Financial Consequences of Enlargement: ECC Report

HL Deb 04 December 1997 vol 583 cc1509-70

5.5 p.m.

Lord Barnett

rose to move, That this House take note of the report of the European Communities Committee on the Financial Consequences of Enlargement (10th Report, Session 1997-98, HL Paper 41).

The noble Lord said: My Lords, I do not think that I have ever been more delighted to be called to move a Motion. I have been asked, uniquely, to give an apology on behalf of my noble friend Lord Bruce of Donington. I have never had to apologise for my noble friend previously, but I do so now because he will be unable to speak in the debate. That apology applies also to my noble friend Lord Kennet.

Before turning to the Motion, perhaps I may welcome our two maiden speakers, the noble Lord, Lord Garel-Jones, and my noble friend Lady Young of Old Scone. I am sure that we all look forward to hearing from them.

I should like to take this opportunity to thank the witnesses who appeared before our committee. I am sure that those noble Lords who have read their evidence will appreciate how valuable those witnesses were in helping us to prepare our report. I should also like to take this opportunity—I am sure that members of my committee would want me to—to thank our Clerk, John Goddard. We have been especially fortunate in the quality of our Clerk in helping us to prepare this report. I thank also the members of my committee because, if we have been fortunate in our Clerk, we have been especially fortunate—I certainly have been fortunate—to have such brilliant and hard working committee members. They have helped to prepare what I hope your Lordships will accept is an excellent report.

We have worked to a tight timetable and I apologise to your Lordships for the delay in publishing the report. As I understand it, the report was available to your Lordships in the Printed Paper Office last Friday, although that was not generally known. The tightness of the timetable arises because we felt it right to try not only to get our report out, but to have a debate on the Floor of your Lordships' House, before the Luxembourg Council on 12th December which I hope will not only take note of, but act upon, the points made in our report. If your Lordships have in some way been embarrassed by not receiving the report quickly enough, I apologise, but I hope that when your Lordships have an opportunity to read it, you will realise why we have produced it in this way.

I start by speaking of the structure of our report. The introduction comes in Part 1, but perhaps somewhat unusually we have highlighted a sort of scene-setting paragraph, using the words "coming home" which is what the applicant countries of the eastern European area believe is what would happen if they could successfully become members of the European Union.

Part 2 contains the summary of our opinion and what might be called the bald points. We have put them up front because—I know that this does not apply to your Lordships—there are some outside this House who may not read the whole of the report and such points might help those who suffer from what might be called "report fatigue", of which noble Lords will be aware. Although. as I have said, there are some outside who do not necessarily read reports in their entirety, perhaps after they have read our main points, they will want to read the whole report—I hope so.

Part 3 is the factual background to the report. I hope that your Lordships will find it helpful.

Part 4 is the summary of the evidence of the witnesses to which I have already referred. Again, it brings out the important points in the evidence that we have received from some very good witnesses.

Part 5 is our full opinion, to which I now turn for the main part of my remarks. We believe that there is huge potential to be gained from enlargement in this direction. Successful enlargement of the Community will make for great advantages not only for the applicant countries, but for the existing 15 countries of the European Union. Equally, there is huge danger if we miss this opportunity. There could be a slide towards tension and instability in Europe among those applicant countries. We should like to see a successful enlargement. However, we believe that the financial consequences of enlargement have been inadequately thought through. That is a great worry.

I read with great interest the speech of my right honourable friend the Foreign Secretary during his visit to the Czech Republic. Naturally and quite rightly, he was very pleasant to his hosts. He clearly recognises the need to bring the Czech Republic and others into the Community. Much thought has been given to that by the Commission itself in the excellent report Agenda 2000. That sets out a realistic route for enlargement.

That said, we do not believe that the Ministers of the member states, including the UK, have seriously thought through the financial consequences both to the existing 15 members of the European Union and the countries that we hope will come in. My right honourable friend the Foreign Secretary was very enthusiastic and said many things with which I wholeheartedly agree. I am not sure that he discussed his speech with the Treasury. If so I would be surprised if that department had given any thought to the financial consequences, let alone give my right honourable friend any advice. Both in this country and many others within the European Union—I am worried because my noble friend Lord Bruce of Donington nods in agreement—there is concern in government about paying more or receiving a smaller rebate.

The Economic Secretary to the Treasury, Helen Liddell, gave evidence to the committee. She said that our rebate was set in stone. That took my mind back to another lady, Mrs. Thatcher, now the noble Baroness, Lady Thatcher, who said that Britain wanted its money back. I believe that that was the phrase she used. If every member state pursues that line, the chances are that financial success in enlargement will be pretty remote. We all know that it will be difficult. In some countries general elections are imminent. Nothing will be done before the autumn of 1998 and the German elections. I am sure that they would not agree to anything until those elections were out of the way. Win or lose, somebody will be in charge in that country who will I hope be able to make some decisions. Other existing members of the European Union will be holding elections at some time. There is a worry about the ability of the 15 countries of the European Union to reach agreement about successful enlargement of the Community. Even without imminent elections both the Germans and others will press strongly for an alteration to our rebate which many see as unfair. The committee did not discuss it in those terms. The committee wanted to see the UK do well within the Community. One is not speaking about fairness or unfairness in terms of rebates. The committee agrees with the comment of the Foreign Secretary that successful enlargement of the Community would be a great advantage to this country.

How will enlargement be paid for? There are probably three ways in which it can be done. No doubt noble Lords can think of others. The first is economic growth. That is usually regarded as the painless way of paying for a number of matters. Secondly, there is the possibility of raising the own resources ceiling, which at the moment is 1.27 per cent. of the European Union's GDP. To be utterly realistic, the likelihood of that occurring is pretty slim. (I wish that my noble friend would stop agreeing with me. It would be even worse if the noble Lord, Lord Marsh, began to agree with me.) Thirdly, there might be cuts in structural funds and the common agricultural policy.

As to growth, between the years 2000 and 2006 it is estimated by the Commission that the European Union's 15 will grow on average by 2.5 per cent. (I am glad to see that my noble friend is now disagreeing with me. This is not my view but the view of the Commission.) It is also estimated that the applicant countries will grow by an average of 4 per cent. I have never had much faith in forecasts, even weather forecasts. If a forecast were made about tomorrow I would be uncertain. Those growth forecasts for the period 2000 to 2006 may be achieved—I underline "may"—but the committee is uncertain whether they will be. The figures are spelt out in paragraphs 79 to 83 of the report. The committee views those figures with scepticism, although not the same kind of scepticism as is sometimes displayed in your Lordships' House.

One important section stands out. Even with an average growth of 2.5 per cent. among the 15 and 4 per cent. among applicant countries, it is estimated that it will take about 25 years for the latter to achieve 50 per cent. of the 15's average GDP. That gives an indication of the seriousness of what we are talking about here. To narrow the gap to that extent will require European Union assistance for at least a generation following accession. Therefore, the financial consequences of enlargement are very serious indeed. It is foolish to disregard the problems that it will create.

If growth does not achieve very much, I come to the other points: the structural funds and the common agricultural policy. We believe that those issues are pivotal to the financing of enlargement. That word is worth repeating because the committee spent some time discussing it. We believe that governments and Ministers have given insufficient thought to the full scale of the required reforms. As to the structural funds, the situation would be difficult enough without economic and monetary union. I do not intend to go into it. The fact is that there will be a significant impact on vulnerable regions within the existing 15 member states, including the UK, in terms of the level of structural fund grants. That will occur whatever happens, because there will be a requirement to cut down the areas within the European Union that are now in receipt of structural funds. I would very much regret that because some of those areas are not far from where I live. It is a fact that they will have to be reduced.

With regard to the common agricultural policy, the committee has deliberately not dealt with the details. It is not an agricultural sub-committee, and that will be dealt with by the appropriate committee. However, if we look at the financial consequences of enlargement, we cannot ignore the fact that the financing of the common agricultural policy as now cannot continue. There must be substantial reforms.

There is a further cost to the applicant countries which has not been considered in any way: NATO enlargement. In his speech in the Czech Republic the Foreign Secretary referred to the hope that some of the applicant countries would become members of NATO. Costs will be applied to those countries which are now applying for NATO and EU membership, but no one has given the slightest thought to them.

Equally, there will be a need to build strong and honest institutions in the applicant countries. That is crucial to the whole question of enlargement. I was pleased to see that we in the UK will be helping them to create decent, strong and honest institutions. There would be serious financial consequences if they did not have such institutions. Some members of my committee went to Athens and to Dublin and saw the difference in the way in which institutions manage sensibly to use the cohesion fund. The same will apply in the case of the structural fund.

I turn to the opening of negotiations. There are two options. The first is to start bilateral negotiations with all 10 countries. For some reason that is called the "regatta" approach. Perhaps someone may know the reason for that. The second option is to have bilateral discussions at the outset with the five countries which we have listed, plus one; that is, Cyprus. It is anybody's guess what will happen there; I should not like to speculate. I am pleased to note that my right honourable friend the Foreign Secretary recommended that negotiations should start with the five countries. I hope that that recommendation will be accepted at the Luxembourg Council. If its members agree nothing else, I hope that on 12th December they will agree that.

There is a further important factor, to which the Foreign Secretary referred. The other five countries must not feel that they are being overlooked. It is vital that they are not thought to be overlooked. We must convince them that if they achieve the acquis communautaire they could overtake some of the first five countries in obtaining entry to the Community. That point was made to us by Commissioner van den Broek when we were in Brussels, so it is beginning to be recognised. The Commission believes that accession will most likely be in 2002. I believe that that is a little optimistic, given the difficult financial problems that we face.

In conclusion, I have missed much in our report and I am sure that members of my committee will fill in the gaps. I did not wish to take too long in opening the debate, but I believe that I have dealt with the major issues. The clear central issue is that we and other member states do not pay lip service to enlargement, but that we recognise the financial implications. The prospect of enlargement has already stimulated reform in the 10 applicant countries. Any delay and wrangling over what would be comparatively marginal costs to the 15 members of the European Union would do immense damage. Therefore, I hope that the tremendous opportunity of enlargement will be grasped. Indeed, my right honourable friend the Foreign Secretary—I am sorry to refer to him again, but he is the only Minister who has commented on the issue—intends to launch the European conference early in the spring in order to deal with some of these issues. I urge the 15 members of the European Union at their meeting on 12th December and at the conference mentioned by the Foreign Secretary to provide a positive response to the great challenge which enlargement provides. I beg to move.

Moved, That this House take note of the Report of the European Communities Committee on the Financial Consequences of Enlargement (10th Report, Session 1997-98, HL Paper 41).—(Lord Barnett.)

5.24 p.m.

Lord Garel-Jones

My Lords, I have listened to a number of maiden speeches since I came to this House. I hope that your Lordships will not think that it is a routine matter if I say that I and all other noble Lords who entered in what might be referred to as a "bumper bundle" are grateful for the warmth and courtesy of our eception from Members on all sides of the House and from the staff. It considerably enhances what would in any event be a great privilege. I and all the new Members are grateful for that.

I rise with trepidation to address your Lordships for the first time, not least because having had some responsibility for European policy I am well aware of the standing of the committee chaired by the noble Lord, Lord Tordoff, and the sub-committee chaired by the noble Lord, Lord Barnett. In another place I had substantial experience of their courteous precision.

Perhaps I may begin by making a few remarks which I regard as entirely uncontroversial; at least I believe them to be uncontroversial in your Lordships' House. The Treaty of Rome, the Single European Act and the Maastricht Treaty were all signed by Conservative governments. I do not regret that, nor do I resile from any of them. I wish to touch briefly on two subjects: monetary union and political union. Monetary union is a high risk strategy. The loss of exchange rate flexibility—the safety valve that has hitherto enabled nations to adjust to underlying divergencies—could exacerbate tensions to a point which would raise a question mark over the political project itself; not to mention a whole range of technical difficulties which must be overcome.

I have no difficulty whatever with the cautious enthusiasm which the Government have expressed for monetary union, hedged in as it is by the conditions laid out by the Chancellor of the Exchequer. Nor do I intend to lie awake at night—for a decade perhaps?—over the cautious scepticism put forward by the Leader of the Opposition. If monetary union works Britain will join. The Leader of the Opposition has left the door open, just, for such an eventuality, and I welcome that.

There are those, some of them in this very House, who believe that a single currency equals a single government. They say that they do not wish to see that at any price. Together with my right honourable friend the Leader of the Opposition, on balance I should prefer to wait and see what that price might be because sovereignty does not reside at any fixed address. Already in 1944, Professor Von Hayek said that the one thing which would undermine the prospects of peace and order after the war would be an attempt by nation states, large or small, to regain unfettered sovereignty in the economic sphere. That was true then and it is truer still today in the global economy in which we live.

If economic sovereignty is a moving target so, too, is political sovereignty. The difficulty is that the debate on Britain's place in Europe has been polarised. On the one hand, there are those who believe that the European Union is some kind of harbinger of a brave new world, where the individual and selfish aspirations of nations can be subsumed in a supra-national structure where Liberals lie down in peace with Social and Christian Democrats. Others have a vision of brave little Blighty sailing an independent course through these increasingly difficult waters.

Charting one's way through these noisy extremes is no easy matter. In recent years, your Lordships' House has been a consistent voice of sanity. This report, unlikely as it is to elicit much interest from the extremists, will he regarded as a serious contribution to discussion by those who have the worthy if unexciting ambition of trying to make the European Union work. For those of us who plough that particular furrow, the arguments involved are humdrum; the outcome is uncertain; and the compromises which must be made along the way are difficult. Not for us the simple either/or luxury enjoyed by the extremists.

But if we are to find a balance between the mechanisms for co-operation between nation states without burying that sense of belonging to nationhood which is so important, plough on we must. We must seek to entrench the inter-governmental pillars which emerged from the Maastricht Treaty. To do that, we must try to make them work. That means, for example, in the interior justice pillar, leading the search for new methods of fighting trans-border crime. In the common foreign policy and security pillar, in spite of all the set-backs and difficulties, we must contribute with enthusiastic realism to the search for common positions on foreign policy and security matters. It means sustaining the trans-Atlantic link through NATO and the US leadership of the NATO alliance; and yes, building the WEU but standing staunchly against those who believe that the WEU is some sort of Euro-friendly substitute for the NATO alliance.

In the first pillar—and I believe paragraphs 100 and 101 of the report refer to that—we must be robust, (I think that is the word) in advancing the case for more equitable voting weight to be given to the larger countries; for a reduction in the number of official languages; for annual presidencies led by a troika, headed by one of the large member states; and above all, in the first pillar, we must come forward with new and imaginative proposals for including the democratically elected parliaments of the member states in the legislative process. It is all very well to scrutinise draft EU legislation as we now do in this Parliament, and I wish that all other member states did that, but we need to find a way after that in which to insert the views of national parliaments into that whole complex comitology procedure that takes place between the Commission, the Parliament and the Council. That is crucial and Britain could be in the lead in such an area. The report makes it absolutely clear that, unless we have those bits of plumbing right, that alone could also undermine prospects for the European Union.

But having said all that, it simply is not good enough, as many do, to say, "Oh, I am in favour of a single market. I want a free trade area full stop". If you have a free trade area, by definition, you need regulations to define that area and by definition you therefore need a supra-national body capable of imposing its authority on those regulations by law. The Commission's right of initiative and the authority of the European Court of Justice should be defended staunchly by Britain because Britain is, and I think continues to be under this Government, the standard-bearer of free trade within the European Union.

This is a political project. It will be difficult to find the balance between sovereignty and lost sovereignty. But Britain has no need to subscribe to the dreamy idealism of some of our partners to influence the direction of the union. She only has to make up her mind once and for all that that is where she belongs. Once that is acquis, as they say in Brussels, then and then only shall we be in a position to exercise our full influence.

Those of us who have a settled opinion in this matter, as I do, believe that we enjoy one important ally in this matter; that is, the common sense of the British people and their unwillingness to relegate Britain, our country, to the sidelines. In that, as in many other areas, your Lordships' House has been very much in tune both with the interests and aspirations of the British people and I look forward to contributing to your Lordships' deliberations on those matters.

5.35 p.m.

Lord Dahrendorf

My Lords, few things could give me greater pleasure than to congratulate the noble Lord, Lord Garel-Jones, on his maiden speech on behalf of the whole House. The speech was elegant, good humoured and subtle. Those of us who have had the pleasure to know him expected that. It was also the speech of someone who might be described as a natural European, if such a thing exists: at any rate, someone who is at home in Europe, who knows the countries of Europe and who has been able to define his thoughtful approach to things European from the vantage point of his ministerial appointment in the Foreign Office. We look forward to hearing from the noble Lord on many future occasions.

Those of us who have served on Sub-Committee A of the European Communities Committee in recent years have been very fortunate. We have dealt with a number of important subjects. We have had the company of interesting contributors to the debate and, above all, we have had an extremely skilful chairman in the person of the noble Lord, Lord Barnett. We are all grateful to him.

One of his skills was to persuade the committee to agree unanimously on a report, although its members had a whole variety of views on what should follow from that unanimously agreed report. Your Lordships will find that my views on the cost of enlargement are not in all respects the same as those of our chairman or, indeed, I suspect of others who will speak.

I shall make four brief observations. The first is fairly obvious. Ever since I became involved in European Community matters in the 1960s, I have been unable to understand the contrast between "deepening" and "widening". In my view, there is no contrast between the two. Indeed, widening the European Union is an expression of the common interest of the members and in some cases an expression of a rather important and profound common interest.

When Spain, Portugal and Greece were welcomed to the European Community, the community made a small but not insignificant contribution to stabilising democratic institutions and the rule of law in those countries. I have felt since 1989 that we had and continue to have a similar responsibility with regard to the post-communist countries of eastern and central Europe. Indeed, I have felt and continue to feel that the European Union has not properly discharged its responsibilities because it is now eight years since 1989 and it should have been possible to hold this debate years earlier.

Indeed, I am one of those who believe that early membership of NATO for those countries is in some ways a substitute for what the European Union has failed to do. It would perhaps have been better if the European Union had been first to welcome the new democracies. In any event, I see no particular problem with respect to the five countries which we are now discussing for accession.

My second observation takes me to our subject, which is the subject of cost. At first sight the cost of membership for the new members or for the candidates is enormous. Those noble Lords who have had an opportunity to read the committee's report will have seen what the Polish negotiator told us. Perhaps I may say in passing that I believe that Poland is the test case among the five. In some ways Poland is the Spain of eastern Europe. It is a country of major importance but also of considerable size and therefore a very important addition to the Community if the negotiations succeed. Those who have read the report will have seen the figures given by the Polish negotiator, Mrs. Danuta Hubner. She has been quoted as saying, and has confirmed, among other things, that Poland would have to spend 3.2 per cent. of its total GNP for each of 10 years to achieve the environmental, health and safety standards alone which the European Union is setting. Indeed, we have not even mentioned the subject of agriculture in our discussions.

This is the subject of reaching the so-called acquis, the level which the European Union has set for its members. It is a large sum but, nevertheless, I cannot help observing that something quite odd is happening here. We say democracy and the rule of law; we say that we want to welcome these countries into a Community which is committed to those values; and we talk details—details which in some cases have literally nothing to do with democracy and the rule of law. The cost that we are talking about so far as concerns the accession countries is, in large part, a burden which is not visibly related either to the stability of democratic institutions or to the functioning of a market economy.

I looked through details of the last entry negotiations and saw that days were spent on subjects like the training of dentists, the provisions for the conservation of wild birds and the introduction of fire-proof doors in houses of multiple occupation. Here we have the European Union, yet the entry negotiations will be concerned with such subjects. I have long found that hard to bear; indeed, it is nearly unbearable. In discussing detail I hope that we shall not lose sight of the objectives which we are pursuing—namely, to have the post-communist countries at the table with us in the context of the EU.

That leads me to my third observation. We also learned that the candidate countries are quite realistic. They do not expect the cost of what they have to do to be borne by the budget of the European Union. Nor, incidentally, do any of them expect there to be a change, an increase, in the ceiling of 1.27 per cent. of GNP which the Union is prepared to spend on its affairs. The changes related to the acquis will be brought about by policies which those countries are pursuing in any case, including changes in agriculture.

There are fundamental changes in the agricultural structure of these central European countries going on in any event. Poland is extremely inefficient agriculturally. It is not the great threat which some seem to think that it is to the vested interests of the present members. Some of those changes will be brought about by borrowing, and both the EBRD and the European Investment Bank are aware of the special task that they have in that connection. In other words, it is not the budget of the EU which will have to cover the cost within the candidate countries. No doubt there will be some derogations; indeed, in some areas the countries need more time than the period of negotiation itself.

Basically I can see no reason—I state this briefly and without having the time to produce all the back-up argument required—in terms of the acquis or other conditions why Slovenia and Estonia should not be members by the year 2002 and Poland by the year 2002, 2003, or some such time. Indeed, Slovenia could probably become a member in 1999 if we wanted it and if we thought purely of the necessary preconditions of membership in the terms that we are discussing today.

Of course, that will not happen; and I come now to my fourth observation. They will not be members by the year 2000 or 2002; indeed, I doubt whether they will he members by 2005, the reason being—and this in a sense is my key point—that the cost of enlargement is crucially the cost perceived by present members to themselves of enlargement. The real obstacle is not what potential new members have to do; they can do it. The real obstacle is what present members fear will happen to them; and that is partly political.

In some European countries there is a fear. The noble Lord, Lord Garel-Jones, is better placed than I am to confirm and discuss that aspect, but in Spain there is a fear that the whole European Union is moving north-east and away from the interests of countries in the south. In some countries, like Sweden and Denmark, there is a sense that it was wrong to single out Estonia and not include other Baltic states at an early point. Similarly, in France there is a strong sense that Romania should have been included among the first five.

Above all, there are fears that the cohesion fund money will no longer be available and that the structural fund money will have to be cut. Indeed, the noble Lord, Lord Barnett, gave us some indication of what might happen in parts of the United Kingdom. Then there is the great and almost metaphysical fear in France and in Germany that the common agricultural policy may have to be reformed. That is quite likely to be the case. I argue that that is a greater obstacle to the rapid conclusion of entry negotiations with the new candidate countries than the cost to those countries.

One must fear that the negotiations will be protracted. One must fear that the popularity of the EU will decline in the candidate countries. When the moment comes and referenda have to be held in those countries, one must wonder whether there will still be the kind of majority which one would like to see for such an important step for those countries.

I therefore conclude by saying that I very much hope that the UK Government at least will not only start these negotiations at an early date, but that they will also continue to press, after their EU presidency, for the continuation and rapid conclusion of the negotiations with those who are starting after the Luxembourg summit in a few days' time. I repeat what I said at the beginning of my remarks: we have a great responsibility to do what little we can, but to do at least that, in order to ensure that the enormous gain in liberty, in democracy and in the rule of law, which I link to the year 1989, is not lost for reasons which are quite minor in relation to the task.

5.49 p.m.

Baroness Young of Old Scone

My Lords, I very much value my first opportunity to speak in this House on such an important and lucid report. Perhaps I may, first, thank my noble friend Lord Barnett for his welcome and, secondly, for his valiant attempts to get my title right. It is infinitely preferable to be called "old scoon" rather than "old scone", as has sometimes been the case during the past few days. I should very much like to praise the work of my noble friend Lord Barnett and his colleagues. They have put their finger on exactly what is wrong with the Commission's Agenda 2000 proposals and the economics of European enlargement.

The report quite rightly points out that enlargement is vital for the security and stability of all the peoples of Europe. I declare an interest as Chief Executive of the RSPB, Europe's largest wildlife conservation organisation. As an environmentalist I have always thought that the European Union generally was a good thing. Much of this country's more enlightened environmental law and policy is drawn from European law. But I suppose that during the process of thinking about enlargement I began to wonder whether I was right as I thought about some of the costs and benefits of the European Union, and particularly the costs and benefits of the common agricultural policy which comprises half of the European Union budget. If one looks at it in the context of value for money, it is hardly a roaring success. The common agricultural policy is probably the single most significant cause of major declines in European Union wildlife and habitats over the past 30 years. It is closely followed in terms of poor value for money and adverse environmental impact by EU structural fund policy.

The report also recognises the environment as an essential element in the enlargement. If one looks at the accession states, the environmental record there is a bit of a mixed bag. In many cases outdated technologies under past regimes contributed enormous backlogs of environmental damage that will require attention. But in some ways it is the economic inefficiency of the former CEE states that has meant that, unlike the rest of Europe, land uses of forestry, agriculture and water management are considerably underdeveloped by EU standards. Almost by default the rural environment of the central and eastern European states is high quality if one measures that in terms of richness of wildlife and habitats which we are losing at a great rate elsewhere in Europe. I shall ignore at this point the pigeon-holing of the noble Lord, Lord Dahrendorf, in relation to the importance of birds when he ranked them with fire doors.

Before anyone thinks that I am talking about protectionism for the central and eastern European states in terms of putting their environments and agricultural and rural economies into aspic, and idyllically thinking of haywains and chaps with scythes, 1 assure the House that that is not the case. I am talking about economic growth both in the rural and industrial sectors of the CEE states having to be environmentally sustainable growth. If I may summarise the situation, we have expensive, environmentally damaging agricultural and structural policies in the existing 15 states of the European Union, with a fast declining natural environment, but a comparatively buoyant natural environment in central and eastern European states. I suggest that we cannot afford financially or environmentally—nor should we wish to—simply to export the policies that we have here in the west to the centre and east of Europe.

If enlargement is to be achieved in a way that is economically and environmentally acceptable, I believe that we must resolve three issues. First, the report rightly points out that reform of the CAP which reduces its financial costs is pivotal. I very much like those words of the report. Apart from needing to release money for other budget lines, the common agricultural policy is quite simply bad value for money. Yet only recently the European Commission has allowed an outline CAP reform to be agreed which will increase the total budget for the common agricultural policy over seven years. We see a proposal that maintains a high level of subsidy in the form of compensation payments to farmers for price cuts.

The CAP has to be made more affordable and more environmentally sound by reducing these compensation payments, by time limiting them and by redirecting some of the money to more positive rural employment and environmental schemes as part of a more extensive greening of the common agricultural policy. In enlarging the Community we must not simply extend this wasteful and environmentally damaging agricultural policy but develop lower cost and environmentally suitable alternatives that fit the economic stage of development of the central and eastern European states.

My second point which I believe needs attention concerns structural funds. Under enlargement structural funds must not be allowed to continue to be the "thugs" of Europe. There is substantial evidence that infrastructure dominated EU funded development such as roads, dams and irrigation schemes—old-fashioned concrete pouring schemes—which we have seen funded from structural funds not only cause environmental damage in existing member states but are often not even effective in terms of creating jobs or promoting regional development. The structural funds certainly get my thumbs down. When we extend these into central and eastern Europe they must be accompanied by much stronger environmental safeguards. Having wreaked wasteful destruction in western Europe, we must not let the structural funds do that in central and eastern Europe. In the rural areas particularly the model of big infrastructure development is uniquely inappropriate and damaging. We must focus on developing the special strengths of the rural areas and developing projects which are appropriate in scale and which draw on their skills and natural assets.

Thirdly, I touch on a point that the report rightly acknowledged: namely, that environmental protection is a key element of a functioning market economy. The report acknowledges the difficulties that the accession states will face in meeting the Community environmental obligations under the acquis. I do not believe that it is in the interests of the European environment, nor in the interests of an effective functioning of a single market, for environmental standards in the accession states to be lower than in the rest of Europe for any significant time. There needs to be considerable financial, technical and institutional development expertise injected into the CEE states using the loan process that the noble Lord, Lord Dahrendorf, mentioned, but also by using current aid budgets and certainly by effective targeting of the pre-accession measures.

EU enlargement is vital for the peoples of Europe, but so is a healthy environment. The current common agricultural policy and structural funds are financially and environmentally unsustainable. They must not simply be exported eastwards without considerable reform—reform which, I am afraid, has not been sufficiently robustly begun in the Commission's Agenda 2000.

5.58 p.m.

Lord Bridges

My Lords, it falls to me from these Benches to speak in the name of the whole House and to congratulate the noble Baroness on her maiden speech which I thought was accomplished, relevant and extremely thoughtful. This does not come as a surprise to one who has studied her curriculum vitae because she is a lady of remarkable accomplishments. She has revealed to us that she is the chief executive of the RSPB which I believe to be the voluntary organisation with the largest number of members in the country, which is an extraordinary tribute.

In addition, she has had a distinguished career in her role in the health authorities of this country. She was the chairman and president of the Institute of Health Service Management. She has served on the BBC general advisory council and as a trustee of the National Council for Voluntary Organisations. She is also a member of the Environment Secretary's round table on sustainable development. This is a career of extraordinary achievement and it is evident from her excellent speech today that she will play a prominent part in our deliberations. Perhaps I may be permitted to add that this extraordinary career of achievement makes her admirably suited to be a Member of these Benches. However, I do not hold that against her because her contribution will be to the House as a whole.

I believe that the report prepared by the sub-committee chaired by the noble Lord, Lord Barnett, is essential reading for anyone who wishes to make a success of the British presidency of the European Union next year, as enlargement negotiations will be a large part of our responsibilities. I have for long believed that the future and character of the EU is more likely to be determined by the number and nature of states admitted to membership than by any other factor. The report is a guide to the problems and possibilities of a financial kind which we shall have to navigate if we are successfully to launch the enlargement negotiations. I shall cover a few of the salient points, and emphasise one or two key issues mentioned in the report, and some additional factors which I believe to be important.

First, I like the catch-phrase at the heading of Part I on page 5. It suggests that accession to the European Union is seen by the CEE states as "coming home". I very much agree with that sentiment. However, I agree also with the converse proposition that without the admission of the CEE states, the Union is not fully European. I regard those countries as being European, whether we are thinking in political, cultural or geographical terms. The strength of my feeling derives in part from personal experience, having spent about one-third of my professional life dealing with the countries of this region.

I began by studying the progress of communism in the infant German Democratic Republic when living in Berlin. In the 1950s, at the height of the Cold War, I spent four years in the Northern Department of the Foreign Office, which dealt with the USSR and its east European empire. After an interval of 15 years spent travelling first in Latin America and then in Greece, I became the counsellor at our embassy in Moscow during what the Russians now call Brezhnev's years of stagnation, an apt description. It was in Moscow that I began to ponder the Europeanness of Russia, a difficult but essential subject. Where does Europe end? In the west, we tend to think instinctively of General de Gaulle's well-known phrase regarding Europe "from the Atlantic to the Urals". But I am not sure that the Russians themselves would agree with that. In Moscow I looked up the definition of "Europe" in the large Soviet encyclopedia. I was surprised by the indeterminate, short and woolly article under that heading. That in itself was intriguing, as the whole point of the encyclopedia was to lay down the party line in a short and authoritative manner. Imprecision suggested uncertainty.

Perhaps I may be allowed to divert for a moment on a personal anecdote. The encyclopedia provided an occasional source of merriment—a real pleasure in that grim environment. One day the embassy received a letter from the publishers of the encyclopedia instructing all subscribers to remove certain pages from the volume dealing with the letter B. On inspection those pages referred to the life and career of the recently disgraced Beria. The letter told us that further pages would follow to fill that missing section. When they arrived some weeks later, they were found to contain an elaborate entry about the Irish philosopher Bishop Berkeley, who had not previously been thought to merit attention.

That type of thought control could have its Orwellian moments. Some years earlier in Berlin there came into my hands a copy of a circular letter from the Ministry of Education in East Berlin sent to all the major libraries in the country instructing them to return for destruction copies of certain well-known classic German works which were now to be withdrawn from circulation. I do not recall all the books listed, but one was Fichte's classic and seminal work, Speeches to the German Nation. Above all, I remember the place to which those books were to be returned. It was called, "die Zentralstelle fuer Altliteratur". The address of all places, was, Weimar. That was really an Orwellian memory hole. It is worth recalling it at this moment.

I also recall discussing with Russian officials in Moscow the Russian relationship to Europe. Those people explained to me that the USSR was both a European and an Asian power. Of course, as the disciples of a world-wide creed they could not wish to limit their activities to a single continent, or even to two continents. Their mission was global in scope and ambition. Yet when one considers the components of Russian culture, it seems impossible to deny its European characteristics. Russian composers of this century and the last must be classified in that way, and so must the great writers in Russia of the last century. Pushkin, Gogol and Lermontov are all in the mainstream of European writing. I concede that Dostoevsky is more native Russian than European, but interestingly his reputation is less highly esteemed in Russia than in the west. Nevertheless, in a sense the Soviet officials had a point. Russia is too large, too much sui generis to be neatly categorised in one group or another. She is in a separate category of her own among the states in continental Europe—so vast yet oddly amorphous, and with great latent talent and power in every department of life.

I dwell on Russia in particular because there is just one sentence in the report which makes me ponder and pause for thought. It is in the first part of paragraph 1 which states: If enlargement is successful the peoples of Europe could enjoy conditions of security and stability without parallel in their history". In one sense that does not say a great deal. Those countries have enjoyed little of either peace or prosperity for two centuries or more. I certainly hope that enlargement will bring them stability and prosperity. But I suggest that security is another matter.

The key question is how the enlargement of NATO is to proceed. This is not the subject of the report, and discussions about the enlargement of NATO are proceeding separately. The cost of enlargement, as the noble Lord. Lord Barnett, reminded us, is mentioned in the report as another burden to be shouldered and taken into account. But it will be the NATO negotiation which will be critical to the security of Europe in the ordinary sense of the word security. It is a very thorny subject—thornier than any noble Lords have suggested in the debate.

All the CEE states want to join NATO as well as the EU so as to provide for their essential security needs. There is a vacuum in eastern Europe since the collapse of the Warsaw Pact. But there are obvious dangers also in extending the NATO umbrella so far as to include the Baltic states which are regarded by Russians as falling within their own sphere of influence, and even of belonging to the historic territory of Russia. The same kind of severe difficulties—although not to quite the same extent—occur in the case of Poland. In this debate it is relevant to pose this question. Do we want to extend NATO membership right up to the western frontier of Russia? That problem is not part of the European Union's enlargement negotiations, but it is closely connected. If we are to establish a new and lasting relationship with the CIS, as we should and must, we need to consider the security issue with great care and seriousness. This is the essential corollary to EU enlargement and should proceed in parallel with it. Indeed, I am almost tempted to call in my aid the extraordinary phrase invented by the late Aldo Moro, when Prime Minister of Italy, who described his effort to create a new and very precarious alliance with the parties of the centre left with their deeply felt historic antagonism, as a policy of "parallelismo convergente"— that is, converging parallelism. Moro's political style was virtually incomprehensible to non-Italians, and was ridiculed by many Italians. But his odd phrase conveys the essential difficulty of the task in front of us.

I should mention one other item on the hidden agenda in this process: the latent divergence between those seeking to bring about the enlargement of Europe to the east and others whose ambitions lie in the south. Some noble Lords have already referred to this matter. There is no doubt that Germany is strongly interested in the accession of the CEEs, where so many of her political and economic interests lie; but other member states—notably, France, Spain and Italy—wish the EU to be more active in the Mediterranean and to expend EU resources in North Africa. No doubt, in order to promote prosperity in the Maghreb, they would like to see us invest in such well known matters as steel mills and airlines. They hope by so doing to stem the flow of migrants from the Maghreb into southern Europe.

The EC's Mediterranean members are also reluctant to forgo the benefits of the structural and cohesion funds which have brought them such prosperity in the past decade. This subject is well discussed in the report and the sensible conclusion is that economies must be made to these funds in order to finance the changes needed in the CEEs to prepare them for accession. But these conclusions will be extremely unpopular in southern Europe, where it is felt that the richer countries of northern Europe should finance the accession of the CEEs. No doubt the recent proposal by the Commission to remove Ireland and the British regions from Category I eligibility for regional funds was made in order to show that the Commission is proposing a policy of equal misery for all.

Sub-Committee A has over the years produced a series of thorough and illuminating reports on key questions, and the latest report is a worthy addition to the list. I hope that the House and the Government will find it as valuable as I have done.

6.12 p.m.

Lord Boardman

My Lords, I hope that the noble Lord will forgive me if I do not follow his line. He has vast experience of parts of the world of which I have too little knowledge to be able to do so and do it justice.

Perhaps I may start by thanking the noble Lord, Lord Barnett, for his chairmanship of the committee. He carried out his task with his accustomed style, experience and charm. He managed to lead the committee—which was not necessarily united on all matters relating to Europe—to produce a unanimous report. I join the noble Lord in the tribute he paid to our Clerk, Mr. John Goddard. who guided us with great ability and was of great value to the committee.

Perhaps I may make one criticism of this system of reports. That criticism does not apply to this report in particular. and I shall say why that is the case. On these matters much of the vital evidence that is required is only obtainable abroad, normally in Brussels: one has to see the commissioners in Brussels to obtain valuable evidence. The rules say—I do not know whether they are rules of this House—that only three or four members of the committee may go. We assemble and we hear valuable evidence from lots of people but we are not allowed to travel abroad to hear the key evidence, which most of us would like to be present to hear. I am sure that in the other place the whole committee troops off to see what is happening on the shores of Barbados, or wherever it might be. This is a matter which I believe deserves consideration. In the present case we were lucky. The noble Lord, Lord Barnett, and the Members who went with him to Brussels gave the committee very full and accurate accounts of what had taken place. I am sure we lost nothing in the process, although one felt that one would have liked to have had the opportunity to ask certain questions.

It became clear that all the applicants for accession are very keen to join. That is obviously because of the economic security that membership would provide, the trading prospects it would open up and the higher standards of living in the Community. I recognise that there are also considerable benefits to the 15 EU members. I should add the reservation that I am perhaps less enthusiastic than some members of the committee about some developments in Europe. I hope to have the opportunity to discuss later the views on economic and monetary union expressed by the noble Lord, Lord Garel-Jones, in his maiden speech. There are differing views, but none are relevant to this report. I was therefore only too happy to be party to the unanimous report.

Serious problems arise, both for the applicants and the 15 present member states. The Commission appears to have tried to cover these in Agenda 2000, referred to by the noble Lord, Lord Barnett, in his opening speech. However, it does not deal with them in depth in that report or say how it will resolve them. There are some very wide gaps, particularly in the financial field, with which we are concerned.

This enlargement is different from previous enlargements. The last one involved Austria, Finland and Sweden—relatively small, rich states without a large agricultural sector. The five candidates of the eleven candidates for accession which we have mainly discussed are all large and relatively poor and have very large agricultural communities. They are quite different from the previous candidates and will no doubt present serious problems with regard to the finances of the enlargement.

As the noble Lord, Lord Barnett, said, Agenda 2000 speculated on rates of growth: 4 per cent. for the applicant countries and 2.5 per cent. for the present members. We heard evidence that, even on those speculative projections—and who can say what the rate of growth will be five years ahead—it would be at least 25 years before the applicant countries would achieve even half the standard of living of the present members of the Community. Indeed, some evidence regarded that as a considerable underestimate. It will be a major problem. There must be either a considerable reduction in the benefits that the Community pays to its present members or a considerable increase in our own resources, fixed at the moment at 1.27 per cent. As I believe the noble Lord, Lord Barnett, said, there are only three options: first, to cut down what is being paid out; secondly, to expect the applicant countries to pay the difference between their rates of growth and that of the present members; or, thirdly, to increase our own resources above the 1.27 per cent. One of those options—that concerning the rates of growth—is purely speculative and the other two are very unattractive.

The committee did not deal with the CAP; agriculture was not within its remit. Time did not permit it and the sub-committee was not the appropriate one to deal with the subject. About half the outgoings for the Community are for the CAP. The next highest item is the structural and cohesion funds, which we were unable to go into in depth. Yet agriculture employs something like a quarter of the working population of the applicant countries. For the EU15 it is 5 per cent or under. Agriculture provides 9 per cent. of GDP of the applicant countries; for the EU15 the figure is 2.4 per cent. There is clearly a massive problem in trying to adjust one to the other. Such evidence as we had made it clear that the applicants would not he prepared to accept a second-grade agricultural policy. They do not want to see us continue to enjoy the fruits of the present CAP, albeit reduced by the lower level they would be taking. It is a very real difficulty which must be sorted out by the member states before we can look seriously at how we are going to finance the problems.

The other major areas of finance are the structural and cohesion funds. They are the second largest part of Community finance. The noble Lord, Lord Barnett, referred to it as being "pivotal" and the noble Baroness, Lady Young of Old Scone, in her maiden speech, endorsed that word. I was one of those who said it was "critical" and not "pivotal". I am not sure what the distinction is but I am happy to accept that the way in which we deal with the structural and cohesion funds is nevertheless extremely important.

None of the 15 member states of the Community will willingly accept reductions in their share of the structural and cohesion funds. As has been said. Germany has an election next year and will not contemplate any reduction of any kind, and most of the 15 will be having elections during the period when adjustments will be necessary. I therefore find great difficulty in seeing where any saving will come under those two funds.

On a previous occasion the sub-committee was given evidence and formed the opinion that funds from the cohesion fund were only payable to nations whose average GNP was below 90 per cent. of the average of the Community; and it was not payable to any of those if they were also eligible to join monetary union. It now appears that the Commission is having second thoughts and considering that even those who are joining monetary union may be permitted to receive cohesion funds. We could perhaps speculate as to why this sudden change of opinion—if it be that—has come about at this time when support is needed on a variety of matters.

My conclusion is that unless the gross national product of the applicant countries is much better than forecast or the existing members are prepared to give up larger slices of their subsidy from the CAP or from the structural and cohesion funds, or we are all prepared to increase the own resources figure of 1.27 to something higher, serious financial problems will occur. I do not see that they will be easily resolved. It is necessary that the applicants, the members of the Community and ourselves, give whatever thought we can to the problem of resolving those difficulties by sharing fairly in the benefits that would flow from their membership and at the same time persuading our fellow members to accept some of the sacrifices, which I believe will be extremely painful.

6.23 p.m.

Lord Desai

My Lords, I join other noble Lords in first thanking our chairman, my noble friend Lord Barnett, for keeping us in order and making us sign up when he wanted us to sign up, only allowing us occasionally to declare our dissident views from what we signed up to. I therefore greatly welcome this opportunity for debate. I also want to join my noble friend Lord Barnett and the noble Lord, Lord Boardman, in paying tribute to our clerk—Mr. John Goddard—for his excellent helpfulness not only on this report, but also on previous reports.

Today we heard two excellent maiden speeches, both of which were well-informed and detailed. I am sure that those maiden speeches tell us that these new Members will be a great addition to our Chamber and we look forward to hearing them in the future.

On 13th March 1996, the noble Lord, Lord Wallace of Saltaire, introduced a debate on enlargement. I believe that I was the only person to say, at cols. 866 to 868 of Hansard, that I was not sure that it was a good idea. I have always felt that people go into enlargement in a rather emotional, romantic way. The fall of the Berlin Wall following the tremendous misery suffered by the eastern European countries somehow brought about the idea that Europe should be one. We are very explicit in the first paragraph of the report when we say that it is all about "coming home." Indeed, I wanted the report to be called, "The Cost of Coming Home". It is the aspect I shall discuss this evening.

My noble friend Lord Dahrendorf said that he could see no contradiction between deepening and widening. I see huge contradictions between the two. When enlargement was first pushed powerfully by the UK, among other countries, it was precisely to weaken the deepening of the Community which was then on order. The retreat from the deepening of the Community, which we have seen paradoxically since the Maastricht Treaty, will be further damaged by widening. Some of the problems that we are discussing—problems for the 15, not just for the five coming—are caused because, in order to sell the Maastricht Treaty, certain limitations were accepted on the size of the budget.

I know of no confederation of such a large size that can survive on 1.27 per cent. of GDP. Wasteful though it may be and full of fraud, it is one of the cheapest confederations in history. The total budget of the EU in 1999 will be less than 70 per cent. of the social security budget of this country. The CAP costs less than the interest the UK Government pay on their debt. Wasteful though it is, we must keep it in perspective.

We are accepting this arrangement without having even yet sufficiently absorbed the three newcomers, Spain, Greece and Portugal. The doubts we have about the structural funds indicate that. We are going to add five, plus one other country with perhaps another five standing in the background. It has been difficult enough to absorb four poor countries among 15. If we look at the full expansion—we can leave Cyprus out for the time being—it means that there will be 14 poor countries out of 25.

I see no public financial arrangement which can, on the one hand, say, "We are not going to spend more money on the total budget", and, on the other, "We will still absorb these countries." Indeed, as is well known, before the Second World War there was no idea that Europe could be a political union. After all, the British Prime Minister thought Czechoslovakia was a far away country with which we were not concerned. Now suddenly we feel that union is urgent—imminent and urgent. It is not just that it is a good idea; it is imminent and urgent.

As many noble Lords pointed out, the difficulty is not with the five or the 10; the difficulty is with the 15 that exist. One of the saddest consequences of the Maastricht Treaty has been the strains of convergence. I was a wild single currency enthusiast, if I can put it that way. Over the years one has seen the costs of convergence, which were not foreseen, place a tremendous strain on the Community spirit among the 15. That is not only why the UK is always conscious of its rebate and what it gets out of the system, but also why Germany announced that it too is not sure that it is getting enough out of the system.

No federation can survive when all the members of the federation want to be net debtors to the general budget. The simple idea that the richer countries should voluntarily make a positive contribution to the budget has eroded already, even before we consider enlargement. Therefore, all the various things we list about the difficulties of enlargement have to be seen from the perspective that, as we prepare for enlargement in a rather uncritical and enthusiastic fashion, which troubles me very much, the communitarian spirit has eroded very badly. Indeed, we have seen in the dash for convergence that countries have not co-operated at all. They have followed separate deflationary policies. They have run beggar-my-neighbour policies. And that is among the old six; it is not among the 10. If the old six now run economic policies with no community spirit, as we have seen, we shall put a great strain on the Union.

However, I think enlargement will go ahead. I have spent a lifetime thinking that things should not happen and they then happen. What I think will happen is that the budgetary constraints will be acute. It has not yet dawned on many local authorities in the United Kingdom and elsewhere that they will not receive any structural funds. They will have to start zero budgeting. I said that to a local authority conference about four months ago. I had to talk about a report on structural funds. The people there looked at me as if I were a mad man. I said, "I've seen the future and I am telling you. You are not going to get any money and you had better start preparing for zero budgeting." The days when East Anglia could be classified as a region deserving European aid are numbered. I do not think the UK should get structural fund aid at all. Certain areas will get it because that is how the European Union works. But I do not think that it should work in that way, certainly if we are to absorb 100 million extra people.

The European Union 15 will have to get their acts together if they think that within the current budgetary constraints they will be able to absorb the new countries. As there is no climate for expanding the budget, we shall have to fall back on the prospect of cutting the structural and cohesion funds or cutting the money spent on the common agricultural policy. I wake up every day surprised that the CAP was not abolished the night before. The Berlin Wall has fallen but the common agricultural policy goes on. It is no less an injustice not only for Europe but for the third world as well. There we are. It is in the politics of the Union that the reform of the CAP will not be done if only to make members agree to enlargement. That is the paradox of the situation. And, of course, the CAP benefits the richer countries of the Union.

I do not want to go on with this long and sorry tale. What the report points out—I hope the Government will take note of this—is that there is serious trouble ahead if we are to take enlargement on board. Unless we say early on that the cohesion funds have to go—except perhaps for Greece—and that the structural funds will have to be drastically re-ordered so that only deserving regions get them, and unless we say that the common agricultural policy should be halved, if not totally eliminated, by the year 2002, enlargement will not be an easy process. In an ideal world we would all see enlargement as being of great benefit. If it were only a political union, there would be no problem. If it were only a union to encourage democracy, there would be no problem. But it is an economic union. There are serious consequences from having an economic union. I do not believe the major players have recognised what the consequences are.

I shall make one more point. We have not considered the economic consequences of enlargement. We have considered only the financial consequences. The idea of getting 100 million more people in a single market with free movement of labour will have drastic consequences for the labour markets of western Europe. One is absorbing 100 million relatively cheap but skilled labourers. Wages in western Europe will suffer. It may still be that enlargement is a good idea, but people who talk about it should say that this is one of the likely consequences. We have to be prepared for it. If we are to have enlargement, we have to prepare now for that consequence. With that happy thought, I shall sit down.

6.36 p.m.

Lord Haslam

My Lords, having been ceremoniously transferred from Sub-Committee A to Sub-Committee B before my former colleagues started on this study, I knew they would produce an excellent and readable report. It has in fact exceeded even my high expectations. As ever, the masterly chairmanship of my noble friend Lord Barnett shines through.

I shall be brief as I have only one point to make. I agree wholeheartedly with the main conclusions of the report, but would particularly like to emphasise the views already expressed by the noble Lords, Lord Barnett and Lord Desai, that the reform of the common agricultural policy, with the objective of reducing its costs, is pivotal to the financing of the proposed enlargement. It seems to me that enlargement creates a splendid opportunity for a root and branch review of the CAP, and that this should not be missed.

The process of enlargement will undoubtedly add to the existing serious unemployment problems in the European Union. With this in mind, I believe that the opportunities should be seized to boost the finances of the structural funds at the expense of the CAP, with the outcome that the former funds will quickly exceed the latter. I was somewhat perturbed, therefore, when I read on page 13 of the report that the financial framework proposed by the commission for 2000-2006 in no way represents such a radical re-shaping, and indeed the two funds barely converge during this period.

As has been evident in many member states, and particularly in Ireland, Portugal and Spain, the structural and cohesion funds can obviously be deployed on a much broader canvas and for much more deserving causes in generating durable employment opportunities. This was very apparent to me as a member of Sub-Committee A when we studied the structural and cohesion funds earlier this year. In contrast, the CAP is focused on a narrow front, in what I believe has always been a very privileged sector for far too long. One has the feeling that the Commission's financial framework reflects too much what it believes it can persuade the German and French governments to accept, and thereby, I believe, does not meet the really radical approach that is so badly needed.

Finally, as a naïve industrialist, and as a non-farmer, I have never understood why agriculture should uniquely benefit from a form of permanent state aid whereas industries and other businesses have constantly to re-shape their activities to respond to their evolving competitive environment. This strengthens my belief that the current CAP should be the pivotal contributor to the cost of financing enlargement.

6.40 p.m.

Lord Grenfell

My Lords, I begin by once again thanking my noble friend Lord Barnett for his chairmanship of the committee. It is always a pleasure to work with him. He does it extremely skilfully. He has a very good, human way of holding our noses to the grindstone. We usually end up, certainly under his chairmanship, with a very good report, with a great deal of thanks going to our Clerk, John Goddard, whose support to us has been absolutely vital.

I also preface my remarks by endorsing what my noble friend Lord Barnett said about what really worries us, which is that the financing has simply not been thought through. It worries us because of what we wrote in paragraph 7 of the summary of the opinion of the committee: Enlargement, if successful, could lead to unparalleled security and stability for the peoples of Europe. If the opportunity is missed there could he a slide towards the tensions and instability which have so disfigured Europe in this century". That is not just something merely to be desired; it is an absolute imperative.

So the question of financing has to be taken extremely seriously. The Secretary of State of the German Foreign Office came to see us and reminded us that the German taxpayers had so far forked out 176 million deutschmarks to help pay for crisis management in the successor states of Yugoslavia. He sensibly added a comment that if enlargement made these crises less likely, it was a bargain at half the price. I thoroughly agree with him.

That brings us to this question: will the much talked about 1.27 per cent. ceiling be enough? That depends on who one talks to. If one talks to Treasury Ministers of the net contributor countries, one will be told that they will insist that the cost to the EU budget for all 10 applicants up to the year 2000 will be under the 1.27 per cent. ceiling. That is very much the view of our own Treasury.

The Commission is a little less dogmatic. Part III of Agenda 2000 contains this statement: There are various indications that it should be possible to cover the development of priority measures to be financed from the Community budget over the period 2000 to 2006 without raising the own resources ceiling". It is to be noted that it refers to the priorities and not the total cost.

But let us now turn to what the genuinely sceptical have to say. The European Parliaments Committee on Foreign Affairs produced a working document in which it said: Do the financial resources required for enlargement exist or will the ceiling need to he revised? The probable reply is that they do not exist. It would appear extremely difficult to cope successfully with the impact of the accession of II countries which have such widely varying levels of development and are lagging so far behind the current levels in the member states unless the appropriate financial efforts are made". The subsequent draft report of the committee says that it believes: that the gulf between the political, strategic and economic importance of enlargement and the exiguous resources available to carry through this large-scale operation, which will change the face of our continent and the Union's position on the international scene, are just too exiguous". The Budget Committee of the European Parliament also had something to say on this which is in much the same vein. It said: The existing margins for financing enlargement are to a large extent based on virtual savings bound with an uncertain decision-making process spread over a period of time". When one sets that against the insistence of Treasuries that the 1.27 per cent. ceiling cannot and must not be broken, one can see that there is not exactly a consensus.

Of course, governments will have the last word. But that does not mean to say that they will not in the end be proven to have made a disastrous decision. No wonder Hans van den Broek in his evidence to us said in connection with the funding: This discussion, in fact, is still developing and I find it difficult to see where exactly we are going to end up". I do not blame him! The cost is probably not calculable. But at least the basis on which the availability of funds to meet those costs is calculated should be realistic and transparent, and it is not.

What I find interesting is that, if one looks back to recent enlargements, the financial packages were accompanied by the raising of the own resources ceiling as a result of an assessment of the requirements. But this time there seems to have been a reversal of approach. Rather than being the outcome of a process, the ceiling has become a given "a priori", and worse, to be financed with a package of uncertainties.

The European Parliament's Budget Committee working document of September 1997 put the matter this way: The existing margins for financing enlargement are to a large extent based on virtual savings". I repeat that from my earlier quotation. It is important to bear in mind that it is talking about virtual savings. As my noble friend Lord Barnett has pointed out, two-thirds of the expenditure within the ceiling is to be met from supposed economic growth rates of 2.5 per cent. in the 15 member countries and 4 per cent. in the applicant countries. As we point out in the report, that is highly speculative.

Some IMF figures quoted in today's Financial Times show that the annual average GDP growth in the OECD area between 1990 and 1995 was 1.9 per cent. But now of course we have the Asian crisis. There is now serious restructuring to be done in those affected countries and their economies. The transition will be lengthy and painful. It is bound to have an impact on western economies, as demand for imports weaken in Asia and Asian currency values fall.

We should also be on the alert for a possible liquidity crisis and higher interest rates as the stabilisation programmes mop up money on a massive scale. After all, 55 billion dollars for Korea is certainly not chicken-feed. Let alone the EU 15, the central and eastern European applicant countries and the Baltic states need the spill-over effects of this crisis like a hole in the head. We should not count on 2.5 per cent. or 4 per cent. Of course, they may turn out to be achievable rates. But why are we gambling the security and stability of an enlarged Europe on such a string of uncertainties?

The remaining one-third of the costs are to be met from the reform of Community policies, as we have been told. We examined that in some detail in the report and I shall make only a couple of brief comments. First, we had better get on with these reforms. Time and again I have heard officials and parliamentarians from the applicant countries expressing their fears that foot-dragging on reforms which, as the report points out, must take place before the accession of new members is in fact a tactic to delay enlargement. The EU 15 must demonstrate their good faith in this matter and show that that is not so. It was pretty depressing to hear President Chirac say in Salamanca the other day, at the Franco-Spanish Summit, that he was not willing to accept an EU which called into question the interests of France and its farmers. He had the grace to go on to say after that that we should have the courage to put the reforms through. But the two different remarks did not sit too well together.

The German Agriculture Minister is reported to have said that the Community's proposals on reform of the common agricultural policy are simply unnecessary. So far, Chancellor Kohl has not refuted him and probably will not do so until after the elections in 1998. So much for the sense of urgency!

Here, in parenthesis, I draw the attention of my noble friend on the Front Bench to a matter concerning the cohesion fund which needs settling since we are talking about the fund. It had long been understood that the cohesion fund was a convergence fund. That was the popular interpretation of what it was all about. It was there to prepare countries to enter monetary union. That has been the belief. As we recorded in the report, when we were in Brussels and spoke to Commissioner Liikanen, the Budget Commissioner, he said that the lawyers in the Commission had now come to the conclusion that it was not a convergence fund. If that is so, the countries that are entering EMU will be allowed to continue to draw on the cohesion fund—I repeat, "if that is so". However, it is very important that we get it clear once and for all. Her Majesty's Government would do well during their presidency to insist on that being clearly, finally and definitively settled.

There are just too many doubts about the financing of the enlargement. The report sends out some clear warning signals. To be so uncertain how resources will be mobilised to meet a known cost is bad enough; so clearly to underestimate the cost, as I am convinced is the case, only makes it worse. It is simply not good enough to say that the European Union will have to be satisfied with whatever measure and quality of enlargement can be bought within the 1.27 per cent. ceiling. As our report insists in paragraph 84, the financial perspective to be agreed for 2000-2006 should contain a provision for review before 2002 of the own resources ceiling. Of course, I accept that there will be other sources of finance from the international financial institutions. But the 1.27 per cent. ceiling looks to me to be pretty fragile.

I turn now to two non-financial aspects of enlargement: the time-frame and the negotiating process. Applicants are naturally in a hurry. As the noble Lord, Lord Dahrendorf, pointed out, all this should probably have happened long ago. Many countries have populations which will all too easily turn against the idea of accession if it is seen to be pushed off into the distance, but in their own interests they need to be given a more realistic assessment of the timescale. Hungary's Foreign Minister, Laszlo Kovacs, says that negotiations with his government can be wrapped up by 2000, with accession one or two years later. However, Commission officials are saying that negotiations with Hungary could well take not two but three or four years.

Poland's Prime Minister, Buzek, says that negotiations can be completed by 2000, with accession the following year. His president says that it will not take even that long. However, the Commission is saying that Polish entry by even 2003 is an ambitious target. The chairman of the European Union Parliamentary Foreign Relations Committee agreed with that when he met us. Again, Prime Minister Buzek says that five years will be enough to complete the agricultural transition in Poland. Commission officials are unofficially saying that it might take up to 10 years.

Those are just three examples of widely varying perceptions. We need greater transparency, more realism, but no unnecessary foot-dragging, which could be highly counter-productive and eventually more costly. With negotiations beginning at the end of next March, we can reasonably expect the first accession or accessions in 2003. But even that does not leave much time for the EU's own reforms to be completed.

What of the negotiations themselves? As my noble friend Lord Barnett and other noble Lords have pointed out, our report endorses the five-plus-one approach. I endorse it too, but with some misgivings. From a practical point of view, for the EU 15 it makes sense, but it lays a heavy responsibility on them and on us to ensure that the remaining five are not left feeling out in the cold. That, unfortunately, is what they do feel and it is essential to counteract it. It is essential to minimise the damage to their efforts to achieve regional solidarity. The Madrid decision to select a few starters does some damage to those efforts. Moreover, as those countries say, it goes somewhat against the spirit of what was earlier agreed in both Essen and Copenhagen.

A country like Bulgaria knows that it is not ready for accession—and it says so—but why, it asks, cannot a serious negotiating process start now. The so-called "structural dialogue" proved to be no more than embarrassing formalities and empty exercises in protocol observance. That is Bulgaria's view. Why is not the European Union more directly and continuously involved in helping to prepare those countries for an eventual start to negotiations? As a former Foreign Minister of Bulgaria put it to me last night at a meeting in Paris, "Must the European Union keep us at a safe distance until others, like the IMF or the World Bank, have declared us economically fit to be considered ready to start negotiations? This is politically divisive in a region of vital importance to Europe's stability". I agreed with him that the proposed European conference must serve to include the next wave in a meaningful, substantive process, leading to the opening of negotiations at an appropriate time. Such countries must he on this side of the door waiting to come to the table. not on the far side of the door in the corridor, waiting for the door to be opened to them. That, to my mind, is a political imperative.

I yield to no one in my conviction that enlargement is an imperative, not an option. This is surely the most significant, complex and absolutely necessary enterprise that Europe has undertaken in its long process of post-war construction. In this continent's long history, the great geo-political enterprises have always had both winners and losers. Indeed, many had that as their objective. However, in this case we are in an enterprise where there are supposed to be only winners. If we fail to finance the enterprise appropriately, promptly and adequately, there will he losers—perhaps all will be losers, even those who think they are at least temporarily winners. The effect will be felt far beyond the borders of the Union and for far longer than any of us is here. We simply cannot afford that.

6.56 p.m.

Baroness Ludford

My Lords, I very much welcome this debate today and the fact that it is taking place on the eve of the Luxembourg summit and the United Kingdom's presidency of the European Union during which the first negotiations are expected to start. The committee has done this House and the European Union a great service by the speed of its deliberations, considering that the Agenda 2000 document was only published in July.

As has been said, it is now almost exactly eight years since the tearing down of the Berlin Wall. I was unable to visit Berlin at the time and had to be satisfied with watching events, transfixed, on the television. I therefore treasure as no other a gift that I was given by a friend in January 1990—a tiny piece of concrete from the demolished Berlin Wall. So I plead guilty to the charge expressed by the noble Lord, Lord Desai. I have an emotional wish to bring such countries home to Europe.

It is because I grew up on Cold War rhetoric and believed what we said about liberating central and eastern Europe for freedom and democracy that I believe that we have a moral duty to complete a successful enlargement. However, even that is not the major reason for expanding the European Union. The principal motive is our own self-interest in stability and security. We also need to change for our own sake. We need to change the European Union to be more democratic, more relevant and more effective. We should therefore welcome the dynamic impact of enlargement towards those ends.

The report does not pull its punches, noting that enlargement is a challenge of momentous consequence, but that national governments do not appear to recognise its sheer scale. The report warns of the absence of the political will that is needed to accomplish the necessary reforms to the policies and institutions of the European Union. The committee commends the realistic route plotted by the Agenda 2000 document, so the task is to persuade our member state governments to face up to the implications and for them to persuade our citizens that enlargement must happen.

While Agenda 2000 may be a route to the start of negotiations it is not a strategy for the accomplishment of a reformed European Union. It is perhaps an overworked cliché that history will not forgive us if we blow this opportunity, but I believe that it would be a misjudgment of huge consequence if we failed to seize the chance to reunite Europe and lay the foundations for unprecedented peace, prosperity and partnership on our Continent. Far from being an opportunity that is difficult to afford, it is one that we cannot afford to bungle if we really care about making our citizens safe. Here I disagree with the noble Lord, Lord Bridges. Security does not encompass merely military security through NATO; it includes economic, environmental and civil security through the European Union.

One of the points made in the report is that the institutional reforms must be agreed before the first accessions are ready. One of the major disappointments of the Amsterdam Treaty was that the heads of government ducked such issues as the need to streamline the Commission probably to one per member state and reweight the votes in the Council. Mr. Tony Blair was reported at the time as saying something to the effect that institutions were boring. I take issue with him since a citizens' Europe must mean effective, democratic and transparent decision making as much as tackling unemployment or crime. It is strange that a government who at home are rightly keen on constitutional reform, because they believe that that leads to better government, should be so shy of it on a European level. We know that the European Union will simply seize up if there is no streamlining of the institutions.

I was encouraged by the reports of the speech of the Foreign Secretary Mr. Robin Cook in Budapest on 26th November. In terms very similar to the committee's opinion, he said that, without reform, enlargement will remain beyond reach". He urged all member states, to accept that our common interest in a modernised and expanded Union outweighs narrow national interests". We know that words must be translated into reality. However, according to reports, his speech was calculated to convey a message of complete and unequivocal British support for enlargement. The Foreign Secretary indicated that it was the intention of the Government not only to push hard the Agenda 2000 package of reforms but to shake up the decision-making machinery. I hope that he includes the machinery of the common foreign and security policy because enlargement will make that even more important.

Further, I am glad to note that the Foreign Secretary distinguished this Government's approach from that of the previous Conservative Government. The latter was suspected of promoting widening of the EU through enlargement only as a Trojan horse to scupper deepening in a federalist direction. One matter to note is that if monetary union fails enlargement will be derailed. I add that the Foreign Secretary did not say that. While I am sure that unfortunately it is wrong to conclude that the Foreign Secretary is a closet federalist, I admit that his approach to enlargement causes my regard for his somewhat austere intelligence and integrity to recover after his decision to continue the delivery of Hawk aircraft to Indonesia.

Many noble Lords have said that reform of the common agricultural policy is top of the list of policy reforms. In particular, I congratulate the noble Baroness, Lady Young of Old Scone, on her maiden speech. I am a mere townie, but I listen avidly not only to "The Archers" but also "Farming Today". I admit to being bemused by the operation of the CAP. I have enormous sympathy with the terrible difficulties being suffered by beef farmers, made worse by yesterday's announcement, apparently related not only to the frustrations occasioned by the BSE crisis but also to the collapse of prices.

Perhaps it is time that we townies had greater leverage over the CAP. Where on earth do all of these subsidies go? The CAP costs taxpayers £28 billion a year. To the noble Lord, Lord Desai, that may not be very much, but it is £28 billion. We have some clues. Since 1992 cereal farmers have received up to £12 billion excess subsidy due to a failure to anticipate record high cereal prices. The annual cost of set-asidepaying farmers to produce absolutely nothing—is almost £1 billion.

It is perplexing to read these figures and then hear of the undoubted distress of small farmers. It does not take any great agricultural knowledge to work out that the money is not going to the right places. Very little of it appears to be going to support rural development, small family or hill farms, organic production or environmental improvements, and rather too much goes on another Mercedes for the cereal barons or the City types who own the big farms. I understand that we also spend £715 million a year to subsidise tobacco production. That demonstrates a somewhat bizarre conflict with today's meeting of EU health Ministers considering a ban on tobacco advertising.

We cannot carry on like this. I commend my own party's proposals for replacing price support with targeted income support and countryside management contracts to encourage sustainable farming and land management responsive to the concerns of taxpayers who foot the Bill. These reforms are vital in themselves, but unless something radical is undertaken the rapacious financial demands of the CAP will torpedo the chances of successful enlargement. There must be headroom in the EU budget to ensure sufficient aid for accession. That aid must be directed especially to infrastructure investment such as transport networks. I accept the point made by the noble Baroness, Lady Young, that it must be sustainable and environmentally friendly investment. We must help them to meet environmental standards and build up the quality and capacity of public administration and law enforcement as well as the financial and banking services in the applicant states. But we must be able to demonstrate to all citizens in the existing 15 member states that the European Union delivers value for money. We must be able to squeeze value out of every last penny of expenditure and see what can be cut, reformed or funded differently.

In his tour of Hungary, Poland and the Czech Republic the Foreign Secretary made clear that the UK supported the view, which the committee also expressed, that negotiations should be commenced with the five-plus-one rather than adopt the regatta approach. It is vital that even if there is differentiation in the timing of the talks it should not be permanent differentiation. To borrow a phrase usually used in the context of European Monetary Union, they must be "pre-ins" rather than "outs". There should be no velvet curtain to replace the iron or concrete one; otherwise, the confidence necessary to attract the direct private investment which is so vital will not be present. The European conference of all the applicants which is to be launched in February is designed to demonstrate the inclusiveness of the enlargement process and must not be a public relations exercise. It must be real.

The enlargement of the European Union is an investment in our future. We will boost our prosperity by the enlarged trade opportunities and assure our own security if our close neighbours and partners are democratic, prosperous and respectful of the rights of minorities. This debate is about financing enlargement, but the cost to EU countries and the United States of the Bosnian war is a reminder of the expense of instability and conflict.

I am grateful that this debate has taken place today. I hope that the message we send to the Foreign Secretary, other existing member states and future member states is that we are determined and enthusiastic to make a success of enlarging the European Union to almost 500 million people. But the United Kingdom Government must have a firm strategy for the kind of European Union that it wants to achieve. As all noble Lords have recognised today, this issue is highly political rather than technical. It may be 10 to 15 years before all of the current candidates are fully integrated. We had better get cracking and keep up the momentum. A successful enlargement offers the prospect of a transformed European Union and a major contribution to European stability in the 21st century.

Lord Bridges

My Lords, before the noble Baroness sits down, with the leave of the House, perhaps I may suggest that she misunderstood what I was trying to say about security. Of course economic security is vital, but it is surely also important that a country in this part of Europe should be able to live securely within its own frontiers without fear of being gobbled up by its neighbour. That is what has happened in this part of the world for the past century or two. That is what I am seeking to draw to your Lordships' attention. I hope that that may clear up this misunderstanding. I happen to believe that a conventional military pact of the NATO kind is not at all appropriate to this area of Europe.

7.10 p.m.

Lord Shore of Stepney

My Lords, it is my most agreeable first duty to congratulate the noble Baroness on her maiden speech. I congratulate her most sincerely.

Lord Barnett

My Lords, it was a good speech, but it was not a maiden.

Lord Shore of Stepney

My Lords, I thought that it was the noble Baroness's maiden speech. It covered the ground and I am sure that what she said about the CAP, and the eloquent defence that she put up for enlargement will have been greatly appreciated in all parts of the House.

I turn now to the report. I find myself substantially in agreement with a large part of the critique of what is basically Agenda 2000. The Select Committee's report is largely a critique and comment upon that document. It is a useful critique because the whole approach of the Commission, which authored the document, has been to try to reassure the existing 15 members of the Community that no real problem faces them as a result of the enlargement and the introduction of the new member states.

The Commission managed somehow to convey that reassurance by choosing a questionable growth rate of 2.5 per cent. per annum in the EU itself and 4 per cent. in the applicant countries. If that were achieved, the increase in own resources would be such that no serious problem would face existing members. It is extraordinary how neatly the increase in own resources, given those growth rates, matched the particular problems of existing members of the Community. It retained the ceiling of 1.27 per cent. That is hardly a sanctified sum, but nevertheless it retained that ceiling.

Secondly, the existing members can go on enjoying the cohesion and structural funds with a slight decrease towards the period 2003-2006. The extra resources generated are sufficient, apparently, to meet the needs of the much poorer countries which will be coming aboard during the period covered by the report. Finally, and this was a triumph, it even managed to say that, although the CAP would have to change in the period up to 2006, there would be increased expenditure under the CAP head for existing members, as the emphasis of the CAP moved from guaranteed prices to structural changes and the other part of the CAP.

I believe that it was the noble Lord, Lord Dahrendorf, who said that the greater difficulty in accommodating a substantial increase in the membership of the EU lay with the present 15. That is not to say, however, as I am sure he would not for a moment argue, that there are not serious problems for the applicant countries and the existing member states.

The applicant countries, as we have heard from different speakers, are poor. Compared with the average standard of living in the 15, they are woefully behind. We should not minimise the weight of the obligations that the acquis will impose upon the applicant countries. My mind goes back to when we first applied to join the European Community, as it then was. We had to accommodate—it was a difficult enough problem then to digest it—the, as it were, legislative achievement of some 15 or 16 years of Community life, together with the basic treaties (the Rome Treaty, the ECSC Treaty, the Atomic Energy Treaty) as well. But now here we are 40 years, as it were, after the main event, and the applicant countries have not merely to absorb the basic treaties, with which we had some difficulty, but in addition we now have the Single European Act, the Maastricht Treaty and the Amsterdam Treaty.

The noble Lord, Lord Dahrendorf, again quoted the figure aptly, but to achieve the same environmental and health and safety standards as exist in the Europe of the 15. and to which the applicant countries will be bound to adjust themselves, something like 2.3 per cent. of their GDP per year for 10 years will have to be spent on that exercise alone. There is no question of the task which has been set the applicant nations being in any way an easy one.

As for the 15 members states of the EU, I agree with and should like to reinforce the scepticism that my noble friend Lord Barnett, the chairman of the Select Committee, expressed about the achievement of their crucial growth rate. I looked up, quite naturally, what the growth rate has been in the 15 during the past two decades. I had to make some adjustment because all the members were not there. I take 1979-88 as the first decade. The GDP growth on average was 2.3 per cent. in the Europe of the 12, or whatever it was at that time. In the subsequent decade—that is, from 1989-98, and obviously making an estimate for the last year—the growth rate will be 2.1 per cent. on average.

We now have a document based upon a much more ambitious target of 2.5 per cent. That is a substantial difference. I wish to emphasise more strongly the distance that the EU has to go to make that growth rate not just achievable but credible. I looked also at the growth rates of the three major continental economies—Germany, France and Italy—for the past three years. I was struck when I found that the average growth rate during that three years in Germany was 1.4 per cent.; France, 1.3 per cent.; and Italy 1.2 per cent. That is a major difference between the assumed 2.5 per cent. upon which the credibility of the Agenda 2000 estimates depend.

It is worth considering why the growth rates have fallen so remarkably. I refer now to a document by the IMF entitled World Economic Outlook of October 1997. It is a recent document. It has this to say: The unsatisfactory economic performance of the three major economies of Germany, France and Italy cannot be blamed on the external environment'". It continues: The sources of weakness have been internal, and in fact domestic demand has expanded by less than I percent a year in these three countries combined over the past five years". I come to the point which I know will cause great unhappiness to my noble friend Lord Barnett. Why have the German, Italian and French growth rates plummeted so much? We all know the answer, but many people do not have the honesty to face it—I am sure not my noble friend. It is the almost desperate effort of those three countries to meet the convergence criteria laid down in the Maastricht Treaty and to achieve below 3 per cent. GDP borrowing requirement by 1998.

Your Lordships should not dismiss that point—it is very serious. I know that on the whole this House is sympathetic to the European project and does not like to look too critically at some aspects of it, but this is a serious point. It is worth reflecting on whether all the pressure of compression of demand, which is well below their actual GDP, will change when we reach 1999 when the single currency comes into effect.

I am sure that that is the hope of everyone concerned with the problem of the growth of the European Union, but I can see no reason why it should be any better in 1999. First, the convergence reached with such effort—that is, below 3 per cent. GDP by 1998—must be continuing. A country cannot suddenly go above 3 per cent. If it does, it is in for trouble because there is the stability pact with its substantial impositions of deposits and fines. In addition, as was properly pointed out earlier, the world economy is not looking as healthy as we should like, particularly with the repercussions of the international financial crisis. Against that background and combined with expansion of 2.5 per cent., sustainable convergence seems to me to be almost impossible.

Therefore, there is no reason to believe not just that we are unlikely to achieve the 2.5 per cent. growth of GDP during the period covered in the report, but there is every reason to be seriously worried about a continuing pressure on internal demand which will affect the growth rate in the years which lie ahead. The main consequence of an inadequate growth rate has been the massive rise in unemployment in western Europe in the past few years and therefore we must turn our minds once more to the whole construction of economic and monetary union and see whether, having done without it for the past 30 or 40 years we cannot somehow stagger on in the future without it. I hope that there will be the most urgent reconsideration of that as the most major way in which we can assist in achieving a proper growth rate in the European Union.

Finally, as regards the consequences of being unable to achieve the growth rate that we need, we must re-examine the whole business of the financing of the Community. I do not believe that one can do a great deal with the funds which are already raised. Expenditures look unlikely to fall in the years ahead. We must examine the whole issue of financing and whether further financing resources can be released or found. We must examine the whole not-very-thought-through system of Community taxes which have grown up higgledy piggledy over the past 30 years.

7.24 p.m.

Lord Middleton

My Lords, I join other noble Lords in congratulating the noble Lord, Lord Barnett, and his Sub-Committee A on their admirable report. During the time I served on the Select Committee on the European Union it produced three reports on enlargement. Two were the work of Sub-Committee D during the time that I had the privilege of being its chairman. Therefore, I have an interest to declare in the subject. I find it especially gratifying that the line taken in this new report is wholly consistent with the line taken by our 1994 and 1996 reports. That line has been encapsulated in the report's opening paragraph: If enlargement is successful. the people of Europe could enjoy conditions of security and stability without parallel in their history". Speaking at the Madrid European Council two years ago, the then Prime Minister said that he believed that enlargement was the most important task facing the European Union. The promotion of enlargement was at the top of the previous Government's foreign agenda. I shall be grateful if in reply the Minister will tell us whether that policy objective is being given the same priority by this Government. If it is the case that the UK Government will continue to take the lead in working for enlargement, it must be recognised that, in the words of the report: The enlargement now foreseen is a challenge of momentous consequences". In the two reports for which I was responsible, Sub-Committee D concentrated on the challenge to enlargement presented by the common agricultural policy. We stressed the urgent need for CAP reform and told the Commission how it ought to be done. The report of the noble Lord, Lord Barnett, takes exactly the same line. He described CAP reform as "pivotal" to the financing of enlargement. Numerous other speakers today support that view.

Before dealing with the problem of the CAP, I should mention one other problem which must be overcome. The EU is almost fanatically protective when it comes to trade in agricultural products. We found that to be abundantly obvious when my sub-committee looked at the trade agreements with the CEE countries in 1994. Those countries were being treated abominably, and so far as I know they still are. As regards this trade, the old Iron Curtain still stands and remains virtually impenetrable by farm and food products from the east. That must be put right.

I return to the reform of the CAP, which is crucial if enlargement is to proceed. I understand that Agenda 2000 assumes with admirable confidence a reformed CAP by 2006, which will apply only to the present EU 15. Pre-accession aid is to be given to the CEE 10 and estimates are given. The report is not, convinced that national governments have yet thought equally hard"— that is, as hard as the Commission— about the way ahead or faced up to the sometimes uncomfortable decisions which will have to be taken". I am sure that that is right. But I fear that in respect of CAP reform some member states have thought hard and that there will be continuing resistance by some member states and by politically strong organisations within them.

I remember well a trip to Brussels during the previous inquiry of Sub-Committee D in order to attend a conference on CAP reform and enlargement. It was attended by representatives of all member states and CEE countries. After the representative of the French farmers' union had his say, I wondered why the Polish and Hungarian representatives, whom we had met previously in Warsaw and Budapest, did not hurry back home to tell their governments to forget about enlargement and seek refuge instead in some resurrected eastern alliance. They did not do so because desire for accession among the CEEC 10 is immensely strong. Those countries are willing to show great patience. Nevertheless, the report is right in its final paragraph to utter a note of warning that delay imposed, for example, by an EU unwilling to reform the CAP might breed disillusion, putting the whole enterprise at risk.

The lack of a really robust set of recommendations for CAP reform in Agenda 2000 reflects the lack of enthusiasm on the part of some member states referred to by witnesses to the committee chaired by the noble Lord, Lord Barnett. When my sub-committee looked at the MacSharry 1991 proposals for CAP reform, we criticised them and said how it should be done. Those recommendations were endorsed by our own government and were produced as an option in the Commission's 1995 CAP reform document. But they were not adopted because they were too radical.

Agenda 2000 presents a new set of reform proposals which come a bit nearer to what the UK would like to see. Once again the Commission shies away from what is necessary because, quite understandably, it recognises that there will be almost guaranteed resistance from some member states.

The need for CAP reform seems to present the biggest challenge of all. I am led to believe that this Government—and I should he glad to have this confirmed by the Minister in due course—continue to adopt the robust line on CAP reform taken by the previous government. Therefore, I am sure that the Government will do all they can, but they will not receive much support in Council except from perhaps two or three other member states. The only hope is that sufficient pressure from the renewed round of WTO talks in two years' time may loosen up the logjam. Unless it does, the dire consequences of failure to achieve enlargement which are so well expressed in this report will follow.

This is a most stimulating report on the financial aspects of that enlargement, on which the future stability of Europe depends. It complements and extends the views held consistently by your Lordships' Select Committee, which have up to now been supported by all sides of the House. From what I have heard during this debate, in the main that support continues.

7.33 p.m.

Lord Hussey of North Bradley

My Lords, it is with some diffidence that I rise since I have not long been a Member of this House and for an even shorter time a member of Sub-committee A, to which I bring more enthusiasm than knowledge.

First, I must say, although this will be well-known to your Lordships, how much I have been impressed, not just by the wide and detailed experience of my colleagues but by the respect with which the committee is held universally. We do not receive many refusals if we ask anyone to come and talk to us. Much of that is due, no doubt, to the charm, experience and skill of our chairman. That is no surprise to me as he served long and patiently at the BBC under my chairmanship. I can only say that I have learned more in my seven months under his chairmanship than he learned in seven years under mine. Moreover, we are all indebted to the skilful work of our Clerk who has an unfailing eagle eye for the right phrase or telling quote.

The European Union and the part we play in it is the most important issue facing this country today. The prospect of enlargement of the existing 15 countries by a further 10 has been described by the Foreign Secretary as an historic opportunity which must be grasped to end the divisions which have soured our continent since the last war, and to enhance security and prosperity throughout Europe.

I was born in 1923. I am younger than some, although far from all, of your Lordships. My family, like virtually every other in this country, lost close relatives in the First World War. I sensed the increasing anxiety of that generation as it saw the inevitability of the Second World War. Although we were spared invasion, we suffered grievously and we should willingly pay a high price for a Europe which will reduce the likelihood of a third world war.

Of course, the history of our country is very different from that of our continental colleagues. The last invasion we suffered, as we all know, was in 1066, nearly 1,000 years ago. All our wars have been fought overseas—away fixtures, if you like. I believe we under-estimate the appalling memories of the many countries in Europe which have suffered invasion at least once every century, and many of them, like Poland and the Low Countries, more often than that. For them, there is no price too high to pay for stability.

In the first 50 years of this century, the threat to peace stemmed mainly from central Europe. But during the second 50 years, it came primarily from the east. The Community embraces already a large proportion of western and central Europe. The latest enlargement, including Poland, Estonia, Hungary, Slovenia and the Czech Republic, makes heavy inroads into eastern Europe. Dangerous and challenging boundaries are being eliminated. For that reason, if no other, their accession is hugely beneficial to the whole of Europe.

But what will be the financial costs? They are imponderable and the difficulties formidable. We look at the forecasts. Like many I have seen—and, quite frankly, like a few I have presented—they are extremely optimistic. The budget is very tight, but it may not be sufficiently tight. All expenditure rises alongside the Community's growth. The only thing that falls is the reserves. Growth rates are forecast at 2.5 per cent. for the Community and 4 per cent. for the accession states. That is not necessarily impossible. In 1995, the candidate countries averaged a growth rate of 5.2 per cent., more than double that of the European Union. But, as we all know, forecasts of growth rates are notoriously unreliable, not necessarily through any fault of the forecasters: they are subject to so many differing and unforeseen or even unforeseeable factors. The whole edifice depends on those targets being achieved.

Like the noble Lord, Lord Grenfell, I too found the report of the European Parliamentary Committee disquieting. It stated that it believed that the projected growth of 2.5 per cent. was over-estimated and stated that the current ceiling of 1.27 per cent. of GDP for own resources was not necessarily inviolable, a view from which our Government and the governments of Germany, France and the Netherlands strongly dissent.

The budget depends on two issues: the first is the growth rate; the second is the reform of CAP and the structural cohesion funds which amount collectively to 80 per cent. of Community expenditure. In that context, reform means that some will receive less or others will pay more. It will be no surprise to your Lordships to hear that we have not detected any great enthusiasm for either of those policies, partly, of course, because of the startlingly contrasting interests of the northern and southern member states. It is a simple equation: if the growth rates are not achieved, either there are further cuts in expenditure or we increase our own resources to fund expansion. Solving that equation is—I use an adjective which has been used frequently this evening—a pivotal problem. One member of the Commission staff commented that the accession of so large a number of new applicants raised the question of whether the Union has the ability to carry through such an ambitious project, to tackle either the agricultural and cohesion policies, or to take the financial measures necessary for a union of 20 states to achieve its objectives.

On the other hand, there is a contingency reserve—what Commissioner Liikanen called "a margin for surprises". I am sure we all hope that the reserve turns out to be bigger than the surprises. Overall, the impact of past enlargements has been positive but they are not neutral; their impact goes further than simply extending the scope of the European Union. New members lead to new attitudes and new areas of interest. Incidentally, we must remember that the last two enlargements were eased by the raising of own resources, which is not at present on the menu.

I am an optimist, although the noble Lord, Lord Desai, may think that I am a romantic. I also hope that this enlargement will be positive. In my opinion, there is no alternative way to achieve stability, cohesion and prosperity in Europe. Whatever the difficulties and uncertainties—and some of these have been exposed with startling clarity by your Lordships—I believe that the effort must be made. The history of the European Union is the history of awesome difficulties in some unlikely fashion being ultimately resolved. We all believe and hope that this will now happen again. It is certainly in all our interests that it should.

7.42 p.m.

Lord Elis-Thomas

My Lords, there has been a nice mixture of optimism, realism and scepticism in today's debate. I am sure that that is down to the quality of the report which is before us. I should like to add my thanks, as a member of the European Communities Committee, to the sub-committee and in particular to my noble friend Lord Barnett. Of course, my noble friend is so far mainly famous for his excellent formula, of which I suppose I am a personal beneficiary. I am certain that he will become equally famous throughout the EU for the incisive nature of these reports. That is a serious compliment and I trust my noble friend is aware of that.

I should like to emphasise that my contribution will be on environmental standards and the cost of compliance with them, arising out of the points made clearly in paragraph 91 of the opinion of the committee. The committee emphasised that the: way ahead should be for maximum help to be given to the applicant countries in terms of advice and access to investment capital and for accession to be followed by transitional periods which may need to extend over ten or more years". My worry is that that objective of ensuring compliance with the environmental acquis communautaire over 10 years, using the target figure that has already been mentioned—for example, in the case of Poland, an increase of 2 to 3 per cent. of GDP just to meet that level—may not be realised and that that in itself will create disaffection and concern both within the applicant countries and within the existing 15 countries.

In the whole area of sustainable development, we face changes of attitude and of implementation which have been very difficult to overcome so far in the 15. We are in danger of trying to apply standards of environmental management and targeting in the five that we are not yet successfully implementing in the 15. In particular, when one looks at the area of sustainable regional development, it must be clear that we need a combination of resources from the commercial/private sector, as well as that significant amount of public investment which is always required in order to ensure infrastructural standards. In some of the calculations set out in Agenda 2000, it seems to me that we are in danger of forgetting that necessary balance between public resources and private investment, especially in levering for successful development.

In addition, there are the serious costs of enforcement of the environmental standards. We have already seen within our own experience in the 15 how difficult it is to get consistency of enforcement of such standards. We need to ensure that in the whole area the five have the benefit of the pioneering work of the European Environment Agency in Copenhagen, which some of us had the pleasure in visiting last year, along with other members of a sub-committee.

When we consider the resources which will be required to meet the environmental objectives, it will be seen that it will require investment from World Bank sources and from the private sector. There is a tremendous opportunity in investment in environmental sector technology in order to improve standards. That is a major opportunity for manufacturing companies in the existing 15 in partnership with the applicant countries. Indeed, we have the benefit in Bridgend in South Wales of one of the most advanced companies as regards the development of cellular technology for solar energy. That is merely an example of the way in which the developing technology in the 15, in partnership with the five, can create employment opportunities throughout the expanding Union.

However, that means that we need to have ways of thinking about sustainable development throughout the whole Union which go beyond the approaches that we have taken in the past. It is in that context that we must see the shifting of resources from structural funds and regional development in the existing 15 into meeting environmental and other objectives in the five not only as a widening of European Union standards but also as a deepening of our own technological skills, especially in the environment technology industry.

I am concerned that the targets for transfers set out in Agenda 2000 will be difficult to achieve. I know that I am beginning to sound like a Eurosceptic, so I shall try to conclude my remarks on a more jolly note in a few minutes. But looking at the cuts suggested in Agenda 2000—namely, 0.5 billion ecu in agricultural policy, which is a 1.2 per cent. reduction, and also at that I billion ecu per annum cut in structural funds, which is a 3 per cent. cut—which are intended as transfers into accession states, I foresee political difficulties not just within the agricultural sector but also within regions in the 15 as regards obtaining political agreement for such reductions. When one looks at the transfer of funds of 10.5 billion ecu in PHARE, that again will require a clear targeting if it is to be successful in its implementation.

Therefore, when we consider what is set out in Volume I of Agenda 2000—namely, an attempt to create a twofold approach by way of partnership with the European Union and long-term realistic strategies for alignment within the accession states—and when we look at the proposal for the matching of domestic and foreign financial resources, they all seem to me to be a little aspirational. I want to see the UK presidency taking a lead as these negotiations develop seriously to ensure that funding is in place, not only matching funding from the current EU resources and from the own resources of the accession states but also from within the private sector throughout the Union and Europe for developments of that kind. If we do not get that leverage and that balance, these targets will be worse than aspirational; they will appear unachievable.

As we try to adapt our own sustainable development strategies, the integration of the environment along with other economic and social policies, and as we extend that to the accession states, that will require an imaginative approach in terms of implementation. In doing that it is important for us to pay tribute—as the noble Baroness, Lady Young of Old Scone, did—to the achievement of the accession states in biodiversity and nature conservation, which certainly puts to shame the achievement of many of us in the 15.

There are environmental gains and benefits from enlargement. However, I must issue a warning that on the current performance I do not think we have sufficiently assessed the amount of expenditure involved or the extent of the task ahead. I add my warning to that given earlier by the noble Lord, Lord Dahrendorf. I hope that the Government will take this matter seriously as part of the initiatives of their presidency. It might indeed be called "Declaration Cardiff— because it looks these days as if that is about all we shall get in Cardiff.

7.51 p.m.

Lord Shaw of Northstead

My Lords. I, too, wish to congratulate the two maiden speakers today not only on the speeches that my noble friend Lord Garel-Jones and the noble Baroness, Lady Young of Old Scone, made, but also on the fact that they will have realised that enlargement is a continuing process. We have had earlier debates on this matter and we shall certainly have many more. I look forward to hearing from them in those future debates. The more our debating team is strengthened, the better.

At this stage of the debate it is almost inevitable that one will overlap with some of the points that have already been made. I shall try to keep that to a minimum. However, I am bound to repeat something that others have said; namely, how much we have appreciated the leadership that we have always enjoyed from our chairman. I welcome the fact that he has managed to persuade the committee to produce a report so quickly. This morning I heard certain critical comments from a noble Lord who is not present this evening. He criticised the speed with which we had worked and said how much better the report would have been had we taken a little more time. I disagree with that view. As I say, this is not the first report, and it certainly will not be the last, on the financial aspects of enlargement. It is important that we state a critical view—it is bound to be critical—as quickly as possible to try to urge a closer appreciation of the problems connected with enlargement.

The opening paragraph of the report states, Enlargement of the European Union to bring in the Countries of Central and Eastern Europe is no longer a dream". That may be so. The report continues, there is now a practical and immediate opportunity to set a course which will re-shape the political, economic and social life of the whole continent". Opportunities arise but they are not much good unless they are adopted and driven forward. The whole purpose of our inquiry is to see how we can change opportunity into practical steps towards realising that opportunity. I have noted a strong feeling that the member countries have not yet got down to spelling out the tough decisions and consequences that are bound up with any such enlargement, particularly the financial consequences of enlargement, on the individual national economies involved.

One has only to look at the present working of the CAP in that connection. This has been considered several times by my noble friend Lord Middleton, who has had much experience of these matters when serving on his committee. Paragraph 87 of the report states that, The CAP has long been in need of reform", and that such reform is, pivotal to the financing of enlargement". Yet, as our chairman has said, we are told that it is no use talking about changes in the CAP until after the German elections next year. That is true, but, of course, those are not the only elections. Elections will take place from country to country. Someone will always find it inopportune to discuss the CAP unless we are careful and unless there is a will to bring about the change. That will not be easy.

Similarly, changes are also required with regard to the structural and cohesion funds. Whatever benefits may derive from the reform of those funds, and however necessary they may be, they will not be achieved easily. The reforms and disciplines connected with enlargement must be spelt out clearly because, once enlargement takes place, it is much more difficult to change the conditions that have been set out than it would have been to get them right in the first place. However, there is a practical problem here even without enlargement. As regards the CAP. the structural funds and the cohesion funds, necessary changes must be agreed between the existing 15 members whether or not enlargement takes place. I am not quite sure whether there will have to be two stages, with the existing members agreeing on changes and then discussing them with the applicants, or whether there should be one stage of negotiations.

However these problems may be tackled, there has to be a willingness for the present 15 members to provide agreed assistance to the applicants. Equally, there has to be a willingness by the applicants to ensure that such assistance is properly used. That leads me to something that has not been mentioned so far but which I always return to because I think it is so important—I am afraid that I have mentioned it probably too many times in this place—namely, the financial discipline in the Community itself. The Court of Auditors' annual report for the financial year 1996 has just been published. Paragraph 0.8 on page 8 states: Almost all chapters of this Report (and five special reports to he taken into consideration for the 1996 discharge) include observations on administration and control weaknesses which demonstrate how far the development of appropriate systems of accounting and financial management, in particular in the Member States, has failed to keep pace with the expansion of Community activities and with their diversified nature". We have to face the fact that in the Community as it now exists there is far too much misapplied aid and downright fraud. In presenting his annual report to the MEPs the president of the Court of Auditors, Bernard Friedman. has told us that the court had covered many irregularities and cases of fraud amounting to 5.4 per cent. of the 1996 budget, which itself was 77 billion ecu. That amounts to a total figure of fraud of 3.7 billion ecu. If my mathematics are right, that is about £2.5 billion. The president continues that the court was not able to give the Commission a clean bill of health for its management of funds.

The truth is that, although we have strengthened the hands of the Court of Auditors and the Commission, much still needs to be done to ensure a proper control of Community funds. In seeking enlargement we do not want to open the door to further misuse of EU funds. We have to remember that member states are responsible for the handling of some 80 per cent. of EU funds and are themselves in large measure responsible for the proper management of them. That is why at paragraph 95 of the report we stress the importance of developing, strong, capable and honest administrations in all the Member States and applicant countries. The judiciary and the civil service are key institutions whose capabilities will determine the effectiveness of the implementation and enforcement of Community law and practice". How good it was to hear the Polish representative stressing the great steps Poland was taking to improve its administration and Civil Service.

Enlargement clearly will demand a steady progress and a continuous encouragement. In no way can it be a quick-fix operation. One has only to remember that it will take 25 years or so at reasonable rates of growth for the CEECs to bring their average per capita GNP up to roughly half that of the EU 15, we state at paragraph 15.

I fully support my noble friend Lord Dahrendorf in his more cheerful view of events. It is good to have a cheerful view; we are somewhat critical. Nonetheless, it is right to emphasise that the greatest spur to progress in those applicant countries is that we keep alive the hope that they will come into the Community. Towards that end, I am much in favour of something that we mention in the report; namely, the idea of a European conference at which we can continue dialogue with those applicants. We can keep the hope alive and progress towards entry within their view as well as our own.

Finally, I have always stressed the paramount need for financial regularity if the long-term success of the European Union is to be secured. But the other great need is to retain a flexible approach to the problems that must continually arise as we go forward. I am glad to say that I believe that such an approach has a good deal more general support than might often be supposed. In support of that. I conclude with three quotations. First, at the CBI conference on 10th November 1997, William Hague stated: Let us not have debates about who is pro or anti European. We should all he pro European. Pro about a Europe that is flexible, not rigid; that is about diversity not uniformity: that is outward-looking, and does not turn itself into a fortress". The second quotation is by Joachim Bitterlich, Chancellor Kohl's national security adviser. At a recent German Government conference in Berlin he said: I am not an integrationist. I look at what works". Finally I cite Dr. Hans Von Ploetz. He made a wonderful witness before the inquiry. He is the top civil servant at the German Foreign Office. He was speaking at the same conference in Berlin. He said: After Maastricht, Germans were no longer prepared to let power flow down a one-way street to Brussels. The burden of proof had shifted.

Now we have a British element—if it ain't broke—don't fix it".

8.5 p.m.

Lord St. John of Bletso

My Lords, first and foremost, like all other members of the sub-committee I wish to thank the skilful leadership and the skilful charm of the noble Lord, Lord Barnett. I wish also to join in the thanks for the able guidance of our clerk, John Goddard. I was heartened when I heard the opening comments of my noble friend Lord Bridges: he thought that the report was essential reading for anyone who had an interest in Britain's presidency of the European Union next year. It is an extremely interesting report. Like the noble Lord, Lord Hussey, I considered myself to be one of the most junior and naïve members of the committee. It was a steep learning curve for me.

There is clearly an overwhelmingly strong case for the advantages of enlargement of the European Union in terms of peace and security as well as economic growth and development in Europe as a whole. I say that as one of the younger noble Lords who has been fortunate enough not to have been involved in a world war. It is a small price to pay. However, it is clear from the report that there are major financial and political hurdles to overcome, and that the timetable outlined in Agenda 2000 is unlikely to be met. As the Economist in a recent article headed "Welcome to Europe" stated, it would be hard to find a European project that arouses so many suspicions and yet produces such beneficial results". The report highlights a number of substantial adjustment pressures, both political and economic, that accession countries will have to face in order to comply with the acquis communautaire, including the enormous challenge of promoting environmental conformity with European Union standards which is likely in several countries to have a crippling effect on their GNP. The point was made by the noble Lord, Lord Dahrendorf, and my noble friend Lord Elis-Thomas. The noble Lord, Lord Dahrendorf, mentioned that Poland would need to spend 3.2 per cent. of its GNP for 10 years to achieve the environmental acquis. It is not just the money to be spent on seeking to achieve the environmental acquis, but also the challenge of the enforcement of the environment acquis.

Of course the first questions posed by the sceptics of enlargement are these. Who pays? How much? How will it affect our national economies? Paragraph 11 of the summary states, National governments, conscious of their electors and their approaching elections, will not wish to pay more to, or receive less from, the Community Budget than they do at present". The point has been made about the forthcoming German elections. Clearly a key to the success of the exercise will be the need to stimulate sustained economic growth if the Community policies are to remain affordable. The figure of 2.5 per cent. has been cited. As a consultant to Merrill Lynch, I asked our chief economist whether or not that figure is achievable. While noble Lords might feel that economic predictions are unreliable, I am pleased to say that the chief economist of Merrill Lynch assured me that, even though he is a Euro-sceptic, he felt quite confident that the economic growth rate of 2.5 per cent. was achievable. Reform of the CAP is, in the words of the report, pivotal to the financing of enlargement". What is evident from the report is that the relative poverty of central and eastern Europe will impose unpopular extra demands on EU farm spending and the budget for regional aid. In fact, many believe that the biggest obstacles to EU enlargement are the existing 15 countries. I again cite the noble Lord, Lord Dahrendorf. He said, The real obstacle is what present members fear will happen to them". It is apparent that enlargement is entangled with the rest of Europe's unfinished business—namely, the single currency and the need for reform of the CAP. However, ahead of the forthcoming Luxembourg European Council meeting next week, it is encouraging to see that the enlargement debate is moving to centre stage.

While the Copenhagen criteria provide a sound screening process for applicant countries likely to be admitted to the European Union. it is important—as the noble Lords, Lord Barnett and Lord Grenfell, mentioned—that those applicant countries that did not qualify for the first phase should be encouraged to be admitted as soon as possible and not feel snubbed, thus creating potential divisions in central and eastern Europe.

I welcome the Foreign Secretary's recent announcement that, when Britain holds the EU presidency next year, it will host a special European conference to which all applicants — I stress all applicants—for membership will be invited.

While the Copenhagen criteria and the acquis require new members to take on board most EU regulations and to observe the Maastricht financial disciplines. I. like most noble Lords who have spoken today, am concerned that, if that is rigidly applied, it will not only lead to lengthy delays in new members joining the Union but also impose on applicant countries economic, monetary and environmental costs inappropriate to their need for rapid economic and political transformation. I believe that only if the EU is flexible about these pre-conditions and reasonable transition periods are allowed will the full economic and political potential be tapped and costs of enlargement contained. I stress that CAP reform is essential.

I have read estimates that up to £50 billion could be needed to integrate the five potential members in the first phase compared to the relatively low cost of NATO enlargement. I have not seen the figures for NATO enlargement but I imagine that they are substantially lower than those for economic enlargement.

A key point made by several of the witnesses, including Mrs. Hubner, head of the European Integration Office in Poland. was the importance of foreign direct investment into the applicant countries, such as Poland. Mrs Hubner mentioned how foreign direct investment into Poland had resulted in the promotion of political and economic reform and the adoption of the acquis. Should the timetable for applicant countries joining the EU be delayed too long, the potential result could be a drop in foreign direct investment in the applicant countries, which could have devastating effects. It is to he hoped that, in the words of Commissioner van der Broek: It is not the if. hut the when of the applicant membership that is important". In conclusion, although the attraction of NATO's defence guarantee is obvious, after decades of Communist misrule, what embattled citizens want most of all is economic stability, and for that they will look to the European Union. Those unimpressed by the historical opportunity for Europe should think of the practical benefits. In the words of the recent Economist article: The new democracies of Central and Eastern Europe need to shake up and deregulate their economies in order to prosper in a tough competitive world, whether they manage to join the EU or not". If the enlargement process is postponed or delayed, the success of this much needed political and economic enterprise will be at risk. Our target must be a stable Europe that is open to the world.

8.15 p.m.

Lord Randall of St. Budeaux

My Lords, I believe that the report we are debating this evening is a good one. It was prepared in what seemed to me record time in order to be available for the EU Council meeting in the next few days in Luxembourg.

The report is special for me because it is the first substantial piece of work in which I have participated since being introduced into this House in October. I challenge the claim of the noble Lord, Lord St. John, to be the baby of the committee; I believe that I am. The calibre of the committee impressed me immensely. It would be tasteless to draw comparisons with the other place where I spent 14 years, but I should like to say how highly I regard this kind of committee work which shows the value of your Lordships' House in our parliamentary system.

The members' profound knowledge of the workings of the EU, particularly the financial aspects, and their experience and judgment made this for me an exciting and challenging project. Our chairman, the noble Lord, Lord Barnett, upon whom praise has been heaped this evening, played a key role. He created just the right sort of ambience for a complex project of this kind. Sometimes we were deeply analytical and serious; on other occasions we had a good laugh. Our chairman must take great credit for the report. Perhaps I should say that the rumour that the report will be officially called the "Barnett Formula Mark 2" is quite untrue.

I associate myself with the comments of the noble Lord, Lord Barnett, about the committee Clerk, Mr. John Goddard, who did an extremely good job. The report could not have been produced so expeditiously without his superb help and guidance.

One of the main political reasons for enlargement is to diminish the threat of war or conflict from those countries to the east of the EU border. Security of the European continent must, in my view, be a top political priority for the European Union. Consequently, enlargement must proceed and be effective, although it will be very costly. Those high costs will lead to great political pressure to limit the scope of enlargement or to delay its progress. If that is allowed to happen, aspiring member countries could become disillusioned, with very worrying consequences. We could be risking the security of Europe. None of us should forget that the war in the former Yugoslavia is an example of how close conflict can be to us in the European Union, even in the 1990s. We should never take our national security for granted. We must always be vigilant. We should never forget the enormous loss of life, both military and civilian, amounting to about 60 million people, in the last two world wars. Many were children. The waste of lives was indescribable.

I passionately believe that enlargement is the best tool at our disposal for reducing the risks of war and conflict in Europe. Enlargement results in the coming together of nation states and their becoming institutionally bound to the EU. But that binding process is not just limited to the institutions of the EU. It also includes NATO. I am pleased to see this joining of the EU and NATO going hand in hand.

It is encouraging also that so many countries wish to join the EU. Those countries accept that before they become eligible to join they have to meet certain standards; for example, in terms of human rights, democracy, institutional reform and the environment. Those strict requirements are laid down in two key EU documents; namely, the acquis communautaire and Agenda 2000. The conditions are very stringent and demonstrate the huge difference between the EU 15 countries and those in central and eastern Europe wishing to become members of the EU, referred to in the report as the CEEC 10.

The report we are debating today illustrates the difference between the economic performances of the EU 15 and the CEEC 10. The statistic quoted by a number of speakers is the one which makes reference to that part of the report which says that to bring the average GDP per capita of the CEEC 10 to just half that of the EU 15 would take about 25 years. It is an extraordinary statistic.

What all this adds up to is that enlargement is absolutely vital to ensure the security of Europe but at the same time the preparation of the applicant countries to meet the mandatory conditions will be very costly and will take perhaps a generation to complete. The commitment required from the EU 15 countries will be enormous, but we must not be deflected from the path of enlargement.

How do we move forward? Several things need to be considered. First, the member states of the EU 15 need to be fully aware of the scale of the financial commitments that are going to arise from the enlargement programme. I attended the Labour Party European conference a week or so ago in Eastbourne, where one very informed MEP described enlargement as, a make or break issue for the European Union. That is a very strong statement. Is it reasonable? The committee felt that the financial perspective of the European Union for the period 2000 to 2006 was such that the budget allocated to enlargement would be very tight. There is a very limited built-in contingency in the budget, to which my noble friend Lord Shore referred.

Next, the political pressures within the EU 15, particularly from Spain and Portugal, to allocate additional structural and cohesion fund money, will create conflict when it comes to allocating funds to the applicant countries of the CEEC 10 and Cyprus. That conflict will have to be reconciled. The CAP budget is unquestionably the single largest source of money which, if diverted, could fund enlargement. The Commission and the Council of Ministers have brought forward plans for CAP reform, which is very welcome. However, that reform on its own is inadequate. The CAP budget must be substantially reduced.

The question that arises is whether such substantial reductions in the CAP budget would be achievable. The committee felt that political pressures from elected Ministers are such that member states would not countenance such reductions, certainly in the foreseeable future. In addition, the committee felt, after interviewing various witnesses, that the possibility of increasing the Community budget by raising the EU GNP ceiling from 1.27 per cent. was remote.

My own view on funding is that since many of the applicant countries are proceeding with privatisation programmes which potentially can free up enormous sums of money and other valuable resources, then those countries should be encouraged to use as effectively as possible some of those resources to attract private financial institutions to invest in their countries on structural, environmental, social and other costly projects which must be carried out in order that such applicant countries can join the European Union. I stress, however, that such a potential contribution from these countries to enlargement should not diminish the EU 15's commitment to helping them make good progress in joining the EU.

I think the House of Lords committee has done a worthwhile job in highlighting some of the financial and political dilemmas associated with enlargement. I hope the council meeting in Luxembourg will give careful consideration to how those dilemmas can be dealt with.

8.26 p.m.

Lord Wallace of Saltaire

My Lords, this is an excellent report and we have had an excellent and expert debate upon it. I pay tribute to the noble Lord, Lord Barnett, for the amount of work he has done and the speed at which it has been reported. I have a healthy respect for the European committee in this House; indeed, I also have a long family association with it. Michael Wheeler-Booth used to delight in reminding me that my wife was one of the first ever witnesses to the committee when it was formed and that he had given her a double gin and tonic to steady her nerves before she started her evidence.

I was once a special adviser to the committee and, if I remember correctly, it was on the subject of enlargement which meant Spain, Portugal and Greece at the time. I held the then chairman, Lord Trevelyan, in great awe. As I recall, the entire committee went to Brussels with its special adviser and met a number of commissioners and had an excellent lunch. So something has gone wrong between 1978 and 1997 in the way that things happen now. As it is rightly said, we travel in twos and threes, carefully selected on these occasions.

As a new member of the Select Committee I have been parachuted into the chairmanship of the junior sub-committee, if I may so describe it. The third pillar is now one of the most sensitive and active areas of the European Union. We were told, when two of us were allowed to travel to Brussels in July—I went with the noble Lord, Lord Kingsland—that a third of the paper currently going through the Council's secretariat and more than a third of the meetings were now on the third pillar. Papers are coming out on the impact of enlargement, on justice and on home affairs and—heaven knows!—asylum, immigration and organised crime. That is a large number of issues which we are trying, in our small way, to investigate.

What I most liked about the report was the balance it achieved between the strategic objectives and the hard detail. That seems to me to be the most important thing about approaching enlargement. The noble Lord, Lord Desai, talked of not getting over romantic about this subject. But there are powerful interests at stake in making a success of enlargement. I remember in the mid-1980s—as I am sure the noble Lord does—the Cecchini Report on the costs of non-Europe, which powerfully argued the case that completing the single market through the 1992 programme was in our clear economic interest. One can imagine how one would now set about a report on the costs of non-enlargement.

We were spending a great deal more on defence up until 1989 than we are today. As my noble friend Lady Ludford pointed out, we are spending a great deal on Bosnia, having failed to manage the transition in Yugoslavia. The Germans and the Italians in particular are spending a great deal on half a million refugees from Yugoslavia, Albania and elsewhere. So there are costs in non-enlargement as well as in enlargement. There is also certainly a moral obligation, which we all feel, that matey of these countries have suffered from the results of World War II and the failure of the western powers "resolve resolve the consequences of World War II. There is also the question of what we mean by a European community or a European identity. In this respect one has to talk in rhetorical, romantic and emotional terms. The pace of enlargement, the way in which we lock the peoples of these countries into a broader European community, European society, European family of democracies, European market and European economy, matters. That is why the pace at which we approach the process of enlargement matters.

In his opening remarks, the noble Lord, Lord Barnett, said that he did not quite understand what was meant by the regatta principle. As a young man I belonged to a rowing eight. The concept is entirely clear to me. In modern Olympic regattas, eight crews start at the same time but one or two of them reach the finishing line long before the slowest ones. But watching this process, I have a different image. It is what I used to do—tideway rowing. You rowed very fast down the Thames when the tide was with you and back extremely slowly. I fear that what we are doing with these countries is asking them to row up the tideway against the tide. It is important that we should provide a rather warmer flow of water than we are currently providing.

It is the characteristic style of west European governments in approaching European negotiations, to become lost in the detail. That, unfortunately, is the way in which the European Community was designed and is the way in which all governments, including our own, tend to behave. The record of the Commission on enlargement, as on most other matters, is slightly better than that of member governments. Agenda 2000 is a creditable report. It sets out a number of hard choices which most member governments do not want to accept. I do not think it is too strong to say that most member governments are in denial over enlargement. They want to put it off for as long as possible. They come up with phrases like "first reform, then enlargement", meaning that they are not too sure about reform of agriculture, institutions or whatever it may be. Attitudes in Germany are affected by the high and unexpected costs of unification. Attitudes in France are affected by the tremendous crisis of society, state and economy through which the country is going. If we look at our own record. I remember a former British Minister of Agriculture proudly announcing in another place on the conclusion of the Europe agreements that he had safeguarded the interests of Scottish raspberry growers in the course of the negotiations. That is going a very long way down into detail when talking about the future stability and security of Europe.

I find it very saddening that the Community as a whole has taken so much less generous an attitude to this enlargement than it did to the Mediterranean one. We were willing to increase spending for Greece, Spain and Portugal. We were not put off by the extent to which Portugal was an undeveloped country—more like Romania than the Czech Republic in 1977-78. Portugal has made a tremendous success of being in the European Union since then. We were also extremely generous to Spain. We ought to be reminding the Spanish Government of that now as they set out to do their best to block all economic and financial generosity to the new entrants. We are in severe danger, as Polish Ministers have said on many occasions, of asking the applicants to adjust—and they are adjusting remarkably rapidly and well—without being willing to adjust ourselves.

Perhaps I may remark on a few points which the report did not flag. The costs of the future stability of Europe do not stop with EU enlargement. Most governments have their own national programmes. Most generous are the Germans who have given a great deal of bilateral assistance to Russia and the Ukraine. We have our own small programme. The Know-how Fund is not particularly large, but from what I have seen in central and eastern Europe, it seems to be one of the most effective training programmes. Various noble Lords have mentioned NATO enlargement, the cost of which has now been reduced to within the range which the US Senate is prepared to accept. There is also the question of Turkey and of stabilising those other countries which will not join within the foreseeable future or may never join—Ukraine and Russia itself.

I recall at the Barcelona Conference in November 1995 the announcement of a very large package of aid for the Mediterranean countries which I thought at the time was unlikely ever to be disbursed and I assume—perhaps the Minister in replying can tell us—has not yet been disbursed. It was to be of the order of two-thirds of the assistance provided for the Europe agreement countries over the next 10 years.

How do we pay for this? We should not get hung up on whether we can expect 2 per cent. growth or 2.5 per cent. growth. Incidentally, my understanding is that the Polish economy grew by between 6 and 7 per cent. last year. So some of them are doing better than expected rather than worse than expected. If we are to be tough about how we pay for it, we have to insist—I hope the British Government and presidency will set out to insist—that governments graduate from the structural funds, that the cohesion funds must shrink. and that Ireland, having done extraordinarily well-8 per cent. of GNP and now rapidly approaching the same GNP per head as the United Kingdom—must of course graduate away from the structural funds. So must much of Spain, and so, necessarily, must much of Britain. I shall regret no longer having such things as that wonderful notice we have had for the past 18 months as one walks down to the station at Saltaire which says,"Your new footpath, paid for by the European Union", and all those little badges one sees scattered across northern England. But perhaps that is what we shall have to do without in future.

We also need to reform the Union's own resources. The committee's report just touched on that. One of the biggest scandals in the European Union is that Denmark is still a net beneficiary of the Union budget. I also regard it as deeply hypocritical that the Dutch have suddenly discovered that the European Union costs them money since they have now at last become a net contributor. Various people, including the leader of the Dutch Liberal Party, now go around saying, "We cannot afford to pay any more". Clearly, the Dutch. as a relatively wealthy people, ought to be paying more.

We need to have a wider definition of burden sharing. I have just seen a paper prepared for some transatlantic discussions on burden sharing which links together how much each European state is paying towards the European Union budget, towards development assistance and towards defence. Placing things in that wider context is not only fair but is also of some advantage to this country in the overall picture since we are one of the larger payers on defence. But we shall achieve that kind of redefinition only if our political leaders are prepared to redefine the issue and if we can place the details within the wider context. What distresses me most about the governments of western Europe, our own included, is the failure of imagination, the failure to understand that we are engaged in the reconstruction of a wider Europe and the construction of a stable democratic and prosperous Europe, and that it is worth spending a certain amount of money in order to achieve that larger goal. Rhetoric—even romanticism—has a role to play in catching the public imagination and in persuading politicians of all parties and the broader public that this is a goal worth pursuing and an investment worth making. We need to have our political leaders making speeches on that at home as well as abroad.

This is a challenge for the British presidency. It is something we may hope to see in the statement of objectives of the British presidency which is due at the end of this week. If leading Europe means anything in terms of language, this is the direction in which the United Kingdom should be leading it. That message should be addressed very clearly to the rest of the European Union as well as to the British public.

8.40 p.m.

Lord Higgins

My Lords, I join with all those who have spoken in this debate in congratulating the noble Lord, Lord Barnett, and the members of Sub-committee A on producing something which clearly is a remarkably helpful report, particularly so given that it has been produced in a short time on the eve of the Council meeting in Luxembourg. I hope that those at the meeting will have the opportunity of receiving the report. Perhaps the Government will consider ensuring an adequate supply of the document in Luxembourg—one might even suggest that copies of this debate should also be available. If one were convening a conference to discuss these issues on a Europe-wide basis, then perhaps one should take into account that many or even all of those who have spoken today have such a degree of expertise that their views are of considerable importance in dealing with what is an immensely difficult problem.

Everyone who has spoken has come out strongly in favour of enlargement, with the possible exception of the noble Lord, Lord Desai, who had some qualifications. Equally, everyone has recognised that there are immense difficulties regarding the financial arrangements.

Perhaps I may be parochial for a moment and take up a point made by the noble Lord, Lord Boardman. For the past three Parliaments, as chairman of the Liaison Committee in the House of Commons which consists only of chairmen of Select Committees, I have had the rather unusual task of allocating the very scarce funds available for overseas travel. The result is that I probably do not have a friend left in the place. I have always taken the view that, if a Select Committee is travelling, if at all possible—and I know that the noble Lord, Lord Shaw, will agree with me—it is very important that everyone on the committee should travel together. If it is the case that in this House limits are imposed whereby only two or three go, that is an absurd economy and something to which this House should give attention. It is not simply that if some go and others do not, the ones left behind do not understand exactly what the situation is, but also they do not have the opportunity of getting together and taking part in discussions. Therefore, I urge those responsible to look at this matter very carefully indeed.

I congratulate both the maiden speakers. My noble friend Lord Garel-Jones brought to the debate his experience at the Foreign and Commonwealth Office. He has always had a very clear view on the issues that we are discussing today. We congratulate him for that. The noble Baroness, Lady Young of Old Scone, made a speech which was perhaps a little more controversial than is sometimes the case with maiden speeches.

All those who have spoken have made very important contributions and have recognised that this is a matter of the utmost importance. The previous Conservative Government did so; they were among the first to call for enlargement of the European Union and the Conservative Party vigorously supports enlargement. Enlargement will undoubtedly enhance the security and prosperity of everyone in Europe and we want it to be successful, sustainable and affordable.

Perhaps I may now pick up a point made by the noble Lord, Lord Wallace of Saltaire, regarding the jargon. This is a subject which is slightly bedevilled by jargon. There seems to be a distinction between whether it was a five-plus-one kind of arrangement which the committee favoured, or a so-called regatta approach. My experience of regattas is confined to sailing very small sailing boats rather than rowing. One can have a regatta of two kinds. There is one where everyone starts simultaneously (which I gather is what the jargon implies) but there is also the regatta with a handicap and where some start ahead of others.

If we are to have a five-plus-one system where some have a start, then it is tremendously important that the time difference and the handicap which the others suffer is not so great that they become disillusioned, despondent, and one might almost say dangerous. The noble Lord, Lord Grenfell, made a very powerful speech on that point. He stressed how important it was that we should ensure that all potential applicants should feel that they are involved in a process which, whatever the timing may be, is one in which they are participating. As has been pointed out by the noble Lord, Lord Barnett, it may be that those who start at the back reach the finishing tape before those who start ahead of them in the first stages.

The report refers briefly to institutional reform and particularly whether there should be a change in the number of commissioners and the voting on the council. That is not primarily what we are concerned with tonight. We are concerned primarily with the question of costs. Three possible sources were identified in the report, although the noble Lord, Lord Shaw of Northstead, managed to produce a fourth—namely, if fraud, and so forth, were dealt with properly by the Court of Auditors, one might find an amount of about 2.5 billion ecu, a not inconsiderable amount, could be put towards the objective that we are seeking to address this evening.

As regards growth, the noble Lord, Lord Shaw, dealt with it in very considerable detail. Clearly, the assumptions which have been made may turn out to be invalid. Therefore, that is a very serious problem. Similarly, on the own resources issue and raising the limit, the report stresses the very real political difficulties arising from that matter. The other source mentioned was of savings on agriculture or on other funds.

In that context I pick up one particular point. The committee stresses very much the size of the task ahead of us. In its opening paragraphs it stresses that, The enlargement now foreseen is of a different order of magnitude from any that has happened in the past. It is a challenge of momentous consequence". That is certainly the case. The report continues, National governments, conscious of their electors and approaching elections, will not wish to pay more to, or receive less from, the Community Budget than they do at present". So there is here a very real problem. It is hoped that the Council of Ministers meeting in a few days' time will do something to help. It is true that national governments have not recognised, as the committee does, the sheer scale of the enlargement undertaking. I quote from the report at paragraph 28. The committee emphasises very clearly the size of the problem. The report states, Using figures for 1995, if enlargement brought in to the existing Union of fifteen Member States all ten of the applicant countries of Central and Eastern Europe, the Union's population would grow from 371.6 million to 476.9 million; and the area of the Union would expand [enormously]: both population and area would expand by roughly one third". I believe that that gives us some idea of the scale of the problem.

The report continues—and this is important— In terms of GDP per capita and of the proportion of the workforce employed in agriculture the differences between the EU 15 and the 10 are enormous. The difference in purchasing power is pointed out. If one took the figure in 1995 as 100, the figure for the applicants is only 30. The percentage employed in agriculture was 5.3 per cent. among the 15 countries and 22.5 per cent. among the 10. That is very important.

Coming to this matter fresh (as I do in a way which members of the committee do not) as I have listened to the debate I have been a little puzzled. Many noble Lords have said that the important thing is to make economies in the CAP. That is certainly an important issue and perhaps I may expand on it for a moment. When the question of Britain first joining the EEC, as it then was, arose—and on balance, I came down strongly in favour—it seemed that there was a trade-off between the advantages of the single market for most things and the disadvantages of the EEC with regard to agriculture. It has always been a great puzzle that any first-year economics student would have no difficulty in explaining the appalling problems which arise from the present system of agricultural support through the CAP but, however overwhelming those first-year economics arguments may be, politicians have never taken any notice. As an economist, I have always regarded that with great regret. In this context, the figures that I quoted earlier are important. The number of people employed in agriculture will increase enormously. Therefore, the political pressures on the agricultural side will also increase considerably.

We are left with a strange situation which I do not think the committee fully addressed. On the one hand, we are saying that we must find economies in the CAP in order to finance enlargement; but, on the other hand, those who are applying for membership believe that there will be great advantages in joining the CAP. However, the voting pressure, if I may put it that way, will be to spend more, not less. I found no analysis in the committee's report of how that will balance out. I found no reference to how the reduction in the cost of the CAP for existing members relates to the likely increase in costs for the new members.

Paragraph 51, on page 15, contains a most interesting statement by Commissioner Liikanen, pointing out the disruptive effects which would follow the application of the present CAP to Poland: agricultural income would go up by 47 per cent. "overnight" and investment would move from services and industry to agriculture where, given the strict quota system for production, the price of land would be forced up: it would fully collapse the structure there"— that is, in Poland. I shall not expand the argument any further, but I do not think that we have given sufficient attention to the relationship between the CAP for the existing members and how things might look if enlargement is eventually successful, as we hope.

Generally speaking, I very much welcome the move towards a more efficient CAP with lower consumer prices, a move towards world market prices and a move to direct income aid. However, I still hearken after the system of support that we had in this country before joining the EEC which did not put up consumer prices and where we knew exactly what it was costing the taxpayer and the consumer. Despite the excellence of this report, I believe that we shall still need to consider such issues in greater detail on a future occasion.

I turn now to the move towards economic and monetary union. The committee did not deal with this in great detail, but I think it is true to say that the move towards economic and monetary union has, as the noble Lord, Lord Shore, pointed out, had a serious effect on the level of economic activity in a number of other European countries as they seek to meet the Maastricht criteria. My own feeling is that it is important to remember the fundamental argument against the single currency, which is that one is giving up for all time the major means of adjusting for differential movements in costs and prices. If one goes ahead without an adequate degree of convergence, one will find either that there is perpetual unemployment in some areas or that one has to make massive subventions from one country to another. If that is so, I fear—and this is a personal view—that if the Union goes ahead on schedule and with the present degree of convergence, there is a serious risk that it will not work and that it will break down. As has already been pointed out, that would be disastrous for the prospects for enlargement and for our economies generally. I feel that the great pressure to go ahead towards economic and monetary union for, I think, political reasons, should be viewed, in the context of enlargement, with considerable concern.

If the single currency goes ahead and does not break down, clearly some countries will be members while others are not. That poses a problem with regard to the unity of the Union. Clearly, those members which are now applying to join EMU, or which wish to join, will find the problems facing them in the foreseeable future very difficult. The report points out the stark reality of the extent to which those countries are out of line with the other 15. That is a cause for concern, but at the same time it will be a very long while before they converge sufficiently for them to be able to join a single currency if, indeed, it goes ahead and if it is successful.

Finally, I believe that all noble Lords who have spoken are in favour of enlargement. The report has been helpful in highlighting the real problems that we face, but perhaps we should recall the words of the noble Lord, Lord Dahrendorf: we need to press on with this in a direction which we believe is essential and important for our future security as a country, and despite all the difficulties, do all that we can to solve them.

8.57 p.m.

Lord Whitty

My Lords, I begin by echoing the widespread thanks that have been paid to the committee for its thorough, clear and exceptionally timely report. I thank also my noble friend Lord Barnett for his cogent exposition of the report. The reputation of your Lordships' House and of its Select Committees is continuously enhanced around Europe, even at the highest level, by the quality of such reports. This is a great addition to that record.

I am delighted to add to the congratulations paid to the noble Lord, Lord Garel-Jones, on his maiden speech in this House. It demonstrated his vast experience of European matters which will doubtless inform and enlighten the House in the months to come. I even agreed with much of what he said.

I pay very special congratulations to my noble friend Lady Young of Old Scone for her forthright and effective maiden speech, giving an environmental dimension which was perhaps absent from some of the other contributions. When I was general secretary of the Labour Party and we were trying to increase the party's membership, I was constantly reminded that the Royal Society for the Protection of Birds had three times as many members. The Labour Party has since increased its membership, but the RSPB still has three times as many members. I do not think that that has anything to do with the British public's preference for cuckoos over canvassing; it has more to do with the quality of the RSPB's chief executive.

Enlargement is one of the most awesome projects facing us in the modern world. The UK Government, like their predecessors, support enlargement of the Community. I agree with the noble Lord, Lord Wallace, that the European Commission has done extremely good work in pointing out the difficulties and the strategy in Agenda 2000. The Government endorse the Commission's recommendations and agree that there are five countries ready to begin formal accession talks. During our presidency we shall work to secure the opening of those accession talks. I refer to the five central European countries plus Cyprus.

At the same time, the Government believe that the enlargement process should be all-inclusive; it should include the other applicants. The European conference proposed to be held in February should be open to all applicants who aspire to EU membership. A reinforced pre-accession strategy is required to ensure that all applicants remain fully engaged in that process. For example, countries like Slovakia could, with relative ease, catch up with some of the so-called first wave applicants. In the case of Slovakia, much is in its government's own hands. Principally it is the lack of democratic and political credentials that blocks its inclusion in the first group. In other cases it will be more difficult. Very strenuous efforts will be required to deal with economic, environmental, administrative and legal matters in Romania, Lithuania and Latvia. Despite the terrible recent economic performance of Bulgaria, it is possible that during the process of negotiations that country can catch up.

Therefore, the European conference is not a one-off event but an inclusive process. Earlier my noble friend Lord Barnett showed a regrettable lack of knowledge about voting techniques. That has been put right by noble Lords on two Front Benches opposite. The regatta approach requires that everyone starts at the same time if at different speeds. It is beyond the elite of European politicians to find an appropriate sporting term for the alternative which is to start at intervals. Without indulging in puns, we thought that motor racing and pole position were relevant here. However, perhaps motor racing is not the most favourite topic on this side of the House at the moment.

Nevertheless, the process is clear. As my noble friend Lord Grenfell and the noble Lord, Lord Dahrendorf, emphasised, those who are not in the supposed first wave are still part of the process. It is very important that whatever sporting term is used everyone is in the race. Therefore, the other five countries, including Turkey—in a slightly different capacity—must participate in the conference.

Enlargement can enhance peace, democracy, stability, prosperity and human rights; it can stimulate economic growth and competitiveness both for the west and eastern Europe. It can reduce potential migratory pressures. Although it will cost money, it can engage substantially in the environmental clean-up that is needed in eastern Europe. But there is a cost. As my noble friend Lord Barnett and others said, we cannot meet the costs of enlargement without radical reform of the way in which the European Union currently does business. No one is ever enthusiastic about paying more, and that applies to both governments and people. But I believe that there is a universal understanding among the governments of Europe that enlargement will have a net cost for almost all existing member states. The concern is to keep that cost to a sensible and affordable level and to ensure that no single member state faces a disproportionate burden.

To keep the costs affordable we must put the European Union's policies and institutions in a fit state for enlargement. National governments have very difficult decisions to make. For example, it would not be sensible or affordable for the common agricultural policy in its present form to be extended to the new members, even over a long time scale. For the reasons explained, it is not in the interests of Poland to increase the income of the Polish agricultural sector which that country recognises is in need of restructuring and modernisation. Therefore, one is talking about long time scales for transition but also about reform within that time scale domestically inside existing European Union countries. All of this means that the Agenda 2000 negotiations are even more difficult than discussions on any previous EU financial package.

There are some in this country who believe that any increase in cost is to be condemned. We reject that view. Despite its budgetary costs, enlargement is likely to be a good deal for the UK even if the reckoning is kept to economics. The benefit of trade with burgeoning new markets in the east will outweigh the budgetary cost. More importantly, there is a common realisation of the wider security, economic and military benefits of enlargement which mean that ultimately all existing member states will be prepared to face up to the financial cost. However, that financial cost must be managed and limited. To do that will require policy reform.

The Commission's Agenda 2000 has been examined by the Council of Ministers for the past few months. That examination has revealed broad, although as yet not unanimous, agreement that radical reform of the Union's agricultural policy and the structural funds is needed. The political will to make those changes is increasing but it is not yet fully there. Both the committee and noble Lords have commented upon the CAP. The Government are absolutely committed to radical reform of the CAP. As my noble friend Lady Young and other noble Lords pointed out, there is no point in exporting the cost and the damage that the existing CAP can do to eastern Europe.

The Government agree that EU funding will need to be augmented by resources from the international financial institutions. We agree with the committee that the building of strong, honest and democratic institutions should be given high priority. We also agree with the committee on the need for further institutional reforms as soon as possible and the importance of private investment and trade and capital flows.

However, there is one rather substantial area of disagreement with the conclusions of the committee. I believe that it is a matter of tactics rather than strategy. We agree that the own resources ceiling is not likely to be increased above the 1.27 per cent. of Community GNP for the period beyond 1999. But we also believe that, provided the decisions are taken on policy reform, that ceiling will prove adequate. We have not yet reached that ceiling. A very substantial growth in the process and a very substantial underspend in some of the budgets now and, as the noble Lord, Lord Shaw of Northstead, pointed out, adequate application of the Court of Auditors' recommendations would find further money within that budget.

Therefore, we cannot agree with the report's conclusions that we should now decide to have a review of the own resources ceiling before the year 2002. There are different ways in which the Union can deal with the financial challenge of enlargement. The first is to postpone enlargement purely on financial grounds. But if additional resources must be found the Union has the choice of increasing total resources or making the existing total go further. We believe that by suggesting a mid-term review of the own resources ceiling, the committee is ostensibly trying to keep open both options. We believe that that would put off reform rather than accelerate it.

Baroness Williams of Crosby

My Lords, I thank the noble Lord for giving way. On that point, does he accept that if the growth figures over the next two years fall short of the assumptions made by the Agenda 2000 report there might then be the necessity for a review; otherwise the limited funds that are now required for expansion would not be there?

Lord Whitty

My Lords, I was coming to the estimates for growth, and I shall deal with the point now. The report estimates growth of 2.5 per cent. It is clearly prudent for us to have some contingencies around that figure. We do not believe that the figure would fall substantially below 2 per cent., but even with a slight variation there would obviously be greater pressures on the budget ceiling than there are in the mainstream estimation within the report. That seems to increase the necessity for ensuring that reform takes place whereas a declaration now that we will review in 2002 seems to take some of the pressure off the necessity for reform.

We do not agree with the committee's recommendation for a mid-term review of the ceiling. Obviously, if circumstances change, a review may well be necessary. To declare it now would, as I said, take the pressure off the need for reform. The Government therefore insist that there can be no increase in the own resources ceiling. In that we are in good company. The great majority of member states have a similar view. It is one of the strongest levers we have to press for policy reform which, as the committee suggests, is essential for enlargement.

We agree with the committee that governments must look closely at all the figures. They must tell their own electorates the implications of the figures. We do not want to do anything that will reduce the pressure for reform.

I shall deal with one or two of the other points raised during the debate. The receipt of structural funds has clearly been of great benefit to many UK regions, as in other countries. I do not believe that the outcome of the current negotiations will be as cataclysmic as my noble friend Lord Desai suggested, but there will be changes. We do not yet know the outcome of the negotiations. There will clearly be pressures not just from the UK regions but from Spain, Portugal, Greece and Ireland on those fronts.

On cohesion funds, the Commission proposes no increase from 1999-2006. We agree that there is a problem in relation to the definition of what cohesion funds are for. We should not over-estimate their significance. Even by 2006 the figure will be under 7 per cent. of total structural and cohesion fund expenditure.

A number of noble Lords referred to the recommendation that more co-ordination should be adopted by western European countries on the expansion of NATO and the EU. I agree that the costs of both should be considered and that there is a vital security dimension to the expansion of EU and NATO. The costs of NATO will be much lower than the cost of EU enlargement. Those costs have been assessed recently. The Government will shortly be able to give further details of them.

I need to respond to my noble friend Lord Desai who accused some of us who advocate enlargement of being romantic and emotional. I confess to being a little romantic and emotional about these things. When I was a young man I travelled quite extensively. In the early 1960s I visited rural Ireland, autarkic and fascist Portugal, and communist Czechoslovakia. Many parts of Ireland and Portugal were virtually third world. Czechoslovakia, although apparently more advanced, was repressed, albeit with a slight air of hope which all too soon was taken away by Brezhnev's tanks.

As has been said in the debate, Ireland is now at 90 per cent. of the EU average, on a par with the UK. Portugal, like Spain, is a burgeoning society committed to democracy and with an impressive economic record, much of that due to the efforts of its own people. A large part of the economic improvement and the consolidation of democracy in Portugal, Spain and Greece has been aided immeasurably by their membership of the EU. Regrettably, Czechoslovakia, like the rest of central Europe, went backwards from the 1960s both in terms of its economy and human rights.

In the way that we helped Ireland, Spain, Portugal and Greece, we owe it to the Czechs and the other countries of eastern and central Europe which have suffered 40 years of communist repression, fascist repression and, before that, war, to help them to come into the democratic world of western Europe. In the end, it was not western pressure; the people of those countries defeated communist governments in a remarkable and almost bloodless revolution. We spent 40 years spending vast sums of money on military hardware when we thought they were pawns in Soviet expansionism. I find it difficult to reconcile that with being begrudging about the relatively small sums of money which we need to find in order to bring those countries into the European Union.

The Government wish it to be on record that they agree with the committee on the potential costs of enlargement and the uncertainties surrounding it. We do not in any way regard those uncertainties as reasons for delay. Quite the opposite. Enlargement negotiations and ratification will take time. Even successful outcomes will be subject to lengthy transitional periods. Internal institutional and financial reform must take place in the interim, but we must start this process now.

In a few days' time, the Prime Minister will go to the summit in Luxembourg seeking progress on at least the principles for that institutional and budgetary reform. But it will be under the British presidency that we will see the first momentous steps in the European conference and in the bilateral formal negotiations towards creating a common European home for eastern and western Europe. The Prime Minister will be launching that British presidency tomorrow and enlargement will be central to his themes. This Government stand ready to undertake their historic responsibility in that respect, but at the same time we are humble enough to continue to take advice from your Lordships' committee and from my noble friend Lord Barnett.

9.15 p.m.

Lord Barnett

My Lords, I thank my noble friend for those final remarks. I am delighted to hear that the Government will take note of all but one of our recommendations. I thank all noble Lords, particularly members of my committee, for their kind and generous remarks about my contribution. It was the committee's work, and I was delighted and honoured to have the pleasure of chairing such distinguished and able colleagues.

I thank the maiden speakers. When I listened to the noble Lord, Lord Garel-Jones, I thought that I was in the wrong debate. European monetary union was only briefly mentioned in our report, but he and my noble friend Lord Shore could not resist mentioning it. We had the single currency argument all over again. I am grateful to the noble Lord, Lord Garel-Jones, because I agree with him. However, my noble friend Lord Shore knows that I agree with him on most issues but I disagree with him entirely on anything to do with the EU. I disagreed with him again today. I thank both maiden speakers for two excellent speeches. My noble friend Lady Young of Old Scone was good on the environment. I am sure that the House was delighted to hear both maiden speeches and the non-maiden speech of the noble Baroness, Lady Ludford.

I am delighted by the way in which the House received our report because I like to think that it was an excellent report. Perhaps I may make one comment to my noble friend Lord Whitty about his disagreement with our recommendation on a possible review of the own resources issue. Although I was not happy, I was not too surprised to hear what he said. In some ways, I was pleased because it means that the Government may have read the report. I was worried that they may not have done so. It elicited from my noble friend an answer to a question asked by the noble Baroness, Lady Williams, which included the words "if circumstances change". I noted those words carefully in a speech by my right honourable friend the Chancellor of the Exchequer in another context. I hope that they will enable us to join a single currency well before a fixed time of five years. But that is another matter. I assume that my noble friend used the words "if circumstances change" with the authority of the Cabinet itself. I see him smiling in agreement and I hope that I am not upsetting him too much. I do not want to see him sacked because he is a good Minister.

The noble Lord, Lord Higgins, speaking from the Opposition Front Bench, reminded me of the days when we used to debate across the Floor of another place. I was not surprised to hear a highly intelligent contribution. He referred to the problems of agriculture and what they might be with the incoming countries. I did not refer to it before but it is worth quoting a reply from Mrs. Hübner. It is Question 39 on page 11 from the noble Baroness, Lady Williams. Mrs. Hübner was an excellent witness and she said that: there is a myth of Polish agriculture which is based on the real agriculture of Poland that we had in the past. The last census, the 1996 census, I think shows that Polish agriculture is not as it is presented very often. First of all, it is not for example, 28 per cent. of the population, it is just 25. Out of the 25, one third, more or less, depends on the income from agriculture. Around 50 per cent. work". That demonstrates to me that one should be extremely careful about the use of statistics. The plain fact is that when it comes to agriculture in Poland, the people are not selling what they produce. They produce for the family and one member of the family or another works elsewhere. So that destroys many of the statistics we often take too much for granted.

I learned my own lessons this evening from the noble Lords, Lord Higgins and Lord Wallace of Saltaire. They gave me an explanation of the regatta approach, to start negotiations with the 10, rather than the five plus one which we should prefer. I had not realised—and indeed the noble Lord, Lord Wallace of Saltaire, obviously did not realise—that it could be a handicap race. The noble Lord, Lord Higgins, is a former senior athlete in other fields. He knows about these matters and he said that it may be a handicap. I hope that it will not be a handicap when we come to start negotiating on a bilateral arrangement.

It has been an absolutely excellent debate and I am obliged to everyone who has taken part in it. I hope it will be helpful and I hope that it will be read widely. I hope that somebody will take note of the recommendation that copies of our report should be made available to those attending the meeting of the Council in Luxembourg on 12th December. It will be extremely good reading for them. I hope that they will take note of the majority of our recommendations. We know that at least one recommendation will not be accepted by the Government. If they take note of our report, I hope and believe that that may contribute to a successful enlargement which will be to the benefit of all concerned.

On Question, Motion agreed to.