Steel Industry: ECC Report

HL Deb 25 October 1993 vol 549 cc717-44

3.22 p.m.

Lord Ezra rose to move, That this House takes note of the report of the European Communities Committee on Restructuring the EC Steel Industry (24th Report, HL Paper 111).

The noble Lord said: My Lords, I rise to present to the House the Report of the European Communities Committee on Restructuring the EC Steel Industry. The European steel industry is at present going through a major crisis. That is due not only to the recession, which has caused it a great deal of harm, as it has other major industries, but also to the import of low cost steel from eastern Europe where the markets for steel have not been as large as they were before recent events and to the difficulty that there has been in renewing the multilateral trade agreement with the United States which is inhibiting the export of steel to traditional markets for European steel in America.

But a much larger issue than any of those is the overcapacity of the European steel industry. It is that overcapacity which has very largely created the present crisis. It is on the recommendation of the noble Lord, Lord Gregson, who I am glad to see will speak in this debate, that we decided to look at the issue in Sub-Committee B of the European Communities Committee. Members of the committee decided that it would have to be done quickly and so our report has been prepared in quite a short space of time. This is a matter for urgent attention by the Council of Ministers and the Commission.

I should like to express appreciation to the distinguished witnesses who appeared before us at short notice, in particular Mr. Tim Sainsbury, the Minister for Industry, who presented us with a detailed written report, then answered our questions as a witness and subsequently provided us with further information which was most helpful, and Mr. Brian Moffat, Chairman and Chief Executive of British Steel, who not only appeared as a witness but also saw us on a number of occasions and provided the committee with more detailed information. We had much help from our specialist adviser, Professor Aubrey Silberston of Imperial College, and we are much indebted to our Clerk, Mr. Edward Wells, for the great skill that he showed in organising the inquiry and drafting the report.

In fact this is not the first crisis that the Community's steel industry has suffered since the existence of the Community. There was a crisis at the start of the 1980s. On that occasion the solution, which was provided under the terms of the Treaty of Paris, which set up the European Coal and Steel Community, and was ratified in 1950, was to apply a situation of "manifest crisis". That involved setting quotas and fixing prices. It resulted in a degree of rationalisation and a reduction of surplus capacity which, however, was interrupted by the resurgence of economic activity that happened in the latter part of the 1980s.

Some countries seized the opportunity to rationalise their steel operations substantially. Among those countries were Britain and France. But some countries did not do so, and that is where the problem lies. Before getting to the nub of the issue, I should like to summarise the present situation. In October last year a number of the leading steel enterprises of the Community approached the Commission to draw its attention to the very serious crisis which had led to a reduction of something like 30 per cent. on prices compared with the 1990 level and which was leading many of those enterprises into an extremely serious and precarious situation.

As a result of that approach, in the following month, the Commission appointed M. Fernand Braun of Luxembourg, who had served as a director of the industry division of the Commission, to conduct a survey into what needed to be done to reduce the capacity of the EC steel industry to a more acceptable level consistent with likely market demand. He presented a report which showed that the capacity of the European steel industry was something like 30 per cent. over what it needed to be and something of the order of 20 million tonnes of crude steel capacity needed to be taken out of the system.

That report was presented to the Council of Ministers in February 1993. The Council decided to accept the findings of the report. But on this occasion, instead of declaring a manifest crisis and an interventionist solution such as was done under the Davignon plan, it decided to ask the enterprises themselves to come forward with proposals. Furthermore, it asked the Commission to devise a scheme for financial aid for restructuring and to meet redundancy costs. It asked the enterprises to come back with a report and plan of action to cut out those 20 million tonnes by the end of September. Unfortunately, the timetable has slipped. At a meeting of the Council of Ministers on 21st September, it received a progress report which showed that certain progress had been made but now the date of 21st November for a final report has been set.

The nub of the issue is that certain of the countries in the Community provide their steel industries with substantial subsidy. That is totally contrary to the Treaty of Paris which forms part of the corpus of legislation underlying the Community. Article 4 of that treaty states that certain acts are recognised as incompatible with the Common Market and shall accordingly be abolished and prohibited. Item (c) in that list is: subsidies or aids granted by states, or special charges imposed by states, in any form whatsoever". Nothing can be stronger than that. Nonetheless, in spite of the Davignon plan, there are regrettably still flagrant cases of subsidy. They are concentrated in three countries: Italy, Spain and East Germany. Those are the essential issues with which the Commission has to grapple.

It is generally estimated that to take out the 20 million tonnes of surplus crude steel capacity, about half will need to come from the countries which provide subsidies and the other half from the private sector.

Lord Harmar-Nicholls

My Lords, may I ask the noble Lord how East Germany can be identified separately now that it is part of a reunified Germany?

Lord Ezra

My Lords, I should have said plants located in what was previously East Germany and is now part of Germany as a whole. I thank the noble Lord for that correction. The plant is located on the German-Polish border. It is therefore as far east as one can get. I used the term "East Germany" to differentiate between the plants in what was formerly known as West Germany.

It is felt that 10 million tonnes of the 20 million tonnes excess capacity would need to come out of the subsidised plants and the remaining 10 million from the privatised plants which are not in receipt of subsidy. Understandably, the private companies are reluctant to move until they can see what is going to happen with the subsidised companies. They do not want to give up a large part of their capacity for it simply to be taken over by subsidised products.

In the subsidised enterprises the plants are operating in areas which already have high levels of unemployment. I referred to the situation in Germany where the plant is on the border with Poland and is itself a centre of high unemployment. The plant is known as EKO-Stahl. In Spain the plants are located in the Basque country, which also has a high level of unemployment and in which there are number of political perturbations. In Italy the main plant is in Taranto in the south, also known to be an area of high unemployment even in good times. It is therefore clear that the countries concerned will have great difficulty in grappling with the problems.

It is roughly estimated that if the full 20 million tonnes of capacity were taken out, 70,000 jobs would have to go—those would be directly employed personnel—in addition to those employed in the supplying activities, which are always difficult to estimate. That would mean a large increase to the 17 million unemployed already in the European Community. Nonetheless it seemed to the committee that the case was extremely strong for dealing with the situation once and for all.

What is now happening in the marketplace is that subsidised, high cost steel is pushing out competitive low cost steel. The British steel industry is generally regarded as the most efficient in the European Community, if not in the world. But it is finding that it has to face up to the subsidised products which are even penetrating into Britain. That is not a sensible situation at the best of times. But at a time when we are launched into the start of a single European market, distortions of that sort must be removed. If they are not removed, it is difficult to see what the future for the European steel industry can be.

I believe therefore that the Council of Ministers and the Commission need to take a firm line on the issue. They have given an extended period for plans to be put forward. But the Treaty of Paris gave the Commission—then the High Authority—strong powers to deal with the situation. Article 54 reads: The 'High Authority' [now the Commission] may facilitate the carrying out of investment programmes by granting loans to undertakings or guaranteeing other loans. However, if the High Authority finds that the financing of a programme or the operation of the installations therein planned would involve subsidies, aids protection or discrimination contrary to this Treaty, a decision to this effect by the High Authority shall have the effect of prohibiting the undertaking from drawing on resources other than its own funds. Undertakings which disregard such a prohibition may be fined up to an amount not exceeding the 'improperly devoted' funds". In other words, if an enterprise, in spite of the prohibition placed upon it, were to continue to draw subsidies, it could be fined up to the amount of those subsidies. That is a reserve power and everybody will be most reluctant to see it used. Nonetheless, it lies there.

We are talking about an issue of great importance. We are talking about the success of the single market, which many of us support. In the recent Maastricht debate the one thing that I do not believe anybody was against was the creation of a single market in Europe in which goods could flow freely and competition reign. But we must remove distortions. We have a major, clearly identified distortion in the steel industry. I hope that HMG will continue to use all their endeavours to correct that situation and that they will bear in mind that there are substantial reserve powers available if voluntary agreement cannot be reached.

3.36 p.m.

Lord Holderness

My Lords, as a relatively newly-joined member of the sub-committee, it is right that my speech this afternoon should be reasonably short. But I am grateful for the opportunity to pay tribute to the noble Lord, Lord Ezra, who led our inquiry. The measure of our debt is contained in the clarity and authority with which he spoke to us this afternoon.

This debate is particularly timely, placed as it is between the meetings of the Industry Council in September and November. It gives us the chance to express thanks to the noble Lord for all that he has done since he became chairman of the sub-committee. I should like to make clear from all that I have heard that he achieved great things before I joined him. We are all deeply grateful to him and conscious of our debt.

In my opinion, from my short experience, this examination is the most important that the committee has conducted. The report that issued from the inquiry will give valuable support to the position adopted by Her Majesty's Government at the Industry Council. Our ability to debate that report increases its potential to influence opinion in Europe, when further important decisions are to be taken.

The Commission and the Council of Ministers deserve great credit for their determination firmly to tackle what the noble Lord, Lord Ezra, described as the "crippling" continuance of over-capacity, and to try to do so by avoiding resort to any copy of the Davignon plan. I cannot see that any repetition of that experiment can provide a solution to the industry's present problems. Moreover, it is exciting for those whose hearts are in Europe that the new Braun plan challenges the nations of Europe, with the European Coal and Steel Community in a key position, collectively to solve the problem. Looking back into history—not particularly far back—I cannot see how the challenge could be effectively met if individual nations had to meet it on their own.

Before the sub-committee began the inquiry I had no clear idea of either the urgency or the enormity of the problem. Some—I am not referring to members of the sub-committee—seemed to feel that it would go away at the end of the recession even if nothing more was done. I am convinced that nothing could be further from the truth.

One measure, among many, of its magnitude is the very large number of jobs which must now be at risk, a point mentioned by the noble Lord. We have seen in this country the grievous effect of the closure of steel-making capacity, so often, like the cutting off of coal production, in areas where little alternative employment is immediately available. Having in the past had some responsibility in these matters, I am convinced that it is wrong, and would be wrong now, to delay unpalatable but probably in the long run inevitable decisions. It must be better to move as quickly as possible to more constructive alternatives: and this is the strength of being able to take this decision within the European framework. But without doubt, despite any help available to displaced workers, the human price of this operation will be great. It is this that must give grave anxiety to anyone with the least understanding of the present deformity of the industry.

Will steel producers and their governments have the will to act? Can subsidies to uneconomic producers be brought to an end? To my mind, the most important sentence of the report is in paragraph 57, towards the end. It states: Without the necessary political will on the part of Member States, restructuring will fail". The noble Lord, Lord Ezra, must feel very proud that under his leadership the sub-committee has done all in its power—it could do no more—to support and strengthen the resolve of the Commission and Council of Ministers to act now, firmly and decisively. All of us must hope that that resolve will not fail.

3.41 p.m.

Lord Elibank

My Lords, I should like to add my tribute to that of the noble Lord, Lord Holderness, to our chairman, the noble Lord, Lord Ezra, who is standing down under the rules of procedure as chairman of our sub-committee. I hope that he will be proud of his last production, if that is the right word, and I am sure that your Lordships will find it a stimulating and interesting document. As chairman, he will be much missed.

In looking at the restructuring plans for a major industry it is helpful to try to peer, however darkly, into the future to see what is the potential of the industry down the years. It is essential to make up one's own mind whether one sees steel as an industry in gentle decline, in steep decline or suffering only a cyclical hiccup. This was a question on which we received a certain amount of help from the witnesses before us. What they had to say your Lordships may care to read in the report, but it may be helpful to summarise one or two of the points that they made.

First, in a mature economic society such as our own the demand for steel is declining. That does not mean to say that all is black. I was myself astonished at the ingenuity and salesmanship of the steel industry in finding and exploiting new products. Apparently, of the 5,000 or 6,000 different steel products on the market, some three-quarters have been invented or processed during the past five years. That shows at least an agile and alert industry seeking to develop its own future.

Other pointers were that semi-finished steel should be produced in countries like Brazil and perhaps, if one may use the expression, East Germany rather than in places like the UK and other advanced technological societies. They have the labour and the resources to make their contribution—that is, with the proviso that shipping steel about is an expensive business. It is a bulky and heavy product and not easily transhipped at economic prices.

As noble Lords will see from our report, there seemed to be a measure of confidence that large steel firms with high resources of technology and research capability would prosper and that small firms aiming at selected segments of the market would also prosper, but that medium sized firms, which could probably do neither of those things, were in a parlous position and might indeed fade slowly from the picture.

Finally, it looks as though steel-making as a whole will be concentrated more and more at selected large sites, mostly near coastal waters. One would certainly hope that within the EC this would be regardless of national boundaries.

What of steel in the future? One can only give a personal view, but it seemed to me that, taking these factors into account, steel was and is in slow decline. I would expect to see an exercise such as this undergone perhaps in another 10 or 15 years unless the industry itself can phase itself downwards without international or governmental intervention.

The noble Lord, Lord Ezra, and the noble Lord, Lord Holderness, have dealt with state subsidies. It is impossible to consider the situation of steel in Europe without considering state subsidies. They are the rock on which this whole plan may well founder. It is obvious, as the noble Lord, Lord Ezra, said, that private steel companies will not accept painful reductions in their workforce and in their production if they see alongside them state subsidised firms putting out products at effectively a much higher price, the difference being sustained by the taxpayer in the relevant country. That is simply not acceptable and one can only hope that the Commission will be able to deal with it.

The issue of state subsidies is a complex one and one of which we have a long history in this country. I seem to remember—my memory is becoming increasingly fallible—that some decades ago we were pouring around £1 million a day into some of the major state corporations, and even today we apply subsidies to our rail transport. There are often reasonable social and economic reasons for doing this, but if we are to operate a European Community as a common market this must stop. It can only function as an economic entity by the elimination of these subsidies which distort not only steel but the different forms of transport, of which—one might say in parenthesis—the most grotesque example is national airlines.

There is a social cost to this which the noble Lord, Lord Holderness, mentioned—70,000 jobs and probably, with the knock-on effect, a great deal more than that. Fortunately, there seems to be sufficient money in the pot to make very satisfactory redundancy payments to those affected. Money will be available from the Coal and Steel Communities, from the European Commission, from national governments and from employers themselves. Between those various sources it is to be hoped that redundancy payments will be more than satisfactory. Previous speakers have thought sorrowfully of the 70,000 extra unemployed who will be cast on to an unemployment market which is already between 17 million and 18 million. That is a tragedy and one should not try to minimise it. But when one thinks of the sacrifices that have already been made in this country alone in the coal industry and in the steel industry itself, where numbers have dropped from around 250,000 to 42,000 in the space of 10 or 15 years, we have made the most remarkable sacrifices already.

The final point that I wish to touch on—and I dare say that other speakers will elaborate on it—is the position of British Steel. It was a revelation to me to discover how British Steel has turned itself around in the space of a decade, or perhaps a little more, from a somewhat obsolete firm into one of the most efficient steel producers, certainly in Europe, and possibly in the world. It has been done of course with notable sacrifices in plant, equipment and manpower. I believe that the whole committee felt that it would be most inappropriate for any reductions contemplated under the Braun scheme to fall again on British Steel. It has already made its sacrifices and already turned itself into an efficient company. It should not be called on to do more.

I can only say that the Braun plan has been welcomed on almost all sides. One of the almost curiosities of the situation is that the problem is generally agreed by everybody and the solution is widely agreed by most people. The only obstacles are the state subsidised companies. It is to the hoped that the Commission will find the power and determination to overcome those obstacles. Given that determination and a successful outcome to that problem, there is no reason that the European steel industry should not prosper for many years to come.

3.53 p.m.

Lord Tebbit

My Lords, I agree with all noble Lords who have spoken that we should be grateful to the noble Lord, Lord Ezra, and his colleagues on the Select Committee. I read the report with a mixture of sadness and some depression and also with a considerable amount of hope. It raises not just economic and political issues, but moral issues too.

It took my mind back very much to January 1981 when I was appointed Minister of State for Industry with responsibility for the steel industry here. That was the time when the European Community steel industry was held to be in a state of manifest crisis. That is no loose phraseology, as we old Brussels hands know. It has a precise legal meaning: it is a Euro-formula which enables the provisions of the Treaty of Paris and the Treaty of Rome—particularly those concerning state subsidies—to be suspended. That seemed to me to be just as well since, as a government, we had inherited from our predecessors a British steel industry which was severely disadvantaged by a sad history of economics subordinated to politics and constant surrender to unreasonable demands from trade unions. It was an industry so weakened that, without subsidy, it would have collapsed.

My noble friend Lord Joseph, who was my Secretary of State, entrusted to me the negotiations which were designed to restore health to the industry. The only strong card in my hand was that, as one of Europe's worst offenders, I had more to concede in negotiations than almost anybody else. I remember well that vice-president Davignon took me aside at the first meeting I attended and asked me: "Minister, what is your position?" "Well Commissioner," I said, "we are behaving like Italians but we would like to be like Germans". Sadly now, even the Germans are beginning to behave like Italians, although we have learned to behave like Germans.

As noble Lords will know, the 1981 Davignon agreement provided for capacity reductions, quotas and price fixing. In short, it was a classic cartel. I remember well the expression on the face of my noble friend Lord Joseph when I returned from the crucial meeting at which agreement had been reached. He said: "How did it go?" I said: "Very well, Keith". He said: "What happened?" I said: "We have probably created the largest cartel in commercial history and it is designed to force up the price of a product already in surplus". "Oh my god!" he said, clutching his forehead. "Never mind, Keith", I observed, "It will work out".

Of course the redeeming feature of the agreement was that it also provided for an end to subsidy and a phased return to the proper economics of the market. It worked, but as the crisis was overcome so the commitment to the elimination of subsidy was put aside and the game of politics was resumed. So I make it plain that I firmly agree with the committee that we should not again allow a declaration of a manifest state of crisis to be made. That gives far too much to member states who reneged on the 1981 Davignon agreement.

The words of paragraph 49 on page 14 of the Select Committee's report, are worth quoting precisely when referring to the Davignon agreement: Perhaps the key weakness was that the plan was not followed through as the economic boom of the late 1980s took away the incentive to change". I strongly endorse paragraph 51, also on page 14, which says: In some industries much of the industry is state-owned. While this does not necessarily lead to inefficiency, witnesses described the reluctance, particularly in Italy and Spain, to close uncompetitive capacity, resulting in high state subsidies. These subsidies are expressly banned by the Treaty of Paris … Witnesses suggested that the rules are not being enforced, particularly in Italy … Even in Germany … inefficient plant has been kept open, often propped up by banks". That is a turnaround from the situation which we sometimes hear of in this country where efficient plant is closed down mainly at the behest of banks. But that is another matter for another debate. I most particularly choose to share the concerns expressed by the committee in the footnote at the bottom of page 15: The Government initially took the view that, in view of the Treaty prohibition, the Decisions could not be justified [that is, to allow subsidy] except on a very short-term basis, without Treaty amendment. By 1989 they appeared to have changed their policy and their legal position. The Select Committee were highly critical of this change: see Correspondence with Ministers 12th report". I agree with that criticism. We agreed in 1981 to the Davignon plan precisely because we believed that that was the way out of the subsidy trap and that if we allowed that to go on, except in the very short term, it would have required amendment of the treaty. Clearly, anything which undermines the general prohibition of subsidy is damaging to the European Community's economy as a whole but, most particularly, it is damaging to the most subsidy-free member state, which today is the United Kingdom. If Ministers are backsliding, that is a matter for profound regret.

But as I observe, there are also matters in this report for profound rejoicing. Perhaps most clearly that is to be found on page 89, almost at the end of the report, in some of the written evidence that was given. I have in mind the evidence offered by the Amalgamated Engineering and Electrical Union. I believe that it is worth reading. Paragraph 13 states that, as a result of its earlier drastic pruning … operations, British Steel is now the most efficient producer in Europe—so it would not make economic sense to force cut backs in the United Kingdom. Looking at the principles involved—if a company found it had excess capacity and it responded by reducing production at its most efficient plant and subsidising its least efficient plants, it would be well on the way to bankruptcy. The same logic applies to the European steel industry—if total output needs to be reduced, it would not make any sense to force reductions in capacity on the most efficient producer (British Steel). The only sensible response would be to reduce capacity at the least efficient plants (those, in other countries, which are most heavily subsidised)". That is not the Institute of Economic Affairs speaking; it is the Amalgamated Engineering and Electrical Union. It makes a sharp contrast when compared with the flabby thinking of Mr. Pedro Ortún of the Commission. I believe it is well worth while to look at his evidence in the report. I shall quote but briefly from the second column of page 78 of the report. The following is the voice of the Commission: We could have chosen the 'let the market work' strategy but it would have been much more negative … It could have led to massive subsidies". Indeed, it could have led to massive subsidies, but only if the Commission chose to stand aside from its responsibilities and let such subsidies be paid. In fact, the Commission is saying either that it does not believe in the Treaty of Paris or that it does not have the will to apply it.

Let us be clear on the matter. The difficulties of the European steel industry spring, above all, from a refusal to let the market work and a surrender to a political blackmail. No one disputes that the British steel industry is the most efficient in Europe; indeed, among the most efficient in the world. Yet illegal subsidies, especially in Spain and Italy, are forcing British Steel into losses. I have some sympathy with the German problem. The Germans have only just taken on the commitment of East Germany. It will take them some time to sort out the problem. I believe that they should properly be given some time; but that is not the case with the others.

The Commission and the Council sit paralysed as those illegal subsidies force British Steel into losses. They say that it is not their business to destabilise governments of member states. That is a constant theme when one asks the Commission to act. They should think about which governments they are destabilising by a failure to act. The consequences of such policies are all too clear. As has already been mentioned, the airline industry is a particularly blatant example in Europe. Air France continues with illegal subsidies because the French Government lack the courage to stand up to Luddites. The European Community itself pays vast subsidy to open a new coal mine to produce coal at £60 a tonne in Spain, while our pits which produce coal at £30 a tonne are being closed.

What sort of single market is that? If a single market existed and the provisions of the Treaties of Paris and Rome were honoured by our partners, British coal would be exported to Spain as its mines closed and British steel would be going to Italy and Spain and their steel works closed. Moreover, if the French could not run an airline to match its competitors then that would also have to be closed. In a single market there is no case for every country to have a steel works or even an airline.

If other member states ignore their treaty commitments and make the rules to suit themselves, then, sooner or later, this country will face an ugly reality: either more jobs will be lost here and taxes will rise to keep in idleness men who deserve to be in work, so putting more men out of work, or Ministers will have to behave with the same lack of scruples and determination to look after their own people as do those of our continental partners

If illegal subsidies continue, they will have to be met with illegal tariffs, or simple prohibition of imports from offending countries. We always hear the same: the French Government cannot comply with their obligations because they are too weak. The Spanish Government would be overthrown or there would be terrible riots in member states if it was insisted that they comply with their commitments. The same cringing weakness is pleaded by the Greeks, and others, as they plunder British taxes and British jobs. It is a moral issue. We are seeing a political system in which wrongdoing and law breaking brings rewards. I do not believe that that should be allowed to he so. If it continues to be so, then the law will be dishonoured and the whole system will break down.

I sometimes wonder how long we in Britain are expected to queue in an orderly manner to be treated as the mugs—the soft touches of Europe. I was shocked to read that my successor Mr. Sainsbury declined in his evidence to rule out further cuts and job losses here in the United Kingdom. However, the problem is not here in the United Kingdom; the problem is elsewhere. It is in Brussels, it is in Rome and it is in Madrid.

Ministers might do well to start here today with the steel industry with a commitment to take the Commission, as well as the Italian and Spanish Governments, to court for persistent, blatant breaches of the treaty, unless those illegal subsidies are terminated and disgorged by the businesses concerned. Nothing could do more for the rule of law, for the creation of a single market and for the future of the European Union.

4.7 p.m.

Lord Geddes

My Lords, it is indeed a formidable task to follow my noble friend Lord Tebbit. However, the one great advantage in so doing is that he has already covered much of the ground. That will make my intervention much briefer. I, too, should like to begin by saying that it has been a great privilege to serve on the sub-committee under the chairmanship of the noble Lord, Lord Ezra. I should like to thank the noble Lord, and also, as he did, to thank our Clerk, Mr. Edward Wells, for the production of such a clear and comprehensive report. Its recommendations largely accord with the restructuring plan drawn up by the European Commission and the Council. Similar conclusions having been reached by ourselves—that is, by independent means—I hope that that will add to the weight which should be attached to the recommendations.

As other noble Lords have said, there is no doubt that, if the report's recommendations are implemented, the impact will be traumatic on no fewer than an estimated 70,000 steel workers—and, of course, their families—across the EC. Doubtless, as we have seen all too often in this country, whole towns and communities will initially be devastated by its implementation. We know about that in the United Kingdom. But we also know that the phoenix can and does rise from the ashes and that genuine long-term benefit can be achieved, though only by considerable struggle and the implementation of hard decisions. I am entirely satisfied that the proposals outlined in the report form the basis of the only sensible way forward and, indeed, the only way to ensure a viable future for the steel industry in the EC.

The steel industry in Europe can no longer labour under its present load of subsidies, over-production, over-capacity and inefficiency if it is to retain any prospect of competing in world markets. The Minister for Industry gave evidence to the effect that overcapacity throughout the EC was in the region of 20 per cent. The Braun Report, which was initiated by the Council and the Commission in November 1992 to look at the level of cuts necessary in the industry, put it at an even higher figure. On any analysis, that overcapacity is substantial.

Capacity was reduced by 19 per cent. during the early and mid-1980s which was declared to be a lime of manifest crisis in the EC's steel industry. There is however still a long way to go. The UK participated fully in those cuts in the early 1980s and, unlike many of her EC partners, has continued to make reductions, notably by closing Ravenscraig in Scotland. Ravenscraig, with its consequent job losses of 3,700, is the only closure of an integrated steelworks in the EC since 1988, and resulted in a further cut of 15 per cent. in crude steel capacity in this country—a greater percentage than any other EC country.

Unsurprisingly, there is a similar story to tell with regard to workforce figures. During the 1980s, 40 per cent. of its workforce was shed by the industry, with France, Italy and the UK sustaining the biggest number of job cuts. As has already been said, between 1975 and last year, the UK reduced the number of steel jobs from 250,000 to just under 42,000, obviously far in excess of the EC average of 40 per cent. We are now talking about another 70,000 job losses across the Community. In terms of both production and job losses in the steel industry—here I agree wholly with my noble friend Lord Tebbit—this country, to put it in the vernacular, has done its whack. It is now up to our EC partners to follow.

The issue of subsidies is not at all straightforward. Although subsidies are, as has been rightly said many times this afternoon, banned expressly by the Treaty of Paris (with the specific exceptions of research and development, financing closures or assisting regional and environmental policies), there can be no doubt that some countries in the EC are bending the rules ad absurdum. Italy and France appear to be the worst transgressors. I urge the Commission most strongly to heed the words of one of our witnesses, Mr. Ian Blakey—

Lord Ezra

My Lords, Italy and Spain.

Lord Geddes

I thank the noble Lord. Italy and Spain appear to be the worst transgressors. Mr. Ian Blakey, the Director General of the British Iron and Steel Producers Association, said: If governments generally want to get the steel industry off their backs … then the subsidies must go. This is a question of political resolve". I add my own words: no more, no less. Even in Germany private inefficient plants are being propped up, as my noble friend Lord Tebbit said, by banks. I therefore urge the Commission to grasp the nettle—and if your Lordships will excuse the pun—however much it may sting. The solution can only be market led. It lies in increased efficiency and diversity and a recognition of the enormous potential of a well run steel industry. For the story is all not doom and gloom, as my noble friend Lord Elibank said. There are areas where, while the weight of steel per unit has decreased, nevertheless, the overall market share of steel is increasing.

Britain has an especially strong case as our industry is arguably the most efficient of all in the EC. As my noble friend Lord Tebbit said—but I put it in slightly different words—we have complied with the regulations, suffered the closures and increased our efficiency until, as an example quoted by witnesses, our costs per tonne of cold-rolled coil are only 413 dollars as compared with France's 493 dollars and Germany's 558 dollars.

We must not be misled into believing that the crisis in the steel industry is a result of the recession. The boom years of the 1980s may have concealed the problem to a large extent, but no future upturn will solve it. The recession throughout Europe has, perhaps cruelly, stripped away the gloss, and the reality underneath has now been revealed. The Commission should regard it as an opportunity to take tough and painful decisions to ensure the industry's healthy survival into the next century.

4.15 p.m.

Lord Gregson

My Lords, perhaps I may first apologise for not being in my place at the beginning of the debate. That was due to the vagaries of the transport system for reasons that most people will recognise. Perhaps I may also disclose an interest in this subject as a director of the British Steel Corporation for many years. I also congratulate the noble Lord, Lord Ezra, and his committee on an excellent report which well defines the serious crisis facing the great steel nations of Europe.

Under successive governments of both parties, the steel industry in this country has been rationalised and modernised so that it is now among the most efficient in the world. Unfortunately, that is not so with regard to many of our partners in the Community. Clearly they have been caught out by the economic downturn so that despite the fact that subsidies or aids granted by the state "in any form whatsoever" are prohibited by the coal and steel treaty itself; despite the fact that a state aids code for the steel industry which provides the Commission with comprehensive and regular information on state aids has been in place since the beginning of the 1980s; despite the fact that specific programmes for the restructuring of the industry and the eradication of state aid were carried out in the early 1980s, subsidy still exists today and thrives beyond the borders of the UK. It is acknowledged to exist on a massive scale in the state-owned industries of Italy and Spain. There are other cases elsewhere.

In Germany, the Government have proposed the construction, with state money, of a new plant in the former East Germany to manufacture a product already acknowledged by the Commission to be in gross over-supply throughout Europe. I was happy to see that the Commission refused to accept that proposal, but I remain very worried by the apparent willingness of some member states to regard the Community's laws on state aid as being flexible, and negotiable when they become inconvenient. How else can one explain the continuing operation of loss-making plants in Italy and Spain, except by the provision of massive state funds and guarantees, in direct contravention of the laws to which those states subscribe.

I recognise that those laws have in the past often been honoured in the breach rather than in the observance, but today the European Community is committed, by the very existence of the single market, to the necessity of establishing fair competition within its borders. The Community has also recognised, as have the British Government, the need to encourage and foster competitiveness if it is to compete successfully in world markets. To meet these requirements the member states and the Commission must eradicate a political climate in which "deals" can be struck on state aid—for instance, so much capacity closed in return for so much aid—and replace it by the widespread acceptance that illegal subsidy will simply not be allowed.

We find ourselves in a situation where privately-owned, efficient companies in Britain—such as British Steel—are competing against heavily-subsidised Community producers and inevitably facing the difficulties that arise from that. They have already caused plant to be closed and workers to be laid off and could lead to further job losses and closures. That simply cannot be allowed to continue. The immediate task for the Government is to ensure that the state-aid cases soon to be brought before the Council of Ministers are settled in a manner most conducive to an adequate restructuring of the industry. They should then go on to secure acceptance of the principle that the law preventing subsidies must be rigidly applied so that the present situation never arises again.

4.20 p.m.

Viscount Mersey

My Lords, I am grateful to the noble Lord, Lord Ezra, for giving the House an opportunity to debate the report of sub-committee B on the steel industry. I am grateful all the more so because the noble Lord is retiring as chairman of that sub-committee and this is, as it were, his swansong. A most efficient swansong it was. Would that I could say that the steel industry was efficient but, as all other speakers have said, that is far from the case. The industry is extremely inefficient. Since my membership of sub-committee B I have been involved in producing six reports and I have never come across a subject so convoluted and frustrating as Community steel.

Of course, the problem is one of overcapacity. But who in his right mind would try to solve overcapacity by increasing capacity? That has actually happened in Italy and Spain. The plant at Taranto in southern Italy is less efficient than Ravenscraig but it continues to produce 8.5 million tonnes of steel that is hard to sell; so hard that not even Fiat in Turin will buy it. Taranto is producing more than one-third of the Community's surplus capacity of 20 million tonnes. That mill is in a deprived part of Italy.

Likewise, the Spanish mill is in a deprived area in Bilbao in the Basque country. Both ventures are state-aided, which is contrary to the Treaty of Paris. Both are looked upon as solutions to unemployment. However, as Sir Robert Scholey told the sub-committee, if you put a state-aided factory into a deprived area surely you should choose the type of factory that could make money. I should like to quote Sir Robert's evidence. He said: I think it is absolutely crazy that the Spaniards should try to reconstitute the steel industry in the Basque region. They have to have something there but why steel? Why do they not go for something that is going to be profitable? More specifically, he told us: the steel maker has to be quite clear what his role is. It is not to make steel to support a social situation. His role there is to provide a competitively priced quality product". I also agree with Sir Robert that there is very muddled thinking about steel. The reason for choosing steel is on occasions not so much economic as emotive. The word is macho; it has overtones of valour. I looked it up in the Oxford Dictionary of Quotations and found that it appears in contexts such as, "girdle me with steel", "give them the cold steel", "Foemen worthy of their steel", and "steel true and blade straight". Therefore, a country with a strong steel industry could be imagined to be ipso facto a strong country.

Whatever the reason, there is overcapacity. As was said by my noble friend Lord Tebbit, one cannot exclude Germany from the list of transgressors because they have uneconomic mills which are funded by the banks. The Commission is rightly looking to make cuts of some 20 million tonnes per annum. That is three Tarantos or, looking at it another way, the combined output of the Netherlands and the United Kingdom. I must reiterate in passing that we have already cut our steel industry to the bone and it is now the most efficient in Europe. There is no state aid. I make no apology for blowing the trumpet of patriotism. We cannot and we will not make further cuts because we are the best.

That said, the cuts needed are considerable and painful. We completed our report on 27th July knowing that we should not obtain specific directions from the Commission until 21st September. We now have something specific, although only partially so, but more about that later. Suffice it to say that the Commission is not in the business of destabilising governments and we were expecting it to be somewhat tentative.

Before narrowing down to the suggestions for cuts, I wish to widen the debate by mentioning two global issues. The first is the change in the world market for steel. That was mentioned by the noble Lord, Lord Ezra. There are now trade barriers with the USA, but there is in the former communist bloc a sea change from import to export. Once the mighty Soviet Union needed all 44 million tonnes of Ukrainian steel for shells, guns, tanks and battleships and for its factories, bridges and railways. Indeed, it needed more steel than it could produce so it imported from us. But that is no longer the case. Now Russia and eastern Europe are exporting cheap state-aided steel. Hungary is exporting steel, as is Poland, Romania, Bulgaria and the Czech lands. There is therefore a danger of dumping steel on a scale that would dwarf any decision that the Commission might make about Bilbao. If one adds to that the colossal new steel production of the Far East—that is, North and South Korea and China—limiting production in Bilbao and Taranto becomes hardly more than a spit in the ocean.

The second global issue is that of global warming In that respect there is a confusion. We are unhappy that the market for steel is so small yet we are surely happy that we are able to build high-rise structures using 30 per cent. less steel, that we can make steel cans that are 30 per cent. lighter or, most important, that we can make cars of high-quality coated steel that are less heavy and therefore use less petrol and cause less pollution. A decline in the steel market should be a cause for celebration. Of course, it is not. It causes unemployment, poverty and misery because we do not have the environmentally-friendly industry to put in its place. We must compromise and realise that the playing field of European steel is too big. We must make it smaller, but we must also make it more level.

I turn to the Commission's partial decisions of 21st September. They stemmed from discussions with the countries involved. The Spanish plan to close the Bilbao plant and take out capacity of 2.3 million tonnes. However, they also plan to erect a mini-mill, which will be aided 49 per cent. by the state and have a 1 million-tonne capacity. So the net saving is only 1.3 million tonnes.

I cannot understand the Italian situation. I am relieved that the chief executive of British Steel, Mr. Brian Moffat, cannot understand it either. The state-owned company, ILVA, is to be privatised in some parts, restructured in others, rationalised in others and sold off and liquidated in others. Taranto capacity might be reduced by 1 million tonnes. Mr. Moffat regards that as too little too late. In a recent note to us he stated that the time was fast approaching for the Commission to threaten further sanctions to force a satisfactory solution to the state-aided cases. How right! But when it comes to the crunch, even post Maastricht, it is the national governments which have clout. So the 64,000-dollar question is: how much attention will Rome or Madrid pay to Brussels? We should find that out on 21st November; that is, if matters do not slide even further.

After the state-aided sector has reduced capacity the plan is for the privately-funded sector to follow suit within three months; that is, by my reckoning, by mid-February 1994. Then, it is to be hoped, the European Community will have reduced capacity by the required 20 million tonnes. I detect an element of pie-in-the-sky about all this because all that we seem to have cut so far is 1.3 million tonnes in Spain. We should do better than that.

Should we manage the target of 20 million tonnes, we should be setting the world a good example. That is important because I am sure that steel is a world problem. I find support for that view in evidence given to us by the senior delegate of the European Commission, Mr. Pedro Ortún, the director of Directorate C. He has already come in for quite a bit of stick from my noble friend Lord Tebbit. However, I found his concluding words to be quite wise. He said: The steel problem is not a European one. It is a worldwide problem and [the steel market has become] a worldwide market and the problem of overcapacity which has been very clearly defined and analysed in Europe exists also in many parts of the world and this overcapacity leads in some cases to subsidised prices and these are the root of the global steel problem…We should try to find a common discipline for the world steel trade". The best way to find that common discipline is to cut drastically European steel production and to cut subsidies completely.

4.30 p.m.

Lord Thomson of Monifieth

My Lords, I join with every noble Lord who has spoken in congratulating the committee on its report. I congratulate in particular the chairman, my noble friend Lord Ezra, not only on the report but also on the way in which he introduced it to the House today.

This is a strong, even stark, report on the future of the EC steel industry. Its recommendations have major implications not only for the future of the structure of Community steel but, more widely, for Community industrial policy. As a non-expert on the steel industry, I was struck, on reading the report, by two contrasting comments. The first was British Steel's evidence on page 25 pointing out that Japan has seven major producers compared to 16 in the European Community along with the comment that European Community industry is too fragmented to be fully competitive. The second comment, on page 16 of the committee's conclusions, was that the cut in capacity which is proposed as essential will result in the loss of about 70,000 jobs. Those jobs will be in areas of high unemployment and also in areas of great political sensitivity within the member states. It has to be remembered that the Community already has 17 million unemployed.

The stark fact, endorsed by all noble Lords who have spoken, is that the European Community must make itself internationally competitive in the steel industry. The only alternative is a loss of living standards and, in the long run, even greater unemployment. Therefore, for my part, I am glad that the committee endorsed the Braun plan. That is strong medicine but it is medicine that must be taken. As my noble friend Lord Ezra pointed out, there are powers within the treaties for implementing the recommendations of the Braun Report. What is at issue is the question of the political will of the Commission and of the Council of Ministers.

We need a Community solution which aims to produce an efficient and competitive Community steel industry. As the committee emphasises at paragraph 58 of the report, it must not degenerate into some kind of intergovernmental compromise of the type with which we are rather familiar in the European Community—a patch-up of so-called national burden-sharing. The noble Lord, Lord Tebbit, nods his head. He and I do not always see eye to eye on European Community matters but I agreed with the main thrust of what he said today.

Certainly, as regards national burden-sharing—the noble Viscount, Lord Mersey, made the point very pungently—the United Kingdom has had more than its share of the burden. It has faced up to the long trauma of creating an efficient steel industry. As a Scot, I was fascinated by the evidence, mentioned in paragraph 54 of the report, that Ravenscraig, for all its geographical disadvantages in modern conditions, operated at a level of costs lower than other steel plants which remain open. I agree therefore with the rather barbed point made by the noble Lord, Lord Tebbit, in an extremely interesting speech, about the evidence given by one of his successors at the Department of Trade and Industry. Any idea that out of the Braun plan should come further sacrifices on the part of the British steel industry is, I believe, totally out of court.

In my experience, the European Community always looks for ways to dodge difficult and painful decisions. It is possible to use the East Europeans as a scapegoat. The noble Viscount, Lord Mersey, mentioned the change in the steel industry in the former Soviet empire. The report points out that the present penetration of steel from the former Soviet empire is some 4 million tonnes out of 130 million tonnes. Therefore, it is a 3 per cent. penetration. That is not an excuse for dodging difficult decisions.

The Braun plan will require vigorous action, both negative and positive. On the negative side, as paragraph 56 of the committee's conclusions makes clear, there should be a firm timetable for the ending of all state aids which do not directly facilitate closures. That means a political will to take on the situation, particularly in Italy and Spain.

On the positive side, as paragraph 62 of the committee's conclusions mention, maximum effort is needed as regards extra help for retraining, the setting up of new enterprises and the various other activities in which British Steel has engaged during the dramatic changes which have taken place within the British steel industry over the years.

Perhaps I may be allowed to widen the issues raised by the report. If the report is implemented, it will add another 70,000 redundant workers to the 17 million already unemployed in the European Community. The Community as a whole faces a very real problem in the years which lie immediately ahead as regards longer term structural unemployment. It is rather fashionable to refer, with a certain amount of complacent self-satisfaction, to the failure of Soviet communism as an economic system. But unless we find a solution to large-scale structural unemployment in the western industrial world—I am thinking in particular of the countries of the European Community—we shall face a charge of the failure of western capitalism.

That is the wider background against which the report should be seen. I confess that I have no solutions to offer to the magnitude of the problem, but I believe deeply that the only way in which we shall make progress is on the basis of a Community approach. To export our unemployment to each other is no solution in the Community whether as regards the steel industry or industry more generally. I agree with the noble Lord, Lord Tebbit, that if you start to allow illegal subsidies, sooner or later that leads to illegal tariffs. There is no way forward for any of us on that particular route.

I notice with interest that the President of the European Commission, Mr. Delors, and the Social Affairs Commissioner, Mr. Flynn, seem to be jointly engaged in producing a White Paper on competitive growth and employment for the summit meeting of the Community which takes place in December. I am not sure whether I still carry the noble Lord, Lord Tebbit, with me, but I believe that the best hope of finding solutions to the longer-term problems of structural unemployment arising from technological change is action on a Community basis. I hope that the Government will give a fair wind to some of those ideas.

There is talk coming out of the Commission about the need for action on competitiveness combined with other forms of collective Community action. I believe that the Government have a fair case in drawing attention to the paramount need for the European Community economy to make itself internationally competitive within the global economy in which the next generation will have to live. There are big issues here to which I hope the Government will give a fair wind. In conclusion I cannot resist saying that by far the best way to bring influence within the European Community on the issues of maintaining maximum competitiveness, whether of steel or anything else, is from right inside the Community. Standing on the sidelines with opt-outs is not the most persuasive way to exercise maximum influence.

4.40 p.m.

Lord Peston

My Lords, this is an important, interesting and informative report. I join with other noble Lords in thanking the Committee and its chairman for preparing it and placing it before us. I have certainly found today's debate extremely helpful. I use the word "informative" because I found the report informative, particularly in its evidence, and especially the evidence which shows that British Steel is the low cost producer of Europe. I spend a lot of my time pointing out the deficiencies of British industry. For once I almost find it uplifting to be able to say that, on the figures Mr. Aylen presents, British Steel is far and away the lowest cost producer.

The rationalisation that led to that state of affairs was started by a Labour Government and it has certainly been continued by the privatised industry. That leads me immediately to the point which I believe was made by the noble Lord, Lord Tebbit, when he referred to the evidence given by Mr. Ortún and that given by Mr. Sainsbury. I was not surprised by Mr. Ortún's evidence because I would expect the Commission in the end to wish to do a deal and obscure matters. However, I was taken aback by Mr. Sainsbury's evidence in the sense that he did not say in forthright terms two things. One is that we should rely on the single market and the other is that we are not going to give in to those who wish to fudge these issues. I am delighted that the noble Lord, Lord Tebbit, drew that matter to our attention. It is a clear-cut matter and one which in your Lordships' House we cannot stress too often.

I say to the noble Lord, Lord Thomson of Monifieth, that of course one wants to see a Community solution to this matter, but for once the Community solution is that the Commission should do absolutely nothing to interfere and should let the market decide this matter. All the Commission should do is to ensure that those who seek to subvert the single market in this case should be stopped from doing so. For once the Community solution is clear and I have no difficulty in that regard. I reflect that, paradoxically, many years ago many of my right honourable and honourable friends were opposed to the Community on the grounds that it was the embodiment of free market capitalism. Nowadays I note that the Right-wing of the Tory Party is opposed to the Community on the grounds that it is the embodiment of interventionist socialism. How the wheels turn full circle. I think there is a balance there, but in the case of a market like steel, clearly we want it to work as the single market was supposed to work. I take it that that is what the report is saying and I support that view most strongly.

On the question of subsidies there are, as we know, many disguised subsidies whether they consist of preferential access to banks and finance or rather arcane offsets to taxable capacity and matters of that kind. It is not easy totally to stop those who wish to subvert the single market in one way or another. However, to return to my main point, I believe that the role of the Commission should be to seek that out. It can be discovered as easily as one can discover fraud, despite all the fuss that is made about that. It is staring one in the face. When I am told that the Commission is investigating this matter, I wonder what it is it thinks it is investigating. It is perfectly obvious to many of us what is going on as regards subsidies. The Commission should say no. It is rather like those referees of football matches who cannot see when cheating is taking place when the rest of us can see it very clearly.

I believe we are all against subsidy which seeks to keep in existence inefficient structures. However, we are not saying that we do not wish to see public money used to produce new efficient structures if it can be so used. I say to the noble Lord, Lord Thomson of Monifieth, that when we debate industry and the economy, as I hope we shall after the Queen's Speech, I do not believe that we should be pessimistic about the possibilities of dealing with structural unemployment on a European scale. I believe a great deal can be done in that area and I shall certainly propose some ideas when we discuss that matter.

The noble Lord, Lord Holderness, made a point that I am sure we all agree with. When an industry in some sense improves its efficiency, it sheds jobs. Shedding jobs is a human matter as well as an economic one. One has a responsibility to ensure—particularly as we are having difficulty maintaining full employment—that something is done to make the workers who have lost their jobs re-employable. We must ensure that they have hope for the future rather than just the prospect of remaining on the dole. I have no doubt about that whatsoever. I am sure we all agree that it does not help those workers temporarily to prevent the decline of the industries they are in. All that that does is to postpone the problem for a while and make it a good deal worse. The case for intervention and subsidy with respect to the steelworkers as with others is the positive case of what we should do with the resources that are made available rather than the negative case of not allowing efficiency to dominate what happens.

I have one or two brief points still to make. I believe the noble Viscount, Lord Mersey, and one or two other speakers referred to the position in Eastern Europe and in the Far East. Our responsibilities in the Community must still be to welcome competition. We cannot say simultaneously to Eastern Europe, "We want you to succeed and we want your economies to develop; but if there is the slightest chance of your undermining our industry we shall find all sorts of ways to prevent you from undercutting us". I agree that there are still problems with subsidy there, but on the whole I would turn a blind eye in that area, at least for a short while, because I believe it is in our interests that industries are made viable within the new systems developing in that area. It would be catastrophic if the Community said on the one hand how much it favoured Eastern Europe and how much it was willing to give it aid but on the other hand said it was not willing to allow Eastern Europe to beat it at some of the games it is used to winning. I think the principle—

Lord Harmar-Nicholls

My Lords, does not the noble Lord recognise by now that turning a blind eye is setting a precedent which would be much more damaging than the temporary advantage he believes can be gained?

Lord Peston

My Lords, I take the noble Lord's point, but the fact remains that the Eastern European countries are coming from a position that is far behind that of other countries. My first priority would be to encourage them. I would not nit-pick on some matters which I would do if we were dealing with Italy or Spain, or Greece in other areas. The noble Lord's point is valid in the end. Finally, the countries of Eastern Europe will have to compete on their own merits. There is no doubt about that.

Given that simple technology is involved with the steel industry, we must expect the countries of the Far East to become much more effective competitors. Again it would be quite wrong to say that we favour the emergence of the third world and then prevent those countries having access to our markets. I am not suggesting that we will do that; I am simply saying that free trade has a rather tough side to it that we must recognise.

I do not wish to speak any longer as it is perfectly obvious that all the good points have been made. I hope that the noble Viscount, Lord Goschen, will make it clear to us that the Government are determined that the British steel industry will not be undermined by deals which seek to share the misery by making all parties involved shed some capacity. British Steel has made itself efficient. It has shed capacity. I believe that Mr. Aylen said that in a truly competitive world it would expand its capacity and its share of the market. We want to hear that kind of encouragement from the Government in forthright terms.

4.50 p.m.

Viscount Goschen

My Lords, I am extremely grateful to noble Lords who have spoken in this important debate for their contributions, which have been both well-informed and helpful. I should also like to thank the committee for its thorough and incisive report on the serious problems facing the EC steel industry. The chairman, the noble Lord, Lord Ezra, and members of Sub-Committee B are to be congratulated on the quality of their report. It is of no surprise that it has been warmly welcomed both by this House and by outside bodies, including the UK steel industry. We were particularly struck by how much common ground there is between the committee and the Government on what needs to be done in respect of EC steel restructuring. The views of the committee have been invaluable in preparing the UK position for the Council of Industry Ministers.

Perhaps I may say at the outset that we fully endorse the committee's view that the current problems facing the EC steel industry are deeply rooted in history. Following the establishment of the European Coal and Steel Community in 1952 demand for steel rose fairly steadily during the 1950s and 1960s. The ECSC treaty contained some liberal provisions, such as internal tariff reductions and a prohibition on price discrimination and state aids, but it also gave the Commission considerable and commanding powers of its own. Those powers came into play during the mid 1970s in the aftermath of the first oil crisis, first with the Simonet plan and then with the two Davignon plans. These established minimum prices, production restrictions and import restraints.

Recession in the early 1980s resulted in significant overcapacity. Some action was taken to reduce capacity but the task was made particularly difficult for two reasons. Most of the major Community steel producers were either state owned or received considerable state assistance. That meant that many were cushioned to withstand the worst effects of recession. Secondly, it was the policy of the Community to encourage steel firms to rationalise by providing state aid. This, together with the burden sharing principles of the Davignon plan, resulted in only limited restructuring.

Most noble Lords who have spoken in the debate have stressed that it is countries which have failed to adapt their steel industries to market conditions which must accept most of the responsibility for the serious problems the industry is facing today. The current cyclical downturn in many European countries has severely exposed the underlying structural weaknesses that have been caused by past intervention in the market-place and by the use of state aid to sustain unviable steel producers. Overcapacity—estimated at about 20 per cent. of output—is the main symptom of the industry's current difficulties, and most of that excess capacity is located in those countries where there has been less restructuring—Italy, Spain and Germany—and where many of the least profitable and least efficient plants are located. The situation has been exacerbated, but by no means caused, by US trade actions against EC exports and by increased imports from central and eastern Europe, particularly into Germany.

If market forces had been allowed to operate properly we would not be facing severe problems of oversupply today. If the market was left to its own devices then the answer to overcapacity would be simple: those who run tight ships and meet the needs of the market survive and make profits; those who do not, do not survive. That is the market solution. That is what should happen in the case of the European steel industry.

We should like to endorse the committee's support of the Braun plan, which advocates a market-based, industry-led solution to problems of overcapacity. It is only right and proper for the industry itself, and not governments, to decide how it should restructure and rationalise. The Government also fully support the special package of measures proposed by the Commission and agreed at the February Industry Council, which were designed to help smooth the process of adjustment. These measures are dependent upon the industry committing itself to a definitive programme of capacity reductions. We very much hope that the industry will be able to do that. We support the committee's view, as expressed by my noble friend Lord Holderness, that the Braun plan is far preferable to the kind of burden-sharing measures that have been tried in the past, and which have not only failed but have contributed to the current difficulties. Burden sharing implies that the UK industry should do more than it has already done to help solve the problem of EC overcapacity. That is totally unacceptable. The UK has already done a great deal of restructuring in its industry. It is now for others who have done little so far to put their steel industries on a commercial footing to accept the bulk of closures.

We are most grateful to the committee for drawing attention to the crucial link between the need to eliminate state subsidies and the success of the restructuring process. We cannot expect private sector companies to volunteer capacity cuts if subsidies continue to flow unabated into unprofitable state-owned companies. Subsidies which allow uncompetitive and inefficient producers to carry on operating—and to compete unfairly against those who receive no subsidies—are the root cause of the industry's current problems and a major barrier to a true single market in steel. As the noble Lord, Lord Ezra, stated, Article 4 of the ECSC treaty specifically prohibits: subsidies or aids granted by states… in any form whatsoever". That prohibition has been modified by successive aid codes, the most recent of which allows strictly limited amounts of aid only for research and development, environmental protection and closures. However, Article 95 of the treaty can be said to approve subsidies beyond those permitted under the aid code, but only in exceptional circumstances. We find it unacceptable that so soon after the finalisation of a strict subsidies code we are already being asked to approve huge amounts of state aid for companies in Italy, Spain and Germany—all under the "exceptional". provisions of Article 95.

The House will not be surprised to hear that the Government are opposed to state subsidies to the steel industry, as is the committee. I can tell my noble friend Lord Tebbit and the noble Lord, Lord Peston, that we have consistently argued for strict application of the aid rules and for action to be taken against those who break the rules. There is no question of Ministers backsliding. We are taking a strong line and will continue to do so in Brussels. There is no UK paralysis. For example, we have taken a lead in blocking the Spanish, Italian and German proposals for new subsidies. We shall continue to veto proposals which disadvantage the UK steel industry. I believe that that is the reassurance which the noble Lord, Lord Peston, sought.

Lord Tebbit

My Lords, I am grateful to my noble friend for giving way. I thank him for what he has said and in particular that Ministers would regard any further closures or reduction in capacity in the United Kingdom as unacceptable. However, he then went on to say that he thought that the bulk of closures should be elsewhere. Where should the closures be which do not come in the bulk of closures?

Viscount Goschen

My Lords, it is not for me at this Dispatch Box to tell the UK industry where or whether it should shed jobs. I have stressed repeatedly that the UK industry has already undergone a great deal of restructuring and is now the most efficient steel producer within the EC. Those are most important points to bear in mind.

Subsidies mean unfair competition for those who are not subsidised. They can mean that the most efficient companies go out of business while those which have access to seemingly limitless pools of state funding survive. Most damaging of all are subsidies which are paid out to meet every day running costs. Only last month United Engineering Steels announced the closure of its Templeborough plant, whereas its less efficient state-aided competitors carry on unscathed. The Government very much share the committee's concern, expressed by many noble Lords today, that other efficient private companies will be forced to close unless subsidies are brought firmly under control. We agree that it would be quite intolerable for other UK companies to suffer as a result of indiscipline in other member states.

The UK steel industry is not subsidised. The issue was referred to by my noble friends Lord Elibank and Lord Tebbit, and by the noble Lord, Lord Gregson. It is among the most efficient in the world. British Steel is widely regarded as the Community's most efficient

integrated producer. In 1979 it took over 13 man hours to produce one tonne of liquid steel. Today it takes less than five man hours. But that increase in efficiency has not been achieved painlessly—witness the most recent closure at British Steel's Ravenscraig works. The Government are in accord with the committee and a number of noble Lords who have spoken in urging other countries to find the political will to take similar decisions now. Shelving those problems means that even more draconian measures will be needed at a later date.

The three major impending requests for derogations from the aid code are in the Basque region of Spain, the heel of Italy, and former GDR territory near the Polish border. The noble Lord, Lord Thomson of Monifieth, highlighted that those areas are characterised by high unemployment and by their dependence on the steel industry. For political and social reasons steel companies in those areas have been kept going by state subsidies. Regrettably, in those circumstances it is probably inevitable that some strictly time-limited aid may be needed to allow companies to rationalise so that they can then operate on a market basis.

However, we will only agree to those requests if certain strict conditions are met. We shall need to be satisfied that the unsubsidised UK industry will not be disadvantaged by those proposals. Therefore, in exchange for additional state aid we will seek to insist upon substantial, early and permanent reductions in capacity, and we are opposed to any new aided capacity. Finally, and most importantly, we will not sign up to any agreement until it is clear that running cost subsidies are strictly under control.

I am glad to inform the House that there has been some progress on those outstanding state aid cases since the publication of the committee's report, following intensive discussions between the Commission and countries concerned and following the Industry Council meeting last month. Those hold the key to the success of the whole restructuring initiative. However, much has still to be done before the proposals are acceptable to the UK. We need to be fully satisfied that any agreement takes full account of UK concerns. My right honourable friend the Minister for Industry made our views clear to the Council of Industry Ministers in September, and secured useful references to the elimination of running cost subsidies, to capacity reductions and to no new state aided capacity in the Council conclusions and Commission statements. We expect a more substantive debate on these matters at the next Industry Council meeting on 18th November.

The report states clearly that the future of the steel industry depends on it being ready to face the challenge of the single market and competition in world markets. The Government fully agree with that view. In that respect the expiry of the ECSC Treaty and its financial regime in 2002 will make a significant contribution to improving the EC industry's competitive position.

We also noted the committee's points about opening up our steel markets to competition from Central and East European countries. The issue was raised by my noble friend Lord Mersey and the noble Lord, Lord Peston. We are keen to promote trade with those countries and to improve access to EC markets, but we must ensure that the trade is fair. We believe that the limited measures agreed represent a reasonable balance between our desire to support the development of those countries' economies and the need to take limited action in respect of certain sensitive imports.

At the end of last year the UK agreed to the establishment of Community-wide restrictions on imports of certain sensitive steel products from the former Soviet Union, excluding the Baltic states, and from the Czech and Slovak republics. We argued for greater access at the February Industry Council and secured a reference to the relevant parts of the Edinburgh European Council conclusions. Those underlined the Community's commitment to support and encourage political growth.

Lord Bruce of Donington

My Lords, before the noble Viscount concludes, will he deal with an important point on which he has not given a definitive reply to date? He spoke of new arrangements and new agreements to be arrived at. Past experience has shown that some member states have no intention of keeping to the agreements that they sign. In the event that those new arrangements are not properly enforced by the Commission, will the noble Viscount assure the House that the matter will be taken before the European Court of Justice?

Viscount Goschen

My Lords, we do not discount any option such as that referred to by the noble Lord, Lord Bruce of Donington. We would perhaps be prepared to take such measures. However, it would be a drawn out process. Last autumn we and the UK steel industry believed that it was likely to be more expeditious to discuss an agreement in the Industry Council. If there is no agreement in November, we shall reconsider what action needs to be taken and again we shall explore all options.

Before the intervention, I was passing to the problems of the eastern European countries. I stated that we argued for greater access at the February Industry Council and secured a reference to the relevant parts of the Edinburgh European Council's conclusions. Those underlined the Community's commitment to support and encourage political growth as well as developing trade, investment and technical co-operation with the former Soviet Union and central and east European countries. My right honourable friend the Prime Minister also gave a general assurance to the Russian Prime Minister last March that the UK would try and ensure that no Community safeguard or unfair trade action would be taken unless it were clearly justified, and the Commission has endorsed that.

In autumn 1992 negotiations re-commenced on a multilateral steel arrangement (MSA), which aims to put in place a "GATT plus" international trading regime for steel by dismantling tariff and non-tariff barriers and imposing strict disciplines on subsidies. The negotiations have made less progress than we would have liked and are currently hampered by fundamental disagreement between the main contracting parties on the way forward. The main difficulties lie in the permissibility of certain types of subsidy and action that might be taken against them. The Government attach high priority to agreeing a satisfactory MSA which will end the chronic international wrangling which we have experienced and which has bedevilled trade in this product, and the extensive subsidisation of inefficient production for over 20 years.

Finally, I stress that the Government's overriding priority in respect of EC steel restructuring is to create an EC market in which the UK steel industry can trade freely and without unfair competition. We will act vigorously when the unfair and illegal actions of others serve to disadvantage the UK industry. We are determined to see the reorganisation of the Community steel industry completed as soon as possible and in a way which would achieve sufficient capacity cuts to ensure the industry's lasting competitiveness. The committee has made a valuable contribution to current discussion on EC steel restructuring. We appreciate that and thank the committee for the work that it has done.

5.8 p.m.

Lord Ezra

My Lords, in winding up the debate, I wish to express appreciation to the noble Viscount, Lord Goschen, for the relatively short notice at which he spoke on behalf of the Government and for the wide ranging reply that he gave us. I wish also to thank the members of my committee, without whose help this report and others would never have been prepared.

I am grateful to noble Lords from the committee who have spoken in the debate; namely, the noble Lords, Lord Holderness, Lord Elibank and Lord Geddes, and the noble Viscount, Lord Mersey. I am sure that another noble Lord who sits in this Chamber would have spoken had he not in the meantime been elevated to the Front Bench. I refer to the noble Lord, Lord Mackay of Ardbrecknish, whom I congratulate. I only wish that his elevation had occurred a little later so that he could have spoken in our debate today. I am also most obliged to the noble Lord, Lord Boston of Faversham, for the sympathetic support which, as chairman of the Select Committee, he has always given us in our endeavours.

I believe that today's debate has shown one of the strengths of our House, that through our committee structure we are capable of taking a specific problem away, looking at it in depth—in this case in relatively short order because of the timetable—and leading it to such an informed debate not only by members of the committee but also by other noble Lords who have spared the time to come here. We have been totally unanimous in what we feel should happen. However, what has been particularly important about the debate is that we have shown that it spreads beyond the steel industry in the Community, important though that issue is. It raises questions about how effectively the single market: will operate. It raises questions of the world competitiveness of EC industries. Above all, there is the point made particularly by the noble Lord, Lord Peston: it raises the whole question of how together we shall deal with the problem of structural unemployment.

I believe that we have had a useful afternoon. The speeches were as brief and to the point as the report which gave rise to the debate. Perhaps that is an example which may be of interest on future occasions. I ask that the report be noted.

On Question, Motion agreed to.