Europe Agreements: ECC Report

HL Deb 10 October 1994 vol 557 cc713-63

3.31 p.m.

Lord Middleton rose to move, That this House takes note of the report of the European Communities Committee on The Implications for Agriculture of the Europe Agreements (10th Report, HL Paper 57).

The noble Lord said: My Lords, this report is made following an inquiry by Sub-Committee D into the trade agreements between the European Community and the Central and Eastern European countries. For that inquiry we were fortunate in having as our specialist adviser Professor Mario Nuti of the Centre for the Commonwealth of Independent States and Middle Europe at the London Business School. His wisdom and knowledge of the CEE countries was invaluable.

I must pay tribute also to the guidance and support of my colleagues on the committee. The chairman is in an absolutely unique position to appreciate the part played by his Clerk. Mr. Mitchell's work at the inquiry stage and in the preparation of our report was of the highest quality.

This is the second report of the European Communities Committee on the Europe Agreements. The first was by Sub-Committee A in 1991 under the chairmanship of my noble friend Lord Aldington, who inquired into the Commission's proposals for association agreements with Poland, Hungary and Czechoslovakia. That report covered the agreements in broad terms and could not give detailed attention to agriculture. The aim of this report is to fill that gap.

I should say that, since the 1991 debate, the Czech Republic and Slovakia have separated and agreements have been signed with Romania and Bulgaria in addition to the Visegrad countries. Since then, and very importantly, the European Council at Copenhagen in 1993 has declared that the Central and Eastern European countries could become members of the Community as soon as they satisfied the necessary political and economic conditions.

Therefore, our brief was to concentrate on the agricultural provisions of the agreements; to consider the development of the Community's agricultural trade policy towards the CEE states; and to consider the implications of those states' possible membership of the Community.

Why agriculture is important in this context is, first, that in all CEE countries, with the possible exception of the Czech Republic, farming plays a much larger part in their economies than is usually to be found in countries with a comparable degree of industrialisation.

Secondly, the negotiating mandate for the agreements contained a separate reference to agriculture. The agreements envisage a free trade area in two five-year periods with rapid liberalisation of trade in most industrial products. Agriculture was considered separately and trade liberalisation in this sector was more limited. That is explained in detail in Part 3 of the report.

Thirdly, although their agricultural production potential in the short term is limited, for the reasons given in Part 5, if those CEE countries solve their current problems in restructuring their agricultural and related industries, they will have significant export potential in the medium to long term. Fourthly, agricultural policy is a particularly sensitive matter for the Community.

The provisions of the agreements must therefore be judged not only against their original aim of promoting market economies in the CEE countries but also against the more ambitious objectives of accession to the Community.

We began taking oral evidence last December. Even before our discussions with the embassies of the CEE countries and with our own Foreign and Commonwealth Office, and well before our visits to Poland and Hungary, it became abundantly clear that we were not just looking at the minutiae of the Europe Agreements and the way they were operating. We had to look beyond whether Hungary's quota of tariff-free goose-liver was adequate and similar detailed considerations. Like the committee chaired by my noble friend Lord Aldington, we were looking at the social, political and economic future of those five countries, which until recently were part of the Eastern bloc. We were looking at countries whose most important sector in their economies—their agriculture—was in great disarray following privatisation and the collapse of their COMECON markets. Those are countries where growing disillusion with conversion to a market economy has stemmed largely from problems in that field, and where the effect of this dissatisfaction has already been reflected in political changes within the new democracies.

In the Polish election of September 1993, the Polish Peasants' Party came to power together with the Democratic Left Alliance, leading to a new government of the Left having a strong representation of farmers' interests. This summer, the elections in Hungary produced a swing towards those on the Left—or on the Right, whichever way one prefers to look at it—who may be hankering after what they perceive to be the less troublesome climate of the former command economy.

Now, those trends, taken together with the chaotic situation in Russia and the countries of the former Soviet Union, seemed to us to give considerable urgency to the need to accelerate the process of restoring the economies of the CEE states and to the need to boost the progress, already well under way, towards parliamentary systems of government. They give considerable urgency to the need to promote conditions that could allow their accession into the European Union. That will take time and will not be easy to achieve. Community agricultural policy provides one of the main, if not the main, obstacle to enlargement.

We therefore felt that we could not look at the agricultural parts of the trade agreements and what appeared to be a rather relaxed view of enlargement on the part of the Commission and the other European member states without looking at the much wider picture of the stability of Eastern Europe; and, indeed, in the long run the security of the West. If this has meant widening the scope of the inquiry, then we were encouraged as to the lightness of so doing by the strong views of our Foreign Office witnesses and those of our embassies in Poland and Hungary when we visited them that this kind of inquiry was both timely and necessary. I am further encouraged by the Government's response to our report published last month, which endorses the committee's view of the overriding political considerations.

I turn now to the report. In Part 2, we look at agriculture in the CEE countries before and after 1990. Part 3 examines the agricultural provisions of the agreement and the changing context in which they came to be made. In Part 4, we consider their operation and effects also in the light of the recent common agricultural policy changes and the GATT regime. Part 5 explores the implications of further opening of agricultural trade with CEE states and Part 6 considers the implications of their membership of the Community.

In particular, we have investigated whether the CAP, even under its current reform, might clash with further integration—issues which do not appear to have received much attention to date even by the Commission (though I am aware of an independent report advocating further CAP reform released last week by the Commission as a discussion paper).

Our conclusions are given in Part 7. I suppose that these could be summed up as follows. The agreements were made before the undertaking to open up the European Community to accession by the CEE states. So far as concerns trade in agricultural produce, they were very meagre. No concessions at all were made (and for obvious reasons) for trade in "sensitive" products; for example, those which were already in surplus in the European Union—corn, milk, beef, sugar and wine. They simply reflect the level of concessions towards import of other products that could be accepted by Agriculture Ministers of the Community at the time of negotiation. Ministers were more concerned with protecting the Community's budget and EC farmers than with adapting the agricultural sectors both in the Community and the CEE states to the requirements of an enlarged community. Since then, it is important to realise that the trade balance between the Community and Eastern Europe has been shilling in the Community's favour.

The committee makes various recommendations in regard to promoting a more liberal trade regime; to the importance of promoting investment in processing industries both from outside and inside the CEE states, and to re-focusing the existing aid and assistance programmes. The central issue, however, is the incompatibility between the common agricultural policy and the further integration of CEE agriculture with that of the European Union.

We conclude that the target of Community membership cannot be attained without further reform of the CAP, especially since the CAP's additional burden on the Community budget is not the only cost of CEE membership: the costs to the Community's structural and cohesion funds must also be considered. We say in paragraph 178 that without a clear commitment to radical CAP reform there is no prospect that the agriculture of the CEE countries can be integrated with that of the Community.

In 1991, Sub-Committee D stated in its report of that year on the reform of the common agricultural policy how it should be done. In paragraph 179, we repeat in summary those recommendations. The MacSharry proposals, to which we took exception at that time, were considerably modified towards our views when the reform package was eventually agreed by the Council in 1992. That CAP reform still had a great many undesirable features and did not go nearly far enough. Unless the European Union can be dragged albeit unwillingly into the daylight of reality, there is no scope for further enlargement and we face instability and insecurity if governments of the CEE countries slide back into the waiting hands of their "old guard".

After the Corfu Summit meeting in June, my right honourable friend the Foreign Secretary, when interviewed for television, said that one of the main objectives of British foreign policy was the, strengthening of the links with Eastern Europe".

When members of my committee visited Hungary in March, our ambassador, Sir John Birch, expressed that rather more vividly when he said to me (and he has given me permission to quote him): If, ten years ago, we thought we could obtain a situation in Eastern Europe where the Russian army had withdrawn into Russia and where the CEE countries were moving into parliamentary systems of government, we would have paid billions of pounds to achieve it. Now we have got that situation for virtually nothing. For heaven's sake do not let us lose it".

We fully endorse his remarks. I commend the report to the House. I beg to move.

Moved, That this House takes note of the report of the European Communities Committee on The Implications for Agriculture of the Europe Agreements (10th Report, HL Paper 57).—(Lord Middleton.)

3.47 p.m.

The Minister of State, Foreign and Commonwealth Office (Baroness Chalker of Wallasey)

My Lords, I am delighted that we should have such a debate as the first on the return of your Lordships' House. As my noble friend Lord Middleton said, it is an important report. Perhaps I may say how much the Government welcome it. On another point, I very much regret that, due to some unforeseen circumstances, I may have to leave the debate later on to attend two important meetings. I hope that your Lordships will forgive any necessary absence; but I know that I leave you in the most capable hands of my noble friend Lord Howe, who is to respond to the debate.

The future relationship between the agricultural systems of Central Europe and that of the European Union is more than a technical issue for specialists. It has important implications for the political and economic development of the Central European countries. It goes to the heart of the debate over the future size and shape of the European Union. I also happen to think that it is pretty crucial for all of us who have been in the European Union, struggling at times with the costs of the common agricultural policy.

I should like to congratulate my noble friend Lord Middleton and his committee most warmly for their foresight more than a year ago in choosing to investigate an issue which is now moving to the real forefront of the agenda of the European Union. I commend them on the thoroughness with which they conducted their inquiry and on the content of this excellent report. It is especially useful that members of Sub-Committee D were able to visit both Poland and Hungary to see conditions on the ground. While your Lordships will understand that I cannot say that the Government endorse every single word of the report, it should be pretty clear from the Government's response (in Command Paper 2666) that we share the analysis underpinning the report and most of the recommendations made by my noble friend and his committee.

I heartily welcome this opportunity to debate the issues that the report raises. My noble friend Lord Middleton has already quoted Sir John Birch, our ambassador in Budapest. I do not think those words were said lightly and certainly we have a chance now, with those countries of Central and Eastern Europe, to achieve a stability which we have never had before. We have a chance also to put our own houses in order over the very important issue of agriculture.

Sir John Birch's comments remind us too, I think, of a fundamental truth that is too often lost in the bickering and horse-trading that tend always to accompany any trade negotiations. The events of 1989 and their aftermath confront us with challenges and opportunities which are truly of historic proportions. It is important to remember that the Europe Agreements and the Europe Agreement countries are not just another set of demanding trading partners. These are European countries, just as European as any existing member of the European Union. They are countries that are undertaking demanding and unprecedented political and economic reforms. They are reforms which will go a long way to deciding the peace and stability of the European continent for centuries ahead. So we have a real interest in helping those countries to succeed in their endeavour. We have an interest in extending security and prosperity to the East because, by so doing, we will help to reinforce security and prosperity throughout and beyond our European continent. These are indeed big prizes and that is why I say we should keep them before us as we enter the detail of tariff quotas, minimum import prices and above all of CAP reform.

The European Union has a unique contribution to make in helping the countries of Eastern and Central Europe through the painful transition that they are now experiencing. Together, the member states constitute the largest single market in the world. Access to that market therefore is the most substantial form of assistance we could give to any trading bloc, and particularly to our near neighbours to the East. The prospect of eventual membership is the best incentive we can give to them to continue their political and economic reform.

The Government have worked consistently since 1989 to develop the European Union's relationship with the countries of Central and Eastern Europe. Indeed the Europe Agreements with six of them were the result of a United Kingdom initiative. We worked for and welcomed the statement by the Copenhagen European Council that the Europe Agreement countries would, if they so desired, join the European Union. This will happen when they have met the necessary political and economic conditions. We are again working hard—this time under a German presidency—to agree a substantial package of measures for the CEEs: one that will amount to a route map for the further development of their relations with the European Union as they prepare for membership.

I will not pretend, and the Government have never claimed, that the Europe Agreements are perfect agreements. My noble friend Lord Middleton has just shown us quite clearly that that is not so, but these Europe Agreements represent an important step forward in the relationship with the Central and Eastern European countries. First, they establish a framework within which each associate can prepare itself for membership of the Union. Secondly, they commit the parties to dialogue across the whole range of European Union business. The United Kingdom has, with Italy, been most closely identified with efforts to give this dialogue substance in the inter-governmental pillars. But we want to see the same sort of process taking place in the Community pillar, including, of course, on agricultural issues of common concern.

Thirdly, the Europe Agreements allow for rapid and far-reaching trade liberalisation. Community barriers to all imports of industrial goods from the Visegrad 4 countries bar steel and textiles will have disappeared by the end of this year, and for Bulgaria and Romania by the end of next year. All remaining tariffs on steel and textiles will have been removed one year after that, by the end of 1996. These are all very positive developments which were, in many cases, reinforced or carried further by the conclusions of the Copenhagen European Council.

However, agriculture is the one area in which the Europe Agreements and Copenhagen fall well short of the needs of the Central and Eastern Europeans. First, this is because the tariff quotas created by the agreements deny the CEEs the extensive market access which they need to assist the restructuring of their agricultural sectors, but, secondly, as the Committee's report so correctly concludes, it is because the trading arrangements enshrined in the agreements, cannot of themselves define the path of transition to CEE membership of the Community". We cannot be satisfied so long as this remains the case. Agriculture is a sector of far more importance in the economies of the Central and Eastern Europeans than in those of the European Union. It is an area in which the CEEs have a natural comparative advantage. It will be difficult, if not impossible, for them to complete the transition to full and successful market economies if they cannot exploit these agricultural resources. They will therefore want to participate in some form of European Union agricultural policy when they accede.

The report is right to identify the common agricultural policy in its present form as a major obstacle to progress. So long as the Community remains a surplus producer of most of the agricultural goods that the Central and Eastern European countries want to export, wider trade access can only be achieved by disposing of more of our own produce through intervention or subsidised export. Neither course makes sense. Both would impose new burdens on European Union taxpayers, burdens which would fall disproportionately on the taxpayers of this country; more subsidised export would run against the grain of the GATT Uruguay Round outcome, an outcome for which the United Kingdom fought hard and in which we believe we have secured the interests of both the European Union and the wider multilateral trading system.

The same logic shows clearly that the common agricultural policy could not be extended to the Central and Eastern European countries in its present form, at least, not at a price that is affordable for the existing member states. The same problems would occur but on a much larger scale, as Central and Eastern European production took off under the stimulus of artificially high prices. The best way to prevent this happening is by bringing CAP prices towards market levels before the CEEs accede.

My noble friend Lord Howe will, I suspect, want to say rather more about this later in the debate but I think from the nods of agreement around your Lordships' House that there is no one who disagrees with the statement that I have just made.

The Government's written response, to which my noble friend Lord Middleton referred, refers to the difficulty of overcoming these problems during the negotiation of the Europe Agreements. The common agricultural policy is not a flexible instrument; I need hardly say it. Changes to it require time and patience, as the history of the Uruguay Round negotiations amply demonstrates. But the outcome of those negotiations also shows us that change can happen, that it is happening, and that it is going in the right direction. Against that background, the agricultural provisions of the Europe Agreements need to be seen as an interim solution only. The challenge facing us as we prepare for a further round of enlargement is to reform further and to manage the evolution of European Union and Central and Eastern European agricultural policies in such a way that they will be compatible on accession, and at a point which is not only affordable and sustainable but consistent with the direction in which multilateral disciplines are already taking us.

We need to set about that task with determination if the enlargement of the European Union to bring in the Central and Eastern European countries is to happen in a politically realistic timeframe. I see three main areas; for further action.

First, the European Union and member states individually should, when asked, continue to share their expertise with those responsible in the Central and Eastern European countries for completing the transition to market-oriented agricultural structures. In its conclusions, the report refers to the importance of agriculture in the development of those economies. I am extremely grateful to the committee for the support given to the approach being adopted in this field by our own British Know-How Fund. The committee is also right to note that there is a role to be played by PHARE. As the Minister responsible for the Know-How Funds and for PHARE and TACIS, perhaps I may say a few further words on this score.

The European PHARE programme involves a finite sum of money. We know that the Central and Eastern European countries have many needs covering many sectors, including nuclear safety and the environment. Agriculture is one sector, but it is an important one. We must always remember that the PHARE programme is demand led and the priorities have been established following discussion with the Central and Eastern European governments themselves.

Agriculture already accounts for 11.5 per cent. of the total PHARE programme and is the fourth largest single project, alone worth 416 million ecu in the period 1990 to 1994. Therefore we are trying to ensure that in the agricultural sector we focus help on those reform strategies which will bring the greatest benefits: the restructuring and privatisation of state farms; the development of rural finance, banking and credit schemes; the establishment of independent rural co-operatives; and also providing market information and forecasting systems for the major agricultural commodities. Those are all ways in which, with Britain's help, the European Union PHARE programme is beginning to assist. But, as the Government's written response notes, it must be for the beneficiaries to establish the priorities for PHARE expenditure, and we shall continue to work with them to that end.

The second aspect of the action that I foresee is the review of the common agricultural policy. The aim must be for the European Union to produce recommendations for further reform that will pave the way for the accession of Central and Eastern European countries, with improved market access in the meantime. That in turn will give those countries the greater certainty they need to determine their own policies and priorities in the interim. None of it will be easy. There will be strong resistance from some quarters to any further change in the status quo. But I am glad to tell your Lordships that a growing number of policy makers—in France, Germany and the Commission—are coming to see that not to change is not an option. That is good news.

A review of this kind will take time. Implementation of reforms will take even longer. But we cannot stand still. Therefore, in the meantime we need to look critically at the existing trading arrangements to see whether there is scope for further immediate improvement. The United Kingdom believes that there is. We believe that the German Presidency offers an opportunity for exploiting that scope. We warmly welcome the fact that your Lordships' committee has produced its own menu of suggestions. These have already generated interest in Brussels and in the Central and Eastern European countries. I know that my noble friend Lord Howe will want to comment on these in more detail later.

Suffice it to say that all of this adds up to a formidable work programme. I repeat that the committee's timely report has made a truly valuable contribution to the Government's own reflections on how best to pursue these issues. I am confident that the debate today will be no less useful, and I am indebted to your Lordships for the report which has given rise to our debate.

4.5 p.m.

Lord Carter

My Lords, like the Minister, I should like to thank the noble Lord, Lord Middleton, and congratulate his committee on what has correctly been described as an important, persuasively argued and detailed report which raises considerable questions about the future of the common agricultural policy.

The canvas which the report covers is a huge one: six countries with a total population of nearly 100 million people and with substantial agricultural production, even at the recent reduced levels resulting from the strains of liberalisation. Even at current reduced levels, in 1993 agricultural production in Central and Eastern European countries, as a percentage of European Union output, was: milk, 22 per cent; beef and veal, 15 per cent; pig meat, 30 per cent; coarse grains, 44 per cent; and wheat, 29 per cent Those countries are obviously substantial agricultural producers.

I have had the good fortune to visit, albeit only briefly, Poland, Hungary, Czechoslovakia, Bulgaria and East Germany. Because my visits were short my impressions were in the form of snapshots rather than in-depth studies. My first impression, which I am sure was shared by everyone who has visited those countries, was the enormous task which all the Central and Eastern European countries face in adapting to the end of the command economy and its replacement by more liberal regimes. I also formed the view that if privatisation went too fast there might well be a reaction and a hankering for a more authoritarian style of government.

The agricultural sectors of central and eastern Europe are not homogeneous. They differ in structure and product mix and their role in the economy. The countries themselves range from temperate crop producers to the more Mediterranean conditions of the Balkans. However, there are certain common themes in what has happened since 1989. These are well brought out in the report. Production and rural incomes have fallen; demand has contracted markedly; retail margins have risen; and farm gate prices have fallen in real terms. Despite rising relative profitability of food processing, downstream agricultural industries have also been struggling, increasing the uncertainty in the uncertain environment in which agriculture operates. Those problems are not exclusive to agriculture, but are the common currency of industries and sectors in transition.

As an agriculturalist, on my visits I was struck by what I saw as the impediment to essential improvements in agricultural production which results from what I can only describe as an obsession with land reform. The problems in relation to land reform are mentioned a number of times in the committee's report. With the exception of Poland, state collective and co-operative farms account for a substantial portion of the farmed area in Central and Eastern Europe. I believe that the new democratic regimes have missed a once and for all golden opportunity to achieve a farming structure based on units of a size suitable for modern agricultural production. One possible solution was touched on by Mr. Peter Toth, an agricultural consultant whom the committee met in Budapest. He is quoted on page 50 of the report as saying that, in the case of Hungary, the method of privatisation adopted: was mistaken and would lead to too much fragmentation. Privatisation should not mean small scale farming. Efficient co-operatives and State farms should have been transformed into companies and their shares privatised instead of splitting and parcelling out the land to 600,000 people many of whom did not wish to farm. Large scale leasing should have been carried out". An alternative method might have been to have some form of national agency, acting in effect as head tenant, which would sublet the land in reasonably sized units. Having collected all the rents, it would then have paid them over to the many original owners—if indeed they could be tracked down. However, in my view the obsession with offering the land back in small parcels to the original owners must act as a brake on the improvement of agricultural production. The lack of certainty over title has restricted the development of a land market for sale or rent, preventing the consolidation of holdings. That has restricted the development of market behaviour or the provision of greater direction to fanners. Diffuse ownership, even of those holdings over which clear title has been established, has also held back recovery. One extreme example relates to a Slovak farm of 56 hectares with 348 owners. In East Germany—it is outside the scope of the report—I visited a farm of 20,000 acres which has 1,000 owners. Understandably producing coherent farm management in those circumstances has been a difficulty.

Uncertainty has also increased the inherent difficulties of obtaining finance for production as the banks are reluctant to lend in a world of uncertain and multiple title. That reluctance has reinforced the desire not to become enmeshed in the long term relationships which are inevitable in the agricultural sector. Restricted access both to working and long term capital has exacerbated the problems of transition. That lack of certainty and of finance is in many ways the true problem of the agricultural industries of the CEE countries of which falling output and incomes are but symptoms.

A number of the CEE countries, quite correctly in my view, make it difficult if not impossible for foreign investors to buy farmland. The last thing that they want is a new class of overnight rich rentiers. However, one way of getting foreign investment and know-how into farming rather than into the ownership of land would be to have reasonably sized tenant farming companies in which outsiders could invest both capital and know-how.

The committee refers to the excellent annual course for young officials from the CEE countries which is run at the Sparsholt College in Hampshire. I have had the honour to lecture during that course each year and to speak to those young officials about the agricultural systems in Europe and the workings of Parliament. I have to tell your Lordships that they find the House of Lords a difficult institution to comprehend.

The other area in which outside capital and know-how is badly needed is in food processing, distribution and marketing. That is referred to in the report. One possible reason for the failure of the CEE countries sometimes to fulfil their quotas for exports to the European Union could well be the sheer lack of a marketing system capable of meeting export demands in terms of both quality and quantity. However, that is clearly not the only reason for the swing in balance of agricultural trade between the European Union and the CEE countries of nearly 1.4 billion ecus between 1988 and 1993. That swing is from a positive balance of 950 billion ecus in favour of the CEE in 1988 to a negative balance of 420 billion ecus in 1993.

The CEE countries certainly have some justification for their irritation with subsidised exports from the European Union. The report makes some useful suggestions for dealing with that problem and related problems in its recommendations on quotas, reciprocal measures, export licences, rules of origin and minimum import prices. I thought that the Government's response, although helpful, was perhaps a little half-hearted. Perhaps it was hard to find common ground on the topic between the Foreign Office and MAFF.

The report also touches on a subject which is of great concern, and not just to farmers; namely, the possibility of putting the Community's animal and plant health standards at risk if there are no proper standards of veterinary and phyto-sanitary inspection and control. I well remember visiting a state cattle-breeding station in a a CEE country which shall be nameless. I was told before I saw the animals that the average milk yield approached 7,000 litres per cow. Having seen the cattle I would have been surprised if they were capable of giving 700 litres. I have never seen animals in such poor condition. I mention the incident not only because it relates to the animal health problem but because it also illustrates the problem of obtaining accurate information and statistics about what is happening on the ground in those countries. The figure of 7,000 litres probably related to the targets under the previous regime and the old habit of reporting the target production as actual production obviously died hard.

The crucial question of the implications for agriculture of the Europe agreements relates to the relationship between the CAP as it is now and as it might become, and the eventual accession of the CEE countries. That is analysed clearly in the report. One issue is clear. There is no way in which the CAP in its present form could be applied to the possible improved production levels in the CEE countries which might be in place when they eventually join. That is why estimates of extra costs of 20 billion ecus to 30 billion ecus, although I am sure arithmetically correct in the light of the heroic assumptions on which they are based, are way beyond the bounds of political possibility. That was expressed clearly to me when I visited Poland earlier this year. The official, who also met the committee when it visited Poland, said that the CEE countries had to accept that there was no way in which European Union taxpayers and consumers would agree to the approximate doubling of the present cost of the CAP just for the privilege of bringing CEE agriculture into the Union.

We all know that the CAP clearly needs further reform. That requires a debate in itself. Already the first signs of new thinking are appearing. The committee refers to that in paragraph 145 on page 34 of the report. I am sure that your Lordships are aware of the report entitled, An Agricultural Policy for the 21st Century, recently published by DG II of the Commission. I understand that it was promptly disowned by DG VI as the precursor of a change in European Union policy.

If—it is a big "if—ideas of subsidiarity and national support begin to be applied to the CAP, it might make it easier for the CEE countries to accede. Their agricultural efficiency would have to improve so that they, like the remainder of us, could operate at or near world prices and they would undoubtedly require considerable help in terms of capital and of know-how. However, the suggestion in paragraph 148 on page 35 of the report that a drastic curtailment of the CAP budget might make it possible to extend regional support to CEE countries on a significant scale implies a degree of optimism about the attitudes of member states of the European Union which experience of the Union does not altogether support.

The policy conclusions are predictable. Reform is needed if the CEE countries are to accede together on the basis of a CAP which obeys the principles of Community preference, common pricing and common funding. But that process is not inevitable. The impact that Central and Eastern Europe has on the CAP is a product of a set of different factors: the likely supply response to reform in the region; the attitude of governments and the political imperative from outside agriculture underlying membership in terms of European security. Above all, the timescale over which production and yield levels increase, and the possible sequence of membership, could mean that the CAP's Houdini-like ability to survive will continue.

The question of timescale is overwhelmingly important. The speed with which yield levels converge is central to the view that the CAP has to be reformed to allow full membership of the CEE countries. That point is well made in the report. But the reverse may be true. Early membership could take place with agricultural production at such a level that serious reform is not necessary. Cereal yields have risen at roughly 2 per cent. a year in Western Europe since 1945. Assuming a similar rate of growth in the CEE countries, if one starts from current levels, those yield levels will not reach the current community average before the end of the decade, and in many cases not before the end of the decade after that. This places a serious question-mark over some of the estimates of the cost of membership. Responses in agriculture are frequently strong, but rarely swift. This places a premium on getting the incentive structure right.

Another important aspect of CEE agriculture which is touched on in the report concerns the way in which the state, collective and co-operative farms in CEE have played an important social role in their local communities: looking after pensioners, for example, and fulfilling a social service role. There was and is a lot of disguised unemployment on these large farms. If there was one job and four people to do it, the wages were divided by four and everybody, nominally, had a job. The collective or co-operative also made sure that everybody had a home or a flat.

It was put to me extremely graphically by the manager of a large co-operative farm in Czechoslovakia who said: "I have six people milking and looking after 100 cows. I only need two. Which four do I get rid of and what do they do? There are no other jobs in our rural economy". I mention this only to emphasise that a breakneck rush to privatisation may have social results which could have serious political repercussions.

CEE agriculture has a great potential, which, when taken with the aspiration to EU membership, in a short time could put considerable pressure on the CAP under certain assumptions. However, it must be noted that there are several imponderables over this timetable. Accession may be later rather than sooner; the likely increase in agricultural output may only take place in the long term as a result of slow recovery from the present malaise and the natural growth of production. On the assumption that production levels are more easily controlled by the EC once the CEEs are incorporated in the common agricultural policy, there may be a case for arguing that early accession offers one way of minimising the impact of their accession on the CAP. However, the CEEs will still be a force for reform, pushing the EU towards price cuts as their production potential and domestic political agendas are geared towards these ends.

However, it might be as well not to see CEE enlargement as the inevitable motor of CAP reform; phased membership and the Heath-Robinson evolutionary tradition point to a possible avoidance of the pressures. But some principles remain: if the EU is serious about encouraging membership of the CEEs, then agriculture must be built upon world market prices geared to the long term. The CAP is certainly an expensive way of failing to meet the needs of the CEE countries.

The comprehensive nature of this excellent report means that there are many areas which cannot be properly covered in one speech of acceptable length. The effect of the GATT agreement, the possibility of recreating the trade links between the CEE countries and the countries of the former Soviet Union, the eventual enlargement of the European Union to accommodate not just the CEE countries but perhaps also Slovenia and the Baltic states, and overlaying all of this —and I am sure that this will be touched on by my noble friend Lord Bruce of Donington—the future direction of the European Union itself after 1996 will all have their effect on agriculture throughout Europe, both in the European Union and the CEE countries.

There will be much more debate and many considerations of policy. This report will undoubtedly provide an invaluable source of reference and analysis. The noble Lord, Lord Middleton, and his committee are to be congratulated on its timeliness and its quality.

4.23 p.m.

The Duke of Somerset

My Lords, as a member of Sub-committee D, I should like to start by saying what a fascinating and interesting but complicated inquiry this was, but so well and ably chaired by the noble Lord, Lord Middleton. Its conclusions will undoubtedly be discussed at least over the next six years while reform of the CAP is debated and the CEE countries themselves push for accession to the European Union.

It is these two points which are central to the report, to my mind, together with the concomitant consideration of the political risks of upsetting the electorates in the CEE countries. It is imperative that the process of democracy, of transition to market economies and co-operation with NATO and the West is continued and enhanced. None of us wishes to see a return to a communist form of totalitarian government in the East, but already we are witnessing a return to power of the old personalities under slightly different party names. For instance, in Poland, the post-communists were returned in September 1993. The next electoral danger in that country will be in November 1995 with the presidential elections. I think that result will be a significant pointer to the future health of Eastern Europe. Disillusion with the transformation away from central planning has set in among the voters.

The report clearly states that the aim of maintaining political stability in Eastern Europe is of paramount importance for our security, our economy and investments. So it is disturbing to discover that apparent resentment and the report endeavours to pinpoint why this is happening. The Europe Agreements are supposed to prevent it, but I think they are not doing so. Agriculture is only part of these agreements, but it is the largest part of the CEE countries' economies and. thus of employment, accounting for anything between 12 and 25 per cent. of the total.

The CEE countries certainly seem to feel that these Europe Agreements are not working properly and the data and figures bear that out. The evidence section of the report is full of tables demonstrating that actually the European Union benefits more than the CEE countries, despite asymmetry. For instance, Hungarian exports to the European Union fell by nearly 35 per cent. between early 1992 and early 1993. By 1992, the European Union was in surplus with all the states.

The reason for this failure and the popular resentment that results is one of attitude by the West, both at the time of negotiation and still today, or certainly until very recently. The agricultural trade concessions of the Europe Agreements were based on data relating to trade that was happening before the upheavals of the political and economic reforms of the late 1980s and the subsequent collapse of the market in feeding the populace and armies of the former Soviet Union.

Despite the shock of the Moscow coup, there was no intention by the Commission to see these agreements as a paving stone for any future Community membership. EC farmers had to be protected. Even the Copenhagen changes of 1993, as the report states in paragraph 158, failed to take the opportunity, to reshape the Agreements in line with the objective of the CEE countries becoming members of the Community". This was in spite of the reversal of EC trade balances into surpluses. For instance, the Poles complained to us when we visited them that they had large quotas for microwaves, which they did not produce, but they had no quotas for strawberries, which they produced in large amounts.

This attitude of doing the least possible is still prevalent among many of the Union countries, with the exception, certainly, of the UK, among others. Basically, those operating in the agricultural sector of the CEE believe that political commitments by the European Union to greater integration carry little weight in the protectionist world of agriculture. For instance, in the major commodity of wheat, the permitted access to the European Union is equivalent to 0.3 per cent. of the Union's production.

Even the latest German plan to allow Eastern European countries to send representatives to EU meetings met with opposition from France. Again, France procrastinated over plans even to draw up an analysis of future membership by CEE countries, apparently arguing for a hardening of restrictive clauses in the Europe Agreements and for more protectionism. However, I know that these noises are quietening now with the German presidency, the country best placed Co gain from increased trade with the East.

There are of course other reasons for the apparent failure of these agreements. Not all the quotas have been fulfilled. That is often a production problem and not one of access, perhaps caused by disruption arising from the abandonment of central planning; by lack of credit; marketing infrastructure; and sometimes drought. Other problems are mentioned in the report.

The worrying aspect is the response by the CEE governments, as opposed to their electorate. That response includes CAP-style subsidies. At the Hungarian University of Agricultural Sciences, the academics to whom we spoke made clear their view that there would be a rising plane of subsidy: their country had one of the lowest support systems in agriculture among OECD countries; and they could look over the border at the apparent prosperity of farmers in the Union.

The dairy policy in particular was previously characterised by massive subsidies—such that the retail price of milk was usually below the cost of production. Market forces then forced large rises under the new regimes, so consumption fell, which in turn caused the prices to fall, and there was an over-capacity leading to debt problems. So Hungary, along with Poland and the Czech Republic introduced regimes based on the CAP model with an intervention system, control of imports and minimum producer prices.

The farmers' lobbies as represented in some of those governments, because of perceived unfair competition from subsidised EU products, have encouraged this policy. That was recognised by the European Commissioner for Agriculture, Mr. Steichen, when he spoke at a conference held in Budapest just before the sub-committee visited that city. His question was: how can we ask the CEE countries not to protect themselves against our subsidised products unless we reduce the subsidies on our exports to them? The only answer so far from the Commission has been a token removal of subsidies from apple exports to the Czech Republic. Otherwise, the problem has been largely ignored.

There are many other important factors to consider, but I shall mention only one in passing. Internal trade between the CEFTA countries should be encouraged. Some of their internal trade barriers are higher than those of the European Union; and it became apparent during our visit that there was a mental difficulty—one that is quite understandable—in reviving any trade links which smacked of Comecon. The European Union could usefully encourage this, perhaps by setting up financial clearing systems as suggested in the report and also by clarifying the fraught rules of origin. I am glad that the Government have supported the sub-committee in their published observations on this issue, as indeed they have on a good deal of the report.

It would appear to be obvious that the way forward is eventual accession to the Community. However, it does not appear to be obvious to the Commission, as the current CAP is incompatible with this aim. German and Irish farm ministers have stated that there is no prospect of substantial changes to the CAP before the millennium. Professor Marsh, in evidence to the sub-committee said that to enlarge the European Union and to extend the present CAP to the new countries would be effectively to deny to their largest economic sector the economic benefits of entry. Mr. Steichen has given the impression that the new CAP of 1993 was the end of CAP reform. How can that be giving the right impression to the EC countries, especially when other reports, such as those by M. Nallet, are encouraging the CEE to adopt CAP-style regimes. That uncertainty means that these countries are aiming their policies at a moving target.

The Times recently reported that the Czech Republic now fulfils the full array of Maastricht Treaty convergence criteria better than any of the privileged Twelve, barring Luxembourg. Indeed, it has a higher credit rating than Greece from one particular bank. That sort of pressure will surely force a reappraisal among foreign ministers. Budgetary considerations and the GATT will do the same for agriculture ministers. The report is quite adamant about CAP reform: reductions in the level of agricultural price support must be made across the board towards world market prices.

There are two particular difficulties over future membership besides the immediate CAP. One is the structural and cohesive funding; the other is the environment.

In Poland, we were told that only 40 per cent. of farms have piped water and that the wells are either dry or polluted. There is massive under-supply in gas, electricity, telephones and general infrastructure. The cost of implementing structural fund policies in the CEE would cripple the Community budget and also upset the poorer members, who would expect to see a diversion of cash away from them. It has been suggested that new members might be excluded from structural funds, leading to a multi-tier Community and larger regional differences in income per head. I wonder how that fits in with current government thinking on a wider scale. Or indeed, can one contemplate the accession of CEE countries without their full participation in the CAP—in effect, a very long transition period rather like the one enjoyed by the UK?

However, that will give rise to anxieties over production conditions and standards in such matters as hygiene, animal welfare, employment conditions and wages. I believe, however, that the EU can afford to make concessions over some of these matters.

Pollution is another question: all matters such as soil erosion, polluted groundwater, and pesticide and veterinary product residues in food need to be tackled quickly, as, equally, do such matters as veterinary control for diseases such as foot and mouth. The Community could easily organise a stronger animal and plant health inspectorate to operate within the associated countries.

The way ahead is clear; but are the inclination and the will there? Most of the countries that we are discussing meet preset economic conditions. They regard their inclusion as essentially a political decision for the EU—one that will become harder after the accession of the EFTA states. Internal negotiations over CAP reform should start now, not at the turn of the century. In conclusion, it can do no harm to follow the first two speakers in strongly drawing attention to the epilogue.

4.37 p.m.

Lord Reay

My Lords, the subject we are now debating is one of major importance. In the words of the Government's reply to the Select Committee's report: Extending security and prosperity to Central and Eastern Europe is the major foreign policy challenge facing Europe today". It is also, happily, not a party political issue in this country; nor even, up to a point at least, an issue of contention between those who were in favour of and those who were opposed to the ratification of the Maastricht Treaty. The committee was in harmony with itself, and the Government were in harmony with the committee. I believe that we all saw the prospective enlargement of the Community to include the countries of Central and Eastern Europe—which is now the agreed policy of the Union, reiterated on every appropriate occasion—as one more urgent reason for further reform of the CAP which was already desirable on many other grounds. As we wait for the irresistible force of enlargement to meet the immovable object of the CAP, we at least are firmly on the side of the irresistible force.

Agricultural trade between the European Union and the CEE countries has developed, as has been pointed out, asymmetrically but not in the way that was intended or expected under the Europe agreements. It is the agriculture of the European Union that has been the bigger beneficiary, its exports growing at a substantially faster rate than those from CEE countries. No doubt that is largely the result of the backward and disorganised state of CEE agriculture, its undeveloped distribution and marketing and the immaturity of its processing industries which cannot begin to meet the increasingly sophisticated demands of a growing domestic market. Nevertheless, it is also true that European Union agricultural exports are heavily subsidised —up to 40 per cent. in some cases. How can the CEE agriculture be expected to develop its full potential against such unfair competition? It is not surprising that in Warsaw and Budapest our hosts talked of introducing measures to curb imports from the European Union. They could hardly be blamed for thinking in those terms and are probably restrained only by their desire not to introduce political impediments into their relations with the European Union.

What we should not do is give any sort of encouragement to the CEE countries to establish their own versions of the CAP. Several factors may tempt them to do so. For instance, the collapse of farm incomes and the introduction of democracy in particular have introduced a vociferous domestic demand for special measures of protection for agriculture. To those factors at work must be added the unfortunate example set by the European Union which is so inspiring to them in other ways. For example, we discovered that Hungary had just introduced an intervention system and that the level of protection there had risen considerably above what it had been immediately following the abandonment of communist controls, as the noble Duke described.

Inability to meet the cost will prevent agricultural protection from moving very far in the direction of the CAP. Nevertheless, I suggest that we must not give encouragement in any way to that process as the Commission, which can speak with more than one voice on this matter, sometimes seems inclined to do. The Government's reply quotes a report referred to by the noble Duke, just published under Commission auspices, which recommends that the CEE countries prepare themselves for accession by adopting price stabilisation policies based on the CAP.

It is surely beyond argument that the European Union will not be able to pay for agricultural support at existing CAP levels for the new member states. As the Foreign Office Minister, Mr. David Heathcoat-Amory, put to us with admirable forthrightness, it would be impossible to bring these Eastern European countries into the European Union with the CAP in its present form. Put crudely, I think it would probably bankrupt the European budget". It would also produce an explosion of production in those countries without markets in which to dispose of it. Nor do I see how the CAP can be renationalised or repatriated, at any rate in its entirety. There may be scope for different national levels of compensation for farmers but a single market surely requires a uniform system of price support.

The European agreements do very little to open our markets to their agricultural produce. But while the agreements are all that we have we must keep them in good repair. The committee found that there was scope for improvement. A complaint widely made to us and one that should be addressed is that European Union traders, rather than CEE exporters, drew the benefit from the allocation of European Union import licences. In their reply the Government acknowledge that a greater proportion of the full value of the concessions should accrue to CEE countries and propose the introduction of authenticity certificates, as used in association agreements, in preference to the issuance of licences to CEE governments for resale or auction internally, as proposed by the committee.

Perhaps my noble friend will explain why they have that preference and how such certificates work. That was not something that was put to us or about which we heard in any of the evidence. Perhaps he will also elaborate on the reasons given by the Government for rejecting the enhanced role that we proposed for inward processing relief on raw materials imported by the food processing industry in the European Union for re-export to CEE countries in the form of manufactured products.

In the long term I agree with the Government that we all want to see the food processing industries built up in those countries. But in the short term there may be an advantage in such arrangements. They may help to develop the links between agricultural producers and food processors and improve the quality of agricultural products.

On the broader and more substantial issue of export refunds, perhaps the Government can say why they seem to reject the committee's proposal that the European Union should reduce or remove export refunds on its exports to CEE countries and to third markets such as the NIS which are traditional to those countries. They seem to state that there will be little benefit in the European Union acting in such a way unless other countries do so too. Do the Government see any opportunity for the European Union to act alone in the matter? In their reply the Government said, This is one of the aspects of the problem to which the Government will give particular attention in the representations it makes to the Commission". Can my noble friend say what sort of representations the Government are contemplating?

It is perhaps salutary for us to face the fact that not all producer lobbies responsible for the erection of impediments to free trade are foreign. Minimum import prices on soft fruit—about which we received many anguished complaints on behalf of CEE producers—are in existence partly to protect the interests of our own raspberry growers. The Government will seek to introduce an early warning system—something strongly requested by the CEE countries—in a way which will not damage the interests of our own producers. Does my noble friend believe that that is a realistic course? Do the Government foresee that eventually free trade should operate in that sector also?

I am pleased that the Government accept the case for full cumulation of the rules of origin in that it would help secure the desirable goal of developing trade between CEE countries themselves. Intra-CEE trade is something to which those countries, with the hated memory of COMECON behind them, appear to pay little attention. Nevertheless, with the goal of their future integration into the enlarged European Union in mind, an expansion of intra-trade is surely something we have a right to ask them to pursue and an interest in encouraging.

As the Minister reminded us, the reforms of the CAP have begun. Price supports have been reduced; compensation payments have been introduced and surpluses have fallen. Whether enough is being done to enable the European Union to meet its Uruguay commitments is an arguable point. In any event, as the Government said in their observations, much remains to be done to take this reform process further". Further CAP reform does not depend on decisions taken in this country. Indeed, I suspect that the key is held by Germany. Germany today remains suspended between its support for the CAP, called for by its alliance with France and its own vociferous farm lobby on the one hand, and on the other the priority which it is increasingly giving to the European Union enlargement to the East. Germany will have to decide how it wishes to accommodate those two incompatibles. The unprecedented decision last week taken in the Council of Foreign Ministers under the Germany presidency to admit the CEE countries to meetings on a regular basis surely brings that day of decision closer.

Of one thing at least I remain convinced. I do not believe that anything will prevent the countries of Central and Eastern Europe from continuing to seek their future in the European Union. To them the European Union is the guarantor of their democracy, of their prosperity and even, strange though it may seem to some, of their independence. It is the star to which they have hitched themselves; the handrail they will use to pull themselves out from their unhappy pasts. Some of our policies may tarnish, may blemish, may render less comfortable than it might have been, that process, but they will not prevent it. There is a historic wave carrying those countries towards us, and we should rejoice that that is so.

4.50 p.m.

Lord Bruce of Donington

My Lords, this is one of the very rare occasions when the whole House appears to be agreed on something concerning the European Community. This very memorable occasion is signalled by the publication of the very excellent report of the committee under the chairmanship of the noble Lord, Lord Middleton. Unhappily, the report will not go far beyond this House. We ourselves and myself in particular have been very interested in every speech made this afternoon. Those, too, will not go outside the House.

The report itself, with the appendices and the government document in reply, costing £2 for five pages, together with the Hansard report covering the debate that will be available tomorrow will involve any individual interested in the EEC with an expenditure of £40, which is rather a large sum for the individual to bear at this time. Nor are our public libraries, whose funds are being very severely constricted, likely even to know about this afternoon's report let alone buy copies for the people to be able to understand. I fancy that we shall not intrude ourselves onto the television screens or that there will be more than half an inch—and that will be lucky—in the press tomorrow. So we are debating the report among ourselves. That enables me to be very agreeable, as your Lordships will appreciate.

When I first came to this place nearly 20 years ago mild noises were being made about the defects in the common agriculture policy. They were very mutely uttered according to whether one was a Euro-fanatic, a federalist, a sceptic, or whatever. Those who were sceptical tended to be rather more vociferous; those who were Euro-fanatics tended to be rather mute. But all agreed that the policy had to be reformed. Well, what stopped it being reformed? There have been innumerable inter-governmental conferences at which large numbers of people have made loud noises about it and yet very insubstantial reforms have been made. However, the politicians have suddenly apprehended— and politicians are alive sometimes—that unless the common agriculture policy is radically changed—and I am using the words in the report of the noble Lord "more radical reform"—we run the danger of extinguishing the emergence—the growing emergence, one trusts—of real democracy as we understand it in the eastern states of Europe which have recently emerged from the Soviet dictatorship. It is only when that suddenly comes before us that we become aware of and treat as a matter of great significance the manifest defects in the common agricultural policy, a point with which even the Government now agree.

I say "even the Government" because a considerable conversion has taken place. On page one of their reply to the report the Government state: But agricultural trade relations continue to present an obstacle to the achievement of these political objectives. The agricultural provisions of the Europe Agreements fall a long way short of the timetable for complete trade liberalisation envisaged for industrial products". Paragraph 11 of the reply states: The undesirability and unaffordability of extending the CAP in its present form to the CEEs are, however, not yet universally accepted". Of course they are not universally accepted. The Commission will never accept them. The Commission does not want them and the governments are quite unprepared to stand up to the Commission. I heard on the radio this morning that the Commission has issued a reproof to the United Kingdom concerning the extent of its public sector borrowing requirement. Well, nuts to the Commission! It is no business of the Commission's, whatever powers it is alleged to have been given in the Maastricht Treaty, a point to which I and many of my friends on both sides of the House referred at the time. The Commission does not want the reforms. I shall return to that point later.

Other people do not want the reforms. I draw your Lordships' attention to a report in the Observer on 7th August last. That was, I know, when your Lordships' House was in recess and I do not want to strain memories too far. But this is what the report said: A total of 651 English landowners, including both wealthy aristocrats and corporations, were each paid more than £100,000 of taxpayers' money not to grow crops last year". Well, well, well! The report goes on: Of these, 45 farm owners netted between £250,000 and £500,000—and a further seven each received more than £500,000. Some 2,325 landowners received between £50,000 and £99,999".

The Earl of Onslow

My Lords, I have large sums of money from set-aside. It is a lovely trough into which I am quite happy to put my snout and both trotters, but it does not stop me arguing very strongly against the evilness of the existence of that trough. They are two totally different things. Anyone who does not take advantage of a trough is an idiot. But it is perfectly reasonable to argue against the existence of the trough.

Lord Bruce of Donington

My Lords, the noble Earl is well known for his ethical standards being far superior to any material reward that he might even seek or not seek to receive. I am giving the facts. If one looks at last year's figures, which are derived from a patient examination of the Official Report of another place, one finds that farm owners were paid a total of £759 million under the arable area payments scheme which compensates them for falling crop prices on condition that they take 15 per cent. of their land out of production. No wonder that there can be no intellectual justification, or moral justification either, for the continuation of the common agriculture policy, which in the United Kingdom—this may not be generally known—adds approximately £20 a week to the food bill of an average family of four. The figures have not been challenged. Indeed, they come from the Government's own sources. The Minister will reply in due course. I shall be happy to receive his official note which I shall compare with the Government's own figures.

Why then cannot we reform the common agriculture policy? I believe that there is a general political will among politicians of all parties to do so. I cannot think that they are completely insensitive to the gross immorality of the policy as it is. I cannot believe that in their hearts they do not know that being at the heart of Europe means an acceptance of its rotten core which is the common agricultural policy.

So what are we left with? We are left with the same thing all over again. We are left with the almost complete dominance of the international and the national Civil Service in this regard. Ministers have not got the time either to approve or disapprove of the material which is laid before them because so much of it is prepared completely outside their control and very often without their knowledge.

During the early part of this Recess I studied the legislation coming out of Brussels. I shall give my final report when the parliamentary Recess is complete and I have concluded my examination. But I can tell noble Lords that in the first four weeks no less than 265 items of legislation emanating from the European Community were put in the official journals. Those items do not include legislation which it is not compulsory to publish. They do not include mere amendments to existing legislation which are of little consequence. Substantive amendments are put in the official journals in time. Unless we can stop what is happening and assert our political will, we do not stand a chance. That was realised a long time ago. I do not know whether any of your Lordships have read the excellent diaries by Sir Nicholas Henderson. I recommend them. They are called Mandarin and they are very good indeed. For 29th December 1978 his diaries say: I have not been so busy lately, which reflects, I think, the changing role of an Embassy now that we are in the European Community. Officials in the various ministries do an increasing amount of work … with their opposite numbers in Community capitals". He continues: My own feeling is that officials tend to fly about and meet too often. We had a brief discussion of this problem when the Chief Clerk had a meeting earlier this month with the Heads of Missions from the Community countries. Donald Maitland"— of the Diplomatic Service and head of its news department at the time— said that for a recent meeting on agriculture in Brussels sixty officials had come from Whitehall, including two for potatoes—he supposed one for new, the other for old potatoes". We know that at present a minimum of 60 British civil servants are on secondment to the European Commission. I am not suggesting for one moment that these people are acting in bad faith. I am merely saying this: we have to establish the political ascendency of the members of the government in office, of whichever party, over their own civil servants so that what goes out in fact represents their will for which they are able to take personal responsibility and for which, if necessary, they will resign.

Baroness Chalker of Wallasey

My Lords, I am grateful to the noble Lord for giving way. Is he aware of one matter as regards civil servants on secondment to the Commission? We are very pleased to have the opportunity to second most able British civil servants to the Commission because we believe that: it is through the expertise which they can share: with their Community colleagues that bodies like the Court of Auditors and bodies within the Commission will actually do the kinds of jobs which the politicians in Britain wish to see them do and to find some of that financial rectitude for which the noble Lord is so well known. I agree with him wholeheartedly in his pursuit of that goal.

Lord Bruce of Donington

My Lords, I am most grateful to the noble Baroness, particularly in view of the fact that her intervention gives me the. opportunity of expressing on behalf of the whole House our appreciation of her single-minded sense of duty in Rwanda and elsewhere in Africa. That must have occasioned her great physical and mental distress. Perhaps I may say how much we admire her for the execution of responsibilities which she undertook.

I take up the point made by the noble Baroness. Of course, secondment is good. It is also attractive because the Community institutions become part of the Civil Service career structure. It means that after a suitable period of time civil servants can aspire to offices within the Commission and the other institutions. I need not remind your Lordships that the rates of remuneration and reimbursable expenses run roughly double the amounts paid to the average Cabinet Minister at the present time. So there is a little incentive there.

The fact is that if we want to exercise our political will we can do it. We have had every opportunity at inter-governmental conferences, when pressure has been exerted on us, to do things which we have not wanted to do. But for the sake of being at "the heart of Europe"; whatever that may mean, and for the alleged prestige and esteem that stems from that, we have given in on a number of points all the way through. We could have stipulated a complete overhaul from top to bottom of the agricultural policy and that is what I hope we are going to do as a result of this report. At the next inter-governmental conference we should insist that proper measures be taken.

The Commission has an answer as it is entitled to have. It says, "We can compensate the eastern states by bringing them into the structure and pay of the structural funds". Of course it can. The structural funds can be increased and, since their disposition lies in the hands of the Commission, that can increase the political bribery that the Commission is able to exert by reason of it being the source of funds going to individual member states.

At the moment we in this country pay £2.5 billion net each year into Community funds. Under the new system of own resources, on the Government's own admission that figure may increase to £3.5 billion as a net contribution each year. If the structural funds are further enlarged by way of trying to compensate the eastern states for their acceptance of the common agricultural policy, on whatever gradual grade it may be, that will add further to the grossly excessive payments already made out of the pockets of United Kingdom taxpayers. We all marvel sometimes that the Government scratch around as regards the waste of £2 million, let alone £2 billion, and the way in which they accept quite blandly the grossly excessive amounts which are paid by this country into the CAP. They know quite well—they would have known better if today's debate on fraud within the Community had not been postponed for a further period of time—that not only does it represent a gross injustice to the British taxpayer, but that it is also a fertile source of fraud and irregularity on the grandest scale, as revealed in the Court of Auditors' report.

That is why I welcome the report and the Government's response to it. I even welcome the contribution of my own Front Bench spokesmen and their agreement with it. We are all in agreement. Therefore, let us at last do something about it. Let us not waffle about it any longer; let us do something.

5.10 p.m.

Lord Boardman

My Lords, when the noble Lord, Lord Bruce of Donington, began his speech, I thought that we would both be embarrassed because we would find ourselves in complete agreement. Indeed, I agreed with a great deal of what the noble Lord said, but I have reservations about some of his remarks and about the emphasis that he placed on others.

I should like to add my congratulations to those that have already been paid to my noble friend Lord Middleton and his committee on the excellence of their report. I should perhaps be dealing with it rather cursorily if I were to sum it up by giving your Lordships my impression of its conclusions and saying that we can have either the central and eastern European states joining the Community or the common agricultural policy—we cannot have both in their present form. This is a serious matter, as was made clear by my noble friend Lady Chalker when she said that change can happen within the CAP, although the clear emphasis was that change is unlikely to be achieved easily, if at all, within the Community.

I was privileged to serve on Sub-committee A back in March 1991 when we discussed the association agreements. We then debated them in this House in June of that year. That report warned of the dangers that would flow to sensitive industries—footwear and textiles were two—and especially to agriculture. Those are the products which those countries would most like—and be most able—to import into the Community. It was clear, particularly with regard to agricultural products, that that would create impossible conditions with the CAP as it was then—and as I believe that it is today.

We were careful in that report, which was produced under the able chairmanship of my noble friend Lord Aldington, who is not in his place, to avoid suggesting that Poland, Hungary or the Czech and Slovak republics could gain easy membership of the European Community. Some of us visited the Czech Republic and we heard the constant request, "When are we likely to be able to enter the Community? Can you give us some assurance that we will get in?" Of course, we were quite unable, and without any authority, to give such an assurance. However, we noted in that report: It was hoped that those states would be ready to complete 'a free trade relationship' within a 10 year period although the target may prove over-ambitious". We chose the words "a free trade relationship" carefully, recognising the then problem of any entry into the Community.

I was also privileged to serve under the chairmanship of my noble friend Lord Middleton on Sub-committee D in 1991 which considered the developing future of the CAP. Again, once the committee reported, we debated the matter in this House. Both the report and the debate gave a clear warning that, given the conditions at the time, it was impossible for those eastern European countries to enter the European Community and the CAP.

Both those reports made it clear that the admission into the European Community of those central and eastern European states was not compatible with the CAP as it then was—or even, I suggest, in its amended state of today. However, notwithstanding those clear warnings, at the Copenhagen Council in June 1993 the European Community member states agreed to the eventual membership of the Community of the central and eastern European states, but did not put forward any proposals for the complete amendment of the CAP that would be essential if their entry was to be achieved. I suggest that in its reports this House was rather more far-sighted than were the EC member states at Copenhagen in June 1993.

The report that is now being debated makes it clear that the admission of those states to the European Community is incompatible with that CAP. That has been made abundantly clear in the speeches that we have heard, including from members of the committee. So, what is it to be? Is those countries' membership of the Community to be delayed? My noble friend Lady Chalker said—and I agree—that that would be both an undesirable and a dangerous course. We want to enlarge the Community. We want those countries to join the Community. Or is the CAP going to be radically changed—and quickly? We know from what we have seen in the past 20 years that it is almost impossible to achieve that. We know the difficulties encountered in bringing about the achievements that were secured recently under MacSharry. When giving evidence to the committee, the then Minister of Agriculture, Fisheries and Food said that she had to concede that it was almost impossible to make the necessary changes to the CAP.

There are many other reasons why the CAP needs to be changed. It needs radical reform. What we need politically and strategically, for security and for economic purposes—that is, the enlargement of the Community—cannot be achieved by bringing in those countries unless we have that radical reform. However, many other reasons for reform arise. The noble Lord, Lord Bruce, has given some of them. We should remind ourselves of the fact that when the CAP was formed originally, it involved only six states with broadly the same agricultural conditions. They were faced with a shortage of supply.

Now, however, we have 12 states with more about to join and we hope that many more will join before too long. Some states, such as the central and eastern European states, have been promised membership. However, there are enormous differences between the agricultural conditions in each of those states. Let us bear in mind the agricultural and economic differences between the eastern European states, Norway and Finland, and Italy, Spain and Portugal. Those differences and the surpluses of food are such that the conditions that applied when the CAP was created bear no relationship to those of today. Therefore, it is nonsense to think that we can fiddle with the edges of the CAP and find a solution that will establish the common criterion that is needed to meet the needs of those disparate states. Trying to adapt the existing structure can result only in the creation of great unfairness and economic nonsense.

The CAP has not been a great blessing to the United Kingdom. We now pay in considerably more than we receive. We are faced with the massive bureaucracy of the CAP—as of so much in the Community. We are faced with massive fraud. I share the regret of the noble Lord, Lord Bruce, that the debate on fraud that should have taken place next week has now been postponed. We are not allowed to produce some of the indigenous foods in which we have a shortage. Milk is an example. Therefore, we should not necessarily mourn any departure of the CAP. Indeed, matters will get worse as the Community widens unless the CAP is radically reformed. It is ridiculous for a country like this, which believes in free and fair trade and in free markets, to buttress itself with the quotas, bureaucracy, central planning and fraud that goes on in the CAP. For those reasons, I hope that reform of the CAP can take place as a matter of urgency. Enlarging the Community is a good hook upon which we can hang that policy and demand that it be now done.

I shall touch on just two points which arise in the report. They are not related directly to the reform of the CAP but arise from something that the noble Lord, Lord Bruce, said: there is a tendency when any measures are taken in relation to the CAP or anywhere else which appear to be of benefit to the farmer for everyone to get on to their high horse and shout that consumer prices are going up; that once more prices have shot up, and that is all the fault of the farmers. My noble friend Lord Onslow raised the subject in the inquiry. The rise in consumer prices in this country bears hardly any relationship to a rise in farm prices. The price of wheat at the fanners' gate has gone down rather than up, while the price of a loaf of bread has doubled. That goes for a whole mass of things. Those responsible for advocating the farmers' case fail to make that point powerfully enough. There is reference to massive expenditure. The massive expenditure is not going into the poor old farmer's pocket although he may be having a little better time now than he was a year or two ago.

Another point relates to health and safety. Anxieties have been expressed about the danger of the importation of disease from eastern Europe. That is a real danger and considerable caution must be applied. Grave dissatisfaction has been expressed by fanners who have been exporting live animals to continental Europe and who find that they can no longer do so because of conditions on the ferries. I shall not enter into an argument as to whether that is right or wrong or the degree to which there is cruelty. If there is cruelty, I support exports being banned. The objection that is being made is that while that trade is stopped here, live animals are being imported into those same markets from eastern Europe—from Poland and the like. That is being done in conditions which are far worse than anything that happens during export from this country. That is something which we should not let pass unnoticed. I accept of course that those are side issues. I raise them because there were references to them in the report. The major point is the impossibility of central and eastern European states joining the European Community unless we have the radical reform of the CAP which is so badly needed for so many reasons.

5.22 p.m.

The Earl of Onslow

My Lords, when I heard my noble friend Lord Boardman opening his remarks I imagined him as Cassandra in white robes upon the walls of Troy warning against disaster if a certain sensible policy was not followed. Whereupon the certain sensible policy was not followed, whereupon disaster followed. Unless we look at the issue of the CAP and eastern Europe as a whole—as he rightly said one is completely impossible without the other—then disaster will happen, and I sincerely hope that my noble friend can continue to wear a grey suit rather than a white sheet.

I was flattered to be allowed to be a member of the committee chaired by my noble friend Lord Middleton because I am not a standing member of it. I have, as your Lordships know, banged on, on occasions, about Odessa, to which I shall refer again later. Eastern Europe at the moment is in considerable turmoil. It is difficult for us to realise how far back that turmoil goes. In 1919, the whole of the world from the Rhine to Vladivostok lost its political history and was upset and destroyed completely. The Hapsburgs went; the Hohenzollerns went; the Romanovs went. All that part of the world was in turmoil. We put into place some bad treaties; we had a war; we then had Russia. That all flowed from those bad treaties.

Everything now has suddenly been lifted. It is in a way an even more dangerous place than it was when it was garrisoned by large numbers of Russian guard divisions. Under those circumstances no one moved without consent. Now we have nationalistic feelings and risings. We have no real sense of authority and a very uncertain journey into democracy. There are Transylvanian and Hungarian minorities. They do not know whether Pressburg is called Pressburg or Bratislava. Again because of the Hungarians there are Rupenes who are not sure who they are but they run

around somewhere in middle Europe. I think that they are called little Russians. They also have nationalistic tendencies. The situation has not broken out into horror as it has in Yugoslavia. The one that has broken in between Bohemia and Moravia has been settled relatively peacefully and sensibly.

We must get those countries into a trading position. Whatever anyone says, the only way we increase wealth is by the buying and selling of widgets. It does not matter what that widget is. We must make those conditions easy so that those countries can make money and prosper.

The report is fundamental to the whole future of Europe. It is miles more important than just a report on agriculture. The German capital is due to move from Bonn to Berlin. The Germans will, through nothing other than geographical movement and political change, instead of thinking like palatinate Germans start thinking like Prussian Germans because their frontier will be just 80 miles away on the River Oder. They will start thinking like that automatically and their policies will be influenced in that way. The centre of Europe will move eastwards. There is nothing wrong in that. We need not be frightened of it. Germany is a completely responsible, respectable and very decent place. We may not always laugh at all their jokes—they do not make all that many. There is nothing to criticise in their political rectitude and behaviour and their general responsibility to Europe. We should not be frightened of them. It is going to move from the palatinate to Prussia.

The noble Duke, the Duke of Somerset, mentioned the things that we cannot buy. I go back to my widgets. The French are complaining bitterly about Hungarian foie gras, but not because there is no demand for foie gras. The demand for foie gras is limited only by its price. The Hungarian foie gras is just as good and rather cheaper. It is not totally surprising that the French, with their tradition of a centralised market state of Colbert, decided that they do not like cheap imported foie gras from Hungary, however good it might be. So those things are excluded in the agreements.

There is the grain in France, for example. If one drives from Calais down to Burgundy one goes through an enormous grain area. One does not see any set-aside. I do not know why, but one does not. However, that does not benefit French peasants. It benefits the grain barons of Alsace Lorraine.

When my noble friend Lord Middleton went to Hungary he commented upon the beauty of the buildings in Budapest. He was told that they were the result of the agricultural boom that took place between 1880 and 1914. Poland means "land of the fields". According to evidence presented to us, Polish agricultural production could increase by at least two thirds if it brought itself into line with western Europe. I come back to my favourite port of Odessa. In 1913, imperial Russia, through Odessa, exported three times the amount of agricultural produce than did the United States. Romania exported the same amount of wheat as the United States. Part of Poland is part of that old imperial Russia. Part of Hungary is applying to join the Community. So the agricultural potential of the eastern European countries is every bit as great as it was in 1913.

Unless we chuck the CAP out of the window we shall have silly things, such as set-aside in Poland which is permanent in Pannonia and rotational in Ruthenia. The concept is so silly that it does not bear thinking about.

I do know whether your Lordships are aware of one of the serious idiocies of European trade involving the importing of horses from Eastern Europe. There is a market in Polish and Hungarian horses because they make good driving horses. I speak from limited experience. There is a duty on geldings but not on stallions and mares because they can breed. What idiot produced such an idea? It may be that the Government want to state that they are agricultural animals. If so, please can we have VAT back on the stables that we want to build? However, the Government should not impose a 12 per cent duty on geldings but not on stallions and mares.

Perhaps your Lordships can imagine the introduction of sheep quotas in Hungary. A rather vulgar story circulated before the war which related to the then Duke of Sutherland and Prince Esterhazy. They argued about who was the richest and it finally came down to who had the greatest number of sheep. Prince Esterhazy proved to his quiet satisfaction that he had more shepherds than the Duke of Sutherland had sheep. I admit that in recent years the Esterhazys may have been dispossessed, but to have ewe quotas on such a scale can do nothing but result in more sillinesses than we now have. Blackcurrant juice was prayed in aid of the silliness relating to trade agreements. Such prices can be changed at 24 hours' notice and that cannot be good for anyone's business, either the buyers' or the sellers'.

Sixty per cent. of the European budget goes on the CAP. As regards the cohesion fund and others, large amounts of money are spent on improving agriculture in Portugal and Spain and on draining the marshes where Byron died in order to increase Greek tobacco farming. For that we pay £1,000 million per year in subsidies and then say that we want to make it illegal to smoke the ruddy stuff! That is too stupid. Bulgaria produces vast amounts of tobacco. Are we to subsidise Bulgarian tobacco, the smoking of which is then forbidden? I recently read about a directive providing that lettuces must contain only X amount of nitrates, which effectively has banned the growing of lettuces under glass in this country. There was no objection from the Ministry of Agriculture, Fisheries and Food and 500 people in the lettuce growing business were put out of business. Perhaps my noble friend Lord Howe will comment on that excellent article by Mr. Booker, which appeared in yesterday's Sunday Telegraph.

We say that we must get rid of the effects of the CAP in order to produce market levels. We do not know what the market levels are. The Japanese subsidise every bit as badly as the European Community, and the Americans are even worse. I believe that sugar produced in Florida fetches less than the cost of the subsidised water used to irrigate it. Unless we get rid of subsidies in world agriculture businesses we shall not escape such nonsense. We must begin in Europe and make radical reforms. As your Lordships know, "radical" means root and branch reforms; that is, pulling it up and starting again. It does not mean reform in the old English sense, which was to remake; it means completely to change. Unless we do so we shall head for disaster.

I shall leave your Lordships with a story from Book VI of Livy. Hannibal was besieging Saguntum. The Roman legate said to Hannibal, "I have in the sleeves of my toga peace or war. Take quid placet tibi"; that is, that which pleases you. We have an opportunity to make peace in Eastern Europe but we cannot have the CAP and enlargement. Take quid placet tibi.

5.34 p.m.

Lord Palmer

My Lords, I too would like to pay the highest possible tribute to the noble Lord, Lord Middleton, and his committee for producing this tenth report. The mind boggles as to how much work has gone into it. I just hope that the noble Lord, Lord Bruce of Donington, is incorrect and that someone will read it outside this Chamber. I found of particular interest the tables on page 45 which emphasise the enormous gap in the efficiency of the old East and West. They emphasise also how very different all these countries are and I believe that we must be very wary to take this on board.

Agriculture has always been and, I believe, will always be a long-term business. Many of us involved in it have already planted the vast majority of next year's harvest and yet we have no idea what it will yield in tonnes or in pounds sterling. And now, of course, that we have set-aside we do not even know how many acres we can farm, unlike most other countries which do not even know what set-aside is.

No other business has to wait a year to discover its outcome and that is why I believe agriculture must be treated with kid gloves. I am sure that in the long term it is sensible for the associated countries in Central and Eastern Europe to become full members of the European Union but I believe it is vital that, as specified by the European Council, a number of social, political and economic conditions are met and met in full. Indeed, I agree with other noble Lords that the CAP is becoming a mockery, and that, as was mentioned by the noble Earl, Lord Onslow, it must be taken up root and branch and planted again.

I was interested in what was said by the noble Lord, Lord Boardman, about the price of a loaf of bread. According to my research the price of wheat is exactly the same as it was 15 years ago. I believe that I am right in saying that the price of a loaf of bread has quadrupled in those 15 years. I am sure that the noble Lord, Lord Mackie of Benshie, will talk about the wonderful formula that he has about tonnes of wheat to tractors to buy and how many sheep you need. I shall look forward to hearing from him later.

What we must not forget are the hideous mistakes made by the Commission in the early 1970s. If your Lordships remember, there were grants available to drain the wetlands and the moorlands and now, 15 years later, we are told, "Stop, set it all aside". We must do our very utmost to ensure that this type of fiasco does not happen again.

I appreciate the political imperative to draw these countries towards a democratic future and I applaud much of what has already been done. But it should not be done regardless of the consequences such actions may have on the stability of agricultural and food markets, with all the horrific ramifications for employment and trade within the European Union.

There are some important details which need to be got right on animal and plant health. Indeed, as I am sure your Lordships are aware, there are well-documented cases of disease being transmitted into the European Union due to the extremely low standards which apply in some countries. What we need urgently is a much stronger European Union animal and plant health inspectorate to be set up and given real teeth.

An attempt was made to stop destabilising floods of Eastern European produce by introducing triangular-made arrangements reflecting the previous trading practices of those countries. I fear that these arrangements, which could allow the former USSR to purchase goods from their former Comecon partners, do not appear to have been very effective. This, I believe, must be rectified.

We must also, I believe, be vigilant. The previous marketing arrangements in many of these countries involved massive central distribution points which were highly inefficient in meeting the needs of the local population but provided an excellent base from which dumping could take place. I believe that the restructuring of marketing within these countries is a priority.

The minimum import price system for soft fruits from Poland is in operation but, as I am sure many of your Lordships would agree, it has proved unsatisfactory. This mechanism is not triggered rapidly enough to take account of low price transactions. I am, of course, particularly referring to the blackcurrant market. This is a major issue for Scotland's soft fruit producers and the industry, centred in the Tayside region, has suffered years of periodic dumping. I believe strongly that future arrangements must not further destabilise this sector. Many jobs in Scotland are at stake.

I believe that the European Union and the UK authorities must take appropriate and measured action to ensure that fanners throughout the European Union are not faced with years and years of economic uncertainty brought about by hasty political decisions as they have been in the past. Agriculture is our lifeline and it cannot be treated like a toy, put down one minute and picked up the next. Long term planning is vital to the whole of the European Union.

5.40 p.m.

Lord Harlech

My Lords, I join with other noble Lords in expressing my sincere thanks to my noble friend Lord Middleton for inviting me to contribute in this vital debate. I also wish to congratulate the committee on its extremely thorough investigations which have resulted in a clear and valuable report. There is no doubt that it gives one great confidence when one hears the Minister expressing such enthusiasm, as she did, for wishing to assist our Eastern European neighbours.

I should say at the outset that my knowledge of the CEE countries is limited to Romania, and in particular to the mixed farming communities of Transylvania. Therefore, my comments are inevitably based on my knowledge of that country.

A typical farming village in central Transylvania consists of 400 or 500 houses grouped around the main street with a police station and probably three churches—orthodox, Roman Catholic and Lutheran. In the larger villages there may be some form of shop but that would be unusual. There will certainly be a good village school. There will probably be no piped water and no mains sewerage, an inadequate electricity supply and perhaps only two or three telephones in the whole place.

A proportion of the houses—up to 25 per cent.—will have been owned by families of German origin who, over the past 20 years or so, will almost certainly have returned to Germany leaving the houses boarded up. There will be other houses owned by families who have moved into the cities, perhaps many miles away, and who no longer have any interest in the village of their origin. Those houses too will be unoccupied although some of them may have been taken over by gypsy families, of which there is a significant minority.

The former state or co-operative farms which would have been the main employers will now be in a semi-dilapidated state, as will the tractor stations, which is what they are called. There may be some worn-out tractors and machinery in the village to be loaned around among various families, but the organisation to maintain them will no longer exist. It is not uncommon to see groups of men and women mowing corn and hay fields with scythes. In many cases, the nearest petrol pump will be 15 or 20 miles away and petrol or fuel of any kind will be available only intermittently. Each farm will have one or two cows or buffalo to provide milk and to pull the ploughs and carts. It will have two or three sheep, some pigs and a few acres of maize or wheat for animal feed. It will have one or two plum trees and a small vegetable garden. Every village has a communal flock of geese. Each family spends many man-hours a day, particularly in the winter, drawing water by hand from a well to water the livestock and provide for the families' needs.

Probably few of the householders have title deeds to their property. Those who have are prevented by law from selling their farms even if they do not wish to farm them and there is no system of land tenure to enable land to be let. There is no structure for marketing surplus produce apart from, possibly, a market stall in the nearest town or village. But towns and cities are few and far between and in many rural areas poor roads and a shortage of road fuel and vehicles mean that each village is more or less self-sufficient, providing subsistence for the population and little else.

Therefore, the holdings in general are of an insufficient economic size. The people are as intelligent and as hardworking as are the people of Britain and on average, they are probably better educated. But after 50 years of communism, they have no understanding of how a market economy works.

I am sure that few in Romania regret the passing of Ceausescu. However, the regime which they began to fear makes many Romanians, and perhaps the majority, only too well aware that that period of transition which has brought higher unemployment, higher inflation and which has reduced their sense of stability falls far short of their hopes and expectations. Nobody can say with absolute assurance how the transition to a market economy should best be handled because the circumstances in Eastern Europe are quite new and have never been seen before.

One thing is absolutely certain: if the new governments in Eastern Europe are to retain the support of their electorate, they must be seen to be successful in handling that transition. We in the West will do them and ourselves immeasurable harm if we fail to give the help and support that they now need.

The task facing the Romanian Government would be hard enough if the country were surrounded by politically and economically stable neighbours, but it is made even more difficult when one considers that to their east, there is turmoil in the countries of the former Soviet Union, and to the west is the former Yugoslavia. The cost of international sanctions on Yugoslavia and, indeed, Iraq, has fallen very heavily on the Romanian Exchequer.

The Europe Agreements probably have very little direct effect on a fanner in Transylvania who is not yet in a position to market his surpluses in a town 20 miles away, let alone in Western Europe. But their very existence may help to build his confidence in his own government. That is important. In countries like Romania and the other CEE countries, agrarian stability and political stability go hand in hand.

I turn now to the common agricultural policy, of which we have heard quite a deal this afternoon. I understand the difficulty which the British Government face in negotiating with our EU partners. Urgent and radical reform of the CAP is needed. I sometimes feel that that task is made even more difficult by the insistence of Ministers returning from meetings with our European partners that they have negotiated strongly and well in Britain's interests. Reform of the CAP is not a British question. It is in the interests of the whole European Union and the rest of the world as well.

I have said before in this House that 70 per cent. of the most productive agricultural land in the world lies in the temperate regions of the northern hemisphere. It seems to me immoral that we in Europe should be paying fanners to set aside land when there are millions of people in the world with insufficient food and when the population of the world is set to double within the next 50 years.

It also seems quite extraordinary that the production of agricultural surpluses is taken to be a great problem to us all when in fact those surpluses provide enormous opportunity—the opportunity to breed varieties of food crops, not just for their yields but for quality and flavour; the opportunity to breed varieties of cereals that can produce viable yields with a minimum of artificial fertilisers; the opportunity to reduce yields by taxing artificial nitrogen and other key chemicals, thereby improving the environment by reducing their usage and providing funds for cleaning it up as well—unpopular it may be, but it is a useful source; the opportunity to concentrate on growing organic crops which may improve the health of our people; and, indeed, the opportunity to feed the starving of the world. Agricultural surpluses are not negative, they are not a curse: they are an enormous source of opportunity if only we use them wisely.

Some noble Lords may have seen an anonymous letter sent to President Clinton which was published in the January 1994 edition of the Country Landowner. Although it deals with the agricultural policy in the USA, I believe that it is very relevant to the CAP as it is today in Europe and the lessons that we might learn. Perhaps I may quote from it: Dear President Clinton, My friend, Ed Peterson, over in Idaho, received a cheque for $1,000 from the Government for not raising hogs. So I want to go into the "not raising hogs" business next year. What I want to know is, in your opinion, what is the best kind of farm not to raise hogs on, and what is the best breed of hogs not to raise? I want to be sure that I approach this endeavour in keeping with all Governmental policies. I would prefer not to raise Razorbacks, but if that is not a good breed not to raise, I will gladly not raise Yorkshires or Durocs. As I see it, the hardest part of this programme will be in keeping an accurate inventory of how many hogs I haven't raised. My friend Peterson is very joyful about the future of his business. He has been raising hogs for 20 years or so, and the best he ever made on them was $422 in 1968, until last year when he got your cheque for $1,000 for not raising 50 hogs. If I get $1,000 for not raising 50 hogs, will I get $2,000 for not raising 100 hogs? I plan to operate on a small scale at first, holding myself down to about 4,000 hogs not raised, which means about $30,000 for the first year. Then I can afford an aeroplane. Now, another thing—these hogs I will not raise will not eat 100,000 bushels of corn. I understand that you also pay farmers for not raising corn or wheat. Will I qualify for payments for not raising wheat and corn not to feed the 4,000 hogs that I am not going to raise? Also, I am considering the "not milking cows" business, so send me any information that you have on that, too". The letter concluded with the words, "Patriotically yours". There we have what is in effect a CAP policy all akimbo with the interests of the world, but happening in America.

However, in conclusion and on a serious note, I have one further point to make. If Eastern Europe is to go in the direction that is in all our interests, we must help. We must help by assisting the governments of those countries to succeed in the eyes of their electorate and gain their confidence. If all is left to market forces in the hope that all will come right in the end, we could be dangerously wrong because time is not on our side. Political stability depends on the narrowing of the gap between the people's expectations of their government's ability to deliver.

One must observe and draw the conclusions as to what are the basic issues of our time and what policies are best able to solve them—what qualities are most likely to further those policies? If it is essential for the political stability of Central and Eastern Europe that the CAP is reformed (and I believe that it is) then reform it we must. Even if our Government is unpopular in the Council of Europe, they should have our fullest support in doing what has to be done.

We may be faced with an unattractive choice, but if I had to choose between political stability in Eastern Europe and unrest among the agricultural communities of parts of Western Europe, I would go for political stability in the East. Foreign policy and our dealings with our Eastern neighbours should not be dictated by the ill-natured manoeuvrings of a small minority demanding that EU farmers should never have to compete on equal terms on world markets. The words of Sir John Birch, the British Ambassador to Hungary, quoted in the Epilogue to the Select Committee's report are so true and to the point that I make no apology for quoting them again: If, 10 years ago, we thought we could obtain a situation in Eastern Europe where the Russian army had withdrawn into Russia and where the CEE countries were moving into parliamentary systems of government we would have paid billions of pounds to achieve it. Now we have got that situation for virtually nothing. For Heaven's sake do not let us lose it.

5.57 p.m.

Lord Wade of Chorlton

My Lords, I put my name down to speak in the debate because I was so supportive of the conclusions reached by the committee of my noble friend Lord Middleton and because of the need to put at the forefront of our minds the need for central and Eastern European countries to strengthen their economies. Noble Lords may have read in last week's edition of the Economist a very detailed investigation of the impact of the global economy on our various local economies. It confronted the arguments which many of us have heard; namely, that competition from other parts of the world will suck away our investment and jobs and make life more and more difficult for us in the West as the economies of those countries in the East continue to grow.

Nothing is further from the truth. In fact, as world economies grow and as the economies of the other countries of Central and Eastern Europe and Russia grow, and even though in the short term that might have an impact on certain sectors of our industry, it will, overall, bring greater wealth not only to them but also to us. That is something to which the report draws attention in a very specific and important way. There is nothing that could be more against our own interests than maintaining a protectionist approach to the development of markets in Central and Eastern Europe which, in the end, will cause our own circumstances to suffer.

I have listened on many occasions to the splendid speeches made by the noble Lord, Lord Bruce of Donington, when he has talked about Europe, the CAP, the European Union and the European market. I agree with him strongly on how ridiculous is the situation which we have arrived at and which has been outlined by the examples given by many noble Lords. We have now reached the ridiculous position of actually preventing the development of trade not only in our own country but also in Central Europe.

However supportive I may be of the conclusions made by the Committee and of the remarks made by my noble friend Lady Chalker at the beginning of the debate, one has to look at the impact of the changes upon our own rural economy. As many noble Lords have said, we are increasingly confronted by environmental regulations and by controls that prevent other uses of land and take more and more land out of production as set-aside (which looks like waste on the sides of the road), for instance preventing the rearing of pigs, as in the example just given by my noble friend.

We are at this particular time importing some £6 billion-worth of food a year into this country which we could probably produce here. Is there a way forward which enables us to open our markets and develop the marketplaces of Central and Eastern Europe and at the same time maintain a viable and effective rural economy within Europe itself? It would seem to me that that is the issue to which we have to address our minds in a little more detail because quite clearly if we pull away one rug we must find what other rug we put in its place, if any.

In New Zealand a decision was made some five years ago to withdraw all subsidies for agriculture overnight. That shows quite clearly that one can change a subsidised system to an open market one. New Zealand farmers are now better off than they have ever been. We have referred on many occasions to the French. The French established the intervention system some 170 years ago. I would not have thought that the French peasant is any better off now than he was 170 years ago. Therefore one can hardly argue that the intervention system has made anyone much wealthier. Certainly the New Zealand farmers, having got rid of their subsidised system, are now wealthier than they were even 10 years ago. Surely that shows us that there needs to be a different system from the intervention system that the CAP has established as the way forward.

It is interesting to note that there are approximately 30,000 farmers in New Zealand, which is approximately the number in this country. It was expected that, from the moment it was decided to remove the subsidies, up to 10,000 of the farmers might become bankrupt and have to give up farming. In practice, 3,000 went out of business. It was thought that the banks would pull the plug on anything up to 10,000 of the farmers but in fact they hardly pulled the plug on any of them, even though the value of land came down by some 50 per cent. It would seem to me that, although there are many arguments as regards how we can deal with this problem, a review of the bond system which creates a mechanism whereby one removes subsidies over a five-or 10-year period is needed. If at the same time one fed capital into the system, that would prevent farmers going bankrupt overnight but at the same time would allow our farmers in the West to have the same level of opportunities that people have in the East. At the same time we should remove many of the unnecessary controls and environmental regulations that now exist as regards other uses of land.

Reference has been made to the northern sectors of the world, where most of the fertile land is to be found. We should establish a system which, over a period of time, could expose us to world markets with little support being given, except only on a local basis for the purposes of conserving the environment, and which could at the same time make all the farmers in a particular local area much better off. Certainly the opportunities for production of all kinds of agricultural products in Central and Eastern Europe and Russia are enormous. It would be in our interests if those opportunities could be created for them. That would create wealth for them which they could use to build other industries and create wealth for their people, who could then buy far more of our added value products. We so desperately need that

However, achieving that state of affairs is not just a matter of providing further technical assistance. The people in the countries I am discussing need vast amounts of investment in their road structures to improve their ability to transport products. They also need assistance in understanding the marketplace and in developing enormously improved skills to trade in the marketplace. But surely it would be in our interest to provide this assistance. A major international company may decide now to invest in South Africa in the knowledge that it may be five or 10 years before a return is gained on that investment. However, the company knows it will receive a return on its investment in time. We need to give far greater encouragement to our investors and our financiers to invest in Central and Eastern Europe.

Sir John Birch has made splendid comments on this matter. He also commented that there is far less investment in Hungary from British companies than there is from many other European countries. I heard only the other day that Germany, for example, has recently decided to put a computer in every school in Iraq. I am not necessarily suggesting that we should do that, but it shows that one has to take a long-term view of developing trade and an understanding of our products to enable us slowly but surely to develop trade with other countries.

I very much welcome this report. It has been suggested that nothing will come of it. However, perhaps one thing we could do would be to send a copy of this debate in Hansard to every Member of the European Parliament. That might draw their attention to the seriousness with which this House views the impact that the continuing imposition of the CAP will have not just on the agriculture of Europe and the economic growth of Central and Eastern Europe, but ultimately on the economic strength of the western world.

6.6 p.m.

Lord Mackie of Benshie

My Lords, I have greatly enjoyed the debate. We have heard a series of opinions expressed with vigour and eloquence, with a good deal of prejudice and a little nonsense but also with a great deal of good sense. We heard a tremendous flow from the noble Lord, Lord Bruce of Donington. The noble Lord is of immense value. He produces amendments which he believes would improve the CAP and the whole of the European Union. Unfortunately, every amendment is a wrecking amendment because his object is to destroy the whole concept and not to improve it. That, I think we are all agreed, is wrong.

The noble Lord, Lord Middleton, and his committee, have produced a remarkable report. I sat in on one or two sessions of the committee and it was obvious that work was progressing extremely well. I can pay the committee no higher compliment than to say that I could not have done better myself. I have been engaged in the agriculture committee of the Council of Europe in looking at Eastern European agriculture. It has stirred me up no little considering the matter and listening to experts from the OECD telling us exactly how prosperity can come to every region of the earth. However, they have to admit, of course, that in the OECD, which comprises the richest countries in the world, there are 36 million people unemployed. Therefore capitalist enterprise and competition have not exactly solved that problem. If one calculates the figures, one will realise that there are 100 million people in the families of those unemployed people who suffer the effects.

Mention has been made of the fact that many people in Eastern Europe now believe that the rigours of authoritarian socialism were better than being unemployed. We must think seriously about the situation. I believe we have given very bad advice. Admittedly, no one expected that the Russians, as the ambassador said, would withdraw. Ten years ago we would have been absolutely delighted by that. However, no work was really done as regards how one could transform the rather incompetent economies of Eastern Europe. We must respond to the lessons we have learnt. I believe all sensible people admit that we made big mistakes in our advice to rush at this matter.

The Minister, whom I greatly respect and like, said that we negotiated a splendid agreement at Copenhagen. As already mentioned, all that resulted from the concessions to eastern Europe was that we exported a great deal more of our subsidised goods to them while their exports to us fell. That does not appear to me to be a concession of great value. I do not blame the eastern European countries for wanting to protect their agriculture from our subsidised dumping. That seems only sensible.

I have visited most of the eastern European countries recently, but particularly, Estonia, Poland and Hungary. Although it is not extensive I have some knowledge of Hungary's agriculture. My first visit to that country was five or six years ago. A most agreeable man from the Ministry of Agriculture took me to the glorious plain south of Budapest and to good farming country. He showed me a fruit farm which was run very competently. Because I was interested in the minority problem, he also showed me a German co-operative which was doing an admirable job. I could not but admire the crops as I drove through the countryside for two days. I thought that the land was well farmed.

I take issue with the noble Lord, Lord Carter—whom I also greatly admire and esteem—on the question of an increase in production over the previous level. There would certainly be an increase in production over the present level, which is pathetic. I recently drove through the same countryside in Hungary which I had seen five or six years ago and I was shocked by the miserable state of the farms. The reason is straightforward. Financial responsibility was suddenly imposed on co-operatives and state farms which had never had such responsibility before. At the same time food subsidies were dropped. The result was immensely bad fanning. A few farms have survived and the situation is now improving, to a degree.

For the first time, Poland imported food in 1992. It had never done so previously in its history. Although there was a drought, that situation was due largely to the total disorganisation of the state farms, which represented 20 per cent. of the farming area. That 20 per cent. was good land which had produced a surplus for sale to cities, whereas the 80 per cent. of the land held as individual farms produced crops which were mostly consumed at home.

I shall now please the noble Lord, Lord Palmer, by quoting standards of comparison in relation to techniques which are possible in Poland, Hungary and elsewhere, using our own system. A tonne of barley fetches about £80 in Poland. That will pay a man's wages for a month. He receives about £5 a week for a tonne of barley. Those of us who farm know that in Britain it takes approximately two tonnes of barley to pay a man's wages for a week. Therefore, there are advantages in a low wage economy, which can lead to profit in agriculture. In order to make the: agricultural economies of those countries prosperous we need to introduce techniques such as local markets and a bank to lend money to enable farmers to buy fertiliser, and so on.

Two young friends of mine have entered into a venture in Poland with 2,000 acres. They wanted to sow their winter corn but could not find fertiliser anywhere. They had to hire a lorry and take money to Germany to bring back fertiliser. They were able to do that because they knew the ropes and had money. However, there is no structure to which farmers can apply in order to buy what they need.

We can help with those aspects, and we are doing so, although not enough because there is not sufficient money to go around. But we have to ensure that individual private farms and co-operatives—which are genuine co-operatives and not imposed from above— have a fair crack at the whip, obtain the necessary knowledge and are able to borrow money in order to produce crops. It has already been said that as Russia improves her economy the Russian market will again open up to consume much of their produce.

I turn now to the CAP. It has been thoroughly damned. It has produced some extraordinarily foolish results. When the CAP attained its objectives under the original concept nobody thought that the rules should be changed. Now we have a ridiculous situation. I do not often agree with the noble Lord, Lord Wade of Chorlton, whom I regard as a rather extreme supporter of free enterprise. But he is right in saying that we have to change the system drastically. One cannot suddenly plunge all the farming communities of a country, together with the rural communities, into a disastrous situation. It seems to me that the bond scheme of compensation could be one solution. The committee has considered the scheme—it did so in my day—and recommended it as being of interest. I believe that a scheme of that nature would make rapid change acceptable.

Lord Carter

My Lords, I thank the noble Lord for giving way. Does he agree that most of the proposals for a bond system have argued that it should be degressive? In other words, large farms should not receive the amount they would otherwise receive under the bond scheme simply because they are large. Does the noble Lord believe that exactly the same remarks my noble friend Lord Bruce made in relation to the large payments which go to British arable farmers could be made about large payments which might be made to larger farms under the bond system?

Lord Mackie of Benshie

My Lords, I have never accepted the argument, put forward by people whom I have regarded up to now as ignorant, that just because someone farms a larger area and employs more people he should not receive more money. That does not appear to be logical, unless one wants everyone to be a small farmer. Most people do not want to be small farmers. Therefore, I do not accept that argument. If one wants to compensate the industry one cannot simply say that one farmer, because he has a large farm and is competent, should not receive the same form of compensation as another.

I agree that the CAP has to be reformed. I agree that we have to help to produce a healthy agricultural economy in eastern Europe. I believe that we can do that, and I am certain that we should do so.

6.20 p.m.

Lord Gallacher

My Lords, the debate on the report has somewhat paradoxically become a debate about the future of the common agricultural policy rather than about the question of association agreements in Eastern Europe. I agree that the two are inextricably linked. That has been made abundantly apparent by the many speeches throughout the course of the afternoon and evening. Even the changes that have been made to the common agricultural policy in order to meet the GATT obligations which were considered to be significant, leading to new thinking on the CAP, with set-aside, reductions in stocking densities, compensatory payments, and so on, were hailed at the time as representing a major change in Brussels and in the member states' attempts to conform to what was regarded as necessary in order to bring agriculture within the scope of GATT. Critics can rightly say that there has been no overall reduction in the cost of the common agriculture policy, which is still a high cost policy so far as concerns consumers; and that in addition it remains a somewhat restrictive policy with regard to imports. Eastern Europe is an example of that. Even the pending accession of four former EFTA countries to the Community is not likely to revolutionise CAP thinking, since they also subsidise agriculture in varying degrees. The Select Committee report is favourable to better association agreement terms for Eastern European countries but highlights the levels of food output and farm efficiency in those countries by comparison with the 12 member states in the Community. It points out that it is also necessary for the European Community to avoid creating conditions which result in a return by Eastern countries to planned economy status.

There are certainly major agricultural problems in Eastern Europe, as we have heard, especially with regard to the provision of capital. However the availability of capital is the perennial difficulty in food production, whether one refers to long-term working capital for land acquisition or working capital for the needs of the farm or business. The nature of land reform in Eastern Europe appears unlikely to help full membership. We do not know how many large units there will be. We do not know much about land repatriation, or the compensation likely to be made in lieu of repatriation. We know little of who will manage farms in the new Community and who will work on them. We do not know about wage costs—probably one of the most vital issues. The diversity of present patterns of farming in the Eastern European states makes forecasts almost impossible. The report sensibly recognises that. My noble friend Lord Carter amplified that issue on the basis of personal observation.

Despite all those factors, I have the feeling that the problems arising from giving a better deal by association agreements are overestimated. Certainly the difficulties are immense, but they are capable of resolution, perhaps to the embarrassment of the common agricultural policy, which is in a contractionist phase. Even if the cost of the common agricultural policy is not contracting, it reveals a disposition to contract. That factor doubtless explains the Commission's cautious view of Eastern European agreements. However, I take the view that agricultural production is capable of expansion if capital is available at reasonable rates and know-how is sound. I believe that the noble Lord, Lord Mackie of Benshie, would readily agree on that point.

The United Kingdom and Germany may not see as many difficulties for Eastern European states as do other member states of the Community, including France and Italy and certainly the smaller member states. Many problem areas have been illustrated today. They include such mundane issues as the popularity of Hungarian and Bulgarian wines in the United Kingdom, in particular at present prices. Will the French readily accept such competition? Can the European Community afford favourable access terms for commodities which are already in chronic surplus in the Community? There has been reference to soft fruit. We know well the concerns that Western growers have expressed about the excess of soft fruit and the prices charged.

We are entitled to ask this question: what if more added value products come from the East? "Added value" is the cry throughout agriculture at the present time. Will those products have to conform to EC standards and at what price will they retail in cut-price supermarkets? It should not be assumed that our supermarkets are making all the profit. In a petrol station, of all places, I saw a standard loaf on sale at a retail price of 29p. Will countries such as Austria feel as sympathetic to favourable treatment for certain EC neighbours as other EFTA newcomers? How quickly can eastern states improve production? Will they intensify output while the European Community moves in the opposite direction, including the adoption of organic methods, which are now much canvassed both in the United Kingdom and in other parts of the European Community?

My limited pre-war experience of pork and bacon imports from Poland—admittedly the country was then on a low wage structure—inclines one to be cautious about estimates of ability to compete. I well remember that countries such as Denmark and Holland which were considered to be market leaders in bacon production were considerably embarrassed at the loss of sales in this country as a result of imports from Poland.

The defects in ways in which current quota systems and licences work lead naturally to questions about how structural changes in Eastern European farming organisations could help to make use of whatever quotas may be agreed, or to improvements made in them. The report makes mention of co-operatives of primary producers in Poland. About 30 years ago the central agricultural union of peasant self-help co-operatives successfully applied for membership of the International Co-operative Alliance. So too did a federation of Hungarian co-operatives. To achieve such membership they demonstrated sufficient autonomy in running their affairs to be considered genuinely co-operative. That was no small achievement at that time. I have no personal experience of the state of play in either country today, but in any case the nature of land reform will condition structural change and fashion economic freedom.

My assessment of the Select Committee report leads to the view that strong national agricultural commodity marketing boards would better achieve whatever the quota or licences systems allow or facilitate better use of concessions. I am a believer in statutory marketing boards because those can help the general run of primary producers, especially when dealing with large-scale purchasers. That point of view is currently heresy in the European Community. However, for associates who ultimately hope to be full EC members, and who have considerable leeway to make up before they become members, marketing boards are more likely to assist than to retard. They will also facilitate tracing supply sources, should that be necessary.

Observations on the report by the Secretary of State for Foreign and Commonwealth Affairs, and the Minister for Agriculture will be a source of satisfaction to the Select Committee. Those observations are contained in Command Paper 2666. The Select Committee's proposals for change are in some measure acceptable to both ministries. No doubt the noble Earl, who speaks well for his department on agriculture, will rely on the reply to the report in that command paper. However, any additions that he cares to make, in particular with regard to radical reform of the common agricultural policy, will excite us.

There has to be some element of finality in reporting on those matters, not least because the workload of Sub-Committee D is the heaviest of all the EC sub-committees. However, I hope that that does not rule out a progress report following meetings with MAFF and Foreign Office spokespersons on what is of essentially ongoing concern, not merely to members of the European Community but, as has been pointed out so eloquently this evening, to European states generally.

6.29 p.m.

The Parliamentary Secretary, Ministry of Agriculture, Fisheries and Food (Earl Howe)

My Lords, as my noble friend Lady Chalker has made clear, one of the most important challenges facing the European Union today is the development of its relations with the countries of central and eastern Europe to support reconstruction there and to bolster security and prosperity throughout the Continent. At the pivot of that process will be agricultural trade. I should therefore like to pay tribute to the sub-committee as a whole and to my noble friend Lord Middleton in particular for embarking on this inquiry into the agricultural implications of the Europe agreements.

The committee has produced a cogent, thorough and thought-provoking report. I unreservedly welcome it as a timely and most helpful contribution since discussions within the European Union are now underway on this issue. I particularly welcome the committee's decision to examine not only the way in which the agricultural provisions of the Europe agreements might be extended or reshaped in the short term but also the approach to be adopted in the agricultural sector as part of the preparations for accession by the central and eastern European countries to the European Union.

These are and will continue to be central issues in taking forward the European Union's relationship with the central and eastern European countries. As your Lordships' committee has rightly noted in its report, future policy is inextricably linked with the operation of the CAP and its further reform. It is the latter issue on which I should like first to focus in responding to the report and the views that have been expressed this afternoon.

The reforms to the CAP that were agreed in 1992 represented an important development in moving the CAP closer to the market, reducing dependence on intervention and in curbing excess production. As the House will know, discussions have begun on the reform of sectors which were not covered by the 1992 agreement. However, there is no doubt that if the existing CAP, with support prices above world market levels and direct payments to producers in the arable and livestock sectors, were to be extended to the central and eastern European countries, it would stimulate a substantial expansion in agricultural production there. This would have two important repercussions.

First, as was emphasised by my noble friend Lord Reay and others, the cost of disposing of the additional surpluses would be enormous and unsustainable. My own department's estimates put the figure at between 13 billion and 15 billion ecu per annum for the Visegrad 4 alone. That compares with the current budget for the 12 member states of 36.5 billion ecu.

Secondly, it would not be possible for the European Union to meet its GATT Uruguay Round commitments; to reduce both the volume and the value of subsidised exports. Nor could it stay within the ceilings on internal support for agriculture. Although no date for accession by the countries of central and eastern Europe has been set, we should remember that in 1999 the further negotiations on the treatment of agriculture within the GATT agreement are due to begin. These negotiations will have the objective of further reducing the level of agricultural support and protection.

Against that background, what is the way forward? There are some who argue that the CEEs should progressively adopt price support mechanisms modelled on the CAP to ease transition to full levels of European Union support. In the Government's view, that would be quite the wrong direction for the CEEs to follow. It would impose significant additional costs on them, and it would mis-allocate resources. Quite apart from that, it would be counter-productive for them to follow policies which work against the grain of CAP reform and the GATT.

The Government's position is quite clear. As my right honourable friend the Prime Minister said in his recent lecture in Leiden: The Common Agricultural Policy as at present operated would be unsustainable and unaffordable with 20 members; wholesale reform will be essential". It will be even more unsustainable with more than 20 members. I am glad that this message is increasingly being accepted and the Government look forward to further discussions on this issue in the European Union.

Lord Mackie of Benshie

My Lords, if the noble Earl will allow me to intervene, I agree with what he said but will he then alleviate the position of those countries which are now suffering from our dumping by measures such as refusing to subsidise any exports to those countries?

Earl Howe

My Lords, if I may come to export refunds in a moment, I think I can answer the noble Lord's question at that point.

The noble Duke, the Duke of Somerset, questioned the pace of the adoption of the CAP on accession by the CEE countries. The precise terms on which the central and eastern European countries become members will be a matter of course for the accession negotiations. Previous enlargements suggest that there is scope for flexibility; but while some transitional arrangements for agriculture should not be excluded, it would be quite wrong to assume that any transitional arrangements would obviate the need for fundamental CAP reform before accession takes place.

The noble Duke also raised the possibility of the CEEs being denied the benefits of the structural funds on accession. He is right to identify that as a major problem which again would have to be resolved before accession. The unaffordability of extending the funds at their present level to the CEEs suggests either that existing recipients will have to receive less after accession than they do at present—and there may be some logic to that; the funds received so far should have gone some way to meeting their objectives—or that the CEEs will be treated on a different basis from the existing recipients after accession. In either event, it is too early to predict what the outcome of the accession negotiations will be in that regard.

The Earl of Onslow

My Lords, before my noble friend leaves structural funds, may we have a formal undertaking that they will not be used either in the present European Community or with any future members of it to improve or enhance the productivity of agriculture? That would be a totally counter-productive exercise.

Earl Howe

My Lords, as my noble friend knows, the structural funds have particular objectives, but it is only the European agricultural guidance and guarantee fund that relates directly to agricultural production. The future of that fund will be a matter of the closest attention, as we negotiate over the coming years.

What kind of agricultural policy would be appropriate to the needs of an enlarged Community? The Government have welcomed and broadly share the objectives for further CAP reform which the Select Committee has advocated in its earlier report, some of which are already being pursued. I welcome too the recent paper published by the NFU on this subject as an important contribution. We shall, of course, study the paper closely and discuss it with them to seek to identify areas of common ground. In the Government's view — and contrary to what the noble Lord, Lord Bruce, seems to think, this is a long held view, publicly expressed— the longer-term aim must be a more market orientated CAP, much closer to world market prices. The removal of inefficient supply controls and phasing out of direct compensatory payments to farmers would also be desirable developments. An agricultural policy based on those principles would not only be in the interests of consumers and taxpayers but it will, in our view—in common with the views of my noble friends Lord Boardman and Lord Onslow—be the sine qua non of further enlargement to the East.

The noble Lord, Lord Bruce, spoke with his customary vigour about the excessive costs of the CAP, both to the taxpayer and to the consumer. He said that the CAP currently costs the average family in the UK around £20 a week. I think that, even though he is not present at the moment to hear this, and even with his deep knowledge of Community affairs, the noble Lord is being a little disingenuous in quoting that figure. The fact is that there is a fundamental difficulty in estimating the cost of the CAP to individuals. Any estimate of the cost of the CAP to consumers depends on estimates of the difference between prices in the Community and the price at which food is available in the rest of the world. However, those so-called world prices tend to overestimate that difference. If the CAP is to be abolished, we could expect prices on the world market to rise. For that reason, the real cost imposed on consumers by the CAP is likely to be a good deal less than the figure we arrive at simply by calculating the difference between EC and world prices.

My noble friend Lord Wade suggested that we should reconsider an income bond system. That point was also taken up by the noble Lord, Lord Mackie. Income bonds may have their attractions, but it is only realistic to consider them in the context of doing away with market price support. Their function would be to compensate farmers for the loss of that. Income bonds are also potentially extremely expensive. Our main task must be to reduce market price support substantially.

The noble Lord, Lord Bruce, and my noble friend Lord Boardman stressed their view that the need to bring about radical reform of the CAP should be a condition of enlargement to the East. Extending security and prosperity to the East is a fundamental foreign policy objective. It is not just a hook on which to hang a demand for radical CAP reform. The key point, as many noble Lords appear to agree, is that the enlargement of the European Union to the CEEs, which we want, requires fundamental CAP reform. We shall pursue it, both because CAP reform is desirable in itself and because we are serious about preparing the conditions in which CEE accession can take place.

I turn now to the agricultural trade provisions of the Europe agreements. As the committee noted, these provisions have not operated asymmetrically as was intended—that is to say, more to the benefit of the eastern Europeans. Agriculture has particular importance for most of the central and eastern European countries. They attach great value to further liberalisation in agricultural trade and to improving the operation of the existing access arrangements. The Government sympathise with their position.

Perhaps I might comment in passing on a point that was made by the noble Lord, Lord Mackie, who suggested that trade concessions made at Copenhagen have been of no benefit to the CEEs because of the current trade deficit that they experience. The CEE trade deficit with the European Union owes much to the large imports of capital goods that they make as they make the transition to a market system. That will help their exports in the long run.

It has to be recognised that without further CAP reform substantial additional liberalisation of agricultural trade would increase budgetary costs and make it more difficult for the European Union to meet its GATT obligations. It is an unfortunate fact of life that the bulk of the production in the central and eastern European countries is of commodities which are already in surplus within the European Union. That means that imports would be likely to displace production in the European Union. The result would be higher budgetary expenditure as a result of increased intervention or more subsidised exports. An increase in subsidised exports would, of course, affect the European Union's ability to meet its obligations under the GATT Uruguay Round settlement. Nonetheless, the Government will continue to press for further improvements in the access provisions where these can be accommodated.

Baroness Seear

My Lords, perhaps I may briefly interrupt the noble Earl on a point of information. Is it true that there is surplus in all these commodities regardless of changes in price? Is it true that in some cases if the price were less there would be more demand?

Earl Howe

The noble Baroness is quite right to point to the effect of price changes on production levels in the medium term. It would be the period of adjustment that would most acutely affect us, assuming that there was a gradual tapering away of subsidies within the Community. I am grateful to the noble Baroness for the point that she made.

An opportunity to examine the possibilities will arise quite soon since the Europe agreements will need to be adapted to take account of the Uruguay Round and accession by the four EFTA countries.

I am aware that there is disappointment in the central and eastern European countries at the way the agricultural provisions have operated so far. There are two main issues: the under-utilisation of the tariff quotas; and, as a number of noble Lords have pointed out, the extent to which the value of the concessions accrue to them.

On tariff quotas, the committee put forward a number of useful suggestions. I note, in particular, that the committee believes that the European Union should reduce or eliminate export refunds if the asymmetrical goal of the agreements is to be achieved. The European Commission recently proposed that a review should be undertaken to evaluate the reasons for the marked expansion of exports from the European Union to the central and eastern European countries with a view to addressing any serious imbalances. The Commission has also proposed that the reasons for under-utilisation of the tariff quotas should be analysed. The Government welcome those proposals. The review should include the possibility of introducing interim measures to reduce or eliminate export refunds in sectors where subsidised exports from the European Union are having a disruptive effect. That point was well highlighted by my noble friend Lord Reay. It would of course be important to ensure, for any sectors where such action was taken, that the European Union's exports were not simply replaced by subsidised exports from other countries. We will be asking the European Commission to consider such an initiative. More generally, an opportunity will arise to tackle this issue when the European Commission brings forward proposals to implement the Uruguay Round settlement.

The committee also suggested that quotas for similar products might be substitutable. While I accept that this proposal would have the advantage of flexibility, it would be necessary to ensure that it operated equitably. The particular sectors for which such an arrangement might be introduced would therefore need to be carefully examined in order to ensure that those affected by it within the European Union would not be significantly disadvantaged. In fact I am rather doubtful whether there would be significant areas where such an arrangement would be possible or negotiable. Similarly, the Government have reservations about the negotiability of the reciprocal bilateral arrangements covering different commodities. As our response observed, arrangements of the sort proposed by the committee would result in the costs and benefits accruing to different member states. The Government believe that it would be more realistic to seek to negotiate bilateral agreements in specific areas such as spirit drinks.

The Government agree with the committee that the current method of allocating export licences may prevent the CEEs from capturing the full or at least a reasonable proportion of the value of their trade concessions and that alternative arrangements ought to be explored. The committee recommends that the European Commission should issue licences to the governments of the central and eastern European countries for sale or for auction. This would be one possibility. As is noted in the Government's response, another possibility would be a system of authenticity certificates which would need to accompany any application for import licences under the quotas. Arrangements based on this principle have already been introduced under the EU's preferential agricultural trading arrangements with other countries. This method should enable exports to be channelled through importers within the European Union offering the best terms.

My noble friend Lord Reay asked about authenticity certificates. Perhaps I may clarify for his benefit how they would work. Authenticity certificates would be issued by the exporting countries' authorities. They would then have to accompany the import licence application. The theory is that that would enable the associates to secure the best possible deal by transferring to them the power to choose the importing trader. That system operates for other preferential agreements. However, it is an option which has disadvantages, as the Government's response acknowledges. It could, for example, work to the disadvantage of the private sector in the central and eastern European countries by re-introducing centralised economic control. The noble Lord, Lord Gallacher, rightly warned against that. For that reason, the Government take the view that while they should not be denied arrangements which are available to the European Union's other partners, the decision on whether such an arrangement should be introduced should be left to them and should only be regarded as a provisional measure.

My noble friend Lord Reay asked about inward processing relief. The reason why the Government do not favour an extension of IPR is that to encourage more exports of raw materials for processing in the EU and re-export to the CEEs would undermine efforts by those countries to improve the efficiency of their own manufacturing industry. It is to their advantage to increase their value added manufacturing, particularly for export, sooner rather than later.

Let me now turn to the question of the minimum import prices system for soft fruit which is, of course, a sensitive one for UK growers. The noble Lord, Lord Palmer, suggested that the system of MIPs was ineffective. The Government pressed hard for changes to the MIP arrangements to try to ensure that they provide the protection intended. We shall continue to monitor the performance of the arrangements which, at our instigation, enable the European Commission to take action if MIPs are not respected over any one-week period.

While the Government favour, as does the committee, the introduction of an early warning system when countervailing charges are about to be imposed on soft fruit because import prices have fallen below the minimum import prices, clearly it will be important to ensure that the proposed system operates sensibly and fairly. If the early warning system is introduced as proposed by Commissioner Steichen, the Government will want, for example, to ensure that it does not encourage a rush of cheap exports each time countervailing charges seem likely to be introduced.

My noble friend Lord Reay asked whether we considered that free trade would operate eventually in the soft fruit sector. Pending accession, when free trade would apply following any transitional arrangements, the aim should be to work towards arrangements which balance the interests of the associates and producers in the European Union.

My noble friend Lord Boardman was concerned about the risk of the European Union importing disease, as was my noble friend Lord Reay. Imports of livestock products and live animals into the European Union from all third countries, including the CEEs, are subject to strict controls to ensure that no threat is posed to our own animal health status in the UK or to that of any other member state. I am glad that the committee emphasised that any further liberalisation of trade with the CEE countries should not risk undermining the European Union's animal and plant health standards. The Government strongly endorse that conclusion.

With regard to improving the effectiveness of the checks on procedures within the CEE countries, increasing the complement of the Commission's veterinary inspection service, as favoured by the noble Lord, Lord Palmer, in particular, would not, in the Government's view, be sufficient. It would need to be accompanied by much better management and training.

This debate touched upon issues of fundamental importance for the future of Europe and I listened with great interest to the many valuable contributions made this afternoon. The Government recognise that the Europe agreements have not so far provided the CEE countries with the assistance they need in order to prepare for membership. I re-affirmed today that the Government attach priority to addressing the difficulties which have been encountered, and they endorse many of the committee's conclusions for improving the operation of the access arrangements. The Government will be vigorously pursuing the proposals set out in their response in the negotiations now underway in the European Union. I hope that our partners will be prepared to adopt as constructive an approach as the UK Government are taking.

6.53 p.m.

Lord Middleton

My Lords, I am grateful to all noble Lords who contributed to this interesting debate. I am only sorry that the noble Lord, Lord Eatwell—a member of our committee and a strong advocate of the need to hold this inquiry—could not take part owing to a commitment in Cambridge.

If the Government and the committee are not wholly in accord on such arcane matters as inward processing relief and the substitutability—I use the word in the Official Report and my noble friend used it just now— of various parts of a chicken's anatomy, I am in no way despondent. They are matters of detail. I find immensely gratifying the way in which the main thrust of our report was received both in the official government response and in the speeches today by my noble friends speaking respectively for the Foreign Office and the Ministry of Agriculture. I am pleased also that the debate showed agreement on all sides of the House on what my committee saw as the fundamental issues: the need to maintain stability in eastern Europe through hastening the economic recovery and strengthening democratic government; the need to make the European Union more liberal and less protective in its agricultural trade policy, and the desirability of eventual enlargement of the European Union to include CEE countries which cannot be achieved without drastic CAP reform. I commend the report to the House.

On Question, Motion agreed to.