flight and no part of it is touching the ground. An aircraft simply jacked up off the ground cannot be considered "airborne".
Noble Lords: Oh!
The Earl of Caithness: My Lords, it is an important point which must he clarified.
Clause 16 will provide an agricultural flat rate scheme for farmers as an alternative to VAT registration. That should be a useful simplification and deregulatory measure for an important industry.
Clause 15 will rectify a problem with the VAT legislation on repayment supplement, which is paid by Customs when they are late in making a repayment to a trader. The new clause was made necessary by a recent decision in the courts. This particular change will not have retrospective effect.
I turn now to the direct tax measures in the Bill and there are a number of proposals in the section which will be of great interest to businesses.
Clause 21 sets the main rate of corporation tax. For this year the rate will remain unchanged at 33 per cent. That level remains the lowest in the European Community and in the G7. As a result of the reductions announced by my right honourable friend in 1991, business will benefit by around £1 billion a year. That allows more profits to be retained and thus more available for investment.
Clause 22 sets the small companies rate of corporation tax. It is not proposed to make any change this year. Small companies have benefited considerably from changes to their tax regime over the past few years. Since 1988, the profits limits have increased by 150 per cent. and the rate of taxation has been reduced from 42 per cent. in 1978 to 25 per cent. now.
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There are also two changes to inheritance tax. The threshold for inheritance tax was increased on 6th April in line with the statutory indexation provisions to £147,000. But Clause 72 and Schedule 14 will increase the threshold by more than inflation to £150,000. That will be backdated to Budget day.
There is also a measure which will be of significant help to small family businesses. Clause 73 will ensure that most of those businesses can be passed onto the next generation free of inheritance tax thus removing the threat that this tax has posed to such firms in the past.
Clauses 41 to 43 and Clause 69 affect the film industry. They introduce two new reliefs for makers of qualifying films—broadly, films certified by the DTI as being UK or other EC films. The reliefs are designed to ease the cash flow difficulties often faced by producers by reducing the lag between expenditure being incurred and tax relief being available. The clauses in the Bill reflect consultation with industry representatives who have warmly welcomed the new reliefs. We hope they will help stimulate film-making in this country.
My right honourable friend also announced in the Budget Statement that the business expansion scheme would come to an end at the end of 1993. Clause 38 legislates for that.
The Bill contains provisions which implement the three direct tax measures adopted in July 1990 by the EC Council of Ministers.
Clause 59, together with Schedule 10, bring in the rent-a-room scheme promised in our election manifesto. This proposal was not in the Budget. It reflects the Government's commitment to a strong private rented sector which will increase the quantity and variety of low cost rented housing, thus giving more choice to tenants, making it easier for people to move jobs and helping to ease homelessness. The scheme is a simple one which will ensure that gross annual rents, not exceeding £3,250, from letting furnished rooms in one's own house will be exempt from income tax. That incentive to people to rent out spare rooms in their homes should make a significant contribution to the supply of furnished accommoda-tion, and it has been widely welcomed.
Another measure which was announced in the Budget is a provision which builds on the major reforms in 1990 and continues the Government's commitment to independent taxation. Clause 20 and Schedule 5 give married couples a new flexibility to allocate the married couple's allowance in a way which suits their own preferences and financial circumstances. Until now the married couple's allowance has always been allocated to the husband unless he had insufficient income to make use of it. Now a couple may, if they wish, agree to allocate it to the wife instead or to split it equally between them.
Charities too will benefit from this Bill. Clauses 27 and 28 reduce from £600 to £400 the minimum donation to charity qualifying for tax relief under the Gift Aid scheme and relaxes the rules for relief under charitable covenants.
The Bill also confirms in Clause 64 the rates of composite rate tax (the tax formerly charged on

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building societies, banks and other deposit takers on interest paid to their investors) for the years 1986–87 to 1989– 90; and in Clause 65 the widely held and long-standing interpretation of the law for taxing proprietary life assurance companies.
This is the Bill before us. It completes the legislation based on this year's Budget Statement, a Budget which continues the process of reform and reduction of taxes which has been the hallmark of 13 years of Conservative Governments, reforms which have encouraged enterprise and which have been an essential component of our policies to raise the sustainable rate of economic growth. I commend it to your Lordships.
Moved, That the Bill be now read a second time.—(The Earl of Caithness.)
3.42 p.m.
Lord Peston: My Lords, I thank the Minister for introducing the Finance Bill. Like him, I shall devote the major part of my speech to the state of the economy, as we normally do in your Lordships' House. I shall have a few things to say about the detail of the Finance Bill but rather less than normal because I am aware that we have other business which interests noble Lords other than the small coterie of people who are interested merely in the economy.
The great problem is where to start. The Government's motto seems to be always to look on the bright side, as a well known song goes. My experience as an economist is that a much better maxim is always to assume things are worse than they seem and then one might obtain one or two pleasant surprises. In a sense, that is what the noble Lord, Lord Harmar-Nicholls, was asking for when he intervened.
One of our difficulties is that we read in the newspapers that the Treasury has redone its forecasts and has new forecasts about output or inflation but we are not told what they are. The Independent newspaper wrote to the Treasury to ask for the latest Treasury views on those matters. The reply from the head of the Treasury was that they could not be made available because they were market sensitive; but that is to get the argument the wrong way round. They should be made available because they are market sensitive. Markets should not be misled and they should not have to guess what the Treasury believes is going on or is likely to go on. That is not merely the view of what might be called a Keynesian like myself; it is central to the view of the most anti-interventionist economists that the role of government is to ensure that markets operate on a correct, factual foundation.
I was disappointed by the Minister's inability to tell us what Treasury current thinking is, but I accept that he was merely repeating the doctrine that the Treasury itself has put out. That is an unfortunate state of affairs. On the other hand, we are aware that all the other forecasters believe that in 1992 things will turn out to be a great deal worse than many of us expected. As I have said previously in these debates, I do not criticise just the Government for that. I too, as it turned out, have been over-optimistic. I could not believe that in 1992 things would turn out as bad as
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they have turned out to be. My excuse is always that I am just me; the Treasury has a vast machine, a great deal of equipment and many people brighter than I am. But they seem to have got it even more wrong. What is more, they will not even admit that they have got it wrong.
We shall return to this issue in the Autumn. We will then have the Autumn Statement when we will know about these things, but several months later than the markets need. I ask the Minister to convey to his right honourable friend the Chancellor of the Exchequer that he has a duty to let us know what the Treasury thinking is and not to leave us at the mercy of other forecasters.
I shall turn now to what has to be one of the central topics—inflation. We are dealing with inflation caused by the Government's own policy errors. There was nothing built in. The inflation was caused by the Government. Nonetheless, having caused it, the Minister is right: inflation is below the peak to which it was driven. I have to point out that the cost in unemployment has been prodigious; and it has been prodigious for a second time within a decade. The cost is measured in hundreds of millions of working days lost. That is the effect of the kind of unemployment that we have. The Minister's noble friend was only the other day reminding us, as the Government do when they are in a desperate condition, of the working days lost through strikes in the 1970s, but they are measured in terms of an order of magnitude less; namely, in terms of tens of millions of working days lost a year. That is not satisfactory, I agree, but tens of millions a year is a great deal fewer than hundreds of millions a year. But that is the price we pay.
I must also point out, as I do occasionally, that even if the extra unemployment is the price that has to be paid for reducing inflation, there is a moral problem which all governments have to face up to: even if the cost has to be borne, is it right that that cost should be borne by the weakest and poorest sections of our community, the ones least likely to gain from the ending of inflation?
The most fundamental point relates to whether and in what sense the inflation problem has been solved. Earlier government claims that sound monetary policy and the attack on the trade unions would solve the problem have been shown to be unfounded, because the moment the economy got going again inflation got going again. I have argued, and I continue to argue, that essentially what has solved the inflation problem, at least until now, has been the fact that the economy requires unemployment to be at no less than 2 million if we are to keep inflation under control. It requires also that the sustainable growth rate be kept pretty low.
When I first came to your Lordships' House I said that, if the solution to the problem was to create vast amounts of unemployment and hold back the economy, it was not one that I was willing to accept. The solution to the inflation problem lies in the ability to run the economy in a non-inflationary way, with full employment and at maximum growth. There is no evidence that that has occurred.

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On existing government policy let me say a few supportive things which in due course I shall then undermine. If the sole aim of the policy is to reduce inflation, preferably to zero as the Prime Minister said—of course I disagree with that—then most of the Government's policies make sense. I have to say to noble Lords who criticise the Government that if zero inflation is the objective, then, as the noble Earl said, it is right that we stay in the ERM at the existing rate. It is right that interest rates should be kept high. If the Bundesbank raises them later this week, it is right that our rate should rise as well. The cutting of government expenditure is the correct policy. In those circumstan-ces it would be right also to raise taxes in order to reduce the public sector deficit more rapidly. However, I have heard nothing about that. It would be even more correct to move to the narrow bands of the ERM. If those are the objectives of the policy, then those points follow.
However, the important point to realise—which I do not believe that either the Chancellor of the Exchequer or the Prime Minister appreciates—is that if the sole aim of the policy is to reduce inflation to zero, then output and unemployment are out of control. They will go where they will. A move towards zero inflation, which is what the Prime Minister said he believed in, will mean that unemployment will rise well into the 3 million range and stay above even the 2 million range with which I said we would be permanently saddled. If we assume that the underlying or sustainable growth rate of the economy is about 21 per cent. per annum, the same as in the denigrated days of the 1960s, we must stay below that rate for some time to get inflation down. More to the point, it would be perilous to risk going above that rate.
The reason is obvious economics—a zero inflation target puts all the risks on the down side. Any untoward expansion of output, whenever it occurs, must immediately be scotched. Any tendency for the economy to move ahead rapidly has inflation dangers. More to the point, because businessmen are not stupid they will expect any rapid growth to be scotched. They will say,"The Government will reverse this on anti-inflation grounds."
Therefore, even though the business community, in its usual way, was misguided enough to support the Government during the election, the effect of a zero inflation policy must be anti-investment and anti-expansion. That does not mean that we should not have an inflation target. But it means that we should have other targets as well—high output targets and low unemployment targets. It means that if we stay within the ERM—unlike one or two of my noble friends and noble Lords on the other side, I wish us to stay within the ERM—that gives fiscal policy a stronger rather than a weaker role.
What then of policy? I was not certain which of the relevant metaphors to use about the Government. Are we observing masterly inactivity or seeing the Chancellor as a rabbit, transfixed by the headlights of an approaching crisis? That is an appalling metaphor, and I wish that I could withdraw it. Does the Chancellor know what he is doing? Or is he doing nothing because he does not know what to do? What
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could he do? With his views, he cannot raise government expenditure because the deficit is too high. He cannot cut taxes because the deficit is too high. He may be tempted—as the Economist argued the other day that he should be—into vigorously cutting government expenditure in the middle of a recession and raising taxes. The noble Earl said in answer to a Question earlier that because of the pound's weak position in the ERM the Government cannot cut interest rates. For all kinds of reasons—many of which I do not disagree with—we cannot devalue sterling. So we end up writing "no" to every policy instrument we have.
It would be easy for me to adopt the Laurel and Hardy approach and say: "What a fine mess you've got us into, Stan", and leave it at that. But I feel that one has a duty at least to try to suggest one or two possibilities. One question I wish to draw to your Lordships' attention is what keeps the economy going at all at the moment. After all, although we are in a fairly deep recession, we have not quite reached the great slump. What is keeping us going?
What prevents a deep depression is public expenditure. That keeps us higher than we would otherwise be. Some public expenditure is on goods and services, an expansion that the Government introduced before the election. That is the one growth factor in the economy. There is also the vast amount of money we spend on so-called transfer payments unemployment benefits and the like—which are spent on consumer goods. If we did not pay that public expenditure, consumption would collapse still further. Those are the so-called built in stabilisers.
It seems to me therefore that the Prime Minister is disingenuous when he says that we cannot use fiscal policy to stimulate the economy. It is only fiscal policy that is preventing a major catastrophe. The Government must appreciate that. What measures can we suggest? I believe that there is room on the investment side. We could be more helpful to investment in both the public and private sector.
One aspect of the public sector intrigues me. We dealt with it at Question Time. I do not criticise the Government for taking the view that when Canary Wharf looked a viable project, great profits could he made and asset values could be created. I do not criticise the Government for saying in that case,"We would like a private sector contribution to the construction of the Jubilee Line". It made perfectly good sense to me as a taxpayer that in that scenario the Government would ask for it, even though in the past our Underground lines were not built that way.
However, we do not have that scenario. What we have is the collapse of the project. In those circumstances, as the great Lord Keynes pointed out, the rules change. There are two sensible actions for the Government to take. One is to finance the Jubilee Line, which would be enormously helpful to the construction industry and to development in East London. If necessary, they could make a contingent claim on future expected asset values by saying,"If this works and the private sector makes a killing, we, the Treasury, will take some of it when it happens." I heard the noble Earl manfully try to give an answer on

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the Jubilee Line earlier. It seems to me that, given the circumstances, the Government have got the economics wrong. That is not because they were wrong originally: they have become wrong because circumstances have changed.
I go much further. Given the state of the construction industry, I suggest a great deal more public sector investment. I do not wish to rehearse the business of schools, hospitals and all that, but it could provide the biggest boost to the economy that I can think of. There is no large import content, so disasters on the foreign balance side are not as great as they might be.
I cannot continue without pulling the Government's leg on one other aspect of their anti-inflation stance—the venture into incomes policy. As an advocate of incomes policy for most of my academic life, I am not criticising the Government for it. I am just taken aback that they have gone into that field, albeit to control the remuneration of the upper echelons rather than those on average or below average pay.
The recommendations of the review panel have been set aside on what I can only describe as classical incomes policy grounds: to set a good example and to lower pay and inflation expectations. I must have written more briefing material for Ministers on that than on any other subject. I often wonder whether some of my work is recycled and then reaches the Prime Minister and reappears. Incidentally, on the subject of pay for the upper echelons, I did not read the other argument that public finances are in such a parlous state that we cannot afford to pay the rises. That might have been a more valid argument.
Perhaps the noble Earl will reply to these questions in due course. In the circumstances, what is the point of the review panel? Is it suggested that the panel got its sums wrong? I find that hard to believe. It has made the relevant comparisons with the private sector and has found out what is happening there. Private sector pay is out of control. Since the rule is that the public sector is supposed to keep in step, it follows that the review panel's recommendations were correct.
I also wish to point out to noble Lords that, as any first year student of economics could have told the Government, the new privatised monopolies would clearly use their monopoly power not simply to reward their shareholders but to reward themselves. What do the Government think happens in those circumstances? The notion that management has an altruistic view and says,"We have to pay the money out to shareholders" is ridiculous. What has occurred was predictable. Our judges—for whom my heart bleeds—our generals a fortiori, and our top civil servants, even more, are being underpaid.
As to privatised monopolies, I do not believe that the Conservatives achieved much of a bargain. I read that one of the water companies gave the Conservatives £50,000 as a political contribution before the election. The executives are paying themselves very much more than £50,000 each. Equally, on the question of advertising tobacco, I do not believe that the hoardings were really worth to the
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Conservative Government anything like the value to the tobacco companies of the failure to ban tobacco advertising.
On incomes policy, I conclude by declaring an interest. I hope that The Times was mistaken yesterday and that there will be no interference by the Government with academic pay. I was shocked to read that such consideration progressed from judges, generals and civil servants to academics, even though I have little interest myself in such matters.
Noble Lords will agree that I have spoken for far too long. However, I should like to make a few remarks on the details of the Bill. I wish that I had been given notice of the question: when is an aircraft in flight? I congratulate the noble Earl. It is the most interesting philosophical topic that I have heard in your Lordships' House for some time. I shall now consider the matter a great deal. I take the noble Earl's point: an aircraft which is jacked up cannot be in flight. However, the question,"When is an aircraft in flight?" is a difficult one.
There are problems on the charity aspects of the Finance Bill. The noble Lord, Lord Rix, will speak. He will no doubt cover the relevant points. I therefore shall not do so.
I always like to congratulate the Government. I am interested in the rent-a-room scheme. I am certainly interested in whether it will work. If it does, I believe that the Government have made a correct move. Equally, the Government are to he congratulated when they increase the excise duties on tobacco. I hope that that policy continues strongly.
My right honourable and honourable friends in another place raised a question which I hope will not embarrass your Lordships. I understand—the situa-tion does not apply to me—that if one is the owner of land or a work of art one can receive relief from inheritance tax under the so-called conditionally exempt transfer rule. That means that one allows public access to the land or to the art. I am told that people are glad to take the money but not to grant the access. Since the proposal is good, I hope that the Government will intensify their efforts.
I do not care to crow over the Government's problems. The noble Earl always reminds me that my side lost the election and his side won. When I consider the state of the economy, I say,"The best of luck to him". On the other hand, I would not have minded having a go at trying to get the economy right. The Government are doing nothing. I find it hard to believe that they will carry on doing nothing. The noble Earl said that the Government will not be deflected from their inactivity. I shall be interested to hear the Autumn Statement. We shall then have our next economics debate and will know whether we shall have had quite that much inactivity. I conclude by thanking the noble Earl.
Lord Monson: My Lords, before the noble Lord sits down, given his most interesting comments on the consequences of zero inflation, does he agree with the former treasurer of the Conservative Party—he is not in his place today—who pointed out in the Sunday Telegraph two days ago that a mild inflation of less

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than 6 per cent. is more compatible with the classless society to which the present Prime Minister aspires than is zero inflation?
Lord Peston: My Lords, I apologise to the noble Lord. I did not read the Sunday Telegraph two days ago, but that is my major disadvantage. It has always been my view that large-scale inflation is destructive of society. An economist has stated that it is akin to embezzlement because essentially one is eroding the value of money. That is a rather clever idea. However, it has also been my view that a moderate amount of inflation is conducive to economic growth. That is an original Keynesian view. The same economist pointed out that unemployment and the destruction of industrial capacity is akin to vandalism. One has one's choice of evils. The point that the noble Lord makes is that one has to achieve the right balance. I believe that the average European rate of inflation is the one at which we should aim rather than a zero rate.
4.5 p.m.
Baroness Seear: My Lords, I understand that in future we shall consider the estimates for expenditure and the Budget together. In other words, we shall consider simultaneously what we wish to spend our money on and how we shall raise the money. That seems such an eminently sensible idea that I find it difficult to understand why we have not done that for generations. In his private life, no one would plan his expenditure without regard to how he will attain the money, and vice versa. I therefore greatly welcome the Government's conversion to this sensible plan. I hope that the noble Earl will confirm that that will be the practice. Perhaps he will tell us when it will first he introduced.
If that were the position today, we should have a very different Finance Bill from that which is before us. Surely one has to consider the priorities on which we need to spend. What, in order of importance, are the jobs that we simply have to undertake? How shall we make the money in order to tackle them? That is the way sensible persons or businesses run their finances. If those were the questions, surely members on all the Benches of your Lordships' House would say that the matters to which we have to give high priority for spending must be competitiveness and wealth creation. I am quite sure that few Members of your Lordships' House will disagree that those are the important issues because on them depends all the other matters that we wish to undertake.
As well as wealth creation and competitiveness, one has to tackle the related but not identical problems of unemployment and poverty. If those are the jobs to be undertaken, the question then arises: how does one best raise and spend the money in order to meet those needs?
If we had faced the situation in that way I cannot believe that we would have had the Budget and Finance Bill that we have had. In introducing the 20 per cent. band and in their continuing determination to cut taxation the Government have considered that it is best to encourage consumer expenditure. That is what the cutting of taxation presumably is intended to
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achieve. I suppose it is assumed that if the Government put more money immediately into taxpayers' pockets they would start to spend it; and if they started to spend it that would have some effect on employment and therefore on poverty. But of course it is not working out like that, and nor should anyone have expected that it would. We are a heavily indebted country. It is now quite plain that those small amounts of additional money that have gone into taxpayers' pockets have not been spent. Therefore, the desired effects on employment and poverty are not being achieved. Indeed, to the extent that that additional money is being spent, it is sucking in exports, as everyone who has studied the past and looks with any intelligence to the future knew that it would. Such spending also makes the situation regarding the balance of payments worse. That is a further problem which I did not put at the top of the list, but it is one with which we have to deal.
The policy that has been adopted of releasing some money into taxpayers' pockets and the determination of the Government in reiterating, as they do, that they wish to reduce the tax band to 20 per cent. for everyone seems to be based on the assumption that that is the way in which to run the economy.
In so far as money was available for those cuts, and in so far as the Government might have had the courage even to raise taxes somewhat, that money should surely have gone into investment. Indeed, had the money gone into investment the benefit would have spilled over into improvements in employment and the reduction of poverty, which are the objectives which I am sure your Lordships agree we all share.
What form should those investments take? We have made proposals often before and the noble Lord, Lord Peston, referred to some of them. There should be investment in infrastructure and in the railways. I agree with the noble Lord, Lord Peston, that at present Canary Wharf is a candidate.
What would be the effect? It would provide a start. I refuse to call it a kick start. Why on earth do we have to give everything a kick as well as a start? That is one of the appalling cliché phrases which is trotted out on every suitable and unsuitable occasion. Investment would provide a start to recovery in the construction industry, which is in a woeful state. Not only are the small building businesses going bankrupt, as they always do in times of recession; one has only to open any newspaper to see that some of the household names in the construction industry are in serious difficulties. That is disastrous from the point of view of the economy. Investment by the Government in the construction industry and encouragement to the industry in other ways to invest and develop should surely be a top priority in government policy at the present time. Not only would that begin to ease the position in relation to unemployment, but it would also have the effect of increasing the competitiveness of the country, faced as we are by strong competition not only from countries within the European Community but also from countries outside the Community. There is growing competition from Asian countries which we shall have increasing difficulty in meeting.

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The second area of investment, which we on these Benches have advocated repeatedly, is education and training. The Government believe that they are doing a great deal on that front. They have not even begun to face the real problems of the undertrained labour force of this country. Perhaps I may once again throw out a suggestion based on my own experience of training and education.
Many years ago in the company in which I worked we had a system of taking on two school leavers for each job. They spent half of each day on education and training and the other half on production. If we adopted such a system we would solve the problem of unemployment among the 16 to 18 year-olds at a stroke, to use an overworked phrase. Everyone says that the key is the 16 to 18 age group. There is a great deal in that. Very many of them are doing nothing at all and they are not being given any money for doing it. Therefore, not only are they not learning the skills which they need if we are to compete but they are creating the inevitable social problems which are bound to arise when 16 to 18 year-olds have no money and nothing to do.
Will the Government think again about that very simple and obvious proposal—two for each job at the age of 16 to 18? That would have to be accompanied by lower rates of pay for that age group, but if they are receiving decent education and training for half of the time that is not unreasonable. Now that they have had a taste of having no money at all they might even think it a good deal. It is a simple answer to the problem affecting that small group, but one which is well worth pursuing. Administratively that is far simpler than one-day or two-day release schemes which from the employer's point of view are a great nuisance. Two-for-one schemes are not a nuisance and are easy to operate.
That is perhaps a digression but it is another example of the better ways in which the money which is available could be used in preference to a reduction in taxation in order to provide the investment that we need in both the infrastructure and the human infrastructure of this country. Of course it is not only a question of the 16 to 18 age group. There are plenty of other groups, particularly older returning women—but I shall not digress on that point—and there is a great deal of scope for improving the skills of the labour force so that we can meet competition. However, that has not been the Government's way.
In relation to the problems of unemployment and poverty there are other matters which could well have been attended to but which have not been. The Government are great supporters of small businesses. We are all great supporters of small businesses these days. However, what the Government have done for small businesses does not take them very far. There are a number of other steps which could have been taken. I shall not list them all, but I should like to draw the attention of the House to one which has not been mentioned recently.
We have so often said in your Lordships' House that the distinction which is made between national insurance and taxation is totally phoney. There is no
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insurance left in national insurance. They are two systems of taxation. Why on earth cannot we put those two systems of taxation together? That would simplify life for small businesses—and also for large businesses. However, the administration is more difficult for small businesses which have to handle the time-consuming procedures themselves. I understand that it would also save the Government no less than £1.2 billion a year on the administration of the national insurance scheme. It is a waste of money and it is a waste of small businesses' time and therefore of their money.
If we want to deal with the problem of poverty why do we not undertake that other amalgamation which has been discussed so often and about which nothing is ever done—bringing together taxation and benefits? If taxation and benefits were handled together the many people in the lower income groups and in the poverty sector who do not draw the benefits to which they are entitled would automatically receive them.
Finally, also on the subject of relieving poverty there is the whole question of child care, which has not been dealt with in the Finance Bill. Child care is an issue with many aspects, including the benefit to the youngsters. It is also of the greatest importance to women who for one reason or another need jobs and to hold down those jobs, but who find it extremely difficult to do so because of the non-availability of child care or because of its heavy costs. Real concessions on child care and genuine measures to ensure that child care is regarded as an expense of working would ease the position of many low income families and in particular of one-parent families. That is a measure which we hoped that the Government would be able to produce, but it is sadly lacking in the Finance Bill.
4.18 p.m.
Lord Boyd-Carpenter: My Lords, I can agree very much with what the noble Baroness said at the beginning of her very interesting speech. She then suggested that it was much more fruitful to discuss public expenditure together with the means of raising the revenue. As I understand it, that is the intention of the new scheme which is to come into operation next year when in December we shall discuss both what would now be regarded as the Budget and Finance Bill on the one hand and the public expenditure White Paper on the other.
I very much agree, because it must be the case with a country as it is with us as individuals that one has always to weigh, on the one hand, the value of the expenditure which one proposes to undertake against, on the other hand, the cost of undertaking it and the means of raising the revenue for that purpose. Therefore, I was very glad that the noble Baroness began with that remark. I think that she will acknowledge that it is one which the Government appear to accept in view of the changes in the system which it has already been announced they propose to introduce from December next year.
Nonetheless, the Finance Bill is an immensely important measure. I disagreed with the noble Lord, Lord Peston, when he said that only a small coterie of

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Members of your Lordships' House would be interested. I do not believe that that is true. The Finance Bill is of major importance to the whole running of our economy. It is of major importance to innumerable public activities and it is a Bill which it is light that your Lordships' House should discuss. My only regret is that we are discussing it now, at virtually the end of the sittings. Although I am sure that we shall have a very good debate on Second Reading, as I understand it we shall not have any debate on the Committee and remaining stages. That is a pity because many of us have ideas which it is right that we should contribute. Certainly in my experience as a former Treasury Minister I have found in detailed discussions of a Finance Bill the most helpful suggestions either from noble Lords or honourable Members who have experience in these matters.
Perhaps I may retail a slightly amusing story in that context. On the occasion of my last speech in the other place, which happened to be 20 years ago on the Second Reading of the Finance Bill, I pointed out that the proposals in the Bill as it stood provided that inheritance tax (or death duties as it was then called) should apply at £15,000 in bequests to individuals, including one's wife (because there was no exemption as there is now for a wife); whereas for a charity the limit should he £30,000. I ventured to point out that that meant that if you were leaving money you could safely leave more to a cats' home than you could to your wife. That seemed to me wrong. However, it may amuse your Lordships to know that that observation of mine, which was reported, duly produced a letter from the Clapham branch of the RSPCA, which wrote to me to say that the Government were absolutely light; widows were perfectly well provided for and the poor cats needed the money. Fortunately, the Government of the day were not so persuaded. I am happy to recall that in the Committee stage of that Bill both provisions, for charity and for a kinsman or relative, were put at the same figure of £30,000.
But that is a small and perhaps slightly flippant example of the reality; namely, that it is extremely useful to the Government—I hope that my noble friend the Minister will agree—to have the contributions which can be made in discussion. I am only sorry that we have only this one debate on the Bill this afternoon in this House.
One is faced with a dilemma. One can give one's views on the general working of the economy and agree that the Government are right to go for zero inflation or, as some noble Lords have suggested, that it might be wiser to go for a little inflation, with the consequent easing of restrictions on employment and so on. One can consider all those general policy issues. At the same time one has to cover the whole field of taxation, with all its frequent bearing on those problems.
With regard to the latter point, I am glad to see that in modest degree the Government are still pursuing their avowed intention to reduce taxation and in particular to reduce direct taxation. There is a comparatively modest adjustment on the first £2,000 after £20,000 a year but that has been supported by government Statements that in future years it is
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intended to extend it further. Those of us who are interested in these matters will naturally be very anxious to see that that is done.
There is little doubt that at the moment direct taxation is still very high. Forty per cent. is a very substantial rate indeed. It bites on earnings or income of over £20,000 or so a year, which is a very serious discouragement to initiative and an encouragement to those who can earn high incomes to go abroad to earn such money to places where they are not subject to those difficulties.
In that connection, I am sorry to see that there is no action being taken in respect of the so-called—it is so-called—national insurance contribution. The noble Baroness referred very properly to it in her speech. It is a fact that the so-called national insurance contribution on higher earnings is a serious addition to the level of direct taxation. It means that on a considerable body of higher earnings the effective rate of deduction for tax purposes and so-called national insurance is 59 per cent. and not 40 per cent. That is a very serious imposition upon individuals. The provision is also completely misnamed as a national insurance contribution. It does not bite at all on the amount of pension or other benefits received by the person who so contributes. It is simply a tax.
In the days (now a good many years of) when I was responsible for administering national insurance, the national insurance contribution had a direct relation-ship to the benefits: to pension, unemployment benefit, sickness benefit or whatever. But it is now the case, certainly in respect of higher earnings, that it has no such relationship at all. It is a misnomer to call it a national insurance contribution. It seems to provide cover for a high rate of personal tax which is extremely difficult to justify. I hope that when my noble friend comes to reply, though obviously nothing can be done this year, he will indicate that the Government are aware of that point and of the difficulties and are seriously trying to tackle them.
My view is that the levy should cease to be treated as a national insurance contribution, that tax should be imposed at whatever is thought to be the appropriate rate and that the national insurance scheme should not be involved in this matter. It is certainly a misnomer to call it a national insurance contribution and may even mislead some people.
With regard to inheritance tax (or death duties as it used to be called) I was very glad to see a provision included in respect of business assets. That will be a great help to certain small businesses. Where the assets of the business are vested in the individual and the individual dies, it is a very serious matter when inheritance tax is applied to the proceeds. But I should like to see further developments on inheritance tax. In particular, the Government say that they wish to encourage people to own their own home. But it is inconsistent to provide that when a man and his wife die (the wife is exempt for the time being of course), inheritance tax is imposed on the property which they had acquired. That means that the proper desire of a man (or woman) to hold a home for himself and his family and to endow a family home to continue is

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frustrated. With the rates of inheritance tax any property of any particular value would involve a very considerable liability.
Perhaps I may say to my noble friend the Minister that the provision will not necessarily cost the Government a great deal. If ancient family houses and world famous houses throughout the country are exempt from inheritance tax, then one is at least making sure that it is unlikely that there will be a demand for government help to maintain those lovely houses. If they can be inherited without either tax or subsidy, it is surely a much more wholesome provision. In the case of humbler homes it surely meets the Government's professed ideal that we should encourage people to own their own homes. I hope again that this is a matter that may be considered before the next Finance Bill. It is one that certainly I should like to see most vigorously pursued.
I should like to add a word about VAT. I think it is a most inflationary tax, not least because it is imposed not only on sales of articles but on sales of services: it involves a charge in many cases on services. It is also now, thanks to the changes made in order to finance the local taxation system, at 17.5 per cent. a very high rate of tax. Additionally, it is imposed, I think rather oppressively, on various goods and services not only on their own cost but on their own cost as inflated by other taxation, and then the calculation for VAT includes that extra element. Perhaps I may illustrate this in the case of a car. If you buy a car it is sold for a certain price. A car tax is imposed and then VAT is imposed on the cost of the car as inflated by the tax that has already been paid on it. This seems to me a very oppressive provision.
I was responsible years ago for the administration of the old purchase tax and I must say to your Lordships that I remain utterly convinced that that was a much better system than VAT. It fell very little on necessities and not at all on services, but it was imposed at a very high rate on luxuries. If my recollection serves, the rate of tax on jewellery was as high as 66.33 per cent., whereas on necessities—children's clothes, for example—it was not applied at all. It was a flexible, subtle tax, which had little, if any, effect on inflation and was infinitely superior to the clumsy and heavy-handed provisions of VAT. I know that with our European connections it is difficult to free ourselves from VAT but we ought to consider at least lowering the rate.
Then there is the tax on tobacco. That tax has been increased, but I suggest that it ought to be increased even further. I have had some experience of this. During my two stints at the Treasury I was always an advocate of pushing up the rate of tobacco tax. We were always advised by Customs and Excise that the figure which we had in mind was so high that it would discourage sales and that we would lose revenue as a result. We disregarded that advice on the three occasions in which I was involved, and on each of those three occasions for a fortnight Customs and Excise was right but when we got into the third week the craving for tobacco was such that the consumption
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and revenue went up and one was able to turn to Customs and Excise and say, as I am afraid I sometimes did,"I told you so".
There is a very special case for the taxation of tobacco. The evidence that smoking is dangerous to health is overwhelming and, if people desire, and so passionately desire, to smoke that they are prepared to take the risk and greatly to increase, on the average, their liability to illness and therefore contribute to the cost of the National Health Service, it seems to me only reasonable that they should pay additionally towards the cost of the service which they are inflating by the action they are taking. I hope therefore that the Government will be quite resolute in increasing the tax and will not allow themselves to be discouraged—because I believe that Customs and Excise never changes and it is probably giving the Government the same advice today as it gave to us.
There are many other aspects of this Bill and obviously one is tempted to make an unduly prolonged speech. I would conclude by saying only this: I believe that, despite certain minor aspects which I would like to see amended, this is in our present economic situation a sensible measure. I believe that, combined with the Government's resolute refusal—which I very much welcome—to pay high increases to highly paid officials and also with their determination to fight inflation, it will help to bring this country through what is undoubtedly a difficult phase. I do not envy Treasury Ministers at the moment. I think they are going to have a hard and battering time, but I believe they are right and that when the history of this time comes to be written we and our country will have a great feeling of gratitude to them.
4.35 p.m.
Lord Barnett: My Lords, I hope I may be forgiven if, as I am not speaking in the next debate, I welcome my noble friend Lord Healey who is to make his maiden speech. This may not be in order, but we have sat together through long days and nights and I feel obliged just to say hallo.
Traditionally in these debates we ignore the Finance Bill and have an economic debate. Unlike the noble Lord, Lord Boyd-Carpenter, I agree with that. I think it is absolutely right at any time, and particularly this year, because no Budget is more irrelevant to the current economic situation than the Budget which underlies this Finance Bill. I was looking at the Budget speech. It is very interesting. In the other place on 9th March 1992 at col.747 the Chancellor told us:
"Most independent forecasters agree that 1992 will see the resumption of economic growth. The recovery is expected to start slowly, but to gather pace. I expect growth in the year to the second half of 1992 to be almost 2 per cent."
The same forecasters certainly would not be saying that today, as my noble friend Lord Peston said. I doubt whether anybody inside the Treasury is saying it either.
The noble Earl, Lord Caithness, said—it must have been written into his speech by somebody else—that he detected signs of recovery. I can only tell him that this very week I have spoken to a number of industrialists with whose companies I am connected.

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One of them, whose name I shall not mention, told me specifically that there had been a phone call that morning from a major retail company stating,"We are not cancelling the order but we would be obliged if you did not deliver it. If you do, of course we will accept it, but we must warn you that we will not do a lot more business with you in the future". It was as brutal as that. That indicates to me specifically—I have other evidence as well but I shall not bore your Lordships with it—that there are absolutely no signs of recovery in the economy on the ground, whatever may be detected in an odd statistic.
The noble Earl also told us, as indeed the Chancellor did, about small businesses and how they are cutting taxes. I must say to him that many small businesses which have gone bust since would have been delighted to have paid any kind of tax because most of them are not making any profit at all. The Chancellor told us then that small businesses are the life blood of a modern economy. I agree with him: they are. But over the past year, and even since March, they have not been doing particularly well.
Let me make it quite clear, particularly to my noble friend Lord Peston, that I do not blame the forecasters for getting it wrong. In a way it is within what one might call "the margin of error", as the pollsters have said in recent times. It is very easy to get forecasts wrong. So I do not blame the forecasters: I blame the policy. We are bound to ask ourselves whether there is any way in which we could do better. I have said before in your Lordships' House that there are no miracles and there are no easy ways out of the difficulty that we are in; but do we have simply to accept the Government's solution and say,"Well, there is no other way of doing it"?
We must then ask: what is the Government's solution? We have been told that the Chancellor and the Prime Minister are aiming at zero inflation or as near to that as possible. We are also told that we shall maintain interest rates as high as is necessary to reduce inflation, and at the same time we shall reduce the borrowing requirement by cutting public expenditure. I shall be interested to see how that is done in 1993– 94 given the situation in 1992– 93.
I had some experience of cutting public expen-diture, some of which was the fault of my noble friend, Lord Healey. We both thought that we should do that. In current circumstances I am bound to say that making major cuts in public expenditure, even if that were right—and it almost certainly is not right—will not achieve a great deal in terms of reducing what is likely to he a huge increase in the borrowing requirement.
If the Chancellor were to accept the advice of the noble Lord, Lord Boyd-Carpenter, and cut income tax still further, I must ask the noble Earl to give a specific answer to the following question. If the Government are to reduce the borrowing requirement in 1993– 94, even if they can cut the odd billion off public expenditure, will they increase taxation in order to do so? If so, where will they increase taxation? Will they. as I suspect, put VAT on present zero-rated items such as children's clothing, food and so forth and blame the European Community? If that is what
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the Government have in mind they should be honest with us. I see the Minister smiling so perhaps he will tell us today.
The trouble with the Government's "solution" is that it does nothing for unemployment. Indeed, it will make unemployment worse because the figure will rise to 3 million; probably nearer to 4 million when calculated using the old method. What is worse is that unemployment will stay at that level for some considerable time. The Government's solution will do little or nothing for economic growth. If the Treasury forecasters and outside forecasters are telling the truth, my guess is that we shall have zero or possibly negative growth this year and little growth next year and the year after. Industrial performance and investment will not be improved in such circumstances. In addition, public expenditure in vital infrastructure areas will not be able to be found, as my noble friend Lord Peston said. In other words, we shall be in the vicious circle of lower growth, lower revenue, higher unemployment, cuts in public expenditure and higher taxes.
It may be that that is the only solution to the problem. If it is, I could not live with it. I believe that it is an impossible solution and I do not regard it as a price worth paying. At least it is worth trying alternatives. I fear that I shall now part company with my noble friend Lord Peston. It is fair to ask what the alternatives are. I would cut interest rates but I do not pretend that that would be the easy way out. That is not a total answer; although as the noble Earl said at Question Time the result would not be that the pound would appreciate. The plain fact is that the pound would depreciate, and I accept that.
I have long been in favour of joining the exchange rate mechanism—I said that in my maiden speech in 1983—and I am not in favour of coming out. But being a member of the ERM should not mean total inflexibility and total rigidity to a fixed exchange rate. That is the mistake that is being made in current circumstances and there is no reason for it. The Government are supposed to be in favour of market forces. If that is the case let them apply to the pound and let the pound find its own level. That is particularly so having entered the ERM at too high a rate of 2.95 deutschmarks to the pound and when our industrial performance since has made the situation worse.
I am bound to say that I never expected to find myself in agreement with Professor Walters and his friends. In a letter to The Times today—perhaps that, too, is a paper which my noble friend Lord Peston does not read—they stated:
"The pound is badly overvalued, especially against the dollar, and devaluation talk is inevitable; while the appalling prospects for government borrowing suggest strong future pressures to print money excessively in the long term. The worse and longer the slump the worse these problems will become".
They went on to state:
"The pound would perforce fall, and rightly so: it should never have been pegged to an unrealistic level, as in some ersatz incomes policy, in the service of counter-inflation".
I see my noble friend Lord Peston smiling. He might even agree with some of those comments but I doubt it.

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I accept that my solution and I do not pretend that it is a total solution would mean a higher rate of inflation. In order to achieve a fair balance in managing an economy I, too, would accept a slightly higher rate of inflation than the objective of zero. That objective is a nonsense and is absolutely silly. Given the depth of the current recession neither lower interest rates nor a lower pound would necessarily mean a massive increase in the rate of inflation to that which we have known in the past.
I may be told that my proposal will create its own vicious circle, that the more the pound falls the more one needs to increase interest rates. I do not believe for one moment that that is true. When it is seen that we shall not increase interest rates others in the ERM will also see that there is no alternative but to realign. They will have to do so provided that we make our position as crystal clear as the Chancellor and the Prime Minister are doing today. However, I can understand that from what they have been saying they may have to go. That would not worry me too much. What is more important is that we should have a better economic policy than that which we have now.
I accept that my proposal may be no more of a solution than the Government's. But it is worth at least trying rather than allowing the current situation to continue as it would for some years. More and more people would be left unemployed with no hope. Young people would have no opportunities because expenditure on education and training would not be increased. We are already seeing evidence of the cuts. Given the relatively poor industrial performance of this country in recent years it may be impossible to make major changes. However, I would rather give that a try than continue on the present path.
4.48 p.m.
Lord Rix: My Lords, in view of the fiscal erudition which has been displayed in the House today, in particular by the noble Baroness, Lady Seear, with her noteless speech, the almost noteless speech of the noble Lord, Lord Boyd-Carpenter, and the nearly noteless speech of the noble Lord, Lord Barnett—from the rear he reminded me strongly of my old friend Barry Cryer, who would certainly have got more laughs this afternoon—I rise in trepidation to speak on one simple aspect of the Finance Bill. There is considerable perturbation among the parents of people belonging to MENCAP as regards the changes proposed to the disabled passenger scheme under Clause 12 of the Finance Bill. The changes can in no way be described as technical.
About 20,000 people under the age of five or over the age of 65 who are virtually unable to walk and who receive the higher or middle disability living allowance care component will have their right to exemption from vehicle excise duty as a passenger removed. It is already the case that children under five and adults who are over 65 cannot claim mobility allowance. The removal of the right to VED exemption is another burden for that particular group of people.
The Government argue that children with disabilities have no more mobility needs than other
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children of the same age. However, children with profound intellectual and multiple disabilities have needs far greater than any able-bodied children. MENCAP carried out a survey of over 2,000 families with children with that level of disability. Parents were asked about problems with travel, and 88 per cent. said that the nature of their child's disability made travel by bus or train very difficult, if not impossible. Only 5 per cent. said that they could use public transport and 79 per cent. said that they had to use a private car.
Children who cannot stand by themselves by the age of two or three are of course unusual. As all parents who have tried to travel on public transport will know, getting any child on or off a bus is difficult. If your child has no independent mobility it is almost impossible. Behavioural problems are also common, with children having no sense of danger as regards public roads or being so difficult that they cannot be taken on public transport.
Disability incurs great extra cost. Many families with a multiply disabled child rely on vehicle excise duty exemption status in order to manage their finances. Not only do families find that their disabled child under the age of five is not entitled to the mobility component of the disability living allowance; it will now also be the case that the car, which is so necessary to the family, will not attract exemption from VED. I hope that the Government will meet organisations representing the disabled to discuss that matter further and that the noble Earl, Lord Caithness, will convey our wishes to the proper quarter.
4.52 p.m.
Lord Bruce of Donington: My Lords, I trust that the noble Lord, Lord Rix, will forgive me if I do not follow his particular contribution in the same field to which he so eloquently contributed. I should like to return to the theme started by the noble Earl, Lord Caithness, on the state of the economy.
I greatly sympathise with the noble Earl. He has a most agreeable way of putting his point of view to the House, apart from an occasional sally into party politics in order to prove where his instinctive allegiances lie. He addressed us in most persuasive terms this afternoon. However, it is not good for the noble Earl to clutch at straws, although one cannot blame him for doing so. For him to suggest from the Government Front Bench anything other than that there are signs of hope within the economy would be a dereliction of duty. But in point of fact, as everybody knows, the country is still in the middle of an abysmal recession.
We must try to contribute to the deep thinking which we must all do in order to find the best way out of the recession. I must say immediately that if there are changing circumstances, as there are from day to day within our own economy, and indeed in the world economy, it is extremely silly to put oneself into a complete straitjacket—that is, to tie one's hands almost completely in any action that the Government may take. As I have said many times before in this House, I regard the entry into the exchange rate

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mechanism at the parity of 2.95 deutschmarks as a great mistake. I believe that to endeavour to maintain our membership of the exchange rate mechanism under those conditions is a great mistake indeed.
The Government have a point, and as an old believer in the mixed economy, I am bound to agree that market forces are the most efficient way of distributing goods and services throughout the communities in which they are produced and to other parts of the world. However, it is equally clear that, although market forces may be the best way to ensure the most efficient distribution, in practice they produce the wildest distortions in the incomes and fortunes of various classes of people in various professions and in various countries.
Therefore, in order that society as a whole may maintain its cohesion, governments must correct and interfere with free market forces. The normal way in which that is done is for the individual country or nation, within which its rule runs and where it has its own system of laws and integrated systems of administration and taxation, to endeavour to influence the market forces within its own country and to take what redistributive taxation measures are necessary to make transfer payments, and occasionally to subsidise, in order ameliorate the consequences of the driving force of market forces. Therefore, I can understand, within one's own country—and I have been party to it—interfering or helping to mould the way in which market forces operate. That is understandable.
However, at present it passes my comprehension that we should submit to an impersonal external discipline over which we have no control whatever; namely, the exchange rate mechanism. I speak on slightly tender grounds in this regard because I am well aware that prior to October 1990 my party recommended that the then government, under the noble Baroness, Lady Thatcher, should enter the exchange rate mechanism. The Government obliged some three days later by announcing at their party conference that they would do so. My own party leadership of that time must look after itself. I disapproved then of that being done, and I still disapprove. In current world conditions, and current systems of production in force in this country and elsewhere, our currency is grossly overvalued both in terms of dollars and deutschmarks. The world knows it; the Government know it; and it would he difficult to argue otherwise.
What are the consequences of that? Surely they must be that it is more difficult for British manufactures and services to be exported. That must be the case. In certain aspects we may achieve records; but that is a tribute possibly to the excellence of our variety, the distinctiveness of our products and the reputation of our workforce rather than the price at which products are competitively placed. However, it is much more difficult to achieve satisfactory export totals. It certainly means that imports into the United Kingdom are heavily subsidised.
I speak within the experience of many Members of your Lordships' House when I say that over the past two years, when one has tried to purchase British
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consumer durables in British shops—I have been to many large stores—one has been faced with the response that delivery could take place between 10 weeks and three months. However, if I was prepared to purchase a foreign item, delivery would be straightaway. The subsidised price at which goods have been purchased by importers and stores in this country permits them to hold large stocks.
We have been burdened with a double disability. First, our manufacturing and service industries have to compete against imports which are in effect offered at a subsidised price. Not only must they do that, but also they must face the fact that there is little way out of that situation. The result is that even now if we let exchange rates float and import prices rise, the commodity prices in the shops will rise. British industry has been so decimated by the deflationary programme being carried out that it would be unable to compete even with the increased import prices that would eventuate.
What are we to do? Are we to tolerate a modicum of inflation? By "modicum" I mean between 2 per cent. and 3 per cent. Or are we to insist upon a zero rate and the continued deflation that that involves? Past experience gives us some clue to the answer. In 1925 the country was on the gold standard and the rate of the pound against the dollar was 4.86. In 1929 and 1930 this country experienced a considerable depression following the depression in the United States. What did we do? In 1931 we went off the gold standard. Amazingly, production increased Ad unemployment went down. From 1932 until 1952 the Bank rate stood at 2 per cent.—that is,20 years. That was despite the intervention of World War II.
At the end of World War II, the pound against the dollar stood at 4.43. Eventually, in 1949, after a supreme economic effort, we were forced to devalue. We were forced to do so by the inflationary pressures exerted not by vastly increased wages but first by the extent of the damage that we had suffered during the war and which we had to repair; and, secondly, by the massive redeployment in this country of a labour force coming out of the armed forces. In spite of demobilising 2 million people immediately following the war, we achieved an unemployment rate within 18 months of under 3 per cent.
That continued well into the 1950s and into the 1960s. In the meantime, the exchange rate was floated. We brought it down in 1949 to 2.80 dollars, as will be remembered. The result was that once again we had a period of sustained growth. We did not experience any significant inflation—by that I mean the kind of inflation that immediately followed the quadrupling of the oil prices in the late 1970s and the "Barber boom or bust" of 1972 which shoved up the rate of inflation to 26.5 per cent.
Thereafter, inflation continued to go down. Under the Labour administration, until 1979 it had gone down to 10.3 per cent. That was not a bad achievement, bearing; r1 mind the great pressures generated by the quadrupling of oil prices as well as by the "Barber boom". It was accentuated further, following accession into the European Community, by our having to pay artificially high food prices

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owing to the application of the common agricultural policy. That resulted also in price increases. Indeed, as the noble Earl will be aware, the Treasury announced only a short while ago that even today the average family of four has to pay around £18 a week extra for food as a result of the application of the common agricultural policy.
The next bout of real inflation was when the Tory Government of 1979 came into office. They immediately and deliberately raised inflation by nearly doubling VAT and by imposing price increases on the electricity and other power industries. Under the Tory Government inflation rose to slightly over 20 per cent. In the depression that followed it continued to come down, following the Government's monetarist policies aimed at deliberately deflating the economy at the cost of increased unemployment.
The argument that lowering the exchange rate necessarily becomes inflationary is immediately knocked on the head by the somewhat unnoticed fact that in January 1985 the dollar stood at 1.05 dollars to the pound. Indeed, for half-an-hour in January it went down to 99 cents. Strictly speaking, that should have caused an immediate inflation or an inflation within a reasonable period. It did nothing of the kind. There was a slight blip in the following year and it continued between 3 per cent. and 4 per cent. per annum thereafter. Indeed, it would probably have continued if there had not been a repetition under Chancellor Lawson of exactly the same kind of tactics followed by Mr. Barber (as he then was) in 1972, which again increased the rate of inflation.
The purpose of reciting some of that history is to suggest that the following of a flexible exchange rate policy and allowing the pound to find its own level is not necessarily synonymous with inflation going out of control. That is not necessary at all. Indeed, for considerable periods of our history, as I have shown, from 1925 to 1931 onwards the most fruitful period occurred in terms of increased national output at a medium rate per annum. It is the extraordinary circumstances—the Korean war, the quadrupling of the oil prices, the Barber boom and all those things—that contributed to the distortions.
I suggest respectfully to the Government that they should rethink the matter. It does not necessarily follow that the world will suddenly collapse if they withdraw from the exchange rate mechanism or, even more moderately—which I am quite willing to accept—seek a realignment within it. All kinds of catastrophes are forecast, but they are catastrophes which are in the minds of civil servants and some economists who have very little else to think about, bearing in mind that economics is supposed to be the science of rational expectation. But in real life within a comparatively short period of time, the effects would be quite small.
We should not be talking only of abstract ideas, although in the realm of ideas these problems can be solved or attempted to be solved. We should be thinking about the millions of people outside this place who are living in poverty in our country. We should be thinking about the millions of people who
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are living well below the poverty line and the thousands who are homeless. We should also be thinking of the millions who are unemployed. We should be thinking of people who are enduring those kinds of disabilities. We should ask ourselves whether we should be more actively considering the human aspects of the problem and allow them to condition our minds and our determination rather than to allow ourselves to be sucked in by a great number of abstract theories, most of which with the passage of time have been disproved by events.
5.11 p.m.
Viscount Mountgarret: My Lords, perhaps I may intervene in this debate on one specific point; namely, in relation to agriculture. I have always felt that is was this Government's policy and desire to try to encourage an expansion of new people entering farming, and by that the creation of more agricultural tenancies rather than landowners tending to wish to keep land in hand for all the various fiscal reasons that are attached to it.
I believe that in Schedule 14 to the present Bill my right honourable friend the Chancellor of the Exchequer has been extremely generous and considered giving 100 per cent. relief to owner-occupied land. He has been equally generous in considering giving an increase of between 30 per cent. and 50 per cent. relief on tenanted land. It would be churlish of anyone, certainly on this side of the House, to decry the Chancellor's very generous, understandable and laudable provisions. But unfortunately and probably unwittingly, the knock-on effect has been possibly to discourage landowners even considering giving more land to tenants rather than trying to keep more land in hand for themselves. That is regrettable. It is not in accord with what I believe to be government policy. It is not a measure which the Country Landowners' Association, the Tenant Farmers Association or the National Farmers Union welcome.
This matter was raised in another place at Committee stage. It was well reported in the Official Report. Unfortunately, the point was somewhat turned down by my right honourable friend. However, I was very pleased to see that the party to which the noble Lords opposite belong voted in favour of increasing relief for inheritance tax to 100 per cent. for tenanted land. I am very glad to believe that that party is in favour of giving extra relief for inheritance tax.
I understand the reasons my right honourable friend the Minister in another place gave against the proposal which I believe was raised by the honourable Member for North Cornwall; namely, that it might lead to encouragement for landlords, not necessarily of an agricultural nature, to try to claim that their businesses also qualified for 100 per cent. relief, whereas other provisions applied. I recognise that there are difficulties. It is not a very easy matter to dispose of in a very short space of time. I very much support the remarks made by my noble friend Lord Boyd-Carpenter, that it is regrettable that we do not have sufficient time to make contributions of a fairly important nature on many aspects of this Bill at this time. We could be helpful and constructive to the

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Government in order to hone the various rough edges which may appear in this Bill. This point is one of them.
All I seek to do is to draw the Minister's attention to this particular problem and to ask whether I can have some assurance that the anxiety which I have briefly tried to express might perhaps be taken on board, and that there will be a positive determination to have a full discussion with the various interested parties to which I have referred, such as the CLO, the NFU and the Tenant Farmers Association. Such discussion will be in order to see whether there can be some way in which our fiscal legislation can be geared so that the discrimination against consideration of the letting of land to tenants might be eased and that landowners will not be penalised by inheritance tax if they decide, very laudably, to encourage farmers to become their tenants rather than entering into various schemes such as share-farming. That is the purpose of my intervention. I shall be very grateful if my noble friend can give some assurance that this point will be actively considered in due course.
5.17 p.m.
Lord Houghton of Sowerby: My Lords, I reckon that on our second debate—a very important one, in which two notable new noble Lords on both sides of the House will he making their maiden speeches—our Front Bench speakers should be speaking by a quarter-past five. That will give the new debate the opportunity of starting at about six o'clock. I wish to contribute to the attainment of something approximating to that programme. Therefore, I shall try to vie with the noble Lord, Lord Rix, and confine my remarks to three minutes. That alone is something of a record.
There is only one matter that I wish to raise, leaving everything else aside. In the next three minutes I wish to speak about the people who are behind this Bill: about 80,000 civil servants. By a long way they deal with the highest proportion of our national revenue. I refer to the Inland Revenue which provides £80 billion; Customs and Excise, which provides £67 billion; and national insurance contributions, which are now a form of proportionate taxation, provide £34 billion. Those are the factors which lie behind this Bill. Yet the Government are stirring up uncertainty and discontent in the Revenue staffs as well as in the rest of the Civil Service by all this talk about privatisation, testing the value for money in the market and other sloganised approaches to the employment and conditions of working life for the civil servants.
The Government are asking for serious trouble in the way that they are going on at the moment with gossip, secrecy, ill-judged speeches by Ministers, and press comments about what is lying in wait for the Civil Service. Noble Lords should read the article in the Life & Times section of The Times this morning as regards the feeling of staff organisations, both high and low, about what lies in store for the Civil Service. We had this out to some extent when we debated the Civil Service (Management Functions) Bill; but that deals with one limited feature of this exercise. It is not certain that what lies ahead needs to come to either
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House for confirmation. I cannot see that, dealing with the Royal Prerogative, any statute law necessarily has to be passed.
It may be that we have to take every opportunity that we can of alerting the Government to what is the steaming cauldron underneath the Civil Service. I can hardly express my deepest indignation about the way in which the Government are bungling this exercise. They could gain the confidence of the most constructive and moderate leadership of the Civil Service unions today if they would only come clean, give them their confidence and allow them to take part in the decisions which the Government wish to take.
The noble Earl, Lord Caithness, is a Treasury Minister. I ask him to make it clear to his Cabinet colleagues—I ask him to tell Sir Robin Butler, the head of the Civil Service—that the Civil Service is waiting to hear from him as well as from others about the future. The three minutes for which I had intended to speak have now come to four. I have finished, but that is enough.
5.21 p.m.
Lord Desai: My Lords, when the noble Earl, Lord Caithness, was speaking it was interesting to note that there was a problem about whether the aircraft was or was not in flight—and something similar attaches to the economy. We do not quite know whether the economy is in recession. I certainly agree with my noble friend Lord Peston that none of us—even the most pessimistic—expected the economy still to be in recession, and, much worse, none of us thought that the economy would continue to be in recession through 1992 and perhaps into 1993.
The first thing to say is that the assumptions upon which the Budget was based have already turned out to be false. There was a provision in the Budget for an over-spend of £2 billion, adding to an existing PSBR of £26 billion, excluding privatisation proceeds. At that time a lot of people said that, given the size of the PSBR, adding to it by £2 billion was perhaps not the nicest thing to do. But if one wants to add to the PSBR, there are certainly better uses of £2 billion than giving income tax cuts.
Noble Lords opposite are obsessed about income tax for reasons that I do not understand. They continue to think that if they go on cutting income tax the economy will somehow miraculously improve. All I can say is that the past 13 years have shown that that is not so. What we are left with is not a lean and fit economy; it is an anorexic economy. And it is because it is an anorexic economy that we are worried, as my noble friend Lord Bruce of Donington is worried. Although my noble friend would like a devaluation, he fears that if there were to be a devaluation our industries would not be ready or able to deliver the goods that would be required. We have decimated manufacturing industry to such an extent that we are short of capacity.
I should like to discuss the Government's anti-inflationary policy in some detail. But the Government must recognise one thing: although it may be true that we need non-inflationary growth—I shall cast some doubt on this—one way to combat

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inflation is by having sufficient capacity to produce goods when they are required. If one does not have the capacity to produce goods when they are required, even the tiniest revival in demand is bound to cause inflation or balance of trade problems. The Government have neglected the real economy for far too long and are still not admitting that that is the nub of the problem.
I turn now to the vexed question of the exchange rate mechanism. I have been in favour of entry into the exchange rate mechanism since about 1985. Indeed, I thought that we missed a golden opportunity to enter the ERM when our inflation rate was down to about 3 per cent. or 3.5 per cent. in 1985. We had paid a very high price in unemployment to get inflation out of the system. As my noble friend Lord Bruce of Donington pointed out, that inflation was somewhat domestically created by doubling value added tax, etcetera. However, even after all those sacrifices, if we had joined the ERM in 1985 we would have been seven years ahead by now along the path to convergence.
But we did not do that; we did exactly the opposite. The inflation rate has doubled twice in the past 13 years. When it doubled the second time around, not only was monetarism abandoned, which I cannot complain about, but almost any discipline on credit was abandoned also. We had a fantastic credit boom, which we are now suffering from. Indeed, given what the tabloids have been talking about, we not only have anorexia but bulimia as well. We have gorged ourselves on lots and lots of borrowing and are now having to pay it back through very painful debt deflation. Although that is the case, I believe that the Government have gone too far this time in not relieving debt deflation.
Unlike my noble friends Lord Peston and Lord Bruce of Donington, I believe that, staying within the exchange rate mechanism, it is still possible to have a more active interest rate policy than the Chancellor has pursued. Once the election was out of the way and the Government had won again, the market had a guarantee that we would stay within the ERM and that devaluation would not be contemplated. I believe that that was the time to take advantage of the credibility that had been established and to follow an aggressive policy of interest rate cuts by half a percentage point at a time, no more than that. There were very good opportunities to do that in April, May and June because the pound was strong. We could have cut interest rates then.
There has been a slight technical debate between various noble Lords about what would happen if we cut interest rates and about whether the pound would appreciate or depreciate. What actually happens when one cuts interest rates is that people hold the pound only if they expect it to appreciate in the future. For that to happen the pound must first fall before it can rise again. Technically, when one cuts interest rates, the pound drops, but because we are in the ERM people expect the pound to appreciate eventually and they will therefore hold it in the meantime. Therefore, although opportunities have been missed, I believe that it is possible to cut interest rates.
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I remember saying when we had the debate on the gracious Speech, that it was a mistake to regard the deutschmark as a fulcrum within the ERM. The ERM does not have a fulcrum. That is the whole point of the ERM. If I may make an analogy, the ERM is like several people climbing Mount Everest. They are roped together and because they are roped together they do not have unilateral freedom to move wherever they like. They have to stay in tandem with other people. However, that does not mean that each one is in a straitjacket.
The mistake that a lot of people have made is to go on believing that, because of the past success of the Bundesbank, whatever it does is correct. However, I would say that during the past 18 months or so the Bundesbank has made a total mess of its own monetary policy. When reunification with East Germany took place, it suffered what is called a "supply shock" in economics. Given a supply shock like that, the Government had of course to borrow money, but cutting the money supply—or attempting to cut the money supply—was not the appropriate response to that shock. The Bundesbank has now got itself into the state where it does not quite know what to do. I should have thought that one thing that the Bundesbank should have done was to relax monetary guidelines but at the same time to realign the deutschmark upwards.
Part of the demand for the deutschmark exists not in Germany but in Central and Eastern Europe and because people are holding deutschmarks it looks as though the stock of deutschmarks is out of control. The Bundesbank is making a serious mistake and it would be wrong for us to follow it blindly. Therefore it would be perfectly legitimate for the Chancellor not to follow any increase in interest rates imposed by the Bundesbank.
What is more, at the first opportunity when the pound is off the floor and is anywhere in the range of 2.90 deutschmarks and above the Chancellor should cut interest rates slightly. He has allowed himself much less freedom than is possible. That is not only my view—and it is the one I stated when we debated the gracious Speech—but it is also the view recently put forward by my friend, Professor Mervyn King, chief economic adviser to the Bank of England. As various other commentators have said, given that we are in the ERM and given that we shall converge to a single currency sooner or later, the right policy is to get to 2.95 by 1995 and in the meantime keep the pound down within the 6 per cent. range and take as much advantage as possible of cutting interest rates within that framework.
Things are not as bad as people think, but an active monetary policy is needed. With interest rate stability one can allow oneself a little interest rate variation. Interest rates can go up or down. It is silly to think that they always have to go down. We have been far too cautious in the past year and a half since we joined the ERM. Most other countries have allowed interest rate movements both ways. I urge the Chancellor to do that. By cutting interest rates and by now and then putting them up again he will eventually achieve much more than he has so far.

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If one cannot do much with monetary policy one has to do something with fiscal policy. What is surprising in this respect is that since the election the fiscal policy stance of the Government has gone into complete reverse. While the election was still to be won we did not hear any cries about the public sector borrowing requirement being out of control. At that time health could have what it liked; social security could have what it liked; everyone could have what they liked. Suddenly after the election we discovered that there was a PSBR problem. The Red Book showed that we had a PSBR problem. Why did the Chancellor not say at Budget time,"We cannot afford a £26 billion PSBR"? He did not say that and now there is panic about cutting public expenditure.
Although I am as worried about the PSBR as anyone else, I say frankly that it would be a mistake to tackle the PSBR problem by cutting expenditure. I agree with my noble friend Lord Barnett that we should think about increasing taxation rather than cutting expenditure. We have to get out of the American psychology that one cannot talk about increases in taxation because everyone thinks that taxes can only go down and not up.
According to the Red Book the tax concessions excluding concessions for income tax cost £59 billion. The VAT concessions cost £19 billion. As my noble friend Lord Barnett said, and, if I may say so, as I said during the debate on the gracious Speech, sooner or later the Chancellor will complain about Europe and finally abolish zero rating. He has to do that. That is the easiest way to get the PSBR down and to have a tax which is the least harmful—as noble Lords worry about incentives—to incentives. We shall ultimately have VAT with no zero rating. I do not necessarily advocate that but it would be the easiest way, given the philosophy of the Government, to tackle the PSBR and not deflate the economy further. The Government will have to think about that.
I want to mention one minor element of a certain tax. My noble friend Lord Peston has already mentioned it. I refer to the concession on inheritance tax in the 1984 Finance Act. It relates to concessions given to landlords in respect of access to land. Generous tax benefits have been given but landowners have not been asked to give sufficient access in return. The public's right to free passage has not been properly followed up. When the Finance Bill was in another place the Economic Secretary to the Treasury made some concessions on that and said that he would look into the point that existing agreements on inheritance tax with landlords were not working properly. He said that he would take up some suggestions and have discussions. Can the noble Earl tell us how the Government intend to implement the Minister's concession that the current system of inheritance tax is not working to the public benefit? What discussions are taking place? Who is being consulted about this matter?
I believe that, having had for a long time the single golf club of interest rates, the Government have now decided that they have a single objective of zero inflation. That is madness. There is no other word for it. It is nothing but sheer madness to have as a target
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not low inflation but zero inflation. Before the election I made some calculations with the easiest available economic model. It is called the Layard-Nickell model and is used by my colleagues. The unemployment figure necessary to achieve a zero rate of inflation as of the first quarter of 1992 is 4 million. It may not be 4 million; it may be 3.5 million, it may be 4.5 million. But the point is that zero inflation is not a sensible target. One must believe in a trade-off at some stage. One must believe that zero inflation at the cost of so much loss of output is not worth having.
I would point out to those who think that inflation is an enemy of growth that the longest period of sustained growth in the capitalist world was between 1945 and 1975. The inflation rate was then between 3 per cent. and 5 per cent. across all advanced capitalist countries and there was the most rapid rate of growth. It is not true that a moderate rate of inflation is an enemy of growth. Very high rates of inflation may be an enemy of growth but moderate rates are not. To believe that there is no trade-off or that one should pay any price to achieve zero inflation is superstitious. It is to make inflation into a totem and sacrifice everything to it. I hope that the Prime Minister will reconsider his policy and agree that there is more to the economy than the inflation rate, especially as, given the appalling way in which the inflation rate is measured, he will not even know until many years later whether or not it has fallen to zero.
I hope that this Finance Bill will be rapidly forgotten as it has become totally irrelevant and that something more concrete will be done about the ills of the economy as things are becoming rather desperate.
5.39 p.m.
Lord Donoughue: My Lords, I should like to begin by thanking the noble Earl for introducing the Finance Bill and by expressing my agreement with those who welcome the intention to merge the budgetary, finance and public expenditure proposals. In future, when everyone will be quite happy to forget most of the measures introduced by the Government—that is, at least since 1987—I suspect that they will remember this admirable reform with approval.
It is in that friendly spirit that I turn to the present appalling state of the British economy. As I said in an economic debate last year and, repetitively, the year before, the Government are in fact boxed in and clearly feel boxed in. That is the main reason why their policies, especially their monetary policy, are so inert. They are boxed in with an exchange rate fixed too high, with real interest rates much too high (at a level unrelated to the stagnancy in the economy but solely to support the wrong exchange rate) and with a PSBR at a level which constrains the kind of further public expenditure increases and tax reforms which would normally be appropriate at this stage of a deep recession.
In the previous debates to which I referred, government spokesmen denied to me that they were boxed in. They forecast a Houdini-like escape from the box. Even the noble Lord, Lord Hesketh—though, perhaps, lacking Houdini's waistline—was confident of escape. Well, we are still waiting. The box

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remains fairly closed, the Chancellor of the Exchequer is still locked in and the unemployed have little reason for hope.
I shall begin with interest rates which, I believe, are the nails in the box; in other words, the biggest constraint on economic growth. There is apparently little prospect of reducing real interest rates, as the noble Earl confirmed during Question Time and, again, in his opening speech. We are hooked to German monetary policy. No cuts in German rates are expected before the Autumn and there are even some frightening rumours of increases.
Even if UK nominal rates were to fall a little—that is, if we had a small cut—so, according to forecasts which I believe, would inflation fall. Therefore, real interest rates will remain astonishingly high. With a 10 per cent. base rate and below 4 per cent. inflation, that means over 6 per cent. real rates. Moreover, with the average businessman paying at least 3 per cent. to 4 per cent. above base, that points to above 10 per cent. real and is a devastating rate to pay. It is especially devastating to the prospects of investment and, therefore, the prospects of economic growth.
Surely such rates cannot persist for ever, thereby prolonging the slump. As my noble friend Lord Barnett so convincingly said, something must give. In that context and as a personal view, I must say that I agree with my noble friends Lord Barnett and Lord Desai: I prefer the currency risk of cutting real rates to the certainty of a prolonged recession and permanently high unemployment. I should point out that the Labour Party view, with which I agree, is that entering the narrow band reduces the risk.
We are now entering the third year of recession and the prospects remain depressing. The post-election boomlet has disappeared. All those green shoots that the Chancellor of the Exchequer and the Conservative press could see during the election campaign have withered from sight. City forecasters see negative growth for 1992—I emphasise the word "negative"—and only little improvement in 1993. I should like to draw the noble Earl's attention to the July publication of the leading City forecasters, Goldman Sachs, headed Recovery Fears. I enjoyed hearing the reminder from my noble friend Lord Barnett of the Chancellor of the Exchequer's forecast of 2 per cent. growth this year. That has gone.
The housing market seems unlikely to give any help, whatever is done at the margins with stamp duty. The consumer is not helping either, as the savings ratio remains stubbornly high at around 11 per cent. The consumer is as boxed in as the Government; that is, boxed in by high personal debt and high interest rates. He is also boxed in by a diminishing rate of real wage increases which constrains his spending power.
Perhaps the most worrying aspect of the scenario is the effect that it will have on business investment. The brief period of post-election optimism has been squashed. Moreover, seeing consumer spending not rising, unemployment still rising, and the real cost of borrowing at record levels of 10 per cent. and above, why should the businessman invest? It is much more prudent for him to conserve cash and control costs in
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such a situation. There is no point in borrowing to expand; indeed, the situation may well produce a further run down of stock inventories. All that is very damaging to our long-term economic interests. When the upturn comes, it means that our capital stock will be inadequate and out of date. To me, that is the most fundamental reason why we must get real interest rates down and our economy moving again.
Another side of the box is the PSBR which certain noble Lords have mentioned and which I see is forecast as being at least £40 billion in 1993 and beyond. Noble Lords will recall that those terrible Labour Governments—at least, that terrible Labour Government in 1976 at the time of the IMF—never achieved anything as impressive as that. The problem with such an astronomical PSBR is that it prevents the Government, or the Government feel that it prevents them, from using extra public expenditure or further tax cuts in the traditional Keynesian way, counter cyclically, to stimulate the economy.
As a diversion on tax and in relation to the fiscal provisions of the Bill, I must say that I support the noble Lord, Lord Boyd-Carpenter, in respect of a tobacco tax. In relation to VAT, I should also like to suggest to the Chancellor of the Exchequer in a quite disinterested way I am ever willing to help the Government—that he might raise several hundred millions and make many people happy by ending the VAT zero rating on newspapers. I support most zero-rating exemptions, but not that one. I believe that such a move would bring widespread support, even from the Royal Family, and would also lower the PSBR.
Another side of the box is the huge trade deficit, unprecedented at this stage of peacetime recession. Such a deficit is an inevitable reflection of the fact that the currency was too high when we entered the ERM. Yet, apparently, we cannot devalue; the Chancellor of the Exchequer has said that it is not on the agenda. Therefore, the trade deficit will inevitably deteriorate further when the economy finally recovers.
So we are boxed into a long recession: we cannot, apparently, devalue out of it; we cannot further public spend our way out of it; and we cannot tax cut our way out of it. All the pain of this economic slump produces one benefit—the reduction of inflation. I genuinely congratulate the Government on that. Inflation is a destructive menace and it is in everyone's interest that it is reduced. But, as my noble friends Lord Desai and Lord Barnett well argued, the pursuit of it to zero soon may be much too inflexible to the point of self-flagellation and vandalism. As my noble friend Lord Peston elegantly pointed out, the price is very high and perhaps too high. It is not clear what are the benefits of urgent zero price inflation if millions of unemployed cannot afford to buy at those prices.
In conclusion, what should be done in this plight that we are in where, I believe, we have the worst of both worlds: we have Anglo-Saxon levels of debt and European levels of real interest rates and low growth? That is a very unhappy formula. Well, what is to be done? Being of Irish descent, I must confess that I should prefer not to start from here. It is the result of the disastrous credit boom that occurred since 1986.

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Even the Government's strongest supporters now seem stumped for economic remedies, except for the rash departure from the ERM which is as much a political remedy as an economic one. Everything has failed. I read in The Times on Saturday the conclusion of its editorial, that having dismissed every other economic remedy,
"the Chancellor must now talk Britain out of its recession".
What a sad conclusion to 13 years of economic miracle. The Chancellor needs Saatchi & Saatchi, not economic management. PR has replaced the medium-term economic strategy.
Rather than such despair and rather than leave the ERM, the Chancellor might read the public expenditure suggestions of my noble friend Lord Peston; look urgently at reducing real interest rates, as has been suggested; and cease the masochistic pursuit of rapid zero inflation, subordinating all else to that.
I have addressed the Finance Bill in the context of he British economy which it is supposed to influence and steer through its budgetary stance and its revenue-raising proposals. In that context, I am bound to conclude that it seems to have little relevance to the stagnation of growth, to high unemployment, to the slump in industrial investment, and to the alarming deficits on government and trade accounts. The Government are in the same box as they constructed for themselves with the disastrous credit boom that they began in 1986. They now seem to confess that they have no economic measures or proposals to get out of the box. Even their most uncritical supporters admit that only the last resort remains: to talk their way out of it. I look forward to hearing the Minister talk.
5.52 p.m.
The Earl of Caithness: My Lords, I am grateful to all noble Lords who have taken part in this interesting debate. My noble friend Lord Boyd-Carpenter said t hat he wished for a longer discussion on the economy as a whole and on the important points of the Bill. I draw his attention—not that he will need reminding—to the fact that the previous Finance Bill was discussed only a week after a discussion on the economy, so there are opportunities in the House to discuss the economy. It was during that Finance Bill discussion that the noble Lord, Lord Peston, said that he would concentrate upon the Bill and not talk about the economy at large, but he reverted to form today.
Many of your Lordships have expressed the anxiety that the economic recovery continues to be delayed, and some have doubted whether there is an upturn coming. While recent indicators have been mixed, taken together they point to our being close to a turning point, and few independent forecasters question the Government's belief that recovery will be established this year, as I said at greater length when I opened the debate.
We have a real opportunity not just to achieve lower inflation, but to do so on a lasting basis. The benefits from achieving that, in terms of higher sustainable growth over the medium term, will be felt for many years. It would be foolish to put them at risk. By jeopardising the progress that we have made on
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inflation, a devaluation of sterling, either within the ERM or outside it, would put the future benefits at great risk. It is for that reason that my right honourable friend the Chancellor of the Exchequer has stated in the clearest possible terms the Government's determination to keep their nerve in the battle against inflation and to remain within the ERM at sterling's existing parity.
When talking about inflation, the noble Lord, Lord Peston, said that zero inflation means unemployment at 2 million plus. Low inflation is the prerequisite for sustainable growth and only sustainable growth ensures job prospects in the medium term; so it is wrong to say that the zero-inflation aim is anti-growth. In the long run it is the only way for growth to flourish.
The noble Lord then said that our aim should not be zero but the EC average. For the first time since 1986 our inflation, measured on a comparable basis, is lower than the EC average, but just beating the average at a time when most of our competitors are seeking to reduce inflation even further should not be good enough for Britain. It might be good enough for the noble Lord and his party, but it is not good enough for the Conservative Party. The noble Lord should remember that two-thirds of our exports go to countries with inflation rates lower than ours. That is the measure of the challenge that faces us. It shows graphically that if Britain is to remain a successful trading nation we need an inflation rate as low as the best in Europe or, indeed, the world, whether that be Germany, France, Japan or anywhere else.
The noble Lord, Lord Barnett, also commenting upon zero inflation, said that it was a silly objective. The noble Lord is willing to accept a slightly higher rate of inflation—not the European average, but something slightly higher than zero. He was supported by the noble Lord, Lord Bruce of Donington. The point about inflation is its tendency to rise out of control. Accepting a little inflation today, may mean facing up to a lot tomorrow. That is a bad scenario. A great deal of effort is spent on getting the timing right. Interim measures represent a constant fiddling with the economy. They often prove to be crude and clumsy in practice. Therefore I wholeheartedly support the objective of my right honourable friend the Prime Minister: the only sure way of conquering inflation once and for all, is to aim for a zero rate.
The noble Lords, Lord Barnett, Lord Desai and Lord Donoughue, suggested that interest rates could be cut. The noble Lord, Lord Donoughue, referred to the credit boom of 1986– 87. When we cut interest rates in 1987, I seem to recall the Opposition saying that we had not cut them enough. If we had followed the noble Lord's voice then, we would have had not a disastrous credit boom—in his words—we would have had a very disastrous credit boom; so I have to take what he says with a pinch of salt. But now we are in the ERM. If any country within the ERM is to have lower interest rates than Germany, the markets must expect its currency to appreciate against the deutschmark, as I said at Question Time.
The deutschmark has never been devalued in the whole history of the ERM, so it is scarcely surprising

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that at present foreign exchange markets are not prepared to hold ERM currencies yielding substanti-ally less than the deutschmark. We need look no further than France for clear and practical proof of that. It has been all of five years since the franc was devalued against the deutschmark. French inflation is below that of Germany; and last November when the French cut interest rates to a level just below those of Germany they were forced quickly to reverse that cut. Nevertheless, some noble Lords have suggested that Britain should have a bit more flexibility, and that allowing the pound to fall to the bottom of its wider band would create scope for a subsequent apprecia-tion and hence our interest rates could be much lower than Germany's. That is theoretically ingenious, but wholly unrealistic. If that were true, the weakest currencies in the ERM would have the lowest interest rates. But foreign exchange markets do not expect a weak and falling currency with low interest rates to bounce back up again. They expect it to carry on falling, and they sell it, forcing up interest rates.
The noble Lord, Lord Bruce of Donington, wanted a depreciation of the currency. He said that the rate at which we entered the ERM was too high. If depreciating the currency solved anything, Britain would already have one of the most successful economies of the world. In 1966, the pound was worth more than II deutschmark, but the devaluations of the past yielded, not booming exports, but a steadily falling share of world markets. The noble Lord did not say at what rate he would have entered the ERM or what he would have done had the rate at which we entered been under pressure. It would doubtless have led to another devaluation.
The noble Lord, to whom I have listened with great attention for many years, as he knows, made one other point. He said that British industry was unable to compete. That is not so. Exports were at a record level in May and the UK share of world trade in manufactures was estimated to have risen over the past three years. He will recall what I said at Question Time about our trade with the European Community.
The noble Lord, Lord Peston, said that it was the most vulnerable in society who were least likely to gain from the defeat of inflation. I beg seriously to differ with him on that point. Those on fixed incomes, for example, are among those most penalised by inflation. I remember that in the 1970s my mother was on a pension and she, together with many other elderly people, was hurt by the high inflation of those days. The noble Lord, Lord Donoughue, summarised the point better when he said that inflation was a detriment to all.
The noble Lord, Lord Peston, chided me about Treasury forecasts. I confirm the line that he expected me to take by saying that he will have to wait for the Autumn Statement in the normal way. The noble Baroness, Lady Seear, the noble Lord, Lord Donoughue, and my noble friend Lord Boyd-Carpenter welcomed the fact that we shall have a unified Budget. I say to the noble Baroness, as did my noble friend Lord Boyd-Carpenter, that the first unified Budget will be in December 1993. I agree with
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her—and this is something I said when I was in the Treasury—that it seems odd to split the two. It is a good thing that my right honourable friend the Chancellor of the Exchequer has put the two great debates together.
The noble Baroness also referred to investment in this country. She will be pleased to know that business investment increased 3.5 per cent. in the first quarter of this year. Fixed investment and investment in plant and machinery also increased. I wish to spend a moment on another type of investment which the noble Baroness did not mention and which produces enormous benefits for Britain. That is inward investment. We welcome it because it strengthens competition and innovation in the United Kingdom. We are reaping the benefits of it. In 1991, the United Kingdom still attracted one-third of all inward investment in the Community. The next most successful country was France, with only 17 per cent.
As a result of that inward investment, we are now a net exporter of television sets and the trade balance in cars is set to improve during the 1990s, as the massive investments by Nissan, Honda, Toyota and others come on stream. Although some of those investments were criticised at the time, they have done an enormous amount for British industry: they are welcomed and will have a great effect on our balance of payments.
I was interested in what the noble Baroness said about training for 16 to 18 year-olds, two for each job. I shall note the point and put it to my right honourable friend the Chancellor. I am sure that managers and industrialists would also wish to take her advice. The noble Baroness raised the subject of childcare. The wider tax relief will only help with childcare because it will give working wives who are able to pay for the care the extra benefit. The Budget tax cuts reduce the burden for all taxpayers.
Baroness Seear: My Lords, that will not help single parents.
The Earl of Caithness: My Lords, the Budget tax cuts will help single parents but I take the other points mentioned by the noble Baroness. I was interested in what my noble friend Lord Boyd-Carpenter had to say about VAT and car tax. I hoped that he would welcome the fact that car tax had been halved to 5 per cent. I remember discussing the subject with him at the Dispatch Box, when he chastised us for having a car tax at all. The fact that it has been halved to 5 per cent. is something which I am sure my noble friend welcomes.
Lord Boyd-Carpenter: My Lords, it is good that the Government have gone half way to remedy an absurd situation of taxing something at a price inflated by another tax. I hope that the Government will soon tear up the other half.
The Earl of Caithness: My Lords, we are half way there and I am sure that my right honourable friend the Chancellor of the Exchequer will continue to listen to my noble friend on these matters. The noble Lord, Lord Barnett, quoted from the Budget speech when he said that most forecasters expect growth to resume

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this year. He said that he had seen no signs of it. It might be true that most independent forecasters have adjusted their projections, but the vast majority still believe that growth will re-establish itself this year, as do the Government.
The noble Lord went on to say that I was smiling when he asked me whether, if we were going to reduce borrowing, we would put taxes up. Of course I was smiling. It was a gem of a question from a former Chief Secretary, the kind which one believes will never be asked. He knows very well that I cannot answer it today, and, as usual, he will have to wait. If he had been at the Dispatch Box, he would have suggested that we would have to wait and he would make appropriate remarks as and when it was suitable to do SO.
The subject of the zero rate of VAT was also raised by the noble Lords, Lord Barnett and Lord Desai. The Government will not agree to any directive in Brussels that removes our right to continue levying current zero rates. We have an absolute veto on this. The Government have no current plans to change the present rate or scope of VAT.
I now turn to what the noble Lord, Lord Rix, said. I listened with great care to him. He suggested that Clause 12 of the Bill was inappropriate. The vast majority of disabled people benefiting from the exemption—400,000—are in no way affected by the clause. These people have transferred from the old mobility allowance to the higher rate mobility component of the new disability living allowance, which carries automatic entitlement to the exemption. Because of this change, we are bringing an additional 10,000 people into the scheme who did not benefit from it previously. I am sure that the noble Lord welcomes that.
Nor do the Government seek to alter the position of those who use invalid carriages. Their vehicles will continue to be exempt from vehicle excise duty. However, those sections of the Finance Acts and Vehicles (Excise) Act which we propose to repeal concern the disabled passengers scheme. That does not mean those who own or operate buses or coaches for the benefit of the disabled. Like invalid carriages, those vehicles will remain exempt. Rather, the disabled passenger scheme covers those disabled people who have their own car but who, because of their disability, are unable to drive it. Current beneficiaries under the scheme will not lose out as a result of the repeal. The Government propose the repeal of the relevant sections of the Finance and Vehicles (Excise) Act 1971 because the new machinery for disability benefits makes them administratively unworkable. The old scheme depends on establishing, among other things, the extent to which a person's walking ability is affected. We cannot rely on self-assessment claim forms used for attendance allowance and the care component of disability living allowance to provide the level of information required to make a fair decision on this. The Government's present assessment is that to introduce new procedures for continuing the relief would be difficult, expensive and intrusive. I am sure that the noble Lord will agree that that would not be welcomed.
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As my right honourable friend the Paymaster General said at Report stage in another place, we shall take careful note of the views of MENCAP and other bodies representing disabled people.
My noble friend Lord Mountgarret referred to Clause 73 and Schedule 14 when talking about inheritance tax. The clause and schedule make changes to the rate of relief from inheritance tax for certain business assets and farmlands. The higher rate of relief is increased from 50 per cent. to 100 per cent. The lower rate of relief is increased from 30 per cent. to 50 per cent. There is a difference between the rate of an owner-occupier and that of a landlord of a tenanted farm. The reason for the difference reflects the greater risks involved. I add for my noble friend that the changes apply to deaths and other transfers occurring and charges arising on or after 10th March 1992.
Talking of inheritance tax reminds me that the noble Lord, Lord Desai, also raised the matter. He said that public funds had been used to purchase public access to the countryside, but that the public had not been allowed to know where the access land is. I put it to him that that is incorrect. The Inland Revenue insists that, as part of the undertakings entered into by the owner, the owners give publicity to access arrangements. The owner need not publicise the fact that access results from conditional exemption unless he wishes to. The legislation requires that reasonable public access should be secured as a result of the conditional exemption. If, in the view of the Countryside Commission, existing rights of way or other paths already provide a reasonable level of public access, it would be unreasonable to seek a further degree of access beyond that.
I was slightly saddened by the noble Lord, Lord Houghton of Sowerby. I sat back to enjoy more than four minutes of what the noble Lord said. After 43 years in politics, and with a long career before that, he is listened to with great respect and interest in this House. I fully sympathise with him about the views of the Civil Service. It does an excellent job. It has served past governments and this Government extremely well. Our intention is to provide it with stimulating jobs and the best opportunities possible.
The Finance Bill, which was the subject of our discussion today before we went to the wider economy, is a link between the last Government—we discussed the Finance Bill just before we rose—and the beginning of this Government. The work of the Finance Bill continues the good work of the past 13 years and continues to offer greater opportunities for British businesses in the 1990s. I commend it to the House.
On Question, Bill read a second time; Committee negatived.
Then, Standing Order No.44 having been dispensed with (pursuant to Resolution of 13th July), Bill read a third time, and passed.

Consolidated Fund (Appropriation) Bill
6.11 p.m.
The Earl of Caithness: My Lords, I beg to move that the Bill be now read a second time.
Moved, That the Bill be now read a second time.—(The Earl of Caithness.)
On Question, Bill read a second time; Committee negatived.
Then, Standing Order No.44 having been dispensed with (pursuant to Resolution of 13th July), Bill read a third time, and passed.

Enlargement of the Community: ECC Report
6.12 p.m.
Lord Aldington Lord Aldington rose to move, That this House takes note of the report of the European Communities Committee on the Enlargement of the Community (1st Report 1992–93, HL Paper 5).
The noble Lord said: My Lords, my colleagues and I on the Select Committee are happy to see that the report that we discuss today has attracted a substantial list of speakers, sweetened and no doubt sharpened by the two distinguished Maidens who I am so glad have chosen this debate in which to make their debut. We all look forward to hearing the noble Lord, Lord Healey, who sits opposite, and my noble and learned friend Lord Howe of Aberavon. I feel just a twinge of pride that they should take part in the debate on the report which I am about to present to the House.
The hour is a little later than I had expected this rather important debate to begin. Therefore in my introductory speech I shall make a shorter summary of the report than the House has grown accustomed to on such occasions. I shall inevitably leave out some points which some noble Lords may consider more important than those which I cover. However, I must do my duty and express the sincere thanks of the committee and of the House to all those who gave evidence to us. I refer in particular to the distinguished ambassadors from Austria, Finland, France, Germany, Sweden and Switzerland, and to three former commissioners who are our colleagues in this House. We also owe thanks to many who helped us in a less formal way, including two vice presidents of the present Commission and senior members of the Commission staff, when some of us went to Brussels. In London we had informal help from the Danish ambassador and from senior Foreign and Commonwealth Office officials who were able to give us advice. However, perhaps our loudest vote of thanks should go to our specialist adviser, Sir John Fretwell, whom many of your Lordships will know. He brought both his high personal qualities and his considerable diplomatic experience to our aid. Everyone should know by now that no report from our Select Committee to your Lordships is possible without the excellent Clerk with whom my wise and tolerant colleagues and I are blessed.
The message in the report is clear and positive. It is set out in paragraph 141. The benefits which can flow from enlargement are powerful for the future of the Community, its existing member states, new member states and also for the United Kingdom. Economical:), there will be gains in industrial and financial strength from the EFTA countries as they join us. The Community will gain from added diversity. Democracy and stability in Europe will grow stronger when the Community grows eastwards after its western, southern and northern extensions, as we confidently expect. The enlarged Community will carry more weight in the world, and its diversity will safeguard its ability and its will to look outwards and not inwards.
That vision is clear. However, the reality is complex and in many ways difficult. We have tried to outline the problems. To admit as new members, states which cannot fulfil the criteria of membership, even after allowing some derogations over a specified time—and derogations have been allowed, I believe, to all new members since 1971, including the United Kingdom—would do damage to the new members and to the old. It would weaken the effectiveness of the Community, and weaken, too, its attractiveness to other new applicants. It would also reduce the weight of the Community's economic and political position in the world.
Aspirants to membership do not hope to join just a forum for discussion; there are plenty of those—and valuable associations, institutions and organisations they are. Indeed, the noble Lord, Lord Jenkins of Hillhead, described such a forum, for all its importance, as a soft organisation. But such aspirants seek to join a Community with obligations and powers to make laws and to take action in agreed fields. The noble Lord, Lord Jenkins, described that concept as a hard organisation. It is the success of the Community to date, with the important improvements of the Maastricht Treaty, many of which spell out, as my noble friend Lord Cockfield said on 2nd July—and I am glad that he will speak later—what has been evolved in recent years and has begun to work already, which has attracted the new applicants and many others. It is the success of the Northern Atlantic Alliance which has opened the gates to the East and made possible applications from the countries of Central Europe and Eastern Europe.
Perhaps I may add this thought. Those who find fault with the concept of European union as set out in the Maastricht Treaty might pause for a moment and ask why so many other countries which can also read what is contained in the Maastricht Treaty want to join that union, for it is that union which they are applying to join.
Indeed, there are difficult and complex problems to be resolved and they have to be resolved bilaterally between the Community and each applicant. They have also to be resolved internally within the Community and within the institutions of the Community. Those problems are difficult and complex but we are convinced that they can be resolved given the will and the timing.
The EFTA country applicants should, in our view, be dealt with first. I am very glad that preparations for negotiations with those which have applied will begin under the United Kingdom presidency. We expect the principal difficulty with those countries to arise from the so-called neutrality problem. We set out our views in paragraphs 168 and 169. We said that there are two vital questions which should be asked. I should be interested to know whether noble Lords agree with those two questions and also agree with us that no conditional response can be accepted.
We believe that the existing applicants which are not EFTA countries—Turkey, Malta and Cyprus—should wait a while, for the reasons that we have given. In relation to known aspirants for membership, we advise early, perhaps immediate, negotiations with any EFTA country which decides to apply. However, we advise that appropriate time should be given to Poland, Hungary and the Czechoslovak countries, if that is what they become.
However, we call for closer association agreements with all European countries—including Turkey—as relations develop, particularly on the political front. The idea of a European political area which does not attempt to copy in every way the European economic area which will be in force next year with EFTA, was voiced earlier in the year at a United Kingdom conference, and, I was interested to see, was picked up in the Commission's report.
Those who cannot yet meet the undoubted challenges of the single market need to feel that they will be more closely linked politically to the Community or to the union while they wait for full membership. I welcome the plans of the United Kingdom presidency to develop political co-operation at the top level with the three or four Central European states.
It is important to keep up the tempo of the association process with all European countries, a process which starts with trade and co-operation agreements and develops into full and close association. In the Select Committee we saw examples of those trade and co-operation agreements with the Baltic states and others.
The timing of accessions after those of the EFTA countries is difficult to forecast now. Indeed, it would be unwise to try to do so. However, it is right to set targets to encourage economic progress and change. Those countries will need encouragement bccause the targets will not be comfortable.
Whenever other new members join after the EFTA countries, the Community will need to adapt its institutions and procedures to meet the needs of an effective Community or union of more than 20 members. On the basis of the evidence given to us we believe that institutional change is not necessary in the first years of a community of 15, 16 or 17 members which includes new members from the EFTA countries, though some procedures may need to change. However, soon after 1995 members will need to agree new rules concerning the Commission, most likely in relation to its size and portfolios; the Council, its voting and the rotation of the presidency; languages; and some adaptations to the other
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institutions. They will also need to consider the position of small states which become members later. Most of those issues are sensitive and will need careful handling. We decided to offer no blueprint.
The German Ambassador said that it is up to the union to adapts its institutions, structures and procedures to the number of members and not the other way round. We strongly agree. Of course it will be difficult to adapt the Community's balanced structure from that created for six members to one suitable for 26. With political will the problems can be resolved. I am reminded of Sir Winston Churchill's exasperated advice to his minister and staff:
"Don't make difficulties. They make themselves! ".
Subsidiarity will help. That principle is indeed essential for administrative reasons, as the Secretary General of the Commission made clear to us. Other difficulties facing the Community from further enlargement include budgetary problems. However, in the early EFTA stage, the budget will gain. It will be assisted by nearly 3 billion ecus net contributions, rising to more than 4 billion ecus if Switzerland joins too. We set out those figures in Tables 2 and 3 on pages 25 and 26. Those tables show also that with later accessions there will be a real strain on the budget if the economies of the new members who join later do not improve in relation to the Community. That extra strain on the budget could amount to 22 billion ecus.
That is a short summary of our report. We have sought to analyse the facts, the opinions and the choices. As I said at the start, I believe that our message is positive. I also believe that too much of the debate about Europe, not only in the United Kingdom but elsewhere, has become negative. The United Kingdom as well as the Community gains greatly from our membership. It gains in trade, in financial strength and in position in the world. It will gain further from enlargement.
When we reported to your Lordships on political and economic union in 1990 we remarked on the importance of public opinion being helped to understand the Community's objectives. I hope that this report will help as a useful background to the discussion in Britain and the other countries of the changes that will be necessary within the Community as a consequence of enlargement. I also believe that the report is relevant to the continuing discussion of the Maastricht Treaty.
As we say in the concluding paragraphs, the 1996 review of the Community's structure and rules will raise considerable political issues. Such decisions cannot wisely be rushed or taken without public debate in each state. Perhaps I may be allowed to hope that this debate in your Lordships' House will help at the start of that longish process of public debate. In most political matters—so it seems to me—and in all political matters affecting the Community, there are major objectives that have to be balanced and that balance has to be understood. We have sought to help in explaining those major objectives and all that goes into that important balance. I beg to move.
Moved, That this House takes note of the report of the European Communities Committee on the Enlargement of the Community (1st Report 1992–93, HL Paper 5).—(Lord Aldington).
6.30 p.m.
Lord Healey: My Lords, it is a great honour for me to be making my maiden speech in this House following the noble Baroness, Lady Thatcher, and on somewhat the same theme. It is perhaps appropriate that the sandbag should follow the handbag. I am delighted to see that another sandbag will be speaking in this debate—my good friend and old sparring partner, the noble Lord, Lord Howe of Aberavon. If I may use Lady Thatcher's metaphor: I come here after more than 40 years before the mast in another place, and after nearly seven years before that oiling the wheel at Transport House. Almost the whole of that political career of mine has been dominated by the set of problems which we are discussing today.
I sincerely praise the noble Lord and his colleagues for producing such a clear and comprehensive report which sets out the structural and juridical problems with admirable clarity and objectivity. I strongly support his conclusions, particularly that we should aim at enlarging the Community to include those EFTA countries which wish to join by 1995. I slightly disagree with him on one point: I do not think that neutrality will be more of a problem for them than it was for Ireland. I hope that we can bring in at least Poland, Czechoslovakia and Hungary from what I still call Eastern Europe as soon as possible thereafter.
Some may feel that there is one potential shortcoming in the report. It may lead some readers to assume that the Community is embarking on this voyage of enlargement in weather that is far more serene than the whirlwinds which are whipping up the oceans at the present time and which are likely to produce even greater turbulence on the ocean we sail in the years to come. Indeed, in my view, unless we start acting now to try to reduce that turbulence, we may find that our enterprise ends in shipwreck.
The leaders of the seven richest countries in the world told us last week:
"Strong world economic growth is a prerequisite for solving a variety of challenges we face in the post cold-war world".
If that were true, there would be no hope, because the G7 summit gave us no reason to believe that we shall get a resumption of growth on any substantial scale in the near future, and none of the governments represented there suggested any policies which might change the current situation. But I might verge on the controversial if I were to pursue that theme, and it was the subject of the debate which has just taken place on the Finance Bill.
The point that I want to make is that the present economic weakness of the Western World is no excuse whatever for continuing to ignore the threat posed to us and to the countries of Eastern Europe by the tragedies which are now taking place in what used to be the communist empire. In 1990, the last year for which we have reliable figures, when recession had already hit Britain and the United States and many
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other English-speaking countries, the G7 countries between them produced 14,000 billion dollars worth of wealth. Their governments spent more than 5,000 billion dollars of that from the public purse, including 500 billion dollars on defence. That was the year after the collapse of the Berlin Wall, when the end of the communist empire was already in view.
The question I want to put is this: is it really necessary to limit aid, for example, to the former Soviet Union, to one-fifth of 1 per cent. of the output of the seven richest countries in the world when, in the years just after the last war, the United States alone from a far smaller output could spend six times as much in Marshall Aid? To spend money in reducing instability in the ex-communist world is not a matter of charity. It is direct self-interest.
We are still slaughtering sheep in Cumbria because a Soviet atomic plant exploded years ago in the Ukraine. Eastern Europe today is studded with similar unsafe Soviet nuclear plants. Yet, last week, the G7 could only offer 100 million dollars to help deal with that problem in Eastern Europe and the Soviet Union too, when the estimated cost of making the plants safe is something like 10 billion dollars.
The United States Government rightly offered Mr. Yeltsin help in the extraordinarily difficult, expensive and lengthy task of dismantling and making safe the ex-Soviet nuclear weapons which are now surplus to the agreement reached the other day between Russia and the United States. The cost of such an operation again will run into tens of billions of dollars; but the United States has offered only 700 million dollars. That runs out in September and President Bush has not asked Congress to renew it for the coming year. All this in a year when the United States is spending 300,000 million dollars on defence and justifying that expenditure, as we justify our defence expenditure, partly by the possible threat that the Soviet nuclear weapons may fall into the hands of evil men.
I believe that we in the West have the most direct national interest in helping to solve those problems, and I doubt whether any of us would dispute that. I hope that that is an uncontroversial remark.
Meanwhile, the economic situation in Eastern Europe is one of collapse. In three of the countries we have identified as potential members of the Community, output has been falling steadily and heavily for two years and unemployment has already reached levels which we have never known in the Western world.
I suggest that the scale of the problem can best be understood by looking at Eastern Germany, which had the immense good fortune of joining the Community automatically by the simple act of voting to join Western Germany in a united republic. The Bonn Government, which is the only western government which, in my view, has shown any sense of the scale of the problems that we face, are spending about 160 billion deutschmarks a year, certainly until the end of this century, in aid to the East German economy. On top of that, they are giving unprecedented help to the political parties in Eastern Germany and are providing the financial and logistic infrastructure which is essential to bring East

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Germany up to western standards. Yet they now admit that it will be well into the next century before the people living in East Germany will enjoy the same living standards as those in West Germany. We already see political tensions growing in East and West as a result of this problem.
If the rest of the Community continues to fail to give help on a similar scale to the potential East European members of the Community, I think we shall face not only economic disaster but political tensions which will lead to a growth of nationalism and extremism throughout the area. Already in Poland, President Walesa is casting himself more and more in the role of the old dictator, Marshal Pilsudski. President Havel only the other day pointed out that in Czechoslovakia its release from the prison of Soviet authority produced,
"an enormous and dazzling explosion of every imaginable human vice."
Anyone who has read any of the reports about the growth of crime in Eastern Europe, and even more of course in the Soviet Union, will find it difficult to contradict his words. Slovakia has now already decided, we hear, to break away from the Czechoslovak Federation, creating enormous anxiety among the 700,000 Hungarians who I think live in Slovakia. If we look at Hungary, that country finds itself, amazingly, faced with four states as neighbours which did not exist two years ago: Slovenia, Croatia, Ukraine and, shortly, Slovakia. They already face a very serious national problem with the ethnic minority of Hungarians in Transylvania.
It seems to me that unless we act on these problems, which we can all witness and see described in our newspapers every day, we shall see the Yugoslav tragedy repeated elsewhere in Eastern Europe. At this moment the Croatians are pushing refugees across the frontier into other sovereign states like Austria and Italy, because they claim they can no longer look after them. We also face the immediate possibility of war in Macedonia, which could bring in a number of sovereign states: Albania, Bulgaria, Turkey and Greece, as well as Serbia, if we so describe it. Incidentally, although this is not directly relevant, I cannot understand, if we believe in peace-keeping, why we do not organise the presence of United Nations troops in Macedonia now, before the war starts. Once it starts, as in Yugoslavia, it will be too late.
The question I ask us to consider is this: cannot the European Community, so much wealthier now than America was when it launched Marshall Aid, offer help commensurate with the danger? It will be much easier to do so once we get the EFTA countries in, because each of those countries has a higher per capita income than any of the existing members of the Community, including Germany.
When I started my political career nearly half a century ago, I remember Jim Griffiths (who I think later became a member of your Lordships' House) saying,
"Science has turned the world into a parish, but men have not yet learnt how to be neighbours."
That has reverberated in my mind ever since. It has latterly been an unfashionable way of looking at
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things. I have heard it said by a head of government not so long ago that there is no such thing as society, and that consensus is a dirty word, fit only for quislings and traitors. But we cannot afford isolationism and we cannot achieve isolation in the modern world. We are going to be directly and possibly disastrously affected by what will happen in Eastern Europe in the coming years unless we take very drastic and collective action now to deal with it.
Surely the lesson of the Rio conference is that we do now live in one world, where the burning of trees in Brazil can raise the level of the seas all over the world. I suggest that we might return to an older wisdom because 370 years ago a dean of St. Paul's, by name John Donne, preached the following sermon:
"No man is an Island, entire of itself; …
If a clod be washed away by the sea, Europe is the less. Any man's death diminishes me, because I am involved in Mankind;
And therefore never send to know for whom the bell tolls; it tolls for thee."
6.46 p.m.
Lord Pym: My Lords, it is a great privilege for me to be the first to congratulate the noble Lord, Lord Healey, on behalf of the whole House, on his maiden speech. It was a characteristically robust and interesting speech, which we all listened to extremely attentively. The noble Lord has always enjoyed Parliament and politics; and the long experience, wide knowledge, wit and sense of enjoyment which he brings to this House are valued and valuable assets, from which we shall undoubtedly benefit. The only problem I have in relation to the noble Lord is that he is not part of the Opposition Front Bench, but wherever he speaks from we look forward to many more speeches from the noble Lord. May I add here how much we are looking forward to the maiden speech, and with equal enthusiasm, of my noble and learned friend Lord Howe of Aberavon.
The Government are absolutely right to make enlargement a top priority for the Community. There is very wide agreement about this, and this report is very helpful in analysing that process and the likely progress of enlargement. It is a very clear and crisp assessment, and I congratulate my noble friend Lord Aldington and his colleagues on it. It was to be expected that it would be an assessment of the way forward, as viewed from here—that is to say, from the Community's point of view. Of course that was the Committee's remit, but there is another side to the coin, and that is the situation in Eastern Europe, about which the West so far has taken much too rosy a view. I want to speak on that aspect, and I am very much in sympathy with what the noble Lord, Lord Healey, has just been saying.
The dismantling of the Berlin Wall was the symbol of one of the major turning points of the 20th century. The entire geopolitical landscape changed overnight. Suddenly and dramatically we were all faced with the opportunity we have been working for ever since the war: the opportunity to rebuild Europe once again. This is something that happens only very rarely, about once a century: 1714, 1816, 1918. The last was of course a failure, leading to the Second World War and

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the subsequent division of Europe by Stalin. Now suddenly we find ourselves at a new beginning, with the chance to achieve what our predecessors failed to achieve before.
Ever since the Berlin Wall came down I have had the feeling that the West has underestimated quite seriously the scale of the deprivation of all those unfortunate nations that were part of the Soviet empire. They have lost out on practically all the technological advances and the social and political changes that we have grown up with. They long to have the same prosperity as we enjoy. But they are handicapped with enormous burdens; bankrupt economies, no institutional infrastructure and no experience or practice in pluralist democracies or market economies. Their position is far worse than ours was in 1945. No outside help is available to them on the scale that we enjoyed at that time. Surely our primary strategic objective must be to convert the whole of Europe into one diverse but coherent and cohesive entity. With so many different nations, cultures, traditions and languages, not to mention the chasm between the standard of living of the richest and the poorest, obviously that will be difficult.
What concerns me is that the thinking and the language used throughout the Community seems to be based simply on the conditions which must be fulfilled before a nation can join."We are not going to change", appears to be the message which goes out—"You must conform to the club otherwise you cannot join". That approach is the natural one from the Community's point of view. It is appropriate for enlargement of the EFTA countries, whose profile is essentially the same as that of the Community countries.
However, as regards the countries of central and Eastern Europe a very different approach is required because their circumstances are so different. The ultimate aim is for them to be in the same kind of political and economic position as the rest of us in the West. But that prospect is so far off that it is no more than a dream. Having thrown off their communist oppressors they find that in many ways their everyday life is worse than before. The glitter of western prosperity is not available to them and it will take decades to put in place the necessary investment and training to make that available. The danger is that the disappointment and bitterness felt by so many people could well lead to political difficulties, uprisings, conflicts and to anything one might like to imagine.
The seeds of discontent are already highly visible, which is not surprising. Currently we read articles in our own press arguing that unless the recession here ends soon the people will become impatient and force change. The equivalent in Central and Eastern Europe is 10 if not 100 times worse and so few people seem to appreciate that. If one wants an object lesson in what may happen if people start taking the law into their own hands one need look no further than Yugoslavia. Post-communist Europe is a very sick man and in need of intensive treatment; that is mentally and psychologically as well as physically.
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Against that background—that is, the actual situation in Central and Eastern Europe—the posture of the Community appears to some to be inadequate, unimaginative and actually inward looking. Of course, we want to maximise the economic strength of the Community in order to help Eastern Europe but the whole context in which the Community operates changed when the Berlin Wall came down. I sometimes wonder whether people actually noticed that. The question is: how can policies and methods best be adjusted to this wholly new situation?
There are in place at present the European agreements with Poland, Hungary and Czechoslovakia. Certainly they are a valuable start and can be developed, but by themselves they will prove inadequate. I should like to see two new initiatives taken. The first is one which I have previously proposed in this House. It is a structure, a forum, where all the countries of Europe are represented and where the European picture can be considered comprehensively, continuously and as a complete whole. The most urgent needs and crisis points can be identified there and priorities can be recommended.
I believe that that role can best be undertaken by CSCE. The fact that that organisation includes the United States and Japan appears to be an advantage. At its recent meeting CSCE slightly enlarged its role by making some new special arrangements for national minorities. That is a welcome development, but in my view something altogether more substantial is required. Obviously it is important that the numerous initiatives already being taken by govern-ments, by industry and commerce, by the banks and by many international organisations continue. The more links that are built up between East and West the better. But those individual initiatives will be more beneficial and cost effective if they are targeted in the light of the political and economic landscape of Europe as it is at the time.
I shall not repeat what I have said on previous occasions about the many bridges which need to be built across the divide. But unless there is some structure in place to facilitate the process I doubt whether we shall be able to manage the transition successfully or peacefully.
The second initiative that I wish to suggest is the study of the nature and structure of the Community when it is enlarged to 20 or more members. My noble friend Lord Aldington touched on the issue. The present arrangements were designed for a much smaller group of countries and I am doubtful about their appropriateness for a Community of more than 12. But even if they are adapted successfully for, say, 16 members—the EFTA countries—beyond that a new design will surely be necessary for a group of 20 or 25 countries. At present no thought appears to have been given to that.
I believe that the transition process would be helped if we could formulate together joint ideas from East as well as West on how exactly we see an enlarged Community working. I know that vested interests in the status quo make that difficult, but we must rise above that and use our imagination and experience to

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design methods and systems which are appropriate for a group of 20 or 25 countries, which will be new territory.
My view is that such consideration will lead us to conclude that the Community at the centre must concentrate on broad strategic issues, in particular political co-operation, and play a lesser role in matters of detail. But however that may be we ought to be clear in our minds about the kind of enlarged Community that we should be working for, the form of the institutions that it will need and how it will work.
In conclusion I wish to quote two sentences from a speech made by the Prime Minister in another place on 20th May. He said:
"It would be fatal to take the attitude that we have our prosperous club and that nobody else can join unless they are prepared to pay a heavy price. We the Community, this country—would all pay a heavy price if, by our attitude, we damaged the chance of re-establishing for the first time in 50 years a firm democracy throughout the whole of Europe".—[Official Report, Commons,20/5/92; col.272.]
We should indeed pay a very heavy price.
In my view we must reject any flavour of,"I'm all right, Jack". Rather we must see that central strategic objective of bringing the whole of Europe together in one diverse but cohesive entity as a challenge to every country in Europe—to East and West, North and South, rich and poor. We shall all have to work closely together, and contribute whatever we can in a variety of ways according to our circumstances, if we are to maximise the progress of Central and Eastern Europe towards greater prosperity and thus attain our European goal.
7 p.m.
Lord Howe of Aberavon: My Lords, as I embark on my first speech in your Lordships' House, it is a privilege to be able to do so following the distinguished and perceptive speech of my noble friend Lord Pym, just as I followed him, as it happens, in the Foreign and Commonwealth Office some years ago. It is some comfort also to be taking part in this debate in the company of my old friend the noble Lord, Lord Healey. I dare to venture the observation that even this House has seldom perceived before such a gnarled and battle-scarred pair of maidens.
Perhaps it is less of a coincidence that I find myself speaking on the same topic as my noble friend Lady Thatcher (who tells me that she is in her former constituency this evening) because both she and I were swept off the Front Bench of another place by one of those European storms of which the noble Lord, Lord Healey, spoke; and now, rather like the characters of Twelfth Night or The Tempest, we have both survived that turbulent experience and after some time adrift have been washed on to the red leather Benches of the same friendly shore. Some may wonder whether it is Illyria or Caliban's island which we have reached. However, your Lordships may think it wise for me to refrain from speculation about that. Suffice it to say that in both those places the natives were friendly and all was well that ended well.
It is a particular pleasure for me to find on the Benches opposite not just an old friend but a former
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constituent of mine, the noble Lord, Lord Houghton of Sowerby. He was never able to vote for me because he was always a Member of this House. But, although I am sure he will not remember it, he welcomed me as the Minister replying to the debate after my maiden speech in another place many years ago.
I am particularly glad also to be able to speak upon the basis of the excellent report from the Select Committee presided over by my noble friend Lord Aldington. I join in congratulating him and his colleagues on the quality of that report. Reports of such quality have done much to give your Lordships' House the reputation—and I can testify to this from personal experience—of probably the best informed and most expert parliamentary assembly in Europe.
I agree with the Select Committee that all member states now rightly accept enlargement as "both inevitable and desirable". Way back in 1983– 84, I was the first Western Foreign Minister to visit every one of the East European capital cities. In those days I felt the full force of their yearning for escape from Soviet bondage. How much I agree with the Select Committee that those countries now look to the Community, as they did then, as "an anchor" and "a source of strength for their crippled economies" and, above all, as a "guarantee that they will not be sucked back into the quagmire from which they have just escaped".
Of course they want to join us. But what is it that they want to join, and why? I believe that it is important to appreciate the central, dynamic, magnetic role played by the Community in inspiring those revolutionary changes that have taken place in Eastern Europe. They now wish to join our Community because of their admiration for its central achievements: first, its success in curbing nationalism without suppressing patriotism; secondly, its success in finding ways of sharing sovereignty without destroying the nation; and, thirdly, its success in setting the magic of the marketplace to work in the cause of wider unity.
No achievement was more important in that respect than the Single European Act which my noble friend Lady Thatcher and I negotiated together at Luxembourg now almost seven years ago. It is not the precise equivalent, but I agree with my noble friend Lord Mackay who said the other day that it was,
"every bit as great a milestone as the Maastricht Treaty".—[Official Report,2/7/92; col.944.]
Certainly there can be no doubt about the scale of the achievement of my right honourable friends the Prime Minister and the Foreign Secretary at Maastricht because there can be no doubt about the extent to which it was applauded in this country and welcomed throughout the Community. There is little room for doubt that that success was due to our Prime Minister's sustained and, most importantly, continuing commitment that Britain should no longer be seen as "anchor to windward" of Europe but rather as in the engine room of the Community, as part of its driving force. Equally certainly, any attempt now to repudiate Maastricht would be, in my judgment, for Britain as well as for Europe a disaster of the greatest magnitude because it would be the loudest possible

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signal for a resurgence of the worst kind of nationalism, which is the most persistent and pernicious of all European diseases.
We forget at our peril that Balkanisation is not a disease which is or can be regarded as safely confined to the Balkans. Sarajevo is for the second time this century the tragic symbol of that—a brutal reminder of the need to keep up the search for a better way of handling the emotive nationalism that can give patriotism such a bad name. I agree with the noble Lord, Lord Healey, and my noble friend Lord Pym on the need for positive solid help to the countries of Eastern Europe as soon as we can manage it.
None of that implies any disposition on my part to ignore the implications of the Danish vote or to dismiss out of hand the message underlying that event. I agree with those who have argued that we have been given an opportunity to think again, but emphatically not an opportunity to make a fresh start, or anything like it. Of course as we proceed towards enlargement we need to think again about the best way forward from Maastricht, but equally certainly we must not end up trying perversely to retrace our steps in the opposite direction.
Certainly the way forward must embrace the search for a clearer, firmer entrenchment of "subsidiarity". It would be desirable to fortify subsidiarity with a buttress even more secure, if we can find it, than Article 3b of the treaty, as that may be interpreted by the European Court of Justice. Ideally that buttress should be located in the Council of Ministers, for that is where the laws are made. All too often it is Ministers in Council who have adopted the very laws of which they later complain as reaching into the nooks and crannies of national life. Why should we not have a real subsidiarity test in the Council; for example, a requirement that there should be unanimity on the legal base for any new measure?
The Select Committee was certainly right to emphasise that this, subsidiarity,
"must be the key to the effectiveness of the enlarged Community".
Perhaps I may use the words of President Jacques Delors himself when he said that we need:
"a constant counterweight to the natural tendency of the centre to accumulate power".
And it would be good indeed if we could locate a large part of that counterweight at the very centre in the Council of Ministers itself.
Finally, let me make three points about enlargement. First, I agree with the Select Committee and my noble friend Lord Pym that enlargement will require changes and adjustments in the institutions and procedures of the Community. The key question is how far they may—I would say "will"—require change with the addition of five or more small countries. From having been until 1973 a Community with three large countries out of six, it will in due course and quite quickly become a Community of 11, 12 or more small countries alongside five large countries.
I agree with the Select Committee and my noble friend Lord Pym that that must raise at least three questions for early consideration: first, voting weights
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in the Council; secondly, the pattern of rotation of the presidency; and, thirdly and most obviously, the number of official languages for use in ordinary proceedings.
Also we need to question whether such a large convoy can or should all continue to move at one speed. I once had misgivings about separation of speed in that way because I feared that we may inadvertently or deliberately get left behind. However, despite those earlier misgivings, I am increasingly persuaded that a two-speed, or more probably a variable geometry, Europe may be inevitable. If that be the case, it becomes all the more important to ensure that the United Kingdom remains at the heart not just of the Community as a whole but of the inner core of that organisation.
That brings me to the final point I wish to make about the framework within which enlargement should take place. We should take care not to underestimate the importance to prospective new members of the Community, as well as to present members, of the Maastricht commitment to,
"progressive realisation of economic and monetary union".
This is neither the time nor the place for me to argue the case, which I support, for the objective of a single currency. But certainly we should not overlook in the context of the enlargement debate the extent to which applicant countries wish to be part of EMU. Norway, Sweden and Finland at least are already committed to shadowing the ecu as the anchor of their own monetary stability. For us too, our present attachment to the disciplines of the exchange rate mechanism is a vital feature of our own monetary as well as political constancy.
My noble friend Lady Thatcher was absolutely right to emphasise, when we joined the mechanism under her premiership, that entry should be seen as,
"an extra discipline for keeping down inflation".—[Official Report, Commons,30/10/90: col.888.]
Just as she and I stood together—now more than a decade ago—and as others have done before us, in defence of our joint commitment to monetary policy as the then foundation of our policy to defeat inflation, so it is no less essential to be just as constant, indeed courageous, in defence of today's,
"discipline for keeping down inflation".
I judge that the present Prime Minister has been absolutely right to commit our country to participation at the heart of Europe. So too he has been right, together with the Chancellor of the Exchequer, to emphasise our commitment to the discipline to which we have committed ourselves of the European monetary system. Each of those commitments is in line with the long-term needs of the United Kingdom; each of them therefore deserves the wholehearted commitment and support of this House.
Viscount St. Davids: My Lords, There is a suspect car in Parliament Street. There will be a controlled explosion in a few minutes but let us not allow it to interfere with our debate.
7.12 p.m.
Lord Hunt of Tanworth: My Lords, it is my privilege and pleasure, on behalf of the whole House, to congratulate the noble and learned Lord, Lord Howe of Aberavon, on his maiden speech. He has unique experience of dealing with the Community, but the manner and thoughtfulness of what he has said today will, I am sure, mean that we shall want to hear him on many more occasions in this House. We have heard two remarkable maiden speeches and, as someone who as a former Cabinet Secretary was more used to trying to keep up with the eloquence on the opposite side of the Cabinet table, perhaps I may say how nice it is to see both speakers here today.
I was privileged to serve on the sub-committee of the noble Lord, Lord Aldington. I support what he had to say today. In particular, at a time when there seems to be in this country undue pleasure in sniping at the Community, it was salutary to listen to witnesses from applicant countries, all of whom were to be net contributors, who spoke of what they saw as the Community's success and their wish to be part of it. Similarly, I have no doubt that we in this country should benefit from enlargement. I am not thinking of the effect on our budget contribution but rather of the advantages which an even larger single market will give us and the advantages of a stronger and more outward-looking Community.
The arrangements to be made with the central European states with a view to their co-operation and possible membership of the Community in due course are of enormous importance in the context of stability and democracy in that region. But I propose to confine my few remarks tonight to underlining two points relating to the EFTA countries and the more immediate future.
The Community has enlarged before—the United Kingdom, Ireland and Denmark and then Spain, Portugal and Greece—but the next enlargement will be of a different order for three reasons. First, the new members will be joining not just the European Community but the three pillars of the European union and the completed single market. In other words, as one of our witnesses put it, we have "raised the integration threshold" which new members have to cross and also the ultimate goals of membership. They are joining a more developed Community. That may yet cause problems for one or two of the neutrals, but I hope not.
Secondly, the distinction within Western Europe between those countries which are members of the Community and those which are not will largely disappear, while of course the East-West division is also disappearing.
Thirdly, there are already other applicants in the offing, which makes it much harder, even though it will be necessary, to deal with this wave of enlargements on a discrete basis. Indeed, we are already having to talk about devising new forms of waiting lobbies and half-way houses. Therefore I do not believe it will be the same as previous rounds of enlargement.
That brings me to my second point, which relates to institutional reform. I entirely support and share the
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committee's view that institutional difficulties must not hold up the next round of enlargement. I accept also that the EFTA countries can join in advance of any structural reform, although the elastic will be stretched pretty thin. I fully understand the reluctance of governments, having endured the IGCs recently, to embark upon another structural review before 1996. However, it seems to me that some of the consequences of the next round of enlargement cannot be divorced from other questions which will need to be considered shortly relating to the sort of Community we wish to see developing.
In other words, I am not thinking so much about the number of commissioners, the changes in qualified majority voting, the arrangements for the presidency, the number of MEPs and so on; I am thinking more of what the Community is going to do and how it will operate. A framework for six, nine or 12 countries—as we have at present—is not necessarily suitable for 16 or 20. We may need to think again about what we mean by integration and how the borderline between Community level policies and national policies should be drawn in an enlarged and different Community. We may even need, as the noble and learned Lord, Lord Howe, suggested, some kind of variable geometry to take account of the more varied composition of the Community, although how much of that will be tolerable if the Community is to remain effective and strong is a big question.
"Subsidiarity" is currently the buzz word, but flesh will need to be put upon it. I am not sure whether anyone knows at the moment what we mean by it. At one extreme it could mean having a cost-benefit analysis done of all draft directives to see whether it is better and more efficient to do it at Community level rather than national level. It could mean the repatriation of some powers to national or regional authorities from Brussels. Some repatriation may be necessary anyhow in the context of an enlarged Community. Therefore discussion of the future of the Community and what it will do—I am not thinking simply of institutional reform—needs to take account of enlargement.
My argument is that, although some short-term decisions on commissioners and MEPs will be necessary when the EFTA countries come in, and although major institutional reform may have to wait until 1996, we should not think of enlargement as a single one-off subject on its own where one negotiates with a round of people, brings them in and that is that. We need to see the consequences of how a larger and wider Community will develop post-Maastricht and in particular the meaning to be given to "subsidiarity". Otherwise the Community will seize up.
I would like to emphasise that in saying that I am not arguing for dilution or emasculation of the Community. I know that some people have felt that this country wants to see enlargement because we wish to see the Community weakened. That is not my point at all. The Community needs to be enlarged but it also needs to be effective within the agreed role for it, and in the context of enlargement that may need some modification.

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The subject is an important one and no doubt we shall return to it in due course. My point is that enlargement this time is not something which can be seen as a one-off negotiation to accept new members; it is something which can strengthen the Community provided its link with subsidiarity is maintained. If we do that, the somewhat artificial argument between widening and deepening will disappear.
7.20 p.m.
Lord Desai: My Lords, we have already heard two excellent and thoughtful maiden speeches by noble Lords who are much more experienced in these matters than I shall ever be. Therefore, I shall keep my comments brief because there are many more experts to come. When I was getting my doctorate in the early 1960s in America there used to be EFTA and the Common Market. Europe was at sixes and sevens. It was not at all certain which association would prove to be the more durable. Although many people thought that EFTA was an entirely economic interest with not much political or ideological structure, it was believed that it would be more likely to expand than the Common Market as it was then called.
History has shown that it is the Common Market which has grown into a European Community. The reason it has done so is that it has depth and not just size. The success of the European Community is due to the fact that it commits its members to a much more sterner test of membership. much more sovereignty has to be pooled and much discipline has to be accepted if one is to join the club. If the Community is to enlarge it can only do so successfully by not losing depth while at the same time gaining additional membership. That is an important principle which we must bear in mind in discussing this excellent report which the noble Lord, Lord Aldington, and his Committee have set before us.
When there were only six members there was a clear economic and political programme, as the noble and learned Lord, Lord Howe, has pointed out. The programme was to overcome nationalist divisions in Europe. It was built round the Franco-German axis. That gave the organisation backbone. Membership has grown from six to 12 and we have had some problems. I believe that the Danish vote on Maastricht gives us an opportunity to think very carefully about the political logic behind the Community. The economic logic of the Single European Act is quite clear.
But what is the political logic of the European Community? In that respect in many senses we have not yet had a real debate. The move towards Maastricht and a single economic and monetary union has been driven by Brussels and the Commission. The large populations in the many nations of the Community have not as yet played as great a part as they should be playing if they are seriously to contemplate a deep European Community. We do not have a sufficiently good model to aim at.
What is the ideal towards which the European Community should aim? The membership of six was built on two conflicting ideals, one of which was the
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Benelux customs union which was straightforward and has now grown into the Single European Act. The other model was the coal and steel community which was dirigiste, bureaucratic and harmonising. I believe that the conflict between those two tendencies continues to this day. Half the time we are for the liberal movement of capital and labour across frontiers and for the other half we are for harmonisation, regulation and so on. That conflict needs to be sorted out.
The Danish vote on the Maastricht Treaty allows us, while committed to the goal of the Community—I have no doubt that I am very committed to that goal—to think again as to what is the political logic behind the Community. As regards Maastricht and the discussions around it, we have not paid sufficient attention to the political dimension (the democratic deficit) which is at the heart of the European Community. Unless we do something much more drastic about the democratic deficit within the Community I believe that we shall have difficulties. They will increase when the EFTA countries enter because the union of five or six large countries and many more smaller ones is bound to create many problems. The small countries will feel threatened by the large countries which will not wish to share power on an equal basis with the smaller countries.
This debate should give us an opportunity to say much more about the political logic behind the Community. As the noble and learned Lord, Lord Howe, said, it may be that we have variable geometry at the heart of this new Community. Something of that kind is already happening with the economic and monetary union. The convergence conditions are such that we may ultimately end up with an economic and monetary union of fewer than the 12 plus five and have a periphery of countries which are not quite ready to join. If that kind of variable geometry is admitted in the economic and monetary union we may again have variable geometry also on the political front with a different cluster of countries which are more committed to political union than others. These kinds of models have to be thought through.
As regards Eastern Europe, I am very doubtful that we can say very much at all as yet. I quite agree with my noble friend Lord Healey, whose maiden speech I enjoyed very much, that our task concerning Eastern Europe is not so much to think of them as potential members of the club as to help them out of their immediate dire need. Our task right now is to help them to be restored to some semblance of economic and political health. It will take much longer before one can accept the countries of Eastern Europe or the CIS as full members of the European Community. If that happens the variable geometry will become even more variable. We shall have several layers of association in the EC.
The EFTA countries will join the Community without any great economic problems. That should give us pause for thinking about the political basis on which we are going to enlarge the union. Even if it is not enlarged, what will be the political basis on which

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we will maintain the existing Community? If we do not think about that, there will be the danger that some countries may break away from the Community.
7.28 p.m.
Lord Cockfield: My Lords, I have, in one capacity or another, served with both the noble Lord, Lord Healey, and my noble and learned friend Lord Howe of Aberavon. I regarded them both in their own way as very formidable Chancellors of the Exchequer and no doubt very successful ones in the light of the policies which they were endeavouring to pursue. Indeed, had it only been possible to amalgamate them, they would undoubtedly have been the most successful Chancellor of the Exchequer of the present century. They have already contributed notably to our debate this evening. I am sure that we shall have a very great deal to learn from both of them.
We are debating a very wide ranging and careful report which deals with a vast panorama in a very judicial, careful and penetrating manner. In so far as in some instances I may appear to be critical, I am not critical of the report but of some of the ideas that have been advanced outside its ambit. The report and my noble friend Lord Aldington have wisely distanced themselves just a little from some of what I would regard as the rather wilder ideas that we have seen in recent months, if not recent years.
I shall deal with only two issues. I hope—and I propose—to deal with them not on a political or philosophical level, but essentially on a purely practical one. The first issue was the decision at the Lisbon summit that negotiations on the enlargement of the Community to include the EFTA countries should not take place until after the ratification of the Maastricht Treaty and after agreement on the Delors II package. I do not think that we should take that too tragically because all experience shows that the hard work is not done at the formal negotiations, but before the formal negotiations start.
As I said in the debate in your Lordships' House on 2nd July, in the case of the United Kingdom's accession to the Community the formal negotiations took only three days; but that was in the golden days when Mr. Heath (Sir Edward Heath as he now is) was Prime Minister. I would not expect to see such a remarkable turn of speed in these days. Dr. Manfred Scheich, the chief negotiator for the Austrian Government, has suggested that the formal negotiations could take six to nine months, which seems to me to be a reasonable estimate. I should have thought that if the preparatory work is done under the British presidency, in the case of Austria, Sweden and Finland it should he possible for the accession of those three countries into the Community to be achieved by 1st January 1995, which is the target date.
The other issue that I wish to deal with is the cost of enlargement. On many occasions I have suggested that it would be wise if figures were produced showing what the cost of the enlargement of the Community will be. I am glad to see that those figures are now included in the Select Committee's report. The only trouble is that I do not believe them. This is no criticism of the Select Committee because the figures
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are derived from the Foreign and Commonwealth Office—and that gives me even less confidence in the figures.
Lord Howe of Aberavon: My Lords, it obtained them from the Treasury.
Lord Cockfield: My Lords, that reveals internal workings of the Government that are better shrouded in secrecy.
Let me start with the EFTA countries. I have said on many an occasion that the EFTA countries are relatively wealthy countries and that their accession to the Community would impose no burden on Community finances. However, I have considerable doubts about whether the figure of a benefit to the Community of 3 billion ecu a year can be justified. There is in fact no connection at all between wealth or income per head and the benefit or cost of Community membership. In the case of Holland and Denmark—if I may take two of the more prosperous countries—the Dutch benefit to the tune of £15 per head of population per annum, and the Danes benefit to the tune of nearly £60 per head of population per annum. On the other hand, Spain, which is one of the poorest of the countries, benefits to the tune of only £30 per head per annum and, but for the transitional provisions, might even have been a net contributor. I shall not say very much about the United Kingdom; but The Times this morning described the United Kingdom as,
"eighth in the ranking of GDP per head of population … the poorest country in the EC not receiving cohesion funds".
However, although the poorest country not receiving cohesion funds, we contribute no less than £41 per head per annum to the financing of the Community.
Therefore, there is no nexus whatever between the wealth of a country and what it has to put into or draw out of the Community. That is my first point and I go no further than saying that, in the case of the EFTA countries, I am sceptical about the figures. I do not think that those countries will be a burden on the Community, but we should be wrong to regard them as a source of net income to the Community.
When we come to the Central European countries, I do not believe the figures. On this my views are very similar to those expressed by the noble Lord, Lord Healey. Let me start with the figures that actually appear in the report. As I have said, they are derived from the Foreign and Commonwealth Office; but, as my noble and learned friend Lord Howe of Aberavon confirmed, they came ultimately from the Treasury. The report states that those countries will cost approximately 10 billion ecu per annum in terms of net support from the Community. The present position is that our own Government—and I am not in any way criticising them—have strongly attacked the Delors II package on the ground of its excessive expenditure. That amounts to an increase in Community expenditure of 20 billion ecu per annum. I have said that I think that the figures are probably too high so I am not unduly criticising the Government for that. However, by bringing the Central European countries of Hungary, Poland and Czechoslovakia into the Community, they have now

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proposed to increase the cost of the Delors package by no less than 50 per cent. I simply do not believe that when it came to the point that would be regarded by our own Government as a tolerable outcome.
However, I go further than that and say that I do not believe the figures. I shall explain why. I suspect that they have been compiled on what is sometimes called an "as is" basis—that is, they assume that everything will remain the same. However, the lesson of every single enlargement in the past is that things never have remained the same. After the accession of the United Kingdom, for example, we had the foundation of the regional funds. After the accession of Greece, we had what we call the IMPs, the Integrated Mediterranean Programmes. Then after the accession of Spain and Portugal, we had the doubling of the structural funds. A further massive increase is now proposed under the heading of "cohesion". Perhaps I may illustrate what has happened by going back to 1987 when the cohesion and structural funds—there is no difference between the two except in the terminology—amounted to 9.1 billion ecu per annum. By 1997 under the Delors proposals they will have risen to 29.3 billion ecu per annum. That is a threefold increase.
If we look at these three central European countries, Hungary, Poland and Czechoslovakia, we should start by looking at what happened in the case of East Germany, as the noble Lord, Lord Healey, said. The cost to the Federal Republic of Germany has been estimated at various figures up to 500 billion deutschmarks—not per annum, but in total. The noble Lord, Lord Healey, gave the figure of 150 billion ecu per annum. But the fact of the matter is that nobody knows what the figure is other than that it is astronomical. Indeed, it has almost brought the most powerful economy in Europe to its knees. The problems that were being discussed in our earlier debate on the Finance Bill—rates of interest, which are so greatly determined by the Germans, rates of inflation and so on—are essentially a reflection of the tremendous burden that the Federal Republic has assumed as the price of the unification of Germany.
The population of East Germany is 16 million. The population of Hungary, Czechoslovakia and Poland combined is 64 million—four times as much. Poland, if anything, is in an even worse industrial and economic state than East Germany was. Slovakia, which is the industrial end of what is now called Czechoslovakia, faces similar problems. Hungary is in a much more fortunate position but it is a small part of this total of three countries. There is no way whatever that the accession of these countries to the European Community could be financed within a figure of 10 billion ecus per annum, the figure which appears in the report. The authors of the report are not responsible for that figure. It has come from Government sources.
There is one other matter with which I ought to deal. It is very difficult and delicate. The report assumes that the United Kingdom will receive a two-thirds rebate on the cost of these proposals. I entirely understand that in the present delicate
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situation the Government have to maintain the integrity of the British budget rebate—I accept that. But this is a different matter. This is a policy that our own Government are promoting. What rational chance is there that the other members of the Community will agree to give the United Kingdom a two-thirds rebate on the cost of the United Kingdom's own proposals?
It is no good saying that we have a veto and that the United Kingdom rebate is entrenched in the regulation. That is valid so far as concerns existing policies; but what will happen if we come along and say that our policy is to bring these people into the Community, which will bring with it a certain figure, and then claim a two-thirds rebate? Unless we are prepared to meet the other countries on the cost of our own proposals, the other countries will simply refuse to accept our proposals. We already see this in the case of Spain and the EFTA countries. Spain has said that unless we pay up under the cohesion fund it will block the accession of the EFTA countries. Spain has probably put it more politely than that, but I am stripping out the sense of what is said. That is what will happen when we come to the hard negotiations on the enlargement of the Community.
In conclusion, we have a responsibility and a duty to these countries. That is true and I have said so repeatedly. But what we must have also is a policy which is realistic, which is achievable and which can be achieved. Almost certainly we will go down not the path of immediate enlargement. We will not go down the path of concentric circles or different layers of membership. They raise impossible problems on the decision-making process. One has only to look at what has happened on the EEA negotiations to see that. What we shall have to do is to start on a free trade basis, extend that into a Customs Union, bearing in mind that the Customs Union was the foundation stone of the Community, and by specific agreement extend this area of co-operation to the services.
By the time that has been done it may very well be that these countries will have reached the stage at which they can be welcomed into the Community without creating impossible strains. But, quite frankly, that is likely to be well into the next century. If we try and hold out hopes which cannot be achieved, if we offer what cannot be delivered, it will end up in tears, in disappointment and in recriminations. What we have to do is to have a policy which clearly leads to success. That is the kind of policy which I hope will be hammered out in the course of the United Kingdom's presidency of the Community.
7.45 p.m.
Lord Bridges: My Lords, this is a debate about enlargement. Before embarking on that subject I should like to say a few words about the effect of the considerable influx of new Members into your Lordships' House over the past few weeks, something which could, I suppose, be called an enlargement of our own number. We have seen the effect this evening with two remarkable and very distinguished maiden speeches, which did not in the least surprise me

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knowing as I do the quality of the two noble Lords in question. I suppose that there is a certain irony in that two noble Lords who have spent a large part of their political lives engaged in almost mortal combat in another place—"savagery" is one of the words that was used at one time—should have come together in what might be called a combined performance. Their maiden speeches have given us much food for thought.
As one who was fortunate enough to serve on the sub-committee presided over by the noble Lord, Lord Aldington, I join him in commending the report to the House. It is a useful and timely document and it is valuable that we should have the opportunity to discuss the subject before the Recess, given the great fluidity and uncertainty of the European situation at present. I shall attempt to cover only those aspects which seem to me to be of immediate relevance.
My first comment is that the subject has changed greatly since the sub-committee set the work in hand at the beginning of the year. At that time there was every reason to believe that preparation for the enlargement negotiations would fall during our presidency and that this would be one of our most crucial tasks. We reasoned that the period between the signature of the Maastricht Treaty and the end of the ratification process—that is, during our presidency—would be the time when serious thought would be given to the way in which negotiations for accession would he undertaken; how, and with whom, in what order, and so on. The report was conceived to give some guidance on these matters to the House and to the Government. Now the Danish referendum has fundamentally changed that perspective. Recognition of the changed circumstances is explicit in the conclusions of the Lisbon European Council last month, to which the noble Lord, Lord Cockfield, has just referred.
It is clearly stated there that the negotiations for accession will begin only when three other things have happened: first, when the Community has terminated its review of its own resources—that must include our own budgetary contribution, to which the noble Lord has just referred; secondly, after all ratifications of the Maastricht Treaty have been completed; and thirdly, after agreement has been reached on the Delors II package. That is a rather formidable programme. I do not say that this means putting off enlargement until the Greek calends. But clearly there is a quite different timescale and we cannot be confident when the negotiations will begin.
One significant factor in ratification of the treaty will be the state of internal political affairs in a number of member states, whether these concern economic and constitutional questions, as they do in Germany, or the standing of an individual government, as happens in France, where the referendum will be just as much about the presidency and the ruling government as about Maastrict itself. So the outcome seems to me to be unpredictable. What appeared to be a racing certainty only a few months ago is now much more questionable.
The second comment I would offer to the House is that we should not allow these current doubts to cloud our long-term judgment. The opinion of the
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committee at paragraph 184 of the report is that enlargement is in the long-term interest of Britain. I strongly support that view. In the coming years the Community, and we as part of it, would greatly benefit from the accession of those members of EFTA who wish to join. Their support would be invaluable to the existing 12 member states—partly because the economic activities of those countries are in the main strong, prosperous and complementary to our own.
I was interested to hear what the noble Lord, Lord Cockfield, said in that connection. At least they will not benefit from the cohesion fund; in fact I strongly hope that they will contribute to it. Those states are also democratic and soundly based, with an excellent political and social record. Whatever we may think of Maastricht, it would be a great misfortune if a prolonged controversy about that treaty were to impede the accession of states already so close to us in many ways—not least, they are just as European as the existing 12 members of the Community.
The issue of the definition of Europe in the Community context is an intriguing subject and one which detained the sub-committee for some moments. Thoughtful advice was proffered by a number of witnesses, notably by the noble Lord, Lord Thomas of Swynnerton. My own conclusion is that we need not worry over-much with dictionary definitions of Europe but that we should pay due attention to the historical factors which condition public attitudes. The concept of Europe is, happily, an elastic one which need not be a barrier to the decisions which face the Community at present.
We should also beware, I suggest, of geo-political notions; that is, a priori concepts about the extent of Europe. They are quite common, they often mislead and they can be unhelpful to the actual conduct of affairs by government. Of course there will be problems at the geographical margin in future; for example, how European is Russia or the Ukraine? But those questions are not on our current agenda.
A further comment that I should like to suggest to your Lordships concerns the difficult issue of neutrality. The report has two pithy paragraphs on the matter—namely, paragraphs 168 and 169. Those words reflect a lot of thought and discussion and seem to me to address one of the most essential parts of the whole subject. I support the committee's conclusions. The problem arises because a number of countries seeking membership have followed different forms of neutrality in the past—sometimes with rather specific public commitments to that effect—or have chosen to follow neutral foreign policies as a question of political judgment in relation to a current situation. At present we have only one member state in the Community with a policy of that kind. My concern is that a future Community, with, say,20 members, of which four or five had a preference for neutral policies, might find its choice and freedom of action limited by such historic preferences.
I have no personal blueprint of my own about the way in which the Community might develop in the field of political security or collective collaboration on defence. But I believe that it needs to have a wide freedom of choice over policy because we cannot

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foresee how its security needs may develop. The current situation in Bosnia illustrates just how uncertain the future roles of the various organisations appear to be, with the United Nations, the European Community, the Western European Union, NATO and the CSCE all involved. The words at paragraph 169 of the report are surely correct:
"We are of the firm opinion that Ireland's neutral status should not be considered a precedent for applicant States to follow".
I agree with that; indeed, one might go further. There is a case for saying that the question needs to be explicitly recognised by acceding member states, perhaps even in the form of a clause in each agreement renouncing any previous obligations or traditions of a neutral character and making instead a commitment for the Community's future foreign and security policy. At least there should be no ambiguity on the subject.
Those who have spoken in the debate have shown how important they regard the subject to be. In general, the debate has given clear support to the approach suggested in the report. If we do agree that enlargement is in the common interest, I suggest that the only practical policy to give effect to that wish in the course of the next few years is by ratification of the Maastricht Treaty. If that can be achieved, the conclusion of accession agreements themselves should not be too difficult. But if Maastricht should fail, I believe that we would enter a long and difficult period of European debate. That would be divisive, uncertain and demoralising.
No European state outside the Community will wish to begin negotiations for accession until it knows what it is joining. In particular, none of the Nordic states will be interested now until they know whether Denmark has or has not reversed the decision in the referendum. So I offer my opinion that the only certain way of bringing about the next enlargement—or, rather more accurately and in deference to what the noble Lord, Lord Cockfield, said, the first step of enlargement—is surely to see it as the key to the development of the Community in the way that we wish to see it. We must continue on the path followed by the Government in seeking to ratify the treaty. After all, it was endorsed in an emphatic way only a few months ago in another place. I hope that steadier counsels will prevail and that the current policy will succeed, both in the United Kingdom and in the other member states.
7.57 p.m.
Baroness Elles: My Lords, the chairman of our ad hoc committee, the noble Lord, Lord Aldington, is to be warmly congratulated on producing a quite excellent report, the opinion of which I wholly endorse. I should like to thank him for the work that he did. I should especially like to take this opportunity to thank Dr. Tudor, our very hardworking Clerk, and all her assistants who on successive days organised meetings for us on a very restricted timetable. They managed to produce vast amounts of paper which I believe we all read with great attention. She is to be
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warmly thanked, as are all those who assisted her in a mammoth task, especially in getting the report prepared within the timescale required.
At this point, as what I might call a foot soldier on these Benches and as a modest Back-Bencher, I should like to say what a privilege and honour it is for us to be able to have in this House politicians and statesmen of the stature of those who made their maiden speeches tonight. I refer of course to the noble Lord, Lord Healey, and the noble and learned Lord, Lord Howe. They are representative of the statesmanship of our country over several years. We should be thankful that this House exists and that we can receive these great statesmen into our Chamber. Thus they are not wasted in the countryside but can take part and contribute to the political debate at the high level that we have had tonight. I warmly congratulate them.
The opinion of the committee is wholly to be endorsed, with practical emphasis on the rapid acceptance of the four EFTAns' request for membership to be completed, as I understand it, by the end of 1995. There is certainly no reason why they should not be able to complete that, considering the work that has already been completed in the European economic area which must have overcome many of the issues that would normally cause so many problems during accession. Therefore, we should possibly be able to conclude those requests within a reasonably short space of time; indeed, I believe that one noble Lord suggested six to nine months.
Although we made somewhat heavy weather of the issue of neutrality in the report, it was most encouraging to read recently the statement of the former Austrian Foreign Minister, Mr. Jankovitsch, on the subject of Austria's neutrality. He said that,
"the concept of neutrality, as we understand it, is flexible and has to be adapted to political and military circumstances in Europe and Eastern Europe. It has to he interpreted constructively and this is how we will explain to our citizens that our country's neutrality is no longer what it was in 1955".
He went on to say:
"Austria subscribes 100 per cent. to the Maastricht Treaty";
that the treaty was in no way incompatible with Austrian neutrality; and that,
"Austria was ready to take part in a common defence policy".
He continued:
"We are even ready to take an active part, alongside our Community partners, in peace keeping operations to fulfil our role in the case of an international crisis, as Austria has always done".
Our view of neutrality in the report has been overshadowed by that recent statement. I hope that other applicant countries will follow that line. When the Swedish Ambassador gave evidence to the ad hoc committee he indicated that was the way Sweden would be looking. It is to be assumed that accession will be to a post-Maastricht Treaty Europe. Requesters will be bound by the three criteria set out in the treaty—European identity, democratic status and respect for human rights. That provision implies that the best point of entry is to cross the threshold from membership of the Council of Europe, which already includes 27 European states.
It might well be conjectured that if Yugoslavia had been able to become a member of the Council of

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Europe the present tragic situation might never have taken place. The prospect of the central European states joining the European Community is to be warmly welcomed, even if it is a distant prospect. The timing will be a political decision. Recognition of the need to fulfil the aspirations of people newly restored to freedom with those aspirations of greater prosperity, the change in regime causing temporary economic and social disadvantage in many cases, and the complex structure of a modern democratic system, coupled with the European Community's legislation, demand balanced judgment as to the time of entry.
The European agreements are helpful in what might be called a preparatory process to meet the exacting demands of the existing Community. It is necessary only to think of the provisions of free movement and rights of residence to be aware of some of the many problems which are certain to arise. In the meantime, emphasis on education and training opportunities, fostered by Her Majesty's Government's Know-How programme and the European Community's PHARE and TEMPUS programmes, are to be warmly welcomed and encouraged.
There needs to be a balance between, on the one hand, the political imperatives of including those nations whose new democracies would be sustained by taking part in a flourishing part of Europe and being involved in joint decision-making in the region and, on the other hand, consideration of how such countries would be able to accept, implement, apply and enforce the corpus of European Community law, with all the implications that that involves.
Institutional problems envisaged, following en-largement to 16 member states, should not be very arduous. I believe that that was accepted when we visited the European Commission in Brussels. But, at over 16, membership is bound to invoke changes. With an intergovernmental conference by 1996 surely they can then be considered.
We have to face the fact that there are at least two options as to the direction in which the European Community will go: first, a closely knit system of institutions, with qualified majority vote, or even a single majority vote, becoming the norm in the decision-making process, and more effective scrutiny and control by the European Parliament; or, on the other hand, a more loosely-knit system of intergovern-mental action. It should be the task of policy makers to see how an effective compromise, if that is what is required, can respond to those apparently incompat-ible approaches so that an evolutionary process within the institutions responds to the demands and expectations of the people of Europe. I hope that the result of the Danish referendum has taught us a lesson in that regard.
There will be many opportunities to debate further changes and the demand for institutional changes before the next intergovernmental conferences are due. It is sometimes to be recalled that the United States—although perhaps not a model for Europe—took from 1787, with seven states, until 1959 to
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become 50 states. We do not necessarily have to be in a hurry to complete what one would imagine to be a European union.
The overriding imperative is to ensure that applicant states are encouraged in the process of preparation for membership so that they might in future be able to envisage a Europe of dimensions from the Atlantic to the Urals. Yesterday there was a reception in the Locarno Room in the Foreign and Commonwealth Office. Many people there could not remember, or perhaps did not know, who had signed the Locarno Treaty. I took the trouble to look it up in the History of Europe by H. A. L. Fisher, in which there was a telling phrase that Aristide Briand, as one of the signatories, had made the comment:
"There is a new language in Europe; it is the European language. Perhaps that is the language that we should now be learning".
That was in 1925 so perhaps there is still a great deal for us to learn.
8.5 p.m.
Lord Bruce of Donington: My Lords, I too should like to congratulate my noble friend Lord Healey and the noble and learned Lord, Lord Howe, on their maiden speeches in this House. In the past it has been my fortune to listen to them from time to time from the safe haven of the Peers' Gallery in another place. After listening to them there for many years, and hearing them here this afternoon, it seems possible that I may be able to engage in arguments of amiable dissent with both of them from time to time. That is always an agreeable prospect. I should like also to associate myself with the remarks of the noble Baroness, Lady Flies, on the sterling work done by the committee staff, in particular, Dr. Tudor on sub-committee A. The volume of work, the lucidity and carefulness with which the various items of evidence and argument were put forward reflect great credit upon her as well as, if I may say so, on the noble Lord, Lord Aldington, himself.
Those of us who believe that the GATT negotiations are a vital ingredient in securing a more prosperous world and far greater trade between member countries, can hardly dissent from the concept that the European Community should welcome to its ranks other European countries, with the objective of extending the area within which freer and more extensive trade may take place. They are vital to the development of Europe and, as the noble Lord, Lord Cockfield, has pointed out, subject to certain conditions, to the remainder of Europe as well, including those countries that are now in the Commonwealth of Independent States, and the various other countries between the existing Community and the CIS.
It is inevitable that in putting forward the proposals which are so admirably dealt with in the report there should be an element of enthusiasm which should express itself in optimistic terms; but it is occasionally necessary that we should sound a note of caution in some of the more optimistic assumptions that we make. I quote, for example, from paragraphs 141 and 146 of the report, in which the Committee states:

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"The Community's advantages of democracy, stability and prosperity can best be extended to Central and Eastern Europe by integrating those countries, when ready, into the Community".
A similarly optimistic note is sounded at paragraph 146 which says:
"The Community of 12 has proved so successful that there will be pressure for its membership to double or treble over the next 15 to 20 years … They look at its economic successes".
There can be no doubt that progress has been made in all the countries of the Community over the past 40 years. However, we ought to remember that, in all the countries apart from the United Kingdom, democracy as now practised within member states is only 45 to 50 years old. It is essentially of post-war vintage and varies in quality. One should not denigrate it in any way, but it is variable.
For example, at present it is not possible for certain areas of Italy to be brought firmly under the control of central government. Large sections of its land, population and finances are under the control of the Mafia. That is well known. The degree of law enforcement which we take for granted in this country is not always universally applied among members of the Community. That is not in any way to disparage or criticise them, it is merely to acknowledge that there are differences.
As to economic successes, we must be careful. Most of us in the House and, to some extent, in another place are sheltered from the harsh realities of life. We tend to think in terms of concepts and ideas, as we are bound to. After all, that is partly what we are here for. But we do not always take into account the harsh realities of the lives led by millions, not only in our country but in Europe as a whole. When we talk of economic success, we should bear in mind first that in Europe as a whole the rate of growth is significantly lower than that of either Japan or the United States. That is to dampen our sense of self-satisfaction a little.
We should also bear in mind that unemployment in Europe at the moment in the Twelve is at the unacceptable level of over 17.5 million, including 2.7 million in this country and probably, on the old count, nearer 3.7 million. So there is an unemployment level of significant dimensions. We should never underestimate its effect. Already there are signs in some parts of Europe of neo-fascism and fascism emerging again. There are also incipient signs in France. There are, as I said, areas of Italy which are not under government control. Let us bear these points in mind before we smugly say that we are economically successful and imply by that that everything in the garden is more or less lovely, apart from certain unmentionable matters at the periphery of which, perhaps fortunately, we have no personal experience.
That brings me to the question of what form enlargement of the Community should take. There has been much talk of the necessity for cohesion—a term which the noble Lord, Lord Butterworth, who will address the House presently, and I have been trying to clarify for some time. The nearest definition that I can find presupposes the existence of disparities between
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regions or groups, but insufficiently to make them socially or politically intolerant. That is the nearest definition that I have been able to obtain.
Clearly, there are countries within the Twelve in which there are wide disparities. We have them in the United Kingdom, Spain and practically all the countries. One question that will have to be addressed sooner or later is whether the disparities that exist within member states should be addressed by action taken by the Community as a whole, by decisions from the centre, or whether the disparities should be dealt with within the member states.
There should be considerable argument about this because so far—and reference to the European Community's annual regional reports confirms this—in spite of massive sums being diverted from member states' own resources to various other member states qualifying for regional aid, regional disparities have not diminished over the years. Year after year, we find that the differences between the richer and the poorer member states remain substantially the same despite massive injections of money into their infrastructure and for various other purposes.
The position would be far worse, of course, if no such aid were provided. However, it raises the question as to whether, to be really effective, such issues should be dealt with by member states themselves or whether it is wise for them to be determined centrally. That is a matter for consideration.
That is why I welcome the present discussion on subsidiarity. Despite its summary dismissal as something that has already been decided, subsidiarity will, I assure your Lordships, be the subject of argument for a considerable time. Subsidiarity applies only in areas which are not covered by Community competence. The only way to determine that competence is by reference to the Treaty of Rome. Under Article 155, the Commission is made the interpreter of the rules of the Treaty of Rome. Thus the matter will be fraught with difficulty, but the decisions have to be made.
I venture to suggest to your Lordships that any suggestion as and when the enlargement takes place, of the establishment from the centre of a level playing field covering the whole is thoroughly out of the question. Someone will have to think a little harder about it. Moreover, when new members join—and I hope that, for the reasons that have already been eloquently described by the noble Lord, Lord Cockfield, no hindrance will be placed on them—they will face the fact that they will be required in a greater or lesser degree to accept the acquis communautaire. That means the existing body of laws already in existence within the Community. Noble Lords will find that paragraph 50 of the report involves 12,000 pages of rules and regulations, not all of which may be acceptable to the new member states. If derogation is required, it will involve detailed documentation occupying so many further acres of paper that we shall massacre hectares of forest well into the next five or 10 years.

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Those are important matters. I sincerely hope that the Community will enlarge. However, I hazard the view that it will be far better if the member states come together at their own speed and on the basis of unanimous co-operation between the other member states rather than being artificially propelled by the non-elected Commission, which may have entirely other purposes in mind. It would be better to do what we are going to do solemnly rather than being hurried into action which many of the countries and most of their populations may not understand. They may resent its full impact when what is done in their name is finally carried out.
8.21 p.m.
Lord Beloff: My Lords, we are much indebted to the noble Lord, Lord Healey, who began his maiden speech by saying in the politest of ways, as is proper for a maiden speaker, that there was something lacking in the report: a sense of the immediacy of Europe's problems. Not being a maiden speaker, I have no obligation not to be controversial.
I would say that the most marked feature of the report is that, while the issues are discussed with great learning, knowledge and technical competence, the report resembles much of the work that comes from your Lordships' committees on Europe—it takes the Community at face value. Perhaps the noble Lord, Lord Healey, was too polite to ask why the Community and its members seem so indifferent to the sufferings in Yugoslavia and potentially in the remainder of Europe. He could have enlarged on the problem of refugees; he referred to them. He could also have called attention to the fact that what worries many European countries is the likelihood—we already see its beginnings—of massive migration even from areas which at present are not victims of internecine strife.
Having asked the question on behalf of the noble Lord, Lord Healey, the reason is clearly that the Community is not a community. It is still a collection of countries which, reasonably enough—it is, after all, true of politics through the ages—look to their own interests and concerns and take a view of successive events in the light of those concerns. The more closely those countries are in touch with their own public opinion, the more likely that will be the case.
Let us consider the history of the Community. It begins with a very simple proposition: the need to prevent a new war between France and Germany. To that proposition various other objectives, mostly although not exclusively of an economic nature, have been attached. It has been said by some eminent historian that all wars begin as a crusade and end as a business. I sometimes think that one could say of the movement to European unity that it began as a crusade and is ending as a boondoggle—that is to say, it is a method of creating jobs, of transferring income and of satisfying particular interests in different countries. The language that is used to express the movement's purposes is more and more remote from what we actually see.
If that were not the case it surely would be true that when we consider the situation in Eastern Europe we
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would first wish to ask what can be done for those people in order to prevent a recrudescence on an even worse scale of what we see in Yugoslavia. But in Yugoslavia the European Community has already proved its total incapacity. It has not managed to produce a solution. It has not managed to do more than belatedly to bring a little material aid to the worst affected people. It offers nothing in the way of resettlement for the refugees who have been created. The reason is simple. There is no Community; there are different countries, some of which are more affected and some less affected by what has been going on.
The noble Lord, Lord Bridges, referred to this point in some detail. It is interesting to note how much attention our committee paid to the problem of neutrality with regard to the EFTA applicants. One would have thought that all the other countries in the Community were equally committed to common action on matters of major interest. But that is not so. Let us take the most important country in the Community; namely, Germany. I believe that this point was referred to earlier. Germany took an important part in framing a policy for Yugoslavia as the collapse of the post-Tito regime became clear. It urged that policy upon its colleagues in the Community. That policy may or may not have been correct. However, the policy that has been adopted now leads to an involvement of military force, at present not provided to any great extent by this country but involving several other countries. However, if troops are requested from Germany, Germany will say that it cannot send anyone to Yugoslavia because its constitution prevents it from doing so. Are the German constitution's restrictions on the employment of its armed forces more important than the potential neutrality of Finland?
We have to ask ourselves whether we wish to enlarge the Community because it will make the Community more effective, or because we believe that we have a commitment to the remainder of Europe which will not be fulfilled unless in some way those countries are brought into a common organisation.
I do not know how many noble Lords have read the evidence, in addition to reading the report and listening to the noble Lord, Lord Aldington. The evidence gives a picture of a situation which is totally different from the picture given in the report. No doubt much time and effort went into the giving of evidence by the ambassadors of the Federal Republic of Germany and France. If one reads that evidence and the document submitted on behalf of Italy, one will see that the emphasis which they place on, let us say, the importance of deepening as against extending the Community is quite different from the emphasis given by Mr. Garel-Jones and others who spoke on behalf of Her Majesty's Government.
Those are major differences of priority. It is clear, for example, that from the French point of view anything which diluted the pressure towards common policies and common institutions, which they regard as their lifeline against the growing predominance of Germany in Europe, would be rejected irrespective of the possible consequences for the rejected applicants.

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On the economic side it has been argued frequently that what the countries need—apart from the massive aid which was referred to by the noble Lord, Lord Cockfield, as probably being beyond our reach—is opportunities for selling their produce, not only agricultural produce but in some cases, particularly in the case of Czechoslovakia, industrial products. As has frequently been commented on by those who study these matters, the reaction of Community countries towards their demand for markets has hitherto been heavily and distinctly protectionist.
That is not surprising because the dominant element in the framing of the Community is the Commission. The Commission is dominated by Monsieur Delors and Monsieur Delors is a French socialist planificator in the mould of the great Colbert. France is true to its protectionist traditions. This country on the whole is still at heart Cobdenite. Why should one think that they could get together and in an institutional fashion devise a new Europe for the countries which wish to enter?
That question relates particularly in my mind to the timetable and to what the noble Lord, Lord Healey, said. It would be very nice if we could say that we would proceed bit by bit and by early next century or by the year 2020 this little group of 12 will become 20 or 25, or whatever it may be. Time does not wait for bureaucrats. Time does not wait for negotiators. Time is against us, not for us. As the noble Lord, Lord Healey, said, the position in Central and Eastern Europe is grave—and as the noble Lord, Lord Bruce of Donington, said there are already repercussions in the rest of Europe. The idea that one can spin out the process and can say that in 1996 we shall look at one matter and in 1999 we shall look at another seems to me to be running away from the major obligations of governments and of parliaments.
I hope that this little element of controversy will not upset your Lordships too much.
8.32 p.m.
Baroness Hooper: My Lords, my noble friend Lord Aldington and his committee have once again provided us with an excellent report to debate. I predict that it will be scrutinised and used by many not only in those countries which seek to be part of the enlargement process but also by other countries in other parts of the world which are attempting to set up or to develop regional organisations on the same lines as the European Community. Our blueprint and the changes and modifications we make to it are of considerable interest and influence outside Europe as well as within.
My noble friend opened the debate in his customary vigorous and constructive style. It has been a debate which has given us the opportunity to hear two memorable speeches from two distinguished new Members, from whom we all expect to hear much more on many topics in the future.
I unreservedly join those who welcome the conclusions of the report, despite the stern warnings just given by my noble friend Lord Beloff. Enlargement of the Community has always seemed to
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me a wholly desirable objective. After all, without the possibility of the process of enlargement we would not be here today debating the report, and certainly not from the strong position which the presidency of the Council of Ministers gives us.
It is that opportunity to have a voice in the development of the European Community which I believe, and indeed know from my contacts with individuals in Sweden and Finland in particular—individuals incidentally who are not also politicians—those countries want. As my noble friend Lord Aldington said at the outset, they already have virtually all the economic and market opportunities which membership of the Community brings. Yet they want more. As mature and developed countries which have given lengthy consideration to the consequences, they still want the closer partnership of full membership, the Maastricht Treaty and all. I see the Maastricht Treaty as a considerable advantage in all this since it has succeeded, as my noble friend Lord Cockfield said in the presidency debate last week, in crossing the "t"s and dotting the "i"s. It has clarified some definitions and tightened up scrutiny procedures.
Nevertheless, I agree with the noble Lord, Lord Hunt of Tanworth, who put the matter so clearly, that since subsidiarity will be crucial to any future enlargement we shall need a full and practical definition of subsidiarity and what exactly it means in practice.
Enlargement is not a simple process—we know that from our own entry experience. Having been a Member of the European Parliament at the time, I remember the complexities of enlargement during the entry of Greece, Spain and Portugal. However, I believe that enough has been said about the advantages of the addition of the EFTA countries to the Community, both in the report and in the course of the debate, to make it clear that it will be a worthwhile exercise to overcome those complexities.
It is on the importance of Central and Eastern Europe that I wish to concentrate my few remaining remarks. Again, despite what my noble friend Lord Beloff said so powerfully, I believe that it is of great importance to make it clear to those countries that they are welcome in the family of the European Community and that we recognise the need to support their new-born democracies. However, I believe that we should regard that as a much longer-term goal than even perhaps the Select Committee recommends. In the interim, however, they need a clear timetable, a step-by-step approach very much on the lines elaborated by my noble friend Lord Cockfield. Without some form of commitment they will inevitably feel abandoned. A slow and steady process which takes account of the changes in those countries, the changes in the Community itself and changes in the wider world is essential.
As an interim measure my noble friend Lord Pym proposed the setting up of a forum representing the wider Europe. He referred to the CSCE in that context. However, we should not forget the Council of Europe, which was mentioned in the report and brought to our attention again by my noble friend

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Lady Elles. Poland, Hungary, Czechoslovakia and Bulgaria are already members. Applications are on the table from Romania and the Baltic States. At a meeting of the Parliamentary Assembly of the Council of Europe in Budapest some two weeks ago representatives of all those countries were present and participated in the debate.
I know that my noble friend Lord Finsberg gave evidence on that aspect to the Select Committee and pointed out the fact that countries unable to pass the Council of Europe's tests on human rights would be highly unlikely to be admitted to the Community. That in itself is important. I believe that the Council of Europe should therefore be used as a vehicle to provide a halfway house.
However, if that is to be an effective and useful role for the Council of Europe, we have to show that we take the work of the Council of Europe seriously and that we do not regard it as a so-called soft organisation. There needs to be far more collaboration between the European Community and the Council of Europe itself and perhaps—dare I say?—more recognition of the work of the Council of Europe in our national Parliament. I need hardly add that as a new member of the parliamentary delegation to the Parliamentary Assembly of the Council of Europe I am hoping to make a contribution on that score.
I believe that the only way that we can show the countries of Central and Eastern Europe that have been through so much that we are in earnest in our support is to give them a concrete goal at which to aim. It is essential to do so to fulfil the ideals of a united and peaceful Europe, which, in my view, is what the European Community is all about.
8.41 p.m.
Lord Thurlow: My Lords, along with the noble Lords, Lord Jellicoe and Lord Pym, I had the privilege of going to see M. Delors in January on behalf of one of your Lordships' committees. After expressing the Commission's high appreciation of the value of the reports of the Select Committee in general, he went on to express the hope that the committee would undertake a study on enlargement. It was gratifying to hear that the member of the Commission's staff who was responsible for its own recent study of enlargement had expressed his own personal appreciation of the help that the sub-committee's report had given him. As a member of the sub-committee, I pay warm tribute to our chairman for the enormous amount of work which, together with our clerk and specialist adviser, he put into the production of this report and other reports for which he has been responsible.
I was interested in the recommendation of the noble Lord, Lord Pym, that the time had come to address the question of the future structures that may be necessary as the process of enlargement develops. It seems to me that the central issue is how the Community—the union—is to retain a fair ability to be able to take prompt and effective decisions on difficult and controversial issues. Most of the main fields of policy outside the single market area are
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subject to unanimity. One small government can block any decision, as the Greek obstruction over Macedonia and also, I believe, over closer political association with Turkey has vividly illustrated.
If that blatant abuse of the veto by a small state has occurred in a Community of 12 states, how often would it occur in a Community of 20 to 30 states? But the power of veto nevertheless remains the only present safeguard against the overriding of vital interests of a major country by the concerted action of others. I was very interested in the observation of the noble Lord and learned Lord, Lord Howe, in his excellent maiden contribution to your Lordships' debates; namely, that perhaps the time has come when the Council might seek to adopt a legal base in unanimity for certain directives.
The noble Baroness, Lady Elles, posed the choice for the direction of future development after enlargement between the extension/trimming of the existing institutions on present conventional lines or alternatively some more loose-knit kind of future inter-governmental relationship within the Community. It is argued that qualified majority voting has served the Community exceedingly well over the wide spectrum especially of single market and related matters.
The Maastricht pattern—and like other noble Lords, I certainly hope very much that the treaty will be ratified by all members—of separate "pillars" retains normal inter-governmental processes as a possible form of procedure. The crunch will not come before 1996; but the pressures to extend centralised European decision-making remain.
I should like to throw into the ring of public debate something that had very little emphasis in the evidence given to the sub-committee; namely, the problem of how to establish some kind of effective decision-making or assistance to effective decision-making as the process of enlargement proceeds. Do we not want some kind of formalised inner grouping to act on behalf of the councils between meetings? I believe that the favoured label is directoire. There could be various patterns of membership of course—a few permanent members, as in the case of the Security Council, with rotation of others; bringing in the troika. But resistance from the growing number of smaller states would obviously be strong and apparently such a bogey played a certain part in the unfortunate development of Danish opinion over the referendum.
Can one imagine any ordinary group of 30 partners in an enterprise managing without delegating substantial powers to an inner committee? If there is no formal inner committee as time goes on, the same kind of processes of consultation between the major powers will undoubtedly take place behind the scenes. We must resign ourselves to a very long timescale for significant change. But external pressures may force the pace. Also, as the institutional mechanisms finally depend on the development of public opinion in all European countries, it may be that with the younger generation subject to common television programmes and, it is to be hoped, the greater use of English in all countries, new attitudes will come more quickly than we may at present suppose. I submit that eventually

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there must be a greater correspondence between the reality of national resources and the Community's decision-making. A solution may perhaps lie in the variable geometry Europe to which the noble and learned Lord, Lord Howe, referred as a possibility.
8.50 p.m.
Lord Butterworth: My Lords, I have long been convinced that the expansion of the Community is in the British interest and my membership of the sub-committee on expansion has only served to strengthen that conviction. I should like to pay tribute both to the chairman and to the Clerk for guiding us through the perils of this subject and producing the report which is before your Lordships this evening. It is so late that I shall deal only with two topics and I shall try to deal with them briefly.
First, much has been said tonight about the nature of the Community both now and in the future. Our report at paragraph 140 describes the structure of the Community in terms of what is often now identified, and indeed has been identified tonight, as the "pillar" concept. However, in paragraph 171 the report adds an important rider that the advance towards EMU and some of the social legislation do not go to the core of the Community.
In this matter the report is doubtless accurate in representing the views of the great majority in the United Kingdom, but does it represent a general view in the Community?
While we do not know what the founders of the Community had in mind, their vision has come to be encapsulated in the words "European union"—a concept which is continuously being developed and constantly being made more specific: from the first reference to "ever-closer union" in the Treaty of Rome, given prominence in the Solemn Declaration of Stuttgart in 1983, again featured prominently in the Single European Act, and now much more precisely in the Maastricht Treaty.
It seems to me that we fall into the trap of construing Community legislation such as this as if it were a British statute. The Community cannot be understood by considering it as a legal structure created either by a single treaty or a series of treaties. Rather, in my view, it should be seen as an objective or a series of objectives which have been agreed in outline and to which the judicial and political processes of the European Community are gradually giving detail and life—a wholly new form of complex political relationships which are gradually evolving.
In that evolution, states of course abandoned some sovereignty and some freedom of action in order to bring into being the common agricultural policy, the single market, the ERM and ultimately the ecu. To that extent the relationships between the states have federal characteristics in so far as a federation merely describes a division of responsibilities between a central power and state powers.
In 1990 President Mitterrand suggested that Europe should be looked upon as:
"a federation in monetary matters and a confederation in political ones".
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It may be that words such as "federalism","confederation" and "sovereignty" belong to an old political order and are unsuitable to express the concepts of a new political ordering which is gradually emerging from the European Community. However, President Mitterrand's analysis is in one sense prophetic of the "pillar" motif—a further stage in the gradual crystallisation of the political vision of Europe's future, unlike any arrangement between states that has been attempted by earlier generations. It was in Amsterdam that a Dutchman told us:
"The British, as islanders, have no conception of the European desire for a political organisation which would transcend national boundaries".
He then thought for a moment and added:
"Of course, we will never give up our right to hate the Germans".
What I should like to suggest is that this ability to grow and to develop, which is something quite unique in the development of Europe, is a process by which the problems that we face today over enlargement might well be solved. The future wider Community must be welcomed as an opportunity to continue to change the Community and, far from weakening it, those changes must be ordered so that it is strengthened.
My final point concerns the "multi-speed Europe". Paragraph 171 of our report, to which I have already referred, may contain the seeds of a solution to one problem. It proposes that the options and derogations which do not go to the core and which were made available to us at Maastricht should be available to new members. The basis and the core of the Community, or union, should be the single market, and all its obligations must be accepted on membership, subject to the process of derogations. But a would-be member must have achieved sufficient economic convergence to stand up successfully to the strain of the single market.
A much greater degree of economic convergence is required to fulfil the stringent tests laid down by Maastricht before a member will be allowed to adopt the ecu. So often the implication is that the ability to adopt the ecu is fundamental to membership of the Community. Why not a multi-speed Europe? States could be admitted to full membership when they have achieved sufficient economic convergence to participate in the single market, and countries such as the Visegrad 3, the Eastern Europeans, might defer their acceptance of the ecu until such time as they consider themselves, and were considered, to be economically strong enough. This might be something that would make amends for what I would regard as the stinginess of the European agreements.
While it is appropriate that one of the aims of the Community should be to lessen the economic differences between member countries, the primary obligation to achieve convergence should rest upon the individual member states themselves, and if we were able to get ourselves into that position then we might reduce the financial burden which Delors II foresees because of the construction which the Commission is currently putting upon Maastricht. I submit that it would also enable the Community, or union, to be expanded more rapidly.

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My noble friend Lady Elles had cause to quote H. A. L. Fisher. I hope that your Lordships will bear with me while I too give a quotation from Fisher. He begins his History of Europe with the assertion that there is a specific European civilisation which can be distinguished from all the other great civilisations of the world. He concludes with this sentence:
"Ever since the first century of our era the dream of unity has hovered over the scene and haunted the imagination of statesmen and peoples. Nor is there any question more pertinent to the future welfare of the world than how the nations of Europe, whose differences are so many and so inveterate, may best be combined into some stable organisation for the pursuit of their common interests and the avoidance of strife".
My noble friend Lady Elles reminded your Lordships that that was written in 1925.
9 p.m.
Lord Bonham-Carter: My Lords, I too thank the
noble Lord, Lord Aldington, who chaired the sub-committee on which I was proud to serve, for his chairmanly skill and for his extraordinary patience with other members of the committee. I congratulate the noble Lord and the clerk for having produced from our deliberations a report with which I agree in principle, although I may differ from it in respect of some points of emphasis.
I wish to join other noble Lords in expressing the pleasure and genuine feeling of respect which we had when listening to the two speeches from the two battered old maidens who have joined us today. We look forward to hearing from them again. The distinction of this House has been increased by their presence; and our deliberations will be improved if they come here frequently to give us the benefit of their knowledge.
I must confess that I listened to the words of the noble Lord, Lord Butterworth, with great interest. He rightly put on the construction of Europe a far more Burkeian interpretation than is common in this country. He described its development from the Coal and Steel Community, on through the Common Market, through the European Community and to an idea of political union as a process of accretion and learning. That is what it has been. Too often we in this country see Europe as a kind of doctrinaire, continental approach imposing a preconceived pattern on us pragmatic Britishers who move slowly, step by step, without any vision on the horizon towards which we are aiming. His remarks seemed a healthy corrective to that attitude.
I propose briefly to touch on three aspects of the report. First, I shall deal with the criteria for membership of the Community, which lies at the heart of the problem of enlargement. Your Lordships will remember that the Maastricht Council presidency conclusions provided that any European state whose systems of government are founded on the principle of democracy may apply to become members of the union. That statement mentions two of the criteria necessary for membership; first, to be European—and in that respect the quotations from H. A. L. Fisher are highly relevant—and, secondly, to have a government founded on the principle of democracy. In practice it is now, in addition, necessary to become parties to the
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European Convention on Human Rights. It would also appear to be necessary that the applicants, if I may so describe them, should be moving towards a market economy in order that their economies are strong enough to live within the Community.
Among the many obscurities embedded in those criteria it will be noted that the term "European" is not defined. Although it does not appear in the report, your Lordships' sub-committee spent a great deal of time and argument in trying to define what it meant by "European". It can be described geographically, historically or culturally. De Gaulle spoke of a Europe from the Atlantic to the Urals. On another occasion Chancellor Adenauer said that Asia had now reached the Elbe—a rather more restrictive definition. European culture is generally thought to have been Greco-Christian. At that time Greece was largely in Asia Minor, which is now Turkey and which is now Moslem.
All those different factors having been taken into account, I am led to ask two questions of countries which apply to join. First, what is the candidate's political and cultural affinity to the existing membership? Secondly, and perhaps more important, what is the digestive capacity of the Community? The noble Lord, Lord Healey, referred to that matter when he rightly pointed out the difficulties which Germany is having in absorbing, in digesting, what was the GDR and is now East Germany.
That is exceedingly important because what attracts people to the Community is its effectiveness. If it tries to digest more than it can, its effectiveness will be diminished. It is one thing to digest a Nordic country which has a population of 10 million, a strong democratic tradition and a strong economy; it is quite another to absorb a country such as Poland which has a population of 35 million, an incredibly fragile democratic tradition and an economy which is in pretty desperate straits. It is a totally different thing altogether to absorb a country such as Turkey which has a rapidly growing population of 57 million, a rather poor democratic record, a very poor human rights record but which is of strategic importance. However, those differences must be taken into account; they cannot be brushed aside. Nor can we be told that we must absorb them in order to prevent some unknown disaster which may occur.
Thus, while it is quite easy, as the report indicates, to absorb those countries which have come to be called the EFTAns, Poland, Hungary and Czechoslovakia are another matter. In some ways I believe that the report is perhaps slightly bland in its description of the problems which confront the joining of those countries. That is partly because we underestimate the problems not of economic reform but of political reform. The difficulties of economic reform have made the problems of political reform even more acute. If there is a drop in industrial production of 20 per cent, a rise in unemployment of 20 per cent. and a rise in prices of 30 per cent., and if that is associated in people's minds with political reforms as it almost inevitably must be, that undermines the belief in the effectiveness and desirability of those political reforms.

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However, what seems to me to require more emphasis than the report has given it, and which the noble Lord, Lord Cockfield, made so abundantly clear, is that the cost of enlargement must be taken into account and must be faced. It seems to me that that has been neglected by the Government in their general approach. The Government have said that enlargement is the theme of their presidency. As I have already said, enlargement to include EFTAns does not pose any severe economic problems. However, enlargement to include the countries of central Europe will require very substantial sums of money from the Community both before and after those countries join. It is ludicrous to pretend that that is not true. They will need money before they join to strengthen their economies and after they join if any kind of cohesion is to be achieved.
As the noble Lord, Lord Cockfield, pointed out, one must see how much money Germany has been pouring into Eastern Germany and how long the cohesion of Eastern Germany within Germany will take. Who will pay for that? The chief supporter of rapid enlargement has been the British Government, the opponent of Delors II. How are we to reconcile those two positions? The British position appears to be, as one cynic commented,"Europe extends as far as the German taxpayer will allow". That is a position which we shall be unable to maintain.
The second point on which I wish to dwell very briefly is the second consequence of enlargement and another which the Government seem to me to be reluctant to face; namely, the impact of enlargement on the Commission's institutions.
It is difficult to accept that thought about institutional change can be postponed until 1996 and that the EFTAns can be accommodated within the existing structure. The idea that we can continue with existing institutional arrangements in a Community of 15 or 17 member states seems to me implausible. In addition to that, it is contrary to common sense to include countries as large as Poland and as small as Malta without radical institutional reform.
The present arrangements were devised for six countries and those countries managed matters basically on a consensual basis with very little voting. That has been put under strain for 12 member states and it will be largely unmanageable for 15 or 17. Therefore, it seems to me that consideration of the institutional consequences of enlargement should be put in train now rather than being postponed until 1996. Indeed, in a small way nothing can demonstrate more obviously the need for institutional change than the language problem to which the report refers.
Those are two matters which seem to me of considerable importance. I add to those problems the problem of variable geometry, to which many of your Lordships have referred. By that I mean that special arrangements must be made for those countries which cannot join the Community but which, if excluded, will feel that they are in some way insulted. One must develop special relationships with those countries to
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avoid that problem and to avoid the idea that Europe is coterminous with the Community. That is an additional problem that we face.
We must also develop—and it will be exceedingly difficult—a common foreign and security policy. The problem which the noble Lord, Lord Beloff, complained about—our response to Yugoslavia, and so on—is simply because, in my view, the process of developing that very difficult common foreign and security policy is in its earliest stages. Oddly enough, the conclusion that I drew from his remarks was that he was arguing for more integration and less political co-operation. That is one way of solving differences. Political co-operation inevitably means a bargain, a brokering of differences which tends to mean the lowest common denominator.
The agenda is indeed daunting. But if that is so, it is difficult to think of an era in which the role of the Community in Europe was more important both as an economic power house and as a kind of political model; above all, as an element of stability in a Europe which outside, as many noble Lords have said, is in a dangerous condition of flux which may descend into chaos.
9.15 p.m.
Lord Richard: My Lords, this has been not only an interesting debate but also a unique one. Seldom have we been able to participate in a debate with two such notable maiden speeches as we heard tonight. It is a tribute also to the somewhat more clement atmosphere of your Lordships' House that the noble and learned Lord, Lord Howe, and my noble friend Lord Healey managed to make such notable speeches with a non-confrontational, indeed almost a consensual, attitude on both sides. They even eschewed agricultural metaphors; sweetness and light seemed to break out. It was rather like two heavyweight contenders who, having fought each other gamely in the past and having retired from the ring, were sitting down in a friendly way reminiscing about past contests. I sometimes thought that the only thing we missed tonight was,"You know what I mean, Harry"; or,"You know what I mean, Geoffrey" or "You know what I mean, Denis", to make the show complete.
They were remarkable speeches and those who had the privilege of hearing them tonight will long remember them. It may be a little presumptuous of me to say that we hope we will hear them both often again in the future, but we certainly do.
This has been an interesting debate not only because of the quality of the two maiden speeches but also because of the quality of the report we have been debating. This House is used to reports from the committee of the noble Lord, Lord Aldington. But on this occasion he has produced a report which is both timely and pertinent, and, I felt, closely argued. While I felt that these were some omissions and that the gloss I would put on some parts was perhaps not quite the same as that of the committee, nevertheless it is a significant report.
It has also been a good debate because of the quality of the contributions which came from other Members of the House. Obviously one cannot pick

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them all out. I listened to the noble Lord, Lord Beloff, as always, with great interest and concentration. I have accused him in the past of elegant pessimism with regard to the Community. He perhaps expressed it again tonight—a feeling that things have drifted to such an extent, it is all so large and difficult that it is going to implode and its utility is over.
I give the House only one reflection on that. If that is true it is extraordinary that there is such a queue of applicant countries which wish to join the Community. Not only is it extraordinary that there is a queue of countries wishing to join: they also wish to join the Community as it is now, with its institutions, its present acquis communautaire. I totally accept the point made by my noble friend Lord Bruce of Donington that it runs to a large number of pages and instruments; there may well be a case for consolidation, a new Halsbury's Statutes of the European Community. No doubt that can be done. My point is that it is the existing Community, with all its faults and virtues, that various countries are queueing up to join.
I detected also tonight a tendency—save on the part of one or two noble Lords—to gloss over the institutional problems. One should not underestimate the problems for the institutional structures of the Community that enlargement will cause. I was frightened by paragraph 100 of the report which dealt with languages, which the noble Lord, Lord Bonham-Carter, referred to also. The report pointed out,
"The worst scenario of the linguistic problems of enlargement was put forward by Gary Titley MEP. The EC currently has nine official languages. This means there are 72 different pairs for translation (Danish to Greek, Spanish to German, for example). With the addition of the EFTA countries and four new languages (Finnish, Icelandic, Norwegian and Swedish) there would be 156 possible pairs. Mitterrand's European Confederation would bring the total up to, say,21 languages and 420 possible pairs. As a result, the Community's single largest expense would be likely to be on translation and interpretation services, which could swallow most, if not all, the budget".
Not only could that position not be accepted, but with a Commission which was enlarged to include 25 members—which is on the assumption that, if there were 25 members of the Community, each country had only one commissioner—the existing structure of the Commission could not cope. I suspect that the existing structure of the Parliament could not cope. Without a massive increase in majority voting in the Council of Ministers, for the life of me I do not see how that body could cope. I take the point warmly made by the noble Lord, Lord Pym, that this is something which we should be considering in advance of enlargement and not perhaps rushing to consider when we get to that stage.
The other matter that I found a little strange in this debate is how little has been said about the ratification of the Maastricht Treaty. However one looks at it, there is a linkage between ratification of the treaty and the enlargement of the Community. The Danish referendum result having thrown the ratification of Maastricht into some doubt, it now remains to be seen how that is going to affect the development and the proposed enlargement of the Community.
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The committee was in the process of finalising this report when the Danish referendum took place. Consequently, the committee was spared the addition to its already extensive work of the somewhat tortuous task of considering the impact of Denmark's vote against the treaty. The report of the Select Committee clearly recognises the importance and potential advantage of enlarging the Community. Reflecting that, the members of the committee viewed enlargement as the Community's future and almost as its destiny. I am not sure whether the committee actually used that word in the report. The report clearly states that enlargement,
"must not and need not threaten the effectiveness of the Community".
Indeed, the issue for the committee was not whether there should be enlargement—the case for which it found "undeniable", to use its word—but rather how that expansion should proceed; its pace, the changes to the Community's institutions and the procedures which would be necessary to accommodate the accession of new members.
Under Article 237 of the treaty, any European state may apply for membership. Austria, Finland, Sweden, Switzerland and possibly Norway, all now want to join: as do Malta, Cyprus, Turkey and, as far as one can tell, at some stage most of the former communist states of Central and Eastern Europe. To qualify for membership applicants must be democratic and respect human rights, a condition which has so far retarded Turkish attempts to join. In particular, new members have to be parties to the European Convention on Human Rights. They have to accept the right of individual petition and the compulsory jurisdiction of the European Court of Human Rights.
In that respect the Select Committee also recommended that membership should only be extended to countries with the strength and capability to play a full and effective role in the Community. Consequently, the report says, that while the extension of membership of the EFTA countries would strengthen the Community both economically and politically, membership for Cyprus, Malta and Turkey would depend on their ability to overcome substantial economic and political problems. Similarly, membership for the countries of Central and Eastern Europe would have to be linked to whether they could continue to develop democratic institutions and strong, free market economies. In that connection, perhaps I may say how much I share the view of my noble friend Lord Healey who, in his analysis, was grim and perhaps apocalyptic in some ways about what was taking place in Eastern Europe and the possible effect on the rest of us if it goes wrong.
Enlargement of the Community was widely expected to be one of the main issues for the UK presidency. Among other problems, it has to confront the promotion of a peaceful settlement in Yugoslavia; it has to try to effect a breakthrough in the impasse over the ratification of the Maastricht Treaty; and it has to resolve the dispute over the funding of the Community. That is a fair old agenda for a six-month presidency.

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During the recent debate in another place I believe it was the Foreign Secretary who compared tackling these issues to pushing boulders up a steep hill. I hope that the efforts are going to prove herculean and not sisyphean in that respect. I should hate to have a situation in which we push and get near the top only to find that the next president has to start again at the bottom.
As my noble friend Lord Healey said, the gravity of the situation in the former Yugoslavia and the mounting incidence of nationalist and ethnic clashes and tensions in Central and Eastern Europe highlight the need to establish now, if we can, closer ties between the Community and the former communist states as a precursor to their eventual accession to the Community. Why do they want those ties? Why do those countries want to join? It seems to me that the Community offers new members the prospect of economic prosperity for themselves and for their people and a greater prospect of political stability than exists in any other conceivable grouping that would be available to them. It is an attractive option to countries which now face the twin challenges of exorcising their communist past and of rebuilding their societies and economies. To promote the peaceful development of Central and Eastern Europe the Community must somehow embrace those fragile democracies by the end of the century or, if not embrace them, at least appear responsive to them—perhaps more responsive than in the past.
Perhaps I may say a word about the membership of the EFTA countries. The Select Committee noted that Austria and Sweden in particular were already well placed to adapt to the Community's economic structure. Admittedly, questions remain about the neutrality of some of these countries, although I personally do not think that neutrality is so great an issue as the report seemed to indicate. I suppose that there are also questions about other aspects of their political and economic policies. In general, however, the EFTA countries are suited to meet the terms of Community membership and should be able to join sooner rather than later. If they do, it seems to me that such accessions would prove an asset to the Community as it moves towards meeting the challenges of the next century.
Having said that, however, we should recognise that the accession of the other applicant countries—Cyprus, Malta and Turkey, for example—would be infinitely more difficult. The Select Committee concluded—and I concur with its conclusion—that these countries will have to make further progress in confronting their economic and political problems if they are to attain Community membership.
Denmark's vote against the Treaty has, to a certain extent, put the enlargement process on hold. That was reflected at the recent Lisbon summit, which agreed (although in the face of some opposition from the Government) that there should be no formal negotiations with countries wishing to join the Community until the Maastricht Treaty had been ratified. I know that the Government have tried to play down the connection between ratification and
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enlargement because they obviously hope to make enlargement the centre point of their presidency. The Government have also said that they will not allow ratification to dominate the six months of their presidency, but I fear that that is precisely what is bound to happen. Ratification will dominate the presidency because it is now central to the whole future of the Community. Whatever the position in terms of sounding out new members, in reality unless the problem of the ratification of the Maastricht Treaty is resolved, one cannot expect to make any major progress on enlargement.
The Prime Minister has spoken somewhat grandiosely if not exactly originally, as the noble Lord, Lord Bonham-Carter, quoted, of a European Community that extends from the Atlantic to the Urals, adopting General de Gaulle's phrase. If that is the Prime Minister's vision, his task during this presidency is indeed formidable. If he succeeds in it, he may be able at the end of the presidency to say that he has taken the first steps necessary towards achieving that goal. If he fails, we may be looking at the beginnings of an unravelling process in Europe in which nationalism again predominates and in which ethnic tensions again emerge with all the attendant evils that those developments could present.
Europe needs glue. To mix a metaphor, it needs a cement to hold it together as it moves towards the end of this century and into the next. For the life of me I know of no source from whence that can come other than an enlarged European Community. It is in that respect that I reiterate our thanks to the noble Lord, Lord Aldington, and his committee for their report and my personal thanks to all those who have taken part in the debate.
9.30 p.m.
The Minister of State, Foreign and Commonwealth Office (Baroness Chalker of Wallasey): My Lords, I begin with a tribute to my noble friend Lord Aldington and the other members of his committee for their excellent report. Today has been a very special day, even for your Lordships' House. I was delighted and privileged to listen to the outstanding maiden speeches of the noble Lord, Lord Healey, and of my noble and learned friend Lord Howe of Aberavon. It is only a couple of months since I made my maiden speech in this House. Perhaps the House will allow me to recall a very happy time during my early days in another place. One day, when I was looking rather glum and a little dispirited by the work I was undertaking as a new Member, there was a wonderful shout from up a long corridor of "Hiya gorgeous". It was the noble Lord, Lord Healey, who was seeking to cheer me up. He was the best cheerer up that I could possibly have had in those days. He has continued it. Who knows, perhaps in a slightly quieter vein he may reiterate that remark just now and again, although it is nearly 20 years on.
I well remember the kindness of my noble and learned friend Lord Howe of Aberavon because he encouraged me to make my maiden speech in another place during the Queen's Speech debate some four days after the House first sat. He was responding for

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the Opposition in that debate. So I suppose it was poetic justice when I said to him the other day, knowing when he would come to your Lordships' House,"How about your maiden speech on our debate on enlargement?" I am privileged to say that his was a far better maiden speech than I have ever made in either House. I compliment him most warmly and I look forward to his tremendous contributions and to those of the noble Lord, Lord Healey.
The report of my noble friend Lord Aldington and his committee is extremely welcome. It continues the tradition of thorough, searching Lords' analysis of Community issues. It is a valuable and timely contribution to the debate. It is helpful in focusing our thinking as we take forward the enlargement dossier under the UK presidency. I can give the noble Lord, Lord Richard, fair notice that we do not intend to stop progress on the enlargement issue, whatever he may think is the hiccup that we face, as we do, with the result of the Danish referendum and the question of the ratification of Maastricht.
The report deserves to be read closely in other European capitals and Community institutions. What it shows is how your Lordships' House has yet again made a first-class contribution to EC discussions. We owe a particular debt of gratitude to my noble friend Lord Aldington, who has so ably steered the committee since 1989. I understand that he may be persuaded to relinquish his post later in the Session, but we know that he has certainly given his successor, whoever may be chosen, one of the hardest possible acts to follow.
We know that no committee report will please all its readers, but I believe that the committee rightly drew its own conclusions from the evidence it heard. There is no contradiction between the evidence and the report. On the contrary, the report seems to be an admirable distillation of a complex subject, as this debate has underlined. It has been praised to the Government by several witnesses who gave evidence, especially from abroad, both from within and outside the Community.
It is, therefore, in that sense that I now turn to what your Lordships said in winding up the debate tonight. The report is not only of great importance to us—that is, the Community as it is; it is also important for the wider Europe. As the noble Lord, Lord Richard, said, it is the quality of Europe and its strength that so many nations outside are seeking to join. In the Select Committee's report and the speeches that we have heard today there is certainly a convergence of views with those of the Government. The European Council decisions on enlargement at Lisbon, which the UK presidency will now take forward, reflect to a very large extent a similar approach to that taken by your Lordships' Select Committee.
The United Kingdom has long argued the case for enlargement and at last others in the Community recognise that fact. There is no doubt that we have great commitment. I should like to say to my noble friend Lord Aldington that I believe the development of closer political dialogue with those outside the Community who are not ready, or not yet ready, to come forward for membership is a very important
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stepping stone through the European economic area and perhaps through a European political area. That is one of the concepts that I believe we should be investigating thoroughly during the coming time.
There is no doubting the fact that the reason why so many nations wish to join the Community—or, indeed, to draw closer to it if they cannot yet join—is the importance of free trade and the single market which we have developed. Similarly, there is no doubt that the association agreements that we have been developing with Eastern Europe are seen by those in the former Soviet Union as a hallmark of what they too would like to achieve with us in the not too distant future. In other words, the Community's philosophy of opening up trading between our nations, and from outside with the members of the Community, is the most important bedrock on which those nations aspiring to the Community are placing their hopes. That is why I agreed so much with what my noble friend Lord Cockfield said when he talked about the progression from free trade to Customs union to service, without imposing impossible strains. I believe that that is exactly the way your Lordships—and, indeed, those in another place—would have us go. I shall return to that aspect later.
I must tell my noble friend Lord Cockfield that the figures in the report are of course figures which we were invited as a department to provide to your Lordships' Select Committee. They are figures from the whole Government and not solely from the Foreign and Commonwealth Office. Moreover, as my noble and learned friend Lord Howe of Aberavon said, sotto voce, there was another place called the Treasury that had a considerable influence on producing the figures. We were invited to produce figures on the basis of a series of necessarily artificial assumptions. I am glad to see that my noble friend Lord Aldington agrees with me on that.
One country joining alone, and so on, is simply not a possibility in the present day. But we have to have a starting base from which we can then further develop the figures. That is something that we must do. Nevertheless, it is clear that the main conclusions likely to be borne out in real life are that the EFTAns will be net contributors; that Turkey will be a major net recipient; that Malta and Cyprus will be minor net recipients; and that the Eastern Europeans, should they join now, would be major net recipients. However, it may be different in a few years' time. I shall deal with the remarks made by the noble Lord, Lord Healey, in a moment.
The figures that my noble friend Lord Cockfield gave on the Eastern European economic malaise demonstrate more clearly than anything else the need to bring Eastern Europeans much closer to the economic levels of the Twelve before joining. That would at least be of real use to those countries. That is why as a nation we have spent so much time on the association agreements for those nations.
The noble Lord, Lord Bruce, in an uncharacteristically mellow speech, if I may say so, spoke about the importance of the GATT Uruguay Round. He will be aware from the many speeches that I have made in your Lordships' House and other places how essential

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not just the Government, but, I believe a conclusion to the Uruguay Round is for us. It is a top priority for our presidency. It is essential for boosting world economy, and the EC/US agreement on agriculture is of course the key to success.
There will no doubt be real discussion with aspiring applicants to the Community, especially those which have large agricultural subsidies, as to what happens to the agricultural subsidies when they apply. But we cannot cross that bridge until we start the negotiations. We must make progress now with the Uruguay Round. That is one of the issues upon which we shall be concentrating our efforts and, as your Lordships are aware, the Lisbon European Council instructed the Commission negotiators to resolve the remaining differences with the United States. I believe that the CAP reform agreed at the end of May will help achieve that. It is because trade is the lifeblood of all our nations that we believe that that must have a high priority.
The noble Lord, Lord Healey, my noble friend Lord Pym in a helpful speech and many other noble Lords expressed deep anxiety about the conditions in parts of the former Soviet Union and parts of Central and Eastern Europe and the pressures and difficulties being faced by the people there. There is no doubt that we have to make many adjustments if we are to help those nations, but we must do so from a firm base. That is why—I believe that the noble Lord, Lord Healey, knows this—it has been the United Kingdom's support for reform in Russia that has caused many other nations to copy many of the things we are doing and the World Bank and the IMF to give particular support to Russia. Our executive director at the World Bank has been carrying out the negotiations with the Russians, as their representative, with the IMF and the World Bank, and will continue doing so until a Russian director is appointed in November.
Not only have we been giving help in that way; of course our Know-How funds have been used to help develop financial institutions not just in Russia but in other countries of the former Soviet Union and other Central and Eastern European nations. My noble friend Lady Elles reminded us of how much was being done through the PHARE and TEMPUS programmes, through Europe, but very much with our help, because time and time again it has been British institutions and the British personnel who have been making those things happen.
I have to say to my noble friend Lord Beloff that I think that he was—I hope uncharacteristically—unfair about what the European Community has been seeking to achieve in a difficult situation in the former Yugoslav Republic. I believe that he was unfair also to our noble friend Lord Carrington, with the tremendous efforts that he has made to try to achieve peace among people who do not at present want peace.
Yugoslavia has had assistance worth £25 million from the United Kingdom in the past couple of months alone. Only today I dispatched eight doctors and nurses to undertake a special series of operations
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for those poor children in Sarajevo. I do not know how soon they will be able to reach them in the hospitals, but we were prepared, and we have sent them, despite the fact that we do not yet know how quickly they will get through to Sarajevo from Zagreb. We shall continue giving practical help. We will also continue to give political help. The discussions I had in New York last week at the United Nations with the Secretary General and others underline just how much effort has been made by the European Community and by our noble friend Lord Carrington. However, we are facing one of the biggest difficulties that we have ever had with such a country.
Lord Beloff: My Lords, perhaps I may venture to comment on what the noble Baroness said. I made no criticism of the United Kingdom Government, still less of our noble colleague Lord Carrington. Their efforts have been well directed in difficult circumstances. My point was that the Community as a community has found itself unable to act in a constructive way. That is no criticism of Her Majesty's Government.
Baroness Chalker of Wallasey: My Lords, I thank my noble friend. If I inadvertently assumed that he was being critical of Her Majesty's Government or of my noble friend Lord Carrington, I apologise. However, it is fair to say that the Community as a whole cannot move when one notable and clever individual working full time with full support staff cannot even obtain common sense responses from the people who are supposed to be in charge of the various parts of Yugoslavia.
Perhaps I may turn from the former Soviet Union and Central and Eastern Europe to talk of the other aspects of enlargement. One of the successes of Lisbon was the agreement to develop our relationships through association agreements as stepping stones to eventual membership. We aim to begin the effective implementation of the association agreements with the Visegrad 3 and high level political dialogue with them during our presidency. We also hope to conclude association agreements with Romania and Bulgaria. We shall have to consider how to take the discussions and preparations forward over Czechoslovakia when the situation in that country becomes clearer.
I wish to set the mind of my noble friend Lord Pym at rest a little. He spoke of the Community's conditions being too tough for the countries in Central and Eastern Europe. Of course the Community is right to set high standards. As the noble Lord, Lord Richard, said, the Community is attractive because it works, even if we criticise its daily working, as we frequently do in this House. However, taking applicants before they can cope with the economic, political and practical responsibilities would not help them and I do not believe that it would help the Community to help them.
Moreover, maintaining the need for the Eastern Europeans to organise themselves into a position where they can benefit from the responsibilities and opportunities which will come with association agreements and eventually with membership will also help them to reform. That will add strength to the

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arms of the reformers in those countries. That is why our strategy is to develop the Community's links with Eastern Europeans through trade, co-operation and political dialogue and that is why we are using the association agreements as the vehicle.
We have spoken a great deal about the former Soviet Union and Central and Eastern Europe, but it is absolutely right to turn our minds also to other applicants, seven in total. Let us look at the particular importance of Turkey, Cyprus and Malta. The Lisbon Council agreed on the particular importance of Turkey and that we should be developing our relations by building on the present association agreements and through political dialogue at the highest level. That seems to he happening much better now than in the past. I am pleased to tell the noble Lord, Lord Thurlow, that it seems that no longer will the Greek Government stand in the way of the progress that we wish to make with the Government of Turkey.
It was also right that the European Council decided to strengthen relations with Cyprus and Malta by building on their association agreements and by developing their political dialogue. That is why the work that may be done in advance for the EFTAn countries will give us a patterning which may be useful in future in considering the applications of other nations.
One thing I should like to say in response to the noble Lord, Lord Bridges, who made a most interesting speech, is that, although, yes, it would be right to say that we are not moving as fast as we had hoped because of the Danish referendum result on the Maastricht Treaty, there was nothing at the Lisbon conference that stops us making progress. We agreed at that conference that the official negotiations would open as soon as the future financing was settled and Maastricht ratified. However, as my noble friend Lord Cockfield said, the official negotiations can sometimes take quite a short time, as they did in the case of Britain's application for membership in the early 1970s. Therefore, in the meantime, during our presidency, we are ensuring that we make all preparation for the membership of the EFTAns to the European Community that can possibly be made. I anticipate that we shall be ready by the October Foreign Affairs Council of the Council of Ministers to consider the applications of the first three of the EFTAns in time for the Edinburgh Summit. That is indeed our intention.
We know that Turkey, Malta and Cyprus have very different backgrounds from those of the EFTAns. However, I believe that where we see progress we can encourage those countries further in a pattern that will lead them to be in a position in the years ahead to become members of the Community.
The debate has been fascinating. There is no doubt that we as a Government, and many of your Lordships, believe that the Maastricht Agreement represents the best deal for the UK. It is an essential part of the future enlargement discussion. The Treaty of Maastricht introduced procedures to reverse the trend towards centralism through intergovernmental co-operation and subsidiarity with controls over the
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Commission. It is a sound basis for future co-operation. I believe that it firmly indicates that the tide of centralism has been turned.
We took stock a week or so ago with our partners at Oslo on how we should continue. I believe that the stance that we took then, giving Denmark time and space for reflection, is the right way forward. There are a number of options. I am quite sure that your Lordships will wish to discuss those again in the future. However, for tonight and indeed for our presidency, there is no reason to hold up the preparation work that we are doing on the applications of the EFTAns. We should get on with that work; It would be wrong to hold it up because of what has happened. At the same time we must give the Danes the time that they need.
My noble friend Lady Elles asked about the next stage of the Community's development in 1996. My noble and learned friend Lord Howe of Aberavon, the noble Lord, Lord Thurlow, the noble Lord, Lord Bonham-Carter, and my noble friend Lord Butterworth all spoke about the shape of the future Community. It is perfectly true to say that we cannot at this stage foretell what that may be. However, I believe that it will be founded on firm trade and co-operation agreements and that the political reforms have to be developed very earnestly indeed.
I was interested in what my noble friend Lady Hooper said. She talked about membership of the Council of Europe being a half-way house and of looking in detail at the political position of each of the applicant countries because in order to become members of the Council of Europe many of those political conditions which the Community requires already have to be satisfied. Other noble Lords have referred to that.
We have had an excellent debate. The Government firmly believe that enlargement is good not only for the United Kingdom and the existing Community but for Europe as a whole and in particular for those in the queue of countries that wish to join us in membership at some stage in the future. We want a Community that is open, diverse and outward looking. An enlarged Community will be more dynamic, as my noble friend Lord Aldington said in his report. We believe that it will speak with ever greater authority on the world stage and exert ever greater influence. We look forward to working with our present EC partners and with the new members as they join to shape the kind of Community and Europe that will be beneficial for all our people, whether they come from the 12, the 16, the 19, the 21 or the 25. We hope that we shall be able to communicate well. I agree with the noble Lord, Lord Thurlow, that we shall have to turn our mind to the language question very soon indeed. But our hope is there and our determination is there. I believe that, starting with the EFTA accessions, we shall strengthen not only the Community's economic base but also the economic base of the wider Europe for the benefit of those emerging nations in Central and Eastern Europe which today have such dreadful problems.
9.55 p.m.
Lord Aldington: My Lords, I should like to start this very short last speech by thanking my noble friend the Minister for that splendid winding-up speech; for the kind things that she said about the report, my colleagues and myself; for the very interesting new information which she imparted to the House and for the way in which she fitted the debate into the wider framework.
I should like to thank all those who have spoken. I join with all the subsequent speakers in admiration of the quality, strength and depth of the two maiden speeches. They made the debate a very special one and I should like to thank both speakers, as they have been thanked by others. It is a joy to me to see both noble Lords here. They will greatly strengthen our House. That is an example of strengthening by enlargement.
I should like to thank my noble friend Lord Pym, who linked the two speeches and made some pungent and powerful observations which I should like to think about very carefully. I should also like to thank my noble friend Lord Cockfield who once again directed his own distinctive searchlight on to the main problems.
All the speeches have been of enormous value to those of us who continue to study the problems of the Community, its enlargement and its workings. I am conscious of the shortcomings of the report which have been pointed out. There are reasons for them. We elaborated insufficiently on the pressing needs of Eastern Europe and the importance to peace and the future of Europe and the world of tackling those needs. We also perhaps put too little effort into reminding people of the enormous costs and that is partly because about a year ago we prepared a report on those particular agreements and highlighted those points. However, I take the criticism, which is a valid one because that aspect is part of the whole picture.
We may be at fault, but perhaps not to the extent that some speakers indicated, for not attacking the costs of enlargement sufficiently thoroughly. I was warned by the Clerk when we put the tables into the report that they would be misunderstood—and my goodness they have been, despite the small print and despite the elaborate note which appears in the evidence section of the report. I apologise for that, but we needed some figures to give some indication of the effect in monetary terms of enlargement. Nobody pressed us more than my noble friend Lord Cockfield. However, one has learned once again that small print is not always read.
Other points were raised in relation to where we placed the emphasis, but taking the debate as a whole I do not believe that the report has come out too badly. I am most grateful to noble Lords for their comments. I am grateful even to my noble friend Lord Beloff whose elegant pessimism about the Community seems to have extended a little to your Lordships' Select Committee on European affairs. My last words are that the report can claim a little credit for the very high quality of a very interesting debate.
On Question, Motion agreed to.

Summer Time Order 1992
10 p.m.
Viscount Astor Viscount Astor rose to move, That an humble Address be presented to Her Majesty praying that the Summer Time Order 1992 be made in the form of the draft laid before the House on 23rd June [4th Report from the Joint Committee].
The noble Viscount said: My Lords, I beg to move that the Summer Time Order 1992 be approved. The draft order before your Lordships' House this evening has been considered by the Joint Committee on Statutory Instruments, and has been approved by affirmative resolution in another place.
In itself the order is uncontroversial in that it continues for a further two years, that is for 1993 and 1994, the existing arrangements for the starting and ending dates of summer time. This will mean that, as in previous years, summer time will start at 1 a.m. GMT on the last Sunday in March and end at 1 a.m. GMT on the Sunday after the fourth Saturday in October. Summer time will therefore run from 28th March to 24th October in 1993 and from 27th March to 23rd October in 1994. The order is consistent with the operation of the Summer Time Act 1972.
The starting and ending dates and times conform with the sixth directive on summer time in the European Community. All member states in the Community, regardless of time zones, begin summer time on the same day, but the United Kingdom and Ireland end summer time about one month later than the rest of the Community, under a derogation in the sixth directive.
The order has no direct bearing on the wider issues of summer time policy, which were examined in the Green Paper, Summer Time: A Consultation Document.
As your Lordships will know, the Green Paper canvassed opinion on three options for future summer time arrangements. Of those options the harmonisation of end dates with the rest of the European Community, thereby losing one month of summer time in October, attracted very little support. The retention of the status quo, that is, Greenwich Mean Time in the winter months and Greenwich Mean Time plus one hour from the end of March to the end of October, was the option most strongly favoured in Scotland. On the other hand, in England and Wales there was considerable support for the adoption of Greenwich Mean Time plus one hour in the winter and two hours in the summer, effectively moving to Central European Time.
Strong views were expressed on both sides of the argument, and in the light of those conflicting responses we concluded that more time for reflection was required before bringing this matter to a decision. As I informed your Lordships on 29th June, in an Answer to my noble friend Lord Mountgarret, we shall also wish to take account of a review of the future of summer time within the Community, which we understand is soon to be undertaken by the European Commission. We shall be discussing with the

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Commission the scope and direction of that review and when that is clear we shall reach a view and report back to your Lordships' House.
I therefore seek the agreement of your Lordships to the continuation of the present arrangements for a further two years to enable the Government to complete their consideration of the options for future summer time policy, including whether there is a case for change. I beg to move.
Moved, That an humble Address be presented to Her Majesty praying that the Summer Time Order 1992 be made in the form of the draft laid before the House on 23rd June [4th Report from the Joint Committee.].—(Viscount Astor.)
Lord Graham of Edmonton: My Lords, this side of the House certainly has no objection to the order and takes no issue with the speech of the Minister. He told us that there would be a further period of consultation and reflection. I may not have heard him correctly but perhaps he could also indicate to the House the drift of the Government's thinking as regards moving towards a common European Summer Time. In other words, I should like the House to know the direction of the Government's thinking.
Would the Minister care to tell the House the kind of consultation that the Government feel is appropriate and the kinds of bodies whose views will be sought in that two-year reflection period? Can he say whether the Government also have in mind that at the appropriate time there would be what I call a proper parliamentary opportunity to have a debate? That is not to say that this occasion, short as it may be, is not a good opportunity to take a tiny bite at the cherry but clearly a matter of this kind merits some time and a debate in which many people would be primed at the right moment to make helpful contributions.
Will the Minister tell the House the drift of the Government's policy, the kind of consultation that he has in mind and whether at the end of that consultation and before the two-year period is up it is the Government's intention to hold a proper debate on the issue? Other than that, we have no objection to the order.
10.5 p.m.
Viscount Mountgarret: My Lords, perhaps I may intervene for just a short moment because I think it appropriate to discuss the question of time when the clocks in your Lordships' House seem to be rather upset and we do not quite know what time it is.
I think the order is disappointing to the extent that the question to which my noble friend referred on 29th June appeared at first sight to have been overlooked and indeed ignored. Having said that, the answer given by my noble friend was perfectly understandable. To consider any form of change in this country would be premature in the light of the expected discussion with the European Commission on what it may choose to do from 1995 onwards. Therefore it would seem to me that an order of this kind covering 1993 and 1994 has regrettably to be accepted.
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Having said that, I am very mindful of the question which was raised by the noble Lord, Lord Annan, and perhaps I may just refer to it for a moment. He asked whether my noble friend could explain how it is possible for the European Community to know what it wants to do until it has some inkling of what we want to do. I think that is a very important point. Whether we like it or not, we are part of the European Community; and if we are, then we ought to play some part in it. If we are going to do that surely it must be acceptable for us to go along to a discussion and say to the European Commission that the United Kingdom would like to have whatever it wants.
I am not advocating whether it should be Central European Time, Summer Time, Greenwich Mean Time, or any other time that your Lordships like; that is not the issue for the moment. But I think it is important for the Government to take on board the responses to the Green Paper. I am very sorry to say to my noble friend that he somewhat clouded the issue in referring to Scotland. I have to tell him, and he knows perfectly well, that the overall response from England, Scotland, Northern Ireland, Uncle Tom Cobbleigh and all, was 86 per cent. in favour of adoption of Central European Time.
If that is the response, surely the Government have a responsibility to take that response on board, discuss it fairly and squarely, present it to Parliament and see what we want, and then go forward to the Commission and say,"This is what the United Kingdom wants and we will listen to what you have to say". We should do that instead of sitting back and waiting to hear what the Commission may say. It might say,"You will do this, that or the other" without our giving it an authoritative view of what we want.
I think it would be quite wrong for the Government to go to the European Commission and say what they think this country wants. I think the matter ought to be considered and debated, as the noble Lord opposite has said, and then we should go forward to the Commission with a definitive view and get the matter settled. That is the purpose of my intervention and I am grateful to my noble friend for having listened to it.
Lord Desai: My Lords, I should like just to ask the Minister whether he would agree that it would be a good idea during the period of our presidency to adopt Single Double Summer Time before it is imposed upon us by qualified majority voting.
10.8 p.m.
Viscount Astor: My Lords, the noble Lord, Lord Desai, makes an interesting point. Of course we have had, since 1916, a number of different times. Summer Time was introduced from 1916 to 1939. From 1940 to 1945 we had continuous Summer Time and from 1941 to 1945 Double Summer Time was added. At the end of the war we reverted to Greenwich Mean Time in the winter, with normal Summer Time; but then we went back to Single/Double Summer Time in 1947. In 1948 to 1968 we were back to Greenwich Mean Time for the winter, with Summer Time. From 1968 to 1971 we

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were on British Standard Time (Greenwich Mean Time plus one hour throughout the year) and since 1971 we have been on Greenwich Mean Time with Summer Time. If your Lordships are a trifle confused by that, I apologise; but of course in your Lordships' House we are at the moment on Greenwich Mean Time plus two hours, or Greenwich Mean Time minus 10 hours, whichever way one wants to read the clock that failed to work in your Lordships' House.
The noble Lord, Lord Graham, asked about consultation. We published a Green Paper in 1989 and the issues were examined in great detail. Before deciding on the next steps we shall need to see how the discussions and work within the European Community progress. My noble friend Lord Mountgarret was right in saying that in England an overwhelming majority was in favour of Central European Time. However, in Scotland—
Viscount Mountgarret: My Lords, I thank my noble friend for giving way. I did not say "in England". I said that the overall response in the United Kingdom as a whole was 86 per cent. or so in favour of adopting Central European Time. If my noble friend wants the precise figures he will have to look them up for himself. I believe that in England 96 per cent. was in favour but I was merely referring to the United Kingdom as a whole.
That issue is a red herring. I am merely asking the Government to take on board the point that the Green Paper shows that apparently we wish to adopt the same time as Europe. If that is so, will my noble friend be good enough to agree that the Government will have an investigation and a debate on the matter?
Viscount Astor: My Lords, my noble friend Lord Mountgarret, is right in saying that in total there were more representations in favour of the proposal. However, I said that in Scotland in particular, where the problem is one of latitude rather than of longitude, the vast majority were against it.
The noble Lord, Lord Graham, asked me in which direction we are going. The Government are giving serious consideration to the matter and negotiations with our European partners on a directive for dates of Summer Time for 1995 and beyond are expected to begin about the middle of next year. However, we understand that before then the European Commission intends to conduct a review of the operation and the future of Summer Time across the Community. In order to assist that, it will hold a public hearing after the summer break.
One of the arguments put forward in favour of change is that it will enhance our communications with our European partners. Therefore, it would clearly be premature to ask Parliament to reach a decision before the Commission's approach is clear. We shall keep in close touch with developments and report back to your Lordships in due course. A change to Central European Time would require primary legislation and, therefore, a Bill would have to come before your Lordships' House. I hope that I have answered the points raised by your Lordships.
On Question, Motion agreed to, and it was ordered that the Address be presented to Her Majesty by the Lords with White Staves.

Ethnic Minorities: Employment in the EC
10.12 p.m.
Baroness Seear Baroness Seear rose to ask Her Majesty's Government what steps they will be taking during the United Kingdom presidency of the Council of Ministers to ensure that Britain's ethnic minorities seeking employment in the Community will continue to enjoy the level of legal protection against racial discrimination that they currently enjoy in the United Kingdom.
The noble Baroness said: My Lords, at this stage in the Session, and at this time of night, I shall endeavour to delay your Lordships' House for as short a time as possible. However, the subject of this Unstarred Question is a matter of considerable anxiety to many of our fellow citizens who are members of ethnic minorities. I refer both to those who hold British passports, and who therefore are EC citizens, and to those legally resident in this country but who are not EC citizens because they do not have British nationality as such.
Together they comprise a considerable number of people. They are greatly worried by the fact that however inadequate at times they believe the protection against discrimination might be in this country there is no doubt that the protection in the other EC countries is a great deal less. It is true that in the Netherlands and in Belgium there is a degree of protection. Other countries will claim that they have anti-discrimination provisions; for example, Germany will point out that its constitution states that there should be no discrimination.
Nevertheless, it takes little imagination to see that, for example, an unskilled worker from the West Indies who is nonetheless a British citizen is given little protection in practice by the fact that discrimination is banned in Germany. Effective protection requires that machinery for enforcement should be easily available to people for whom elaborate legal procedures are not a practical option.
That absence of protection against discrimination on grounds of race or ethnic origin is in sharp contrast to the protection given against discrimination on grounds of gender. As your Lordships are aware, that is extensive under European law and in fact the Community has been a leader rather than a follower in relation to discrimination on grounds of gender. In some regards, the UK has trailed behind and is still trailing behind in that area of discrimination. Therefore, there is a marked contrast between the provision against discrimination on grounds of gender and discrimination on grounds of race or ethnic origin.
I am aware that the Government are extremely unwilling to see any extension of what they regard as social policy coming from the Commission and the Community. However, I hope that they will not allow that to blind them to the very real issue which I raise today and the way in which it is regarded with, in my view, considerable justification by members of the ethnic communities.
When the question is raised, the first point made in discussions is to argue whether in fact there is competence under the treaties to deal with the question of discrimination on grounds of race. Of course, if there is not competence and it can be established that there is no competence, nothing can be done unless changes are made in order to ensure that competence exists.
I argue that there is at least a case to answer as regards claiming that there is competence because it is an undeniable part of the Treaty of Rome that there should be full free movement of labour. That is a central and undisputed article of the treaty about which there is no disagreement. The reality of the position is that, if for a number of people there is no protection whatever against discrimination as regards employment, housing, education or training, then free movement of labour is not a reality for those persons. Therefore, it can be argued that, under the full implementation of free movement of labour embodied in the treaty, there are grounds for saying that action should be taken to improve the position and to give genuine anti-discrimination protection for people throughout the Community.
Members of the all-party parliamentary group on race in the Community went recently to Brussels and discussed that issue with officials in the Commission. While they did not say that they agree that there is competence, they accepted the argument that it may well be possible to establish, under the free movement of labour argument, that such competence exists. However, I do not pretend that that is in any way established.
The Commission for Racial Equality took counsel's opinion on the matter and I have here a copy of that opinion. Counsel pointed out that on 11th June a joint declaration of the European Parliament, the Council and representatives of member states meeting within the Council and the Commission declared that they:

1. vigorously condemn all forms of intolerance, hostility and use of force against persons or groups of persons on the grounds of racial, religious, cultural, social or national differences;

2. affirm their resolve to protect the individuality and dignity of every member of society and to reject any form of segregation of foreigners;

3. look upon it as indispensable that all necessary steps be taken to guarantee that this joint resolve is carried through;

4. are determined to pursue the endeavours already made to protect the individuality and dignity of every member of society and to reject any form of segregation of foreigners;

5. stress the importance of adequate and objective information and of making all citizens aware of the dangers of racism and xenophobia, and the need to ensure that all acts or forms of discrimination are prevented or curbed".

"All acts or forms of discrimination" must surely include discrimination in the areas of employment, housing and education. The counsel goes on to point out that,
"That declaration was formally appended to the Single European Act, which last amended the EEC Treaty".
Counsel does not argue that that establishes competence, but points out that it is a step in that direction.
There is therefore a case to be answered and an explanation to be given as to whether the Government believe that action can be taken, recognising that there

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is an issue of real importance to many people in this country. It is not only the CRE in this country and those of us who are particularly interested in the Question who are concerned with the matter. The Commission for Racial Equality is acting with the Dutch National Bureau Against Racism and the Belgian Royal Commission on Policy towards Immigrants. They agreed a common policy to lobby the European Community institutions. They are arguing for an amendment to the Treaty of Rome. That is based on the assumption that the case I put forward would not be accepted; it is a further stage. The amendment would state clearly the Community's competence to legislate against racial discrimination; it calls for directives to measure against racial discrimination; and it supports freedom of movement within the EC for all permanently settled third country nationals.
That is a reference to a point I made in the beginning—that there are people among the ethnic minorities who are not British nationals and therefore do not automatically have any right of free movement, giving them the same rights with regard to employment, establishment and family unity as EC nationals.
As I said, it is a matter about which many people in this country are anxious. Of course, the situation has always existed. What is new is that, with the coming of the single market and the changes that will take place in 1993, the whole issue has assumed much greater importance and urgency in the eyes of those concerned.
I raise the matter now at this most inconvenient hour and time because of the British presidency. It gives the Government the opportunity to take the matter up. If they do so, it will be greatly appreciated by the people in this country directly concerned. Therefore will the Government consider joining with other countries in the Community to see what legislation can be put forward or at least, as they are committed to a conference on equal opportunities, to make sure that issues of policy with possible legislative results are discussed?
10.23 p.m.
Lord Desai: My Lords, the noble Baroness, Lady Seear, has covered most of the issues arising in the Unstarred Question. I am grateful to her for raising this important subject. I shall emphasise only one point that the noble Baroness mentioned; that is, the problem of third country nationals.
It so happens that countries of South Asia—India, Pakistan and Bangladesh—are reluctant to allow dual nationality for their citizens. Those people who are here bearing passports for those countries find it especially difficult to translate the entitlements that they have in this country when they travel into Europe for work or even for holidays. Indeed, their entitlement to national health is difficult to obtain.
I urge the Government to take on board the many useful points raised by the noble Baroness and perhaps take the view that racial discrimination is a matter of great economic and political importance.
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Inasmuch as the UK is the head of Europe in that respect, we should take the initiative during the presidency and perhaps chivvy along the other countries to follow our example.
10.25 p.m.
Lord Meston: My Lords, the 1989 CRE annual report pointed out that race issues barely featured on the European agenda. Since then the CRE and others have pushed it onto that agenda and this debate keeps up the pressure. In recent years there has been growing realisation of some of the inconsistencies and anomalies concerning discrimination in the European legal context. Community law gives rights of free movement to EC nationals including specifically the right to take up work, employed or self-employed. The European Court has apparently interpreted those rights broadly.
The first anomaly is that which the noble Lord, Lord Desai, just mentioned. Those rights do not extend to non-EC nationals. That topic is beyond the scope of the Question asked by my noble friend. But if the Community institutions feel able to tackle that problem, then they ought to be all the more ready to consider the problem raised by this Question.
The second anomaly is that those rights of free movement for individual economic activity do not in practice assist EC nationals who belong to ethnic minorities. The reason is the fundamental weakness in Community law which this Question invites the Government to address. The weakness is the absence of any expressed provision in European law prohibiting racial discrimination. That is by contrast to the express provisions of Article 119 of the Treaty of Rome dealing with gender discrimination. For our ethnic minorities, and those from other European countries, it is no use having a theoretical freedom of movement to get work unless they also have legally enforced freedom from racial discrimination in seeking and retaining work.
Our Government's great advantage is that on this topic the United Kingdom can speak to its Community partners with considerable moral authority. The basis for that authority is that the UK has a well-established framework of legislation prohibiting racial discrimination. It is not perfect (that is a topic for another debate) but it means that this country has both that authority and also its expertise to offer. It also means that our Government can point to the further anomaly that, whereas people coming from Europe to this country have the full protection of our discrimination laws, our ethnic minorities cannot at present expect comparable protection if they cross the Channel.
The recent manifestations of racism in Europe are all too apparent. They are illustrated in the latest CRE report by a photograph of a "foreigners out" sticker circulated in Leipzig. It is not enough for us to disapprove of these matters from a distance. We should certainly feel no need to appease any extreme Right-wing elements in other countries.
The Government now have a valuable opportunity to galvanise thinking, to prevent racial exploitation; to prevent competitive disadvantage both for

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employees and employers; and to ensure true freedom of movement for our ethnic minorities. There is no question of sovereignty being infringed here in an area in which we have in force superior laws and have little to be told about these matters by other European countries.
I therefore hope that the Government will not seek to suggest that the EC does not have competence. My noble friend touched on that. Even in this House, where time stands still, it is too late to debate technical questions of competence. But there is a compelling argument in the section on Europe in the CRE's second review of the Race Relations Act 1976. I also understand that it is possible to build on Article 118 of the Treaty of Rome and on the joint declaration appended to the Single European Act to which my noble friend referred. Whether or not our Government can ensure protection as the Question asks, the Government should surely try an initiative for which future generations will certainly be grateful.
10.29 p.m.
Lord Pitt of Hampstead: My Lords, I join in supporting the noble Baroness, Lady Seear, in her Unstarred Question. I am glad to be speaking immediately after the noble Lord, Lord Meston, because he has put the case very well.
As president of the EC, the Government are in a position to influence what happens in the EC during the next six months and to push it forward after that. The question of whether one allows racial discrimination to dominate in a society is a very serious one. There is plenty of evidence in other countries and in other parts of the world of the consequences of allowing racial discrimination to be rife in society. There is plenty of evidence that although it is not rife, racial discrimination exists on the continent of Europe.
We have one of the largest visible minorities in Europe. The only country with a comparable visible minority is the Netherlands; but we also have the best and strongest legislation for dealing with it, and that puts us in a position of strength. Now that we have the presidency, we can say,"Let's look at the problem and see what can be done about it. Let's see to what extent the type of legislation in Britain is applicable to the EC as a whole and if there is a way of getting it enacted through a directive or other measure—even an inter-governmental agreement—let us try to do it." As I understand the Question, that is what the noble Baroness is asking.
The noble Baroness is asking that Britain's ethnic minorities be protected; but one cannot protect one's nationals when they are in other countries. On the other hand, we are supposed to be part of the EC, and what is more at this moment we are in the Chair. Therefore, we are in a position to influence what happens. We are asking the Government to use their influence in this very important area to try to get some EC activity which will make racial discrimination in Europe something that is not acceptable.
The problem of how people of different races live together in equality and friendship is the biggest
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problem confronting the world today. Whenever we have a chance to do anything about it, we must grasp that chance. We are inviting the Government to do so.
10.33 p.m.
Lord Bonham-Carter: My Lords, I should like to join other noble Lords in thanking my noble friend Lady Seear for tabling this Unstarred Question this evening. She referred to the anxiety which is prevalent among many people about the existence of substantial racial discrimination on the continent of Europe, an anxiety that has only increased with the recent symptoms of racism to which my noble friend Lord Meston referred.
My noble friend Lady Seear is also right to point out that those declaratory provisions in the constitutions of some countries on the continent are, in point of fact, practically useless. As we have found with our own legislation, the great problem is to have enforcement procedures which are actually effective. We have tried. We have not done as well as we could—we do better in Northern Ireland, something to which I have objected before in your Lordships' House—but we are still better than most of our continental colleagues within the Community.
Sir Michael Day, chairman of the CRE, wrote to the Prime Minister in September 1991 urging the need for protection against racial discrimination for British ethnic minorities travelling or working in EC countries. To that letter the Prime Minister replied that he was personally committed to the policy that the United Kingdom had long pursued of combating racial discrimination and wished to encourage our EC partners to introduce similar legislation to ours, but that he had doubts whether the policy gain would be worth acceptance of an extension of European Community competence. I find that a rather extraordinary response. It shows an almost paranoid fear of an increase in EC competence even at the expense of UK citizens, even to the extent of failing to protect UK citizens from the humiliation and injustice of unequal treatment. I cannot exaggerate the importance of protecting people from that kind of treatment which extends beyond the inability to get jobs to discrimination, as my noble friend Lady Seear said, to housing, which is of crucial importance, and to the provision of services.
Race relations legislation was introduced in this country in 1965 because of the injustice which discrimination inflicted on individuals but also because of the social consequences of widespread discrimination on the grounds of race, colour or national ethnic origin. Those social consequences are as damaging within the EC as they are within the United Kingdom and as they are within the United States. If the Prime Minister is anxious to encourage his partners to introduce comparable legislation, why does he not take the simple step as proposed by noble friend? Does he regret the protection offered to women against discrimination on the grounds of gender under a series of directives? If he does not regret it, why should not the same protection be

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offered to members of ethnic minorities as is offered to women? It seems inexplicable and very difficult to justify.
Reports in The Times and in the Independent today indicate that we have opened our presidency with characteristic clumsiness, offending and irritating our 11 colleagues and confirming ourselves in the role of the slowest ship in the convoy which sets the pace for all the others. Would it not be a welcome change if for once we took the lead; if for once instead of blocking things we started something; if we proposed something positive which encouraged others to follow our example? For all our weaknesses we are in this respect ahead of the rest of our colleagues with the possible exception of the Dutch.
I understand that the Department of Employment means to hold a conference on equal opportunities. That conference will be an empty gesture unless it contains some positive proposals for dealing with unequal opportunities. One positive proposal is that which my noble friend Lady Seear has made. I hope that we shall not hear that the competence of the EC is a good reason for failing to press for positive action and that the competence of the EC is more important than checking injustice against individuals which we have regarded as important in this country and which is just as important in the Community of which we are members.
10.40 p.m.
Baroness Turner of Camden: My Lords, I, too, am grateful to the noble Baroness, Lady Seear, for introducing a debate on the subject, even at this late hour. As noble Lords will know, these Benches have consistently supported the European Social Charter—or chapter as is now seems to be called. It seemed to us to offer greater protection and security for workers than our own legislation, much of which, since the advent of this Government, has ceased to comply with ILO standards.
Ever since the Treaty of Rome was introduced, there has been a commitment to sex equality. Subsequent judgments of the European Court have built on that and our own law has been amended, in my view, entirely beneficially. Therefore, it is strange that European Community law has not been developed to protect people on grounds of race. The Single European Act fails to guarantee equal treatment on grounds of race and ethnic origin. While other European countries may have some form of protection against discrimination, in most cases, as a number of noble Lords have said, it falls short of our Race Relations Act 1976.
In the Commission for Racial Equality we have a body whose functions include working towards the elimination of racial discrimination, promoting equality of opportunity and good relations among people of different racial groups and keeping under review the working of the Act. It also assists individuals seeking to enforce their rights under the legislation. It can also make formal investigations into situations if it appears that racially discriminatory practices are being followed. While no one can be
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entirely happy about the state of race relations in the United Kingdom, there is no doubt that our legislation and the existence of the Commission for Racial Equality have helped enormously to improve matters. It is no longer quite respectable to display racial prejudice—although of course much of it remains covertly.
Legislation is important in helping to change attitudes. Anyone who doubts that fact should read some of the popular literature published in the 1930s—certain ethnic groups were referred to in terms which would be simply impossible nowadays. Public perceptions of what is acceptable have changed. The CRE has already told your Lordships' Select Committee dealing with European directives (of which I am a member) in its written evidence that it is concerned that the creation of a single market by 31st December of this year, as set out in the Single European Act, may have a detrimental effect on ethnic minorities legally resident in Britain. There is worry that black and Asian British citizens without UK nationality will not have the same rights as EC citizens to reside and work in other member states. That is clearly important against the background of the freedom of movement directive which will allow the free movement of capital and people across EC borders.
The CRE has told your Lordships' Select Committee that it has three objectives in that area: first, to secure an amendment to the Treaty of Rome which would state clearly the Community's competence to legislate against racial discrimination; secondly, to secure the issuing of a directive outlining measures against racial discrimination; and, thirdly, the extension to third-country nationals legally resident and permanently settled in the Community of the same rights to freedom of movement and establishment as those enjoyed by nationals of member states.
Community legislation outlawing discrimination and the granting of equal rights to legally resident third-country nationals is essential if the integration of ethnic minorities is to be achieved. As the noble Lord, Lord Meston, has already pointed out, the CRE is very concerned about the rise of xenophobia in a number of countries, including Germany. I fully support what the commission says. I believe that the Government should take fully into account the views expressed by an organisation which has had many years' experience in dealing with such issues.
The CRE welcomes the EC Commission's proposal that certain non-EC nationals settled in a state should have a right to employment in another member state. The proposal that a firm should be able to move staff, whether EC or non-EC nationals, is also welcome. The proposals also include a strong statement about the rights of families which says that,
"the right to live with one's family is a fundamental right which cannot be denied by the authorities".
That surely is right and acceptable.
There is a problem about young people from ethnic minority groups. There is a real risk of marginalisation. We have seen what can happen in urban centres when the young feel themselves excluded. That could

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well occur in urban centres in a number of EC countries. I understand that our neighbours in the EC have asserted that there is no need for them to have specific legislation on race relations as everyone, irrespective of race, has certain human rights guaranteed by law. As a number of noble Lords have said, that is not sufficient. We have seen that racial conflict occurs in France and Germany, despite rights allegedly guaranteed on an individual basis.
Our legislation, which I believe is in advance of that in the rest of Europe, specifically prohibits discrimination on racial grounds. Of course we know that it happens despite the law. There is clearly a reason why the chalices of employment for young black citizens are recognised to be less good than those for their white contemporaries. Nevertheless, the legal framework exists. The CRE exists to act as a monitoring agency and to assist with enforcement. It is no good having rights on an individual basis if there is no means of enforcing them.
I hope therefore that the UK presidency will see an attempt to ensure that the principle of equal treatment on pay, forbidding discrimination on grounds of race or ethnic origin, is incorporated into a Community-wide directive and also that all countries throughout the EC introduce such legislation.
There is a legal view—this was referred to by the noble Baroness, Lady Seear—that the Community already has competence to enact legislation outlawing racial discrimination. The CRE, as your Lordships have already heard, has had advice to that effect. If necessary, however, the Treaty of Rome should be amended to include the requirement that there should be no discrimination. The UK presidency provides an opportunity for opening up this whole matter, and I hope to hear from the Minister that that will be done.
We owe it to our ethnic minorities to demonstrate that we have their interests at heart and will ensure that they have adequate protection and the same rights as others following 31st December this year.
10.47 p.m.
The Minister of State, Home Office (Earl Ferrers):
My Lords, the House is grateful to the noble Baroness, Lady Seear, and the stalwarts who remain for giving us the opportunity to discuss what is an important matter. The noble Baroness explained her position clearly. Your Lordships' interventions have been of a brevity which must be the envy of other debates, but that has not detracted from them.
I agree with what the noble Baroness said in her Question—the noble Lord, Lord Meston, also said this—that the ethnic minorities in the United Kingdom enjoy a high level of legal protection against racial discrimination. They do. The United Kingdom has the most comprehensive race relations legislation of the whole of Europe. I should like at the outset to assure the noble Baroness that the Government remain wholeheartedly committed to combating racial discrimination—a policy which they have long pursued.
Our aim is to bring about the conditions in which people from the ethnic minority communities can develop to the full their contributions to the life of the
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nation. Our country enjoys great benefits from the outstanding contribution which the ethnic minorities make in business, the professions and other walks of life. The noble Baroness said that there are worries among the ethnic minority communities that they will be unable to enjoy in Europe the safeguards against racial discrimination which United Kingdom laws provide. I realise that that is a genuine fear.
The noble Baroness said that free movement should involve anti-discrimination. Research which has been carried out on behalf of the Department of Employment earlier this year shows that Britain has established a lead in good equal opportunities law and practice within the field of racial discrimination. I was glad that the noble Lord, Lord Meston, acknowledged that, as did the noble Baroness, Lady Turner. We are, for example, ahead of other European Community countries in dealing with indirect discrimination.
The noble Lord, Lord Bonham-Carter, said he wished that we would take an initiative and that we should not be the slowest ship in the convoy. I do not believe that we are. We would like to impart our experience and our knowledge to our European Community partners and to do so more widely. I can understand those noble Lords who would like to see some form of legally binding Community legislation on racism. That is an understandable view, but we take the view that European Community legislation is not the right way to take action in order to enhance racial equality. I believe that to do so might very well have the reverse effect to what we intend, given the attitude in some European countries, with the possibility that attempts might be made to water down our own legislation in order to produce a harmonised European version. In other words, we might indeed be in danger of becoming the slowest ship in the convoy, which at the moment we are not.
The exact legislative arrangements in each member state must be a matter for each individual state, taking into account its own particular circumstances. Each member state has diverse and differing experiences and problems in the field of race relations. Look at France; look at Germany. They have their own particular and distinct problems which they have to resolve in their own particular and distinct way. Each member state must, therefore, be able to frame—and must be free to frame—its own legislation which addresses its own needs.
The noble Baroness, Lady Seear, was concerned to see whether we could get Community legislation on racism and xenophobia. In May 1990, the European Community Labour and Social Affairs Council and the representatives of the governments of the member states meeting with the council adopted a resolution on racism and xenophobia. It was agreed there that the responsibility for taking action on racism and xenophobia should rest primarily with member states rather than with the Community and that therefore the resolution should be mixed. The resolution is not legally binding, but it encourages member states to take measures to combat racism and xenophobia. The Government's position on the resolution is that

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responsibility for taking action against racism and xenophobia should rest primarily with member states rather than with the Community.
The Government feel that it would be an appropriate moment for European Community member states to consider the issue of racism and xenophobia, especially in view of the recent manifestations of racial harassment and racial violence across Europe, which have been due largely to the rise of nationalism. The rise of the far Right in France and the desecration of its Jewish cemeteries, the reappearance of neo-Nazism in Germany and the attacks on refugees in Germany are all nasty reminders that prejudice continues to bubble underneath the surface.
We shall, therefore, during our presidency of the European Council, take any appropriate opportunity to make our partners in Europe aware of the measures—both statutory and non-statutory—which we in the United Kingdom have taken to address the issues of equal opportunities and race. We shall encourage our European Community colleagues to consider taking appropriate action at their own national level to combat racial discrimination in the light of their own policies, their own legislation and their own peculiar needs.
One of the ways in which we intend to achieve that during our presidency will be through the Department of Employment hosting a conference on equal opportunities in employment, which will be attended by representatives of both employers and governments in Europe. The conference will be aimed at the practical steps which employers can take in order to ensure that equality of opportunity is a reality in their organisation. It will be wider than the traditional "Women's Event", which is a normal feature of any term of a presidency. The conference will cover gender, race and age.
It is intended to use the occasion to build upon the success of a number of initiatives including Opportunity 2000, the Prime Minister's initiative on public appointments and the recently issued Ten Point Plan for Employers on Equal Opportunities
The plan was sent to some 36,500 employers in Great Britain who employ 50 or more employees. It gives employers practical advice on how they can offer equality of opportunity within their workforce for people from the ethnic minorities, for women and for people with disabilities.
In the United Kingdom, more and more employers are adopting, and improving upon, their equal opportunities policies and practices. It is intended to invite European Community employers and employers' representatives, as well as representatives of European Community governments, to the conference. We intend to use the occasion as an opportunity for employers across Europe to share good practice in equal opportunities in employment. It is hoped that the conference will result in a handbook of good practice.
Other more specific concerns about Europe have been voiced by members of the ethnic minority
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communities. For example, there have been expressions of uncertainty, and indeed concern, about the implications of the completion of the single European market at the end of 1992 for members of these communities. Your Lordships have expressed concern about that today. I understand that anxiety, but I think that, to a large extent, those worries may be misplaced. They are based on a misunderstanding of the possible effects of the completion of the single European market.
Ethnic minority British citizens should benefit in the same way as should everyone else from the changes in Europe, and we are keen to ensure that this happens in practice. If people from the British ethnic minority communities experience difficulties when they travel or when they try to obtain work in the European Community, the British Government will be keen to help to try and ensure that those problems are put right.
The noble Lord, Lord Meston, asked what redress there was for British citizens from the ethnic minorities whose freedom of movement may have been restricted. I can only tell him that any British citizen who feels that he or she has been prevented from exercising rights under the Treaty of Rome in another European Community member state, whether as a result of racial discrimination, or for any other reason, is entitled to pursue a case against the party through the Community institutions. But there is a real point in the concern that our ethnic minorities, whether or not British citizens, will not enjoy the same form of protection from discrimination in other European countries. It is probably true to say that the United Kingdom, together with the Netherlands, has more effective anti-discrimination legislation than has any other member state.
There will be opportunities for all British citizens, including those from the ethnic minorities, to live and to work anywhere in the European economic area. This is a fact, and it is a legal right which will be available to all British citizens.
When the Treaty on European Union which was signed at Maastricht is implemented, British citizens who are resident in another European Community country will be able to participate in local and European parliamentary elections as voters and as candidates. At the same time the position of non-European Community nationals will not worsen. In fact some developments will make it easier for them to travel within the Community. For example, the draft external frontiers convention will mean that visitors from a third country will be able to visit more than one European Community country on a single visa. It will also mean that non-British citizens who are resident here will be able to travel in the Community without needing to obtain a visa.
The Government are not of the view that the grant of residence or the grant of a work permit by one member state to a national of a third country should carry an automatic entitlement to live and to work in other member states.
The ethnic minority communities have also been anxious about the pressure from the European Community for us to introduce new internal controls.

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The need for extensive changes of that kind should not arise so long as the United Kingdom is able to maintain its present frontier-based system of immigration control, which the Government intend to do.
It is important that we should all, whenever we can, emphasise to the ethnic minority communities that the completion of the single European market by the end of this year will in fact be a positive advantage to them. It will offer new opportunities to all British citizens, including those from the ethnic minority communities. Those are opportunities which we must try to encourage people to grasp and to enjoy.
Baroness Seear: My Lords, before the noble Earl sits down, I wonder whether he will answer the question that I raised when I opened the debate; namely, that at the equal opportunities conference which is to be held the question of a law should at least be discussed. I take the noble Earl's point that the details of the law may best be settled at the level of each individual country, but that is different from saying that there is no case for having a law at all. Surely it should he possible to discuss the requirement that there should be a law dealing with these matters
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in the countries of the EC even if one agrees (and I can see that one could make a case for doing so) that the details of that law should be fashioned to suit the particular requirements of each individual state. Is it not possible that that could be raised as an issue at the equal opportunities conference?
Earl Ferrers: My Lords, I cannot tell the noble Baroness what the agenda for the conference will he. But I shall certainly see that her suggestion is taken into account. I can see that there is no legal reason why it should not be discussed. The point that I tried to make was that it is our view that it is better for each country to frame its own laws to suit its own circumstances—and the circumstances differ—but that those laws should all, with luck and with assistance, be brought up to the level of those which we have in our country.

London Local Authorities Bill [H.L.]
Reported from the Select Committee with an amendment, and recommitted to an Unopposed Bill Committee.
House adjourned at two minutes past eleven o'clock.