Future Financing of the European Union: ECC Report

HL Deb 22 March 1999 vol 598 cc1004-66

5.53 p.m.

Lord Grenfell rose to move, That this House takes note of the Report of the European Communities Committee on Future Financing of the EU: who pays and how? (6th Report, HL Paper 36).

The noble Lord said: My Lords, with your Lordships' leave I begin by paying some well-earned tributes. The members of Sub-Committee A, whose names are listed in Appendix 1 of the report before this House, worked very hard over the five weeks available for conducting this brief inquiry into the future financing of the European Union. I thank each and every member warmly for a report which is well focused, convincingly argued and extremely timely.

It being a short inquiry, we dispensed with the services of a specialist adviser, but were excellently assisted by our Clerk, Dr. Elizabeth Hopkins, whose insights into the subject and drafting skills contributed immeasurably to the inquiry and to the writing of our report. We are very grateful to her for that.

The committee felt that it was important that this inquiry be conducted, and the report produced and then debated in your Lordships' House, before the Berlin European Council which begins the day after tomorrow. That meant that we had to act fast and I am pleased that the Government, in their written response, told us that the report has been taken into account in formulating the UK's position for the forthcoming council.

Because of the short timeframe, we were unable to take account of developments in negotiations on the Agenda 2000 package occurring after 21 st February. But nothing which has happened, including the resignation of the Commission, renders this report obsolete. Many of the problems it discusses are those with which the new Commission, when it is put in place, not to mention current governments, will still have to grapple even if agreement on Agenda 2000 is reached in Berlin.

We had first-class witnesses in London and Brussels; their names appear in Appendix 2. We thank them for their enlightening and authoritative contributions. We are grateful also for the excellent briefing given to us by Britain's Permanent Representative in Brussels— Sir Stephen Wall—and by his embassy staff. We are equally grateful to Her Majesty's Treasury and in particular to my honourable friend the Economic Secretary for providing the Government's response to this report in the unavoidably short time between its publication and this debate. We look forward to hearing more of the Government's views on this when my noble friend the Minister replies.

I should add that the report was agreed unanimously and I congratulate my colleagues on that. But I hope that where there were differing shades of opinion, which eventually merged into a consensus, no one will hesitate to ventilate them in this debate.

Our inquiry was prompted by a Commission report published last October which took a hard look at the revenue side of the EU budget and at the impact of expenditures on member states' net contributions. The Commission's broad conclusion was that all was not well and that there would have to be changes made if the expenditure proposals put forward in Agenda 2000 in July 1997 were to be successfully implemented. At 719 billion euros over the next seven years—the equivalent of just under £500 billion—the Commission's proposals for EU expenditure are modest compared to total public sector expenditure in most member states. Nevertheless, as my honourable friend the Economic Secretary reminded us, the UK's contribution to EU expenditure this year amounts, after abatement, to 1 per cent. of our GNP or 4p on our standard rate of income tax.

That is what we pay now, and it worried our committee members from the very outset of our inquiry that the British people at large have virtually no knowledge of what they are paying and what they are paying for. Enshrined therefore in two of our opinions is a call for greater transparency in funding and even closer national scrutiny of EU spending than at present, and on a continuous basis. With that in mind, our inquiry focused on the potential sources of funding and the problem of budgetary imbalance; that is to say, the issue of inequity among member states' net contributions. I will certainly not weary your Lordships with a recital of the 24 opinions we reached; they are set down and summarised in Part 2 of the report. But let me rather draw attention to some of our more important conclusions and how we reached them.

As your Lordships will know, the 1995 "own resources" decision, described in paragraphs 26 and 27 of our report, set a ceiling of 1.27 per cent. of the EU's GNP on the amount of resources that could be raised from EU member states which, since the EU cannot borrow, also sets the ceiling on expenditures. That ceiling must be reached in steps by 1999 and remain at that level thereafter.

Though we in the committee were aware of the effects of lower growth rates now forecast for both existing members and candidate members, our report agrees with the Treasury's view that the 1.27 per cent. should be sufficient up to the end of the Agenda 2000 period, including therefore funding enlargement, as the evidence of the Economic Secretary said, provided we get stabilisation and the reform of the Common Agricultural Policy". But whether that ceiling will give sufficient headroom after 2006 struck us as highly uncertain, depending as it would on the future growth of an enlarged Union and the extent to which it had proved possible to reform existing spending programmes. Consequently, we did not share the Government's implied expectation that the ceiling would not have to rise after 2006. Although gross contributions to the EU budget are roughly proportional to members' GNP, some consider that under the present arrangements they are contributing too much to the EU in relation to the benefits they receive in return.

In a union of richer and poorer countries, equity would never demand equality of net contributions but there is no disputing that the present system of contributions does not produce equitable results. Germany, currently financing some 28 per cent. of the EU budget and paying a net contribution equivalent to 0.6 per cent. of its GNP, says that it will not go on paying such a disproportionate share. The Netherlands, at 0.7 per cent., is worse off and Sweden and Austria are not far behind—slightly worse off than the United Kingdom at 0.16 per cent., and lying in fifth place among the five biggest net contributors.

Paragraph 54 incorporates an analysis by Professor Iain Begg of South Bank University of the 11 remaining states, explaining why some are net contributors and others net recipients. It would be simple to conclude that some relatively prosperous states contribute fairer shares. We considered the principle of the juste retour— getting back from the EU in financial terms what one puts into it, and we agreed with Senor Colom I Naval of the European Parliament and rapporteur of its Committee on Budgets, that many benefits of membership had nothing to do with the budget.

In London, the Economic Secretary to the Treasury told us that membership of the European Union is immensely valuable to the United Kingdom as well as to other Member States". Nevertheless, our report notes that however great the benefits, financing the EU on the present basis can continue only if all members are content—and they are not.

Remedies to perceived imbalances will not be found simply through changing the pattern of gross contributions. Remedies will also have to be found on the expenditure side, through changes to the amounts spent overall and/or their distribution among individual member states.

On the revenue side, we looked at the three options for change proposed in the Commission's October 1997 report—revision of the own resources system; modification of the UK's abatement; and the introduction of a generalised correction mechanism in the form of a general reassessment of contributions. One member of our sub-committee doggedly and absolutely rightly insisted throughout that there must be a simpler way of raising the required revenue from member states. With that in mind, we looked first at the four own resources—the two traditional own resources of agricultural levies and customs duties; the third resource of contributions based on VAT; and the fourth resource of contributions collected from states on the basis of their GNP.

Paragraphs 61 to 70 set out how we reached the view that the two traditional own resources and VAT-based resource, which are all declining as a proportion of revenue raised, are not only generators of bureaucracy and highly prone to fraud, but are arguably systematic sources of inequitable burdens on member states. We felt that they should be abolished, which would certainly help some large net contributors.

That left the GNP-based resource and we had much sympathy with Commissioner Erkki Liikanen's view that exclusive reliance on that resource would improve the fairness of the system as the most objective criterion for national capacity to contribute. The Economic Secretary agreed that that would bring an improvement in equity, if only small. Therefore, we considered how that equity could be improved further. We concluded that the revenue raised from each state should be based on GNP per capita rather than straight total GNP—and that gross domestic product might be a better proxy for the contributory capacity of states than GNP.

We grant that relying solely on per capita GNP or GDP-based resources is not so popular with people such as Senor Colom I Naval, who argued strongly that unless the EU obtains through taxation some real own resources that do not transit through national budgets, the financial autonomy of the EU is bound to be undermined further. The Economic Secretary told us that the Government do not see more financial autonomy for the EU as desirable. In any case it was the Treasury's hunch that there probably would not be a consensus for renegotiating the existing own resources decision. Neither did Commissioner Liikanen see the need for modification at an early stage.

The committee remains strongly convinced that renegotiation of the own resources system would be necessary in due course and that should be sooner rather than later.

That brought us to the difficult question of the UK abatement—an arrangement which has brought significant benefits to a country which is the fifth highest net contributor to the total budget but only the tenth or eleventh most prosperous state among the 15, depending on the measurement used.

The abatement is based on the decision made at the 1984 Fontainebleau Council that any member state bearing excessive budgetary costs in relation to its relative prosperity could benefit from a correction. Paragraphs 85 to 91 set out why the Government feel strongly that the abatement, currently worth £2.1 billion a year, remains fully justified on the ground of fairness under the present system of contributions to the EU budget and why the Commission thinks otherwise.

Commissioner Liikanen says that the world has changed since 1984 and Britain's abatement is not an easy case to defend. We readily accept, in Opinion 16, that without abatement the UK would remain one of the largest net contributors, but we could not ignore that whereas in 1984 the UK was the only member state making a substantial net contribution in terms of percentage of GNP—as seen in graph 3 on page 4—four states are now making larger net contributions. They are the Netherlands, Germany, Sweden and Austria. In the same opinion, we agreed that some way of remedying the situation would need to be found, given that those four countries are dissatisfied—to say the least—that they are not accorded similar relief.

It became perfectly clear that if the existing rebate mechanism from which we benefit were applied to those four countries making excessive net contributions, that would—in Professor Begg's words—blow such a hole in the budget that the whole thing would collapse. Therefore, we looked for alternative remedies. A proposal by the four countries to grant budgetary corrections to all member states which qualified, but setting a threshold below which corrections could not be claimed, has support in some important quarters but is seen by the UK Government as a means of reducing the burdens of other net contributors by increasing Britain's burden and was, in the words of the Economic Secretary, grossly unjust. We agreed with her that to substitute one injustice for another will not improve matters, but a problem remains for the five net major contributors, Britain included. We felt that the rebate system, of which we are currently the sole beneficiary, may no longer be the best way of solving that particular problem.

In Opinion 18, we state our view that a realistic negotiating result for the United Kingdom would be agreement to forgo the abatement on condition that, and only when, the loss could be made up on a permanent basis through the savings of a reformed CAP and the stabilisation of expenditure overall by 2006 and, possibly, increased EU expenditure in the UK.

I stress the conditions that we set. Nothing could have been further from our minds than to recommend unconditional surrender of the abatement. That brought us naturally to the possible alternatives. We included increased expenditure in the UK tentatively because, as a net contributor, increased expenditures here, unless matched by cuts in other countries, simply add to the burden. The likely solutions lay in radical reform of the CAP, which currently accounts for 50 per cent. of the EU budget, and stabilisation of expenditures overall.

Since we closed our inquiry, negotiations on CAP reform have progressed, but there is no agreement yet at heads of state level on where to set the limit on direct payments between 2000 and 2006. The committee was in favour of the proposal to introduce co-financing by member states of agricultural spending of perhaps 25 per cent. of the total cost, provided the level of support agreed by the Council was adhered to by each member state and that savings for the EU budget would be real, not simply spent on other programmes.

While this would not have been an alternative to CAP reform, it would have reduced overall EU expenditure and, as the UK receives relatively modest amounts of CAP funds, its net contribution would have benefited somewhat from the effect of the overall savings to the budget. It is regrettable therefore that France— a substantial beneficiary of the CAP—has blocked the proposal, but I sincerely hope that we have not heard the last of it.

This brought us finally to the question of an overall stabilisation of EU expenditure by 2006 at the present level of 85 billion euro. As the Economic Secretary told us, the UK and the majority of member states regard stabilisation by 2006 as essential to provide the room to finance enlargement. But more than that, it would, in her words, be, the most effective way of limiting net contributions to the EU budget and thus would help other states who are large net contributors". Our report fully agrees with this and rejects the view of the Commission that stabilisation would make reform of the CAP impossible. We agree with the Government that the circle could be squared if "degressivity"—that terrible word meaning the reduction over time of compensation to farmers—was part of the reform package. At present it is not, and one can only pray that it will be by the end of the Berlin negotiations.

The other area where spending reductions could be sought is structural operations. We agreed that there is a need to continue to provide substantial funding for the most disadvantaged regions, but we also believe that cuts in funding received by existing member states are inevitable. The important point is to ensure that those cuts are manifestly fair. As to the cohesion fund, we echoed the conclusion of an earlier Select Committee report to your Lordships that continued cohesion funding cannot long continue for those member states which have attained convergence and have entered monetary union. However, as we note in Opinion 20, it is crucial that the cohesion fund be continued in some form so that new member states may be helped along the road towards convergence.

On a personal note, I feel that the chances of an agreement at Berlin are looking a little less gloomy today than they were a week ago. The seismic events in Brussels seem to have galvanised those who will be negotiating in Berlin. It now seems likely that the British rebate will survive, but with modifications which may not be attractive to the Government. Spain may get its way over continued access to cohesion funds, but for how long? Italy may recalculate and raise its contribution to the budget after the year 2000. In other words, a deal is likely to be done at the very last minute.

However, the impression remains that what will be brokered in Berlin will be only an incomplete reform. That is better than nothing, provided it does not further delay enlargement. But it still leaves many problems to be resolved: the continuing problem of budgetary imbalances between states; the need to reform the own resources system; the need for greater transparency in funding the budget and greater accountability in spending it; eliminating the continuing shortcomings in the CAP, to mention only the most obvious; and dare I add—although our report did not go into this—a move perhaps to zero-based budgeting in the European Union? These problems will still remain after the heads of state have left Berlin. That is why I humbly suggest that the report remains highly relevant and, I hope, helpful to the continuing debate.

In our report's concluding opinion, we suggest that Europe is a concept which to most goes beyond mere deal making. In relation to the security and prosperity of Europe, the budgetary costs to each member state, although not negligible, are none the less not exorbitant, but they are not yet equitable and that, they must be. That is the essential message of our report. I beg to move.

Moved, That this House take note of the report of the European Communities Committee on Future Financing of the EU: who pays and how? [6th Report, HL Paper 36]. —(Lord Grenfell.)

6.14 p.m.

Lord Skidelsky

My Lords, I start by congratulating the noble Lord, Lord Grenfell, and the Select Committee on their report on the future financing of the European Union. It is a fiendishly complicated subject, which the report has reduced to exemplary clarity. However, the Select Committee's hope—just reiterated by the noble Lord, Lord Grenfell—that greater transparency can be achieved under the present system; that, in its own words, we should know, what we are paying—and what we are paying for strikes me as being somewhat Utopian.

I doubt whether one person in a hundred understands the fiscal operations of his own government. The idea that the accounts of the European Union might become an open book seems to me to be a pipedream. It would certainly be a nightmare to all those who live off the honey pot. The recent mass resignation of the commissioners was a very belated recognition that fraud and corruption are endemic in the way the Commission uses the funds member states place at its disposal. This is always a danger when any group of people are given control over other people's money.

In national administration we take enormous care to ensure that politicians and officials are accountable to the taxpayer. Eight hundred years of our constitutional history can be read as a struggle to achieve such accountability. The officials of the European Union to whom we entrust £8 billion a year, or 5p in the pound of our taxpayers' money, are in practice, largely unaccountable to anyone for how that money is spent.

Most of the report's conclusions and recommendations are sensible, and will not give rise to political controversy. I would like to draw attention to three. First, the committee endorses the Government's view that, by the year 2006, the Union's expenditure should be stabilized, at its present level of 85 billion euros. Contrary to the Commission's own view, it concludes that with an "own resources" ceiling of 1.27 per cent. of the Union's total GNP, this will give it an adequate margin to spend on enlargement—although not necessarily thereafter—depending on what growth assumption is used. It points out rightly that this margin would be greater if the common agricultural policy were reformed, and the cohesion and structural funds more accurately targeted.

Secondly, the committee states: We do not see a directly collected own resource as a viable option at present, in either political or practical terms". We agree with that. To give the European Union its own independent tax base is to cross the line between a confederation and a federation, and we are pleased that the committee resisted this step, despite, I think, some prodding from the noble Lord, Lord Desai, and the noble Baroness, Lady Sharp.

Thirdly, there will be a general welcome for the report's conclusion that, cuts in the structural funding received by existing Member States are inevitable, and that, continued cohesion funding cannot be justified for those Member States which have met the convergence criteria". However, these conclusions, however sensible, fail to tackle the root problem of lack of accountability. In the long run we face a choice between two alternatives: eliminating the so-called "democratic deficit" at the Union level or handing back a large part of the Union budget to the member states. Since we in this party, and I believe most people in this country, do not want a federal Europe, we logically support the policy of budgetary repatriation.

The report is considerably less robust when it comes to the question of Britain's rebate, negotiated by the noble Baroness, Lady Thatcher, at Fontainebleau in 1984. This rebate was made necessary by the fact that Britain's net contribution to the Community's budget—the difference between its gross contribution and its receipts—was greatly in excess of its relative prosperity.

The present financing crisis—to which the noble Lord, Lord Grenfell, alluded—has arisen because four other countries, Germany, Austria, Sweden, and the Netherlands, also believe they are paying too much relative to the benefits they receive, and have formally asked for rebates. Germany, in particular, has indicated "vociferously", as the report put it, that it no longer wants to be Europe's milch cow. In the words of one of the witnesses, Professor Begg, who has already been quoted, the request for a general rebate will, if granted, blow such a whole in the budget that the whole thing would collapse". The general principles of the matter are reasonably clear; indeed, they are relatively uncontentious. Each member state should contribute according to ability and receive according to need—where have I heard that remark before?—so the richer states should be net contributors and the poorer ones net recipients.

However, these lofty ideals are very difficult to translate into practice for two reasons. First, it is very hard to agree a formula for contributions which is generally accepted as fair. For example, the report asks: should contributions be proportional to GNP or to GNP per capita? If one were to design a proportional tax system within a single state, the obvious measure of ability to pay would be the size of an individual's income; and, by analogy, money raised from member states should be a share of that state's national income per head. On this basis Britain's gross contribution to the budget would not be the third largest but the tenth largest. Although of course there are different ways of measuring per capita GNP, they do not affect the rankings by much, though they are at the source of the conundrum about whether Italy is more prosperous than Britain. As my noble friend Lord Boardman—I do not know whether he is here—argued in Appendix I to the report, a per capita funding formula would make rebating unnecessary. The report had a lot of sympathy with that view. Unfortunately, that is not how it is done, and nobody seems to be in favour of doing it that way.

The other problem, as the Treasury memorandum to the Committee pointed out, is that, there is no clear relationship between receipts and prosperity". Net receipts do not necessarily go to the poorest. For example, France, the seventh most prosperous economy, receives exactly as much as it contributes, whereas Britain, the tenth most prosperous, is a net contributor, even with the rebate. That is because 50 per cent. of the EU's transfers go not towards helping the poor but to subsidising the wealthy—in this case France's farmers—through the operation of the CAP, from which Britain's relatively efficient farmers receive disproportionately little. In other words, the total pattern of net transfers fixed by the Union's history, the original deals by which the Union was constructed, is haphazard and irrational.

The report then argues that Britain's rebate should be traded for a reform of the CAP and other funds, which would also help the other large net contributors. The idea is that price support for Europe's farmers should be run down and their replacement subsidies should also be run down. Britain's gross contribution would then be reduced and its net contribution consequently cut. In this connection, I very much regret that the report has given currency to the horrible word "degressivity". We now have an unholy trinity of progressivity, regressivity and degressivity. My computer showed good judgement by underlining each one in red, telling me that it did not recognise any of them. What is the opposite of degressivity? "Gressivity", I suppose.

All the report was saying was that income support for farmers should be tapered off—a sound phrase expressing a sound idea—but how likely is that to happen? The noble Lord, Lord Grenfell, referred to "co-financing" of farm support. The French have vetoed "co-financing" and the Commission will have no truck with tapering. It was rather bad luck that when the report was written it was not implausible to suppose that, the political will for CAP reform was reported to be emerging". All one can say is that the reports of the CAP's death were premature.

The Treasury memorandum therefore argued perfectly cogently that, desirable though reform of the CAP was in the general interests of the EU consumer, There is no medium-term prospect either of reform leading to a dramatic reduction in CAP expenditure or of the UK's share of that expenditure increasing substantially". That being so, we should go on vetoing any reduction in our rebate unless and until we have a proposition on the table to make our net contribution equitable without the rebate. I wish the report had stated that in those terms.

Noble Lords

It does.

Lord Skidelsky

My Lords, not quite. The report says that we should be prepared to trade our rebate for things that are very unlikely to happen.

In its Agenda 2000, the Commission has its own proposals for what it calls "a general corrective mechanism" for dealing with the financing problem. In each of its possible correction scenarios, designed to accommodate Germany and other countries, Britain would lose between 2 billion and 3 billion euros. The Economic Secretary rightly judged that, such a solution would be grossly unjust". It would be quite possible, though, to design a rational corrective mechanism. I offer one today. It would be based on the principle that the pattern of payments and spending should aim to achieve zero net budget balances for all member states, except for the structural funds. The structural funds would then be the chosen instruments for net transfers between member states. That would mean that some key members, such as France, Luxembourg, Belgium and Denmark, would have to pay a fair share for the first time. They would not like it; nor would Ireland. That is why it will not be considered.

This makes it all the more surprising that the report should apparently be willing to trade the solid ground of the abatement that we now have for what is little more than a blast of hot air. So the financing crisis will not be solved, certainly not by the time of the summit in Berlin in two days' time. The Select Committee's report has not suggested a solution but it has made an admirable contribution to the elucidation of the problem, and for that I am sure the House will want to express its appreciation and thanks.

6.26 p.m.

Baroness Sharp of Guildford

My Lords, I was honoured to be asked in December to join the committee which, at that time, was just beginning its work on this report. For me, as a new member of your Lordships' House, it has been a learning experience. I had a high regard for the work of the committees of your Lordships' House, having appeared before them as a witness on some occasions. I have also been an extensive user of the reports of your Lordships' House. It was quite pleasant and enjoyable to be a poacher turned gamekeeper in this respect. I wish to extend special thanks to the other members of the committee, in particular the chairman, the noble Lord, Lord Grenfell, who made me so very welcome. The noble Lord, Lord Tomlinson, was ill for a while during our deliberations and it is good to see him back in the House today.

It is quite clear that the crisis in the Commission which burst last week will dominate the agenda of the discussions in Berlin in the next few days. As the noble Lord, Lord Grenfell, said, any deal on the budget will be an incomplete deal. But the budget issue will not go away. In the end it will have to be an integral part of what will be a new constitutional settlement. That will be a requirement if the EU is to proceed along the agenda it has set for itself.

I have become well aware in the relatively short time that I have been here that some of your Lordships would prefer not to see the EU proceed with a future agenda but rather to wither away on the vine and proceed no further. I am not one of those. I was born just before the Second World War and I am very much one of the generation which has seen the creation in Europe of what Churchill, in the aftermath of that war, called "A kind of United States of Europe". He said, "We must create a kind of United States of Europe". It is amazing that in the past 50 years we have seen the two old antagonists of Germany and France coming together under the umbrella of what we now call the European Union.

However, perhaps more important is the fact that we have also seen countries like Greece, Portugal and Spain, which were dictatorships, using the rock of the European Union to anchor their fragile democracies and build their new economies. The agenda of the European Union will provide the rock on which the newly established democracies of central and eastern Europe, for so long under the yoke of the Soviet Empire, can anchor themselves and go forward. That is the task which underlies the constitutional settlement and, for that matter, the budget settlement. That is why we are considering the budget issue today. It is an extremely important step for the European Union and one that we should not underestimate.

Some noble Lords may have heard of Amartya Sen, Master of Trinity and Nobel prize winning laureate in economics, talking the other day about his new book, Development and Freedom. I heard him on the radio and I was struck by what he was saying. He said that he had become convinced over the course of his life that, on the one hand, freedom of speech and freedom of conscience but also freedom from hunger and freedom from disease were the right aims for development—not GDP growth or GDP per capita, but freedom. But, he said—this was the most significant feature—freedom is both the end and the means by which to achieve that end. In helping the fragile new democracies of central and eastern Europe, we are both helping them to anchor representative democracy to their way of life and creating in the future new and prosperous markets for our own goods and services. However, in order to do that, we must be in a position to divert some of the resources from the present EU budget towards them. That is why there is a crisis in the budget and why we need to consider these issues.

I wish to turn now to the budget and to make two points about it. First, the European Union's annual budget is approximately 100 billion euros. That is about £70 billion. It is not an insubstantial sum but, equally, it is less than we in the UK spend annually on social security. That £70 billion is spread over some 380 million people in the 15 nations of the European Union. A disproportionate share of the budget—some £30 billion—goes on the common agricultural policy. Another 35 per cent. —£25 billion—goes on the structural funds. Those are the two main demands on the European Union's budget. The British rebate is worth 3 billion euro—£2 billion or the equivalent of 1p on income tax. However, the problem with the budget arises from the unsatisfactory and archaic way in which the funds for the budget are raised and spent.

As the noble Lord, Lord Grenfell, made clear, although there are many different sources, what is paid in is roughly, for most countries, 1 per cent. of GDP. The discrepancy arises in what different countries receive from the budget. The UK, because it does not qualify for large payments under either the common agricultural policy or the structural funds, receives very little. That is the logic for the UK budget rebate. It is the logic that underlies the settlement made in 1984 and it remains the logic for our special treatment today. However, I think that the Treasury is disingenuous in some of the arguments that it makes. We could receive much more funding under the structural funds and under the common agricultural policy if we were prepared to co-finance.

Under the common agricultural policy new initiatives are being introduced which aim to move away from paying large subsidies for vast fields of wheat towards helping the rural economy restructure itself. But those require financing side-by-side with the funds that are available from Brussels. We are not paying out to co-finance such schemes. Exactly the same point arises with the structural funds. We could receive far more from the structural funds for our areas of urban deprivation if we were prepared to put more money into our own regional budget.

The discrepancy between what we pay in and what we get out of the budget need not be as great as it is. Even so, there would be a considerable gap under the present system. As I have said, that remains the logic underlying the UK abatement. As the noble Lord, Lord Grenfell, made clear, the problem is that the discrepancy arises in relation to other countries. Sweden, Austria and the Netherlands have made a claim for special treatment. Germany has done so also. In many senses it remains the paymaster of the Community and, with the burden of the integration of the eastern länder on its budget, is by no means as rich as once appeared to be the case. Germany has always made a special contribution towards the UK rebate and is now saying in effect that it wants to renegotiate the whole budget. Sweden, Austria and the Netherlands argue that, if the UK receives a rebate, they should have one too. But if everyone followed the same logic as the UK, the EU budget would collapse. That is the crux of the issue.

The Community is in the process of renegotiating the common agricultural policy. A good deal of movement has been made. If we are to follow the route of enlargement, it is essential that we reform the CAP, because we cannot possibly afford to have Poland within the Community if we retain the CAP as it exists today. There is movement there, whatever the noble Lord, Lord Skidelsky, says. At long last there is a wish on the part of the Germans to see some renegotiation within the CAP.

In the report we argue that there is potential for reform of the CAP and that that would not be at the cost of jeopardising the enlargement process. To my mind, enlargement is the vital next step for the Community. We must help the countries of eastern and central Europe to retain the freedom which we have so long enjoyed and which will in turn help them restructure and rebuild their economies. I commend the report to the House. I believe it is the right way forward.

6.39 p.m.

Lord Harris of High Cross

My Lords, I congratulate the noble Lord, Lord Grenfell, on his forthright opening remarks. I readily pay tribute to the Select Committee for all its justly acclaimed work. This report, Future Financing of the EU, is well up to the outstandingly high standards that we have come to expect. It is a matter of some regret to me that I shall have to launch into some criticism of the apparently unanimous central conclusions. First, I applaud the committee for its lucidity, although it invests the EU mumbo-jumbo with undeserved coherence. Its diligence in marshalling so much complex data provides matter for half a dozen Ph. D theses.

Thus one might go deeper into the question of GDP versus GNP as measures of economic welfare on which national net contributions are supposedly based. I would argue that net national income is a better guide than gross national product, although all these measures have a degree of arbitrariness, because they are severely distorted by the rampant black markets that are caused by over-taxation throughout Europe. Another study might examine the idea of a single tax levied from Brussels rather than fiddling further with this rag-bag of so-called own resources. Yet another might look closely at the Commission's own list of eight possible candidates for still further taxes, such as an EU-wide energy tax; a communications tax; a corporate income tax; an earmarked personal income tax; a Euro-supplement to VAT, or to tobacco and alcohol duties. Finally, I should like to see an honest Ph. D assessment of the costs and benefits of this ever-encroaching Europe project.

To speak frankly as an increasingly convinced Euro-sceptic, my chief criticism of the committee is that its membership, like the witnesses, may not sufficiently reflect the fundamental balance of doubts shared by the majority of independent economists known to me. The latest scandals over EU fraud and incompetence must surely provoke doubts about the amiable indulgence with which the committee views the shambolic finances of this long-running Brussels pantomime. Buried beneath the jargon of "own resources, traditional resources, third and fourth resources", to be supplemented perhaps by a "fifth resource", lies a tangled web of levies, duties, VAT-based and GNP-based contributions. That is the debit side. On the credit side are the kick-backs received by some in the form of CAP, cohesion, structural and administrative payments.

Struggling to comprehend what goes on risks stumbling into a snake pit of politicians and apparatchiks—all working the system back stage, trying to pay less and get more at the expense of everyone else. Some countries, like the UK, end up receiving less than they pay in, while others appear to run off with the swag. But allowing for bureaucracy, the fiscal freight charges in both directions, and the low priority of many of the structural spending projects, most of the 15 nations are in the position of traders buying euros at 1 euro 20 a time!

One of the committee's top Eurocrat witnesses rejected complaints by net contributors about the cost of Brussels by pointing to the non-financial benefits, such as sharing in a common market. It brought to my mind the picture of Sir Leon Brittan standing at the entrance to a shopping centre rattling a collection box for access to a competitive market. Anyway, what about the costs already imposed on consumers by farm subsidies and business compliance with thousands of directives and regulations?

The same lofty complacency was displayed by another former top member of the Brussels nomenclatura on BBC radio's "Any Questions?" last week. Out of delicacy I shall not mention his name. He excused the latest financial irregularities as only what might be expected from any large organisation. He went on to say how modest were the EU budget and staff, considering—wait for it—that they "look after the affairs of 350 million people". But not perhaps quite as well as they look after their own affairs.

Unfortunately, the economic witness to the committee seemed to share similar Euro-phoric delusions, without a redeeming glimmer of healthy scepticism. Thankfully, the British Treasury witness repeatedly provides a welcome douche of correction. For example, against the trivial claim that trade with the EU is a benefit worth paying through the nose for in taxation, the Economic Secretary calmly points out that this: takes no account of increases in exports which might have happened independently of EU membership, nor of the corresponding increase in imports". The truth—which incidentally punctures the weary CBI case for signing up to the euro—is that our trade (visible and invisible) with America and the rest of the world now exceeds that with the EU and is growing far more rapidly.

Returning to the central issue of the budget, paragraph 15 of Part 2 of the report sets the stage with an astounding admission: We are already being taxed to finance EU expenditure, yet we have virtually no knowledge of what we are paying—or what we are paying for". Alas, the committee does not enlighten us on the second half of that unequal equation.

The committee's economic witness seeks to minimise the burden by expressing it as the average cost spread over the entire EU population, which he says is a mere one-sixth of what we spend on the NHS. Along comes the Treasury with a more meaningful assessment; namely, that the cost to the UK after the abatement is £8, 000 million, which is 1 per cent. of GNP and equivalent to 4p on the standard rate of tax. Surely that makes it all the more surprising that the committee should be ready to offer up the UK abatement in negotiation on the future EU budget. Of course the committee wants something back in exchange, but it stops well short of my price, which would be the repatriation of the CAP under World Trade Organisation rules and the phasing out of arbitrary and distortionary cohesion and structural subsidies. That would be a bargain worth striving for. Not only would our abatement become unnecessary, but the so-called "own resource ceiling" could drop well below 1.27 per cent., perhaps closer to 0.27 per cent., and our net contribution would drop towards zero along with everyone else's.

Such a clean, principled renegotiation would have many advantages. Not least, it would finally purify this sordid and sullied project. It would sweep the Augean lobbies clean of corrupting backstage deals, often amounting to little more than Commission payments for support by such perpetual beggars as Ireland, Greece, Portugal and Spain. Above all—and this is my earnest and consistent message—such a fundamental review would redirect attention to the historic engine of economic progress, which is the mutual enrichment of unhindered free trade in an expanding global market.

6.48 p.m.

Lord Barnett

My Lords, the noble Lord, Lord Harris of High Cross, knows very well that my fondness for him is matched by the extent to which I disagree with almost everything he says on European Union matters. With him, it is not simply an emotional spasm; intellectually, I know where he stands. I understand his point of view, and disagree with it totally. In or out of the European Union, there is need for a sensible budget. The noble Baroness, Lady Sharp, says that if we stick to the present system the budget will collapse. I hope that the noble Lord, Lord Pearson of Rannoch, will not mind my saying this; indeed, I am sure he will be delighted. I note that he nodded in total agreement, as he wants to see it collapse.

I start by congratulating my noble friend Lord Grenfell and the committee. They have done your Lordships' House a great service in dealing with this difficult problem. The noble Lord, Lord Skidelsky, made a good point. He said he doubted whether many people understand the UK budget, let alone the European Union budget. He could have gone further and expressed doubt about whether many people understand their own family budget. From my own old days I found that that often applied to clients, their businesses and their families.

I wish to stick to the one point the committee made in relation to the rebate and the general financing of the European Union budget. Under the present system, the committee makes the fair point that equity never demands equality of net contributions. I see that the Government agree with that, and so do I. However, where I strongly disagree with the Government's response, as Ministers may not be too surprised to learn, is in its rigid and inflexible position on the rebate. I strongly agree with the committee and might have been tempted to go further than saying that rebates may no longer be the best way of solving the problem. The committee is absolutely right.

It may be a surprise to the Government that I agree with them occasionally, but I do agree with them that nothing in Agenda 2000 would compensate the United Kingdom for giving up the rebate. On that the committee is right. But that is now. It is not necessarily what will happen or what we should seek to change. The committee puts forward a number of sensible proposals for changing the whole budget scenario. It even goes so far as to question GDP and GNP. Everyone who understands their own budget understands that there is a difference between GDP and GNP. But the committee puts forward the question of whether member states should pay as a proportion of their per capita income. That is at least worth consideration in any renegotiation.

The urgency is spelt out by the question of enlargement which has all too often been shirked. Everyone supports enlargement, at least nominally, including the Eurosceptics. They think it an easy way of dealing with the problem. We have such a large Community; we do not need to worry any more about financing or anything else. There is no chance whatever, it seems to me, of achieving enlargement without major reform of the finances of the European Union. I am not at all sure that we will get it even then. There are member states of the European Union, including major ones, who would not be in favour of enlargement. Although nominally they say they are, in practice they do not like it. I am getting worried. I see my noble friend Lord Bruce of Donington nodding in agreement. I have never experienced that previously on European Union matters. I take it that he agrees with me.

Stabilisation will produce only modest gains for the United Kingdom. I refer to the present proposal on stabilisation with which the Government agree. But stabilisation surely cannot be the end of the matter. Negotiations will need to go on. That is only the start, not the end.

I return to my main point about rebates. It seems to me that reform will never be possible if the UK or any other government stick rigidly to not being willing to give up a penny of a £2 billion rebate. If that is the approach and that of other member states, then we can forget about any possibility of reform. Is it not as foolish to say "never" on the rebate as it is effectively to say "never" on joining a single currency? That seems to me just as stupid.

The report makes clear that there is an obvious, simple case, in a complex system, for major reform and an early renegotiation. Of course, it is foolish not to recognise that it would be extremely difficult to get the kind of successful renegotiation most of us want to see. But we must try. In the UK case, to put it into perspective, if we gave up £1 billion of our £2 billion rebate, we should recognise this in the perspective of a money GDP next year of £925 billion. So let us get into perspective what we are talking about. We are talking about petty cash. Here is our Government sticking rigidly to a principle. That would be a crazy situation. If we gave up £1 billion of our rebate, in return perhaps we could obtain £2 billion by changes in the budget. So why start from that crazy situation? It seems sheer lunacy to do so if, for rather silly political reasons, there is a fear of being accused of giving up the so-called Thatcher victory. I say sheer lunacy because, with such vital net gains, to stick rigidly to not being willing to give up a penny of a rebate is a crazy way to start a serious negotiation.

I hope that the Government will reconsider what they have said—what the Minister said to the committee and what has been said since. Of course, one does not start by giving up a rebate. But if we are to seek early renegotiation of the whole financing of the European Union, it is vital. If we need those major changes—and I agree with the committee that we do—simply saying no again and again is not a sensible way of seeking to solve the European Union's major financial problem. I therefore agree with the committee and my successor, my noble friend Lord Grenfell, in all that is said in the report.

6.57 p.m.

Lord Howell of Guildford

My Lords, I gladly continue with the theme of fondness and disagreement with which the noble Lord, Lord Barnett, began his speech. Unlimited as my admiration is for the noble Lord, I shall not be able to agree with everything we have heard in the last nine minutes. I must also make a brief apology. As the debate is running late, it is possible that I may have to miss part of the wind-up speeches. I apologise for that, particularly after the lesson we had this afternoon in courtesies. However, we are running late and I must speak elsewhere later.

I confess that I find the report extremely disturbing. In a way that is a compliment. It is meant to be a direct compliment to the noble Lord, Lord Grenfell. He is my noble friend, as a matter of fact, and he is the chairman of the committee. A committee report should be disturbing. A report on this sensitive issue that came out saying, "Everything's fine and it's all going to work out well in Berlin" and so on would be no good to your Lordships' House. To have from such a distinguished and experienced chairman and committee of your Lordships' House the phrase in heavy black type mentioned by the noble Lord, Lord Harris of High Cross, that we have virtually no knowledge of what we are paying, or what we are paying for, needs to send the message that there is something profoundly and fundamentally wrong with the system we are examining. Vast and radical changes will be needed to get round it.

What is the root of the problem? The report describes it accurately. There is inadequate, vague, indeed almost untraceable, accountability. I wish to concentrate on that. We are looking at future financing. But financing is driven by expenditures. That is what it is for. And the expenditures are driven by decisions. The reality is that those decisions come pouring out and unless checked—as would apply to national governmental decisions leading to expenditure and therefore the need for new financing—they will grow. Unless those who make the decisions, with the consequent expenditures and generating the consequent financing need, are held to account vigorously and continuously, the whole machinery will expand.

The report talks about achieving stabilisation by 2006. That is a very poor target. I do not believe for a moment that it will be achieved. But even that target would leave the situation that the sub-committee has confronted so perceptively in a very unsatisfactory state. In addition to the very detailed and brilliant questions posed by my noble friend Lord Skidelsky, the question perhaps for the less expert is: who will check all of this? From where will the checks on accountability come? Before we begin to look at new ideas for the financing of this, that and the other by way of new taxes, how is the matter to be held to account? How can we control the driving mechanism for the expansion of expenditure that has been working so vigorously? One answer appearing in the media and current on many people's lips is that it is a task for the European Parliament because it has shown that it has teeth and that it can do it. However, while the European Parliament has performed a signal service with its latest investigation it has not had a reputation for curbing expenditure. On the contrary, it has been a powerful force for increased expenditure. All of its arguments with the Commission each year have been about why more has not been spent on this or that programme. With its co-decision procedures it has now become not only a calling-to-account watchdog and a legislature of the kind that we know in this country but part of the government and executive of Europe. It involves itself in legislative programmes that lead to more and more expenditure. There will be many more programmes like the famous Leonardo programme about which we have heard so much. That is a classic example of unaccountable and unnecessary expenditure.

Before we answer any of the questions on the budget rebate, stabilisation, own resources expansion or, heaven preserve us, the imposition centrally of new taxes directly on the citizens of Europe we must recognise what my noble friend Lord Skidelsky rightly said; namely, that there are two fundamental approaches and we are rapidly coming to the Y-fork in the road. I do not know whether that Y-fork will be recognised at Berlin with all the talk of fresh approaches. I rather doubt it. The Y-fork is the choice between moving towards a centralist or a constitutional European Union. I am aware that "centralist" is perhaps a loaded word. I do not intend to be too critical but that is where we are going now.

We hear suggestions that more power should be given to the parliament and that obviously the Commission should have more expenditure programmes and the power to tax. This is the classic centralist pattern. One has great organisations, perhaps in conflict with each other, trying to hold each other to account. Great organisations, perhaps of a pan-continental size, joust with each other for the government of Europe. I suppose that that was the pattern adopted towards the end of the Roman Empire when the Senate took more power as it ceased to hold the imperial authority to account; it just became a very powerful second kind of government. That is the centralist pattern and the path that we have followed.

That is to be contrasted with the constitutional pattern where we now seek to circumscribe much more effectively than in the past the powers and role of the Commission. We question whether it should have the initiative to legislate and propose, as it has in the past. We seek to impose accountability, not by giving more central power to pan-European institutions but by building up the abilities and initiatives of national parliaments. That is the constitutional route, and it is one I prefer. It is not the path we are now following but that may change. We are at the beginning of the talks on co-financing and we worry about the total inadequacy of the past pattern of accountability. That has grown up thanks to weaknesses in both the Commission and the parliament. It may be that when the Prime Minister talks about a fresh start in Europe he is thinking of going that way. It would be wonderful if that were so.

The constitutional role does not rule out the European Parliament which I believe does extremely good work as a watchdog. Obviously, it can play an increasingly effective role in scrutinising and doing the kinds of things it has been doing in the past few weeks. But the constitutional role insists that power should be remitted to the national parliaments. We in the national parliaments should gear up our methods of calling to account to a far higher level than we have so far, excellent though our work is. I am not averse to the possibility of some Members of the European Parliament participating in a reformed House of Lords. They are extremely well informed and see things that are about to happen way up the legislative stream before we are suddenly confronted with an instrument of expenditure.

Our system here is excellent. We have excellent committees and this evening we are discussing the report of one of them. But the system tends to be document-based scrutiny. We have to shift the whole system in the other place and in your Lordships' House into much higher gear and seek to involve ourselves in calling to account initial ideas and procedures that lead to endless growth of expenditure combined alas, as we have seen in recent weeks, with a considerable diversion of expenditure into improper channels.

The choice is between the centralist and constitutional approach. I should like to think that true constitutionalists will now make that choice and that at Berlin a major step will be taken towards circumscribing the Commission, clarifying its role beyond the endless grey area that leads to constant growth, redefining the role of the European Parliament as an efficient watchdog but calling the work of the Commission and the activities of the European Union to account through national parliaments five times more vigorously than we have so far.

7.6 p.m.

Lord Desai

My Lords, I regret that due to the lateness of the start of this debate I may have to leave before the end. I have an Inter-Parliamentary Union delegation to receive and it is my parliamentary duty to attend. That is not a private duty. I shall try to stay for as long as I can.

The noble Lord, Lord Skidelsky, said that the system of budgeting was haphazard and irrational. I entirely agree. What we have tried to do is to put it on a moderately rational basis. My argument is that our obsession with the rebate prevents us from doing anything rational about the budget. I go as far as to argue that when the UK won its rebate it was so satisfied with that great national triumph that it took its eyes off the ball and did not play a full part in the subsequent momentous events that took place within the European Community. Now many of the people who were then in power regret that they were so happy with the rebate that they forgot to look out for the single market. That is the only controversial comment that I shall make.

There is an anomaly about the budget. Spending per capita throughout the EU population is £155. That is not a large sum of money. The UK contribution, give or take the odd penny, is £155. At present, with the rebate, we contribute as much to revenue as per capita spending. If we lost the rebate we would spend about £14 more per capita: £170. That is not a gigantic sum. However, a large number of people feel strongly about it and so we should look at it rather carefully. Not only does the method by which the EU budget is financed have no reason or structure to it, but the way in which the whole question is always settled five minutes before midnight by a tired group of 15 heads of state or chief executives is no way to run a whelk stall.

There is nothing to urge the European Parliament or governments to think, "Hang on, there are other confederations and federations around the world. How do they do it?" There is much economic literature on burden sharing. Do we apply those principles? I asked the question of a witness. No one has thought about it. No one wants to start from first principles. People are in entrenched positions which they will not give up, but if they do not give them up we shall be in this mess for a long time.

I have been no friend of enlargement. I have said in your Lordships' House that I wish enlargement would never take place; and if it does, it will be a budgetary disaster. I have also always said that the European Union has not thought seriously about enlargement because it has not tackled its budget seriously. Unless it settles its budgetary problems, enlargement will not occur. Alternatively, it will take place but in such a horrendously messy fashion that we shall continue to have debates like this and there will be much dissatisfaction for a long time to come.

Many people like enlargement because it weakens the centralist tendencies in the EU. I was amused when the noble Lord, Lord Howell, said that there were two approaches: the centralist approach and the constitutionalist approach. The United Kingdom has always taken the centralist approach and it has done us no harm whatsoever. We do not want the European Union to take a centralist path, but there is nothing bad about centralism. We have benefited enormously from centralism. We are one of the most centralised states in the world. We would not have considered the welfare state without centralism. A decentralised United Kingdom would not have the same prosperity.

However, I digress. I refer noble Lords to the last page of the report. It has two tables by the European Court of Auditors. They demonstrate that, depending on how one calculates contributions in respect of agricultural levies, sugar and isoglucose levies and customs duties, we are either a net contributor or a net recipient. The difference is £3.5 billion. The figure fluctuates from minus £2 billion to plus £1.5 billion. They are smokescreen mirrors because no one has established correct principles.

In response to the spirit in which the noble Lord, Lord Skidelsky, addressed the issue, I ask: how should we approach it? I believe that the issue does not relate purely to per capita income. Per capita income is one dimension. Given the tremendous differences in the population of the European Union, we should consider per capita income and total GDP. A weighted average—it might be half and half—to decide contributions would, I believe, arrive at a reasonable judgment. I made some calculations, almost on the back of an envelope. The gross contribution of the UK would be reduced, but it would make the position more equitable.

The UK insists on sticking to the principle of per capita income. I feel shocked that our Ministers proudly insist that we are tenth or eleventh in the league and proudly display our poverty. We are a member of the G7. We are a permanent Security Council power. How can we be eleventh in the per capita income league? Why do we not say proudly that we are number three in the European Union as regards total GDP? Why do we always insist on our shortcomings? I have asked our Ministers whether it was Her Majesty's Government's policy always to stick to the eleventh position, perhaps even going down to 12th or 13th, so that they could have a greater rebate. I was given an evasive answer.

I have never liked league tables. They are somewhat fraudulent. I draw your Lordships' attention to the very useful Table 3 in the report. If one adds up the UK's rank on total GDP and per capita GDP, and compares the contributions of different countries by their rank—it takes some calculation but perhaps noble Lords will take my word for it—high ranking countries are the net contributors, including the United Kingdom. There is one anomaly: the difference between the German contribution of 11 billion euros and the next largest contribution, that of the United Kingdom, at 2 billion euros. The difference is far too large. The anomaly has developed and some way will have to be found to correct it. The noble Lord, Lord Skidelsky. said that everything else should be balanced out and only structural funds should be left as an instrument of mechanism. It is an interesting suggestion which we should perhaps follow up.

I also believe that we should devise a system of contributions that is not based on mechanisms which are subject to fraud. The noble Lord, Lord Boardman, suggested a single identifiable contribution—I would prefer it to be based on total and per capita GDP—that was not accompanied by stories of fraud, or debates on the income of Italy, and so on. In any such confederation there should be "progressivity" (if I may use such a horrible word) in contributions. The richer countries should contribute more; otherwise we cannot sustain any kind of Community.

I do not believe in a juste retour. If we based a national policy on juste retour the state would be bankrupt. I do not want as much back from the state as I put in because I am relatively better off. I can put in more than I take because that is the only sensible way to finance the state. If we all received as much back as we put in how would we build roads, and so on?

To conclude, we need a serious, rational, calm consideration of the principles of European Union budgeting, leaving aside the rebate for the time being. I very much agree with what the noble Lord, Lord Barnett, said. Until we do so, this mess will continue. The position will not get better but worse. The report points out that there are ways out of the mess. We may not have suggested explicit solutions, but we have suggested that the present system is not the way to go forward.

7.18 p.m.

Lord Williamson of Horton

My Lords, first, I welcome the report of the Select Committee on the European Communities on the financing of the European Union. I have read its reports regularly and I believe that this report is a valuable contribution to improving the United Kingdom's position within the Union. However, I intervene principally on one point: the United Kingdom rebate. I do so because it is an important point; and because I was a member of the team which, under the command—I think that the word is accurate—of the noble Baroness, Lady Thatcher, negotiated this rebate. I was present when the noble Baroness rejected in a convincing manner some offers on the rebate. I was also present when she accepted the rebate. So for my part, that rebate is like a baby son to me.

But I have noted of course, as have many noble Lords here, the Select Committee's views which have been quoted; namely, that the rebate "should be negotiable" as part of an overall settlement delivering the results of fairer net contributions and: It seems to us that a realistic negotiating result for the United Kingdom would be agreement to forgo the abatement on condition that—and only when—the loss can be made up on a permanent basis through the savings of a reformed CAP and stabilisation of expenditure overall by 2006, and possibly through increased EU expenditure in the United Kingdom". I recognise that that opinion is conditional and presented very carefully. Nevertheless, we must be careful that we do not find ourselves on a slippery slope. I do not consider that at this time the conditions will be met and accordingly, I side with the Economic Secretary to the Treasury when she informed the committee that: The Government is determined to maintain the rebate". I believe that there are good arguments for such an approach which I should like to draw to the attention of the House. First, the UK abatement which was negotiated at Fontainebleau is an intrinsic part of the current own resources decision. That decision was adopted by unanimity and can be changed only by unanimity. When that was first negotiated, it was an essential point for the United Kingdom.

Secondly, although the Select Committee points out rightly that the sums involved in the European Union budget are relatively small as against total public expenditure in most member states, they are by no means negligible and the present abatement system gives an assurance to the United Kingdom or, more accurately, gives back, as the noble Baroness, Lady Thatcher, would have said, resources which can be used directly to train more doctors, to educate more people and to use for whatever purpose the Government think fit.

Thirdly—and this is a point which I genuinely believe to be very important in the negotiations and which has not been raised generally—the system which we have in place at present ensures that if the UK were to gain more from changes in financing, for which there may be good reasons, the abatement would automatically be less. The reason for that is that subject to certain rules on calculation, the abatement is broadly equal to 66 per cent. of the UK's unabated contribution to the Community budget, less its receipts. Clearly if our unabated contribution and/or our receipts were to change, we could receive 66 per cent. of a smaller figure. It is thus a method of correcting unfairness in the budget but it is also a self-correcting mechanism.

Those three arguments are strong for the retention of the rebate in its present form at this time. Agenda 2000, which is referred to quite often, is a comprehensive package which deals with negotiations with the applicant countries, agricultural reform, structural funds and the budget up to 2006. In that basic substantial document, there is no proposal to change the UK abatement at this time. Rather to the contrary, the European Commission document, the main basic document for the negotiations, states that over the period to 2006, the maintenance of the current financing arrangements and the effects of the reform of the main Community policies are not expected to lead to major changes in the budgetary positions of the Member States". Consequently, the uncertainty surrounding the relative prosperity of the UK led the Commission to propose postponing a re-examination of the rebate mechanism until after the first enlargement.

That is contained in the basic document which is being discussed in Berlin and elsewhere. On that basis, the UK can rightly argue that the current package of agricultural reforms, structural policies and progress towards enlargement of the Union does not need to include any reconsideration of the UK abatement.

It is correct—and the Select Committee examines this in its report—that in a later document the Commission has suggested three possible courses of action, including a reduction or phasing-out of the abatement which could address the imbalance, if there were a political consensus". But second thoughts are not always best and I do not form part of a political consensus on that point. It is a perfectly defensible negotiating approach to base oneself on the elements of Agenda 2000 and not to disturb the balance of that document by introducing the question of the UK abatement which was excluded from Agenda 2000.

Finally, the Select Committee deals extensively—and a number of noble Lords have commented on it—with the question of a broader reform of financing. That is a different and wider point. It is extremely important. But I share the view of the Economic Secretary to the Treasury that it is not for the immediate future because it is not going to be negotiable in the immediate future. However, I believe that the Select Committee is right to concentrate on a GNP per capita approach in the medium term and, as we already have a GNP-based part of the resource system, that would make it easier to negotiate.

The defence of some other current elements of the financing, such as agricultural levies and customs duties, on the grounds that they are the Community's own resources seem to be now to be largely theoretical.

I conclude that this is not the time to abandon my baby, the UK rebate, on the steps of the Berlaymont or on the steps of the Breydel buildings in Brussels as the conditions suggested by the committee are not likely to be met. However, for the longer term, the committee's views on a medium-term objective of moving to a GNP per head basis for financing certainly deserves most serious consideration.

7.27 p.m.

Lord Tomlinson

My Lords, like the noble Baroness, Lady Sharp, perhaps I may say how pleased I am to be a member of Sub-Committee A and how grateful I am to my noble friend Lord Grenfell for his support, advice and guidance during the work of that committee. I apologise for the fact that illness precluded me from playing a full part in the work of that committee. However, because I was not able to participate in its deliberations I can perhaps be more objective about them.

Much of the Select Committee's report is clear and relatively non-controversial. The statement that spending should be stabilised at current prices—about £85 billion—is not only clear but is almost universally accepted. That must be done not only by strict adherence to budget discipline but by a number of other endeavours into which the report does not have an opportunity to go fully.

It is quite clear, for example, that in future, the European Commission must follow the advice given so clearly by Commissioner Liikanen to follow policies of critical mass, policies where there is clear added value in undertaking projects at the European level. That really does mean that if we are to follow the policies of critical mass, there must be equal rigour in weeding out the policies which are no longer appropriate to be undertaken at European level.

Towards the end of his speech my noble friend Lord Grenfell referred to the use of zero-based budgeting. That could be a major contribution both to the process of budgetary discipline and, through that process, to the stabilisation of the budget. We must make sure that some recurrent programmes rejustify their utility in terms of European added value.

At present, in a number of relatively small programmes, we see some sort of European game of snakes and ladders but on a board which still has all the ladders there but without too many of the snakes. That creates some inequity as we go forth with new programmes without having the resource necessary to fulfil them.

However, I say to the noble Lord, Lord Howell, in the same way as I would to the noble Lord, Lord Skidelsky, were he in his place, that it is unfair just to castigate the Commission. The Commission merely puts forward the proposals. The policies are agreed by the Council of Ministers either by themselves or jointly with the European Parliament. To that extent, the Council of Ministers must accept its responsibility for demanding of the Commission the execution of policies without necessarily having the resources to go with them. Therefore, the budgetary discipline aspect is extremely important.

The report also commends greater scrutiny of EU spending and states that such scrutiny should be rigorous. Of course, one of the ways in which that could be improved is by the Council of Ministers accepting its responsibilities. Year by year, it gives a recommendation to the European Parliament on whether we should discharge the European Commission for its handling of the spending of the previous year. I have to tell noble Lords that the Council of Ministers has never called into doubt the question of granting the Commission discharge. I pay particular tribute to Mrs Liddell when Economic Secretary to the Treasury, for being the first Minister during a British presidency, or during any presidency, not only to force a political discussion on discharge in the Council of Ministers but also to come to the Parliament's budgetary control committee and to the plenary session of the European Parliament to spell out the shortcomings.

Ministers must accept their responsibilities in the process of control rather than merely looking to an alibi post factum. Therefore, things need to be done in relation to the scrutinising of European expenditure beyond just the rhetoric of blaming somebody else. For example, for far too long there has been a cosy conspiracy between the European Parliament, of which I happen still to be a member, and the Council of Ministers. It has been called "The gentlemen's agreement". I believe that transparency in the budget would be assisted no end by abolishing the pretence that the two institutions are composed entirely of gentlemen. That is "gender wrong" in the first place and factually wrong in the second place. The European Union would be greatly enhanced by each institution accepting a responsibility fully to scrutinise each other's undertakings.

I turn to the question which has obviously been of greatest concern, that of own resources. The committee—I believe quite rightly—did not support, on either political or practical grounds, a directly collected own resource. I welcome that as an important part of its recommendations. However, it very much criticised the traditional own resources system. Such a system is one which is of decreasing economic significance. It is the most fraud-prone part of the European budget and, were it to be abolished, would bring the greatest benefit to the three countries which are the largest net contributors to it.

The benefit to Germany would be 3.8 billion euros; to the United Kingdom 3.4 billion euros, and to the Netherlands 1.9 billion euros. That spending would have to be made up elsewhere, but it would be made up on a far more equitable basis of contribution were it related either to the current fourth resource or to some new GDP per capita resource than to the present system. It is extremely important, in terms of the fight against fraud; and in terms of transparency and budgetary equity, that the Select Committee has commended this attack on the traditional own resource.

This brings me to the heart of the report; that is, the whole question of the inequity of contributions and the EU budgetary revenue. It is perhaps to be regretted that it has almost become an argument as to whether the wording of this is right or wrong when it strikes me that almost everybody who has spoken has said the same thing. They are not arguing that the British rebate should be given up. The argument of the committee is very clear in saying that, instead of merely arguing about that, if the European Union—of which 14 member states are attacking the abatement mechanism—concentrated on following the policies that mitigate the necessity for such an abatement mechanism, the argument becomes unnecessary.

The report seems to me to be quite clear. It recognises that the own resources decision is, as the noble Lord, Lord Williams, said, a decision of treaty status requiring unanimity to change it. It recognises that the own resources decision encapsulates this Fontainebleau mechanism. However, any attempt to change the own resources decision cannot, in any circumstances, be imposed upon the United Kingdom. That is not a matter for argument or debate but merely a statement of fact.

We need to see this abatement mechanism, currently worth over £2 billion, coming into an equation, following member states of other European Union countries taking the necessary steps. Those steps contain some terrible words. They contain the Commission proposal for agricultural reform plus the so-called degressivity in direct payments to farmers. They include stabilisation in real terms of the agricultural budget between now and 2006; non-discrimination against large farmers, particularly British and German farmers with more efficient farming systems, and co-financing of agriculture, not as an act of reform in itself but as an aid to correcting budgetary imbalances after reform has taken place.

However, the report speaks not only of the agricultural sector. The report of the Select Committee clearly recognises the need for cohesion fund reform. Countries which have received major financial aid from the cohesion fund, particularly Spain, Portugal and Ireland, which have met the qualification, the convergent standards, for economic and monetary union, are, in my opinion, no longer automatically entitled to receive cohesion fund money. That is part of the process of reform for living within the 1.27 per cent. ceiling.

If we follow that agenda, I believe that we would have an agenda fully compatible with the Select Committee report. It would produce sufficient levels of budgetary reform and budgetary equity such that it would largely mitigate the need for an abatement mechanism, especially if reforms were to lead us to a budget financed on a different mechanism, such as that suggested by the Select Committee of per capita GDP-based contributions.

On the basis of the comprehensive nature of the report, I am certainly envious of those who are able to take part in the deliberations. I express my regret at not having been able to do so. However, I say to my noble friend Lord Grenfell that, had I been there, I would have been proud to be associated with the report of the Select Committee which is not only a great aid to this House, but of substantial assistance to the Government in the negotiations they have to undertake.

7.38 p.m.

Baroness Ludford

My Lords, I, too, applaud the committee and its chairman for an excellent report. I also welcome the timeliness of this debate, not only because of the cathartic events of last week but also because of the imminence of the Berlin Summit.

I shall make my remarks more on the politics of the question than the technicalities, but I am comforted by the fact that others, including noble Lords on my own Benches, are expert on the detail. Indeed, few know more on these matters than the noble Lord, Lord Tomlinson.

As I took the milk from my fridge this morning, I noticed a pack of bacon. The label stated, "Cooks and tastes like bacon used to". "What a comment", I thought, on 40 years of the CAP that we need to go forward to the past to try to put right the failings of intensive food production distorted by the wrong kind of European subsidies.

On the same theme, I watched a delightful television programme last night about a Devon farm where birds, wildlife and wild flowers flourished due to traditional farming practices, unchanged for 40 years. However, the land surrounding that farm was a desert of ripped-up hedgerows, of fields ploughed to the edges, eradicating habitats for mice and voles, and sterilised by pesticides and herbicides so that insects and birds could not survive.

Coming back from my rural idyll to politics, the fact is that European taxpayers—and certainly British taxpayers—are starting to rebel at paying what used to be three-quarters—now, thankfully, down to half—of the EU budget on farm payments which have helped to destroy our rural environment.

I suggest that we need to start from the big picture. I very much agree with my noble friend Lady Sharp that we need to look at the huge gains in peace, security and solidarity in Europe since 1957, but our goal now is to meet the further challenges to security, trade and globalisation, and to make the EU fit for enlargement both financially and politically, and thus able to call on the support of its citizens.

I suggest that we need to do three things. First, we need to decide strategically what functions the European Union should have and what the EU budget should fund. I follow the noble Lord, Lord Tomlinson, in talking about added value. Secondly, we need to decide how to get value for money. Thirdly—I put this last sequentially only because it flows from the previous two—we need to decide the best and the fairest way to pay.

We cannot really make lasting progress on the issue of EU spending until we settle what it is that we really want the European Union to do. The committee rightly stressed that it is crucial for our citizens to know what their stake in European policies and operations really is, via increased transparency about what we are paying and why. I and my party would go further and say that the time is ripe, even overdue, to write a constitution for Europe to define—and perhaps even in some cases to limit or, in the case of a common foreign and security policy to boost—the powers of the Union, and to define the powers of the national and regional tiers and the rights of citizens to show who is accountable to whom.

The European Union is seeking to decide the budget and the reform of the CAP and the structural funds without looking simultaneously at the necessary constitutional settlement and fundamental institutional reform that should accompany it. The two should at least be twin-track in order to make the European Union and the prospects for enlargement politically as well as financially stable.

We have rather treated our citizens with disdain, failing to justify or to explain the priority areas where EU action is justified. Going back to my bacon and to the farm, we have never had, nor did we ever explicitly seek, the citizens' agreement to pay for food mountains, destruction of wildlife, food from animals fed hormones and antibiotics, and large sums being paid to rich farmers while small and hill farmers go bankrupt. We certainly must not extend that system to the accession countries of eastern and central Europe.

However, we might well get the support of our citizens to an environmental clean-up in the new member states and to pay for the maintenance of the EU's rural environment via a system of direct payments, which meet economic, social and environmental goals benefiting the whole Community.

In the search for ways to placate public opinion about the EU budget, we have in my opinion taken a wrong turning. New little initiatives and pots of gold have been invented on a rather ad hoc basis to give the illusion of a "people's" Europe. That diverted attention from the true priorities of a citizens' Europe; for instance, eliminating the injury and insult of £750 million a year on subsidies for growing tobacco. The injury is that EU citizens are paying for damage to health, which they then pay to put right, but the insult is that the tobacco, being of low quality and unusable in the EU, is dumped on the third world.

One of the frustrating aspects of the current trade disputes with the United States is that, although many of us feel that the US is being high-handed on bananas, GM foods, and hormones in beef and milk, the atmosphere has been poisoned over the past decades by resentment over the export subsidies to dump foods on world markets.

Also on the issue of political creditability, perhaps I may draw attention to an issue of significance to London with regard to the reform of the structural funds. I tried—misguidedly and rather ineptly, for which I apologise—to raise this matter on what I later realised was a Welsh Question and the House was understandably cross with me. The calculation on GNP per capita made inner London come out as the richest region in the EU. That is because the whole: economic activity of the City of London is attributed to the residents of inner London boroughs, many of whom are the poorest in our land. That means that the £1 million bonus of a City trader living in Surrey becomes the notional income of a resident of a tower block in Islington, Hackney or Tower Hamlets. That does nothing to increase the political credibility, transparency or citizen acceptability of EU budget calculations, at least in London.

I turn now to value for money and follow what the noble Lord, Lord Tomlinson, said. I believe that on the very day last week when the Commission resigned, the Council gave discharge to the Commission for its stewardship of the 1997 budget, without any question or hesitation. So, while the European Parliament was exercising some clout over its insistence on a clean-up, the Council—including the British Government, I presume—preferred to look the other way. That rather gives the lie to the spin-doctored line of recent days about our Government's consistency and conviction on these matters.

That is why some of us are not convinced by the protestations about how good management requires the Commission to report more to the Council. It has cared only intermittently about value for money. The previous Conservative Government refused to accept majority voting for anti-fraud measures and insisted on the appointment of a weak Commission president instead of a strong one. The present Government have come only belatedly to the cause, with their political allies in the Socialist Group widely reported to have done No. 10's bidding in blocking censure of the Commission until last week.

Apparently—this is regrettable—the majority of governments in the European Union (of the centre Left, linking up therefore with the Socialist group as the biggest group in the Parliament) until recently put more store on not rocking the boat than they did on cleaning up EU governance. The report that we are debating cites Commissioner Liikanen's comment that, because member states retain only 10 per cent. of the traditional own resources collected for administration—that is, the agricultural and Customs duties—they do not regard that as sufficient incentive to tackle fraud. The Court of Auditors and the Treasury think that VAT collection by member states falls short by at least between £2 billion and £3 billion a year.

I think that we ought therefore to hear a little less piety from the member state governments about the role of the Council—not least because most of the money disbursed from the EU budget is handed out by the national administrations and that is where most of the fiddles, especially on the agricultural budget, go on. One of the arguments for the co-financing of the CAP is to concentrate the minds of member states on making agricultural policy not only WTO-compatible and environmentally sustainable, but also free of fraud.

The fact is that, as the sub-committee said, scrutiny of EU expenditure needs to be on a continuous, rather than an occasional, basis. The attention of the European Parliament has been more continuous than that of the Council. Indeed, I am pleased to see that the Economic Secretary to the Treasury is quoted as saying: the Parliament for many years has largely espoused the cause of budgetary discipline". Those are reasons for agreeing with Professor Begg, who is quoted in the report as saying that the European Parliament is the "obvious democratic authority" to which the Commission should be accountable. Of course, the European Parliament must address the mote in its own eye—and I should declare an interest as an aspiring Member—but I am proud at least that my own Liberal group has been leading the charge to tighten control of MEPs' expenses, as it did the scrutiny of the Commission. The other governments could help by persuading France and Luxembourg to accept one site in Brussels for the European Parliament instead of lamely agreeing to a three-city travelling circus. That would save some £100 million a year.

If the Council wishes to do something else that is positive, it should agree to increase the powers of the Court of Auditors to investigate whether EU spending is achieving value for money. That is a body which, because it has been consistent in its scrutiny, has repeatedly refused to give discharges to successive EU budgets.

Finally, as I promised, I have much less to say about the technicalities of the fairest way to pay than about the surrounding politics. I know that, as the report states—I am sure that all noble Lords know this also—it is not politically feasible to ask the British public to give up the current rebate which caps our net contribution while wastefulness and fraud have not demonstrably been rooted out and while the CAP in particular is wrongly orientated.

For political reasons, throughout the European Union it would also be impossible to lift the cap on total EU spending, however relatively small the budget is at the moment, before all the possible avenues of saving and fraud-busting have been followed. We probably must move in the longer term to more citizen-based funding rather than to a system which focuses on the contributions of governments. It is ironic that the EU has slipped back de facto into a system of national contributions which it purported to get away from through the development of "own resources".

I note and accept the committee's opinion that the implications of moving to a system in which the European Parliament should be responsible for both raising and spending EU funds would be "profound", by which I believe it means, "too profound for now". In the long term perhaps a tax that met EU environmental objectives such as an energy carbon tax, could be a possible contender. In the shorter term we should at least try to link revenue to GNP per capita with the caveat that I made earlier about the effect of calculating that, particularly with a large Community hinterland.

I again thank the committee for its excellent report and its contribution to this extremely important debate.

7.50 p.m.

Lord Renton of Mount Harry

My Lords, like other members of Sub-Committee A, I join with noble Lords on both sides of the House in congratulating our chairman, the noble Lord, Lord Grenfell, on this, the first report we have produced under his chairmanship and also on the efficiency with which he drove us to produce a relatively complicated report in very quick time.

The report was embargoed for release at 0001 hours on Tuesday 16th March, within minutes of the moment when the European Commission offered its resignation. I wonder how the noble Lord felt when he awoke the following morning and realised that his report had hit the world at precisely the same moment as the disappearance of M. Santer and others. He must have pondered a little as to whether it was a good thing or not. If our report had come out a month later perhaps some of our recommendations might have been stronger. But it has had something of a cathartic effect on our consideration of the key issue of financing the EU; not just how it spends money, but how it raises it at this key moment in its history.

On one point I agree very much with my noble friend Lord Howell of Guildford. We disagree on other matters as regards the European Union. I agree, however, that the Union is, as he put it, at the Y point or junction in its history. It can either go forward, as a result of the events of last week, to greater success—which I hope it will do—or it will slip back and in some measure, in power terms, slowly disintegrate. It is important to consider this report today in the light of those circumstances.

It was consideration of the future that led us to decide very carefully that the present methods of "own resources" in raising money for the EU are simply too complex, too inefficient and too subject to fraud to continue. I am sorry that the noble Lord, Lord Harris, is not in his place. He chided us amiably. He spoke about the "amiable indulgence" with which we treated the EU's "shambolic" finances. Perhaps the noble Lord did not read carefully enough paragraphs 65 and 70 of our report in which we firmly draw attention to the incredible mess—there is no other way to describe it—in relying for own resources on VAT receipts in the individual countries of the EU.

The European Court of Auditors reported on the years 1991–93 that VAT collections from all the countries of the EU could be short by as much as 70 billion ecu a year. That is almost equal to the total spending of the European Union. It comes out clearly in our report that, when questioned, the Treasury officials did not have any answers. They did not know the figures and they could not tell us the precise why and wherefore of what the figure meant for Britain. They later sent a written reply, which is in our evidence. I defy some of your Lordships to understand precisely the content of that reply.

I make the point because it is an example of how domestic governments, including our own, have allowed this shambles of resources—the money that goes into the European Union—to continue under successive administrations for far too long. For me, it is the key point of our report. It is one reason why we concentrated so heavily on looking for alternative sources such as a GNP-based resource, possibly with the addition that a proportion of it would be GNP per capita rather than the totality of GNP.

Against that background, I am deeply disappointed by the reply that we received from the Economic Secretary to the Treasury, which the noble Lord, Lord McIntosh, who is to wind up the debate, kindly circulated. Noble Lords who have had time to read it will note that in paragraph 6, "Own Resources Decision", the Economic Secretary writes: The Government acknowledges the problems of fraud in respect of own resources". That is precisely the point we were making. It continues to press for improved systems which reduce these. But it agrees with the Commission that 'the shortcomings of the system … do not by themselves provide grounds to justify an urgent modification of the Own Resources Decision'". Is that not precisely the sort of language and the shoving away of the importance of a matter that caused the commissioners to resign? It seems to me that here we have another example of a government being aware of the problem but simply not being prepared to tackle it.

I hope that the Minister in his reply will dwell on that point because it is a very shallow dismissal by the Government of essentially the most substantial point our report makes—other than that about our own rebate, which has been extensively discussed.

I would like to see the European Union moving to a source of funds which is clearly collected from individual taxpayers via the local tax authorities and clearly marked for European Union purposes. This is not unlike the way in which district councils at the moment collect on behalf of county councils and parish councils. That is stated in the rating Bill. The local tax authorities are being used for that purpose. In my opinion it is the only way in which we are going to solve the problem of the lack of transparency to which our report refers, and the lack of knowledge as to where and how European Union money is being spent.

The noble Lord, Lord Desai, referred to a figure of £155 per head as being the cost to each person in the European Union. If one asked on that lovely programme, "Who Wants to be a Millionaire?", how much the European Union costs and there were four answers to choose from, I am sure that the audience would have absolutely no idea at all whether to elect £10, £50, £5, 000 or £155. But voters should know. That will only happen in the long run through a levy for specific European Union purposes, but using the local tax authorities to collect it and with independent national audit offices checking. Their reports would be debated by the European Parliament which would have powers, in my book, to sack individual commissioners, and senior officials as well, if they Were found to be incompetent.

I mentioned the European commissioners. Who exactly are these great men and women? We are told that once again a heavyweight politician is being looked for to run the Commission. Indeed, the Prime Minister used those words in the House of Commons last week. Is not that precisely what Jacques Delors was? Is not that why he was so unpopular? Is not that why my good friend John Major did not want Jean-Luc Dehaene and M. Santer was chosen instead? And M. Santer said, amiably, that he intended to spend a great deal of time "not doing much" for which he was greatly applauded at the time.

Who could expect M. Santer to do any more than that? After all, he had been Prime Minister of Luxembourg and a very successful broadcasting minister there. Because at the time I was the United Kingdom Minister responsible for broadcasting, I met him several times and found him an amiable and competent person within that context; that is, the context of 330, 000 people. Why was there ever any real expectation that he should go from running a country approximately the size of Brighton and Hove to running the European Union with 350 million people? Yet we are looking for another politician like him at the moment.

Names like Romano Prodi—the former Italian Prime Minister—and Wim Kok, the Dutch Prime Minister, have been bandied around. If we step back for a second and consider what is the real role of the Commission, it would be much better to send highly competent businessmen there or highly competent civil servants. Businessmen would concentrate not on the great strategic plans but on how to run Europe and how to obtain efficiency and more value of money for the shareholder—the voter. Someone like my noble friend Lord Sainsbury of Preston Candover or the noble Lord, Lord Butler of Brockwell would be suitable candidates. Certainly, if I look at the Treasury Benches opposite, delightful and witty people though they are, the only one I would recommend to be a commissioner is the noble Lord, Lord Simon of Highbury, in view of his record as a successful chairman of British Petroleum.

That is one of our problems at the moment. It leads me to take up the point raised by my noble friend Lord Howell of Guildford. Where do we want the European Union to go? I do not believe it is moribund at the moment; I am certain that it will recover from this shock. A weak branch has been pruned off and, as is the way with nature, stronger branches come where the weaker one has gone. But where I agree with my noble friend is that this is the time for serious constitutional reform in the European Union. It cannot happen overnight. It will not happen in Berlin. But it has to be in the long-term programme.

Along with that, I agree with the noble Lord, Lord Desai, that this is not the right moment to proceed with haste into welcoming another five or six members into the European Union. To me the constitutional change has to happen first. If 15 members cannot devise an effective, popular, comprehensible, non-fraudulent organisation, how on earth are 20 members going to do it? I would therefore like to see the constitutional boundaries clearly examined between the European Council, the Council of Ministers, the European Parliament, the Commission and national parliaments, making quite certain that those boundaries are properly drawn. If not, I accept that the European Union might topple under the very unevenness of its own weight.

The existence of the single currency makes the European Union much more important than it was. The single currency could well become the euro challenge to the dollar. I hope that that will happen. But I believe strongly in a limitation of the executive powers of the Commission, a serious enhancement of the legislative powers of the European Parliament and continuous independent audit by national authorities. I hope that that will be on the long-term agenda.

Lord Stoddart of Swindon

My Lords, as I said last Wednesday, this debate is premature in the sense that Members of the House have had only six days to realise that the report has been published; to read and assimilate the report; and to discuss and consult with others about it. That is a great pity. It is an important report which should have had wide circulation; it should have been widely read, with wide consultation, and lots of people should have been given the opportunity to take part in a debate upon it. I sincerely hope that in future such an important report will not be rushed on to the Order Paper for discussion in your Lordships' House.

Having said that, I congratulate Sub-Committee A on the report. It was indeed a tight timescale, though it was probably self-imposed, and the committee worked hard to publish in time for the March summit. Unfortunately, that lack of time restricted the range of witnesses called. I feel that rather more witnesses with wider interests should have been called.

There is a good deal of interesting material in the report and some of the evidence confirms what many of us have been saying for a long while. For example, Ms Patricia Hewitt, the Economic Secretary to the Treasury, responded to a question by the chairman, the noble Lord, Lord Grenfell, who asked: Has the Treasury taken a look at Professor Gretschmann's attempts to quantify the non-monetary advantages of being part of the European Union such as access to markets, free movement of capital and the much broader question of the overall security of the European continent?". She replied: One cannot assume that all increases in our exports to other European Union members derive solely from membership of the European Union. One must take account of movements in world trade generally, and one may need to make some assumptions about what would happen in the absence of the European Union or our membership of it. One would certainly need to take into account, which Professor Gretschmann's model does not, the increase in imports from other European Union countries, even if one accepts his rather narrow methodology". That is a significant answer because over many years we have been told by Minister after Minister that the trading aspects have been paramount and that in fact all the trading increases have been due just to our membership of the European Union. It is useful, therefore, to have that on record. Furthermore, it again confirms what many of us have said; that is, that in many respects the European Union has been a trading disaster; that our adverse balance of trade, since we joined, has been around £130 billion and that has been added to by £4 billion to £5 billion every year.

Again, the Economic Secretary confirmed that for every £1 that we receive from the European Union, we pay back £1.50; and that is not a good bargain. I wish that some of the local authorities who see their financial saviours as being the European Union would reflect that if the £41 per annum net paid by every man, woman and child to the EU budget were distributed instead on a per capita basis to each local authority, they would gain immeasurably. In Reading, where I live, that would amount to £5.3 million and would avoid my rates going up by 8 per cent. next year.

However, where I do not agree with Ms Hewitt is on her evidence at Question 129, repeated in the report of the Select Committee at paragraph 113: If one goes back to the motivation for the creation of the European Economic Community one has in mind the end of war … on the Continent of Europe. One can scarcely put a monetary value upon that or suggest that it is worth more to one country than another". If that were true, her comments might have some relevance, but it is not true. The organisation that has kept the peace in Europe over the past 50 or more years is not the European Union but NATO, which was formed long before the then Common Market came into existence. The greatest threat to Europe came with the Berlin blockade in 1948–49, when the European Union was not in existence. All one needs to keep the peace in Europe is for France and Germany to agree not to go to war. We do not need a European superstate to keep the peace in Europe.

I cannot comment on all the recommendations but agree that a directly collected own resource is not a viable option at present or for the future. The constitutional implications for this and other countries are so involved and important that they cannot be grappled with in the short term. I agree also that there should be greater national scrutiny of the budget. As national parliaments raise the tax—£8, 000 million per annum so far as this country is concerned, or 4p on income tax—they should oversee spending by the European Union, although the European Parliament should also have some input.

It is right that expenditure should be stabilised at £60 billion by 2006, but that is not radical enough. The report considers that the self-financing of agricultural support might be a good idea provided that discretion over spending is not given to member states. If they have no discretion, there is no point in doing it. Most people agree, including the Government and most of your Lordships, that the whole of agricultural support should be repatriated to the nation states. The CAP makes no sense at all. It is wasteful and susceptible to fraud. It helps large and rich farmers but hurts small, poor farmers. It also costs the consumer dear as well as hurting the environment through intensive farming, which is also a health risk.

Being able to trade on world food markets would bring down food prices in this country and elsewhere and help world farming generally—especially in third world countries.

I shall be told, as we always are, that is unrealistic. Is it really so unrealistic? In the present circumstances, it would make far more sense to have a subsidised common market in cars, but surely no one would agree to that. No one would agree that we should create such a market. We must be prepared to think the unthinkable. Getting rid of the CAP would virtually solve the finance problem and the fraud crisis in one fell swoop. I hope that the Government will pursue that proposal irrespective of it being a distant prospect.

Following the fraud fiasco and the resignation of the whole Commission, the opportunity exists to question its powers and whether many of them should be returned to member states—as was promised by Prime Minister John Major when he agreed to the Maastricht Treaty. The Commission complained last week that it was asked to do too much and said that was one of the reasons for losing control of the budget. Let us help the Commission by relieving it of some of its burdens.

One-third of our overseas trade—about £700 million—is administered—wrongly in my view—by the EU. My right honourable friend the Secretary of State for International Development, Clare Short, is concerned at how the money raised by our taxpayers is used. That money could be and should be repatriated to this country. I hope that, too, will be followed up.

I disagree with the report's central recommendation that Britain's rebate should be negotiated. I find myself on the side of the Government. I do not always find myself on the side of the Government on this issue, but I do so tonight. I am encouraged by press reports and the Government's response to the report that the Prime Minister intends to stick to his position that the rebate is non-negotiable. The reasons given by the Treasury witnesses and the Economic Secretary for retaining the rebate seem sound. I do not believe that the consequences the committee fears may result from Britain keeping firmly to its position will come about. It would certainly be extremely unwise to enter negotiations on the basis that one's opposite numbers around the negotiating table know before the start that one has compromised over a central issue. I hope that the Government will stick to their guns.

The Select Committee has not helped the Government. I hope that the take note Motion will not be construed as an endorsement of the Select Committee's opinion. I do not believe that it would be the opinion of the House to undermine the Government's negotiating position at the summit later this week.

Bearing in mind the crisis in EU financing and the cataclysmic events over the past week, this might be a good opportunity to review the whole concept of European co-operation, modernise the treaties, reverse the trend towards further integration and a country called Europe; and rebuild European co-operation based on nation states, voluntary co-operation and democracy.

8.18 p.m.

Lord Hussey of North Bradley

My Lords, the noble Lord, Lord Grenfell, chaired the committee with all the skills and charm of his predecessor—the noble Lord, Lord Barnett—aided by a most excellent secretary. He explained the speed at which the report was considered and written, hoping that it might contribute to a solution of the problems that are likely to crop up in Berlin this week.

I feel honoured to serve on the committee surrounded by noble Lords of great financial experience. I do not intend to weary your Lordships with my views on complicated problems such as reform of the own resources system, the relationship of a member state's gross contribution to its GNP, the co-financing of the CAP and the vagaries of VAT collection. I want to discuss issues that are important to me. Incidentally, I started writing this speech on Monday. Ely Tuesday morning, the whole picture had changed, rather like a transformation scene in a pantomime.

The Community now comprises 15 states and will shortly be increased. Its aim is to weld this body into a unified whole, at least on the economic side. There are those, of course, who argue that you cannot have a unified economic whole without a unified political whole as well, but I shall not go into that. What is vital is that all the member states should agree on their collective objectives. This inevitably means that some countries will have to sacrifice some national objectives in the interests of the whole. In our inquiry into the European Central Bank, the same point arose. It is the crux of many difficulties. Yet I recall the President of France saying, On major issues I represent my nation and will expect others to do the same". That is not an exquisite expression of the communautaire spirit.

The issues arise again over the financing of the Community. My life in the media was dominated by how to raise the money to match the costs—except, of course, in the BBC where £2 billion a year came in through the window—but in most businesses the nail-biting struggle concerns the relationship of cost to revenue. Financing the European Community is not an income problem. Everyone believes that the proposed ceiling of 1.27 per cent. of the GNP will raise sufficient resources for the Community to work within its budget with some spare for the accessions. The issue is how the money should be raised and then distributed; the division of the spoils, if you like—an issue on which friends, colleagues and competitors frequently fall out, and have done over the years.

Neither the contributions nor the receipts from this co-operative effort appear to be fairly distributed. As we were convinced that they never would be seen to be fair, under the wise guidance of our chairman we proposed that we should not endanger the chances of agreement in Berlin by too obstinately sticking to Britain's self-interest with regard to the abatement. Instead, we raised the issue of whether it should be considered in the negotiations. We believe that the abatement was a classic case where we might accept a reduction on condition that—and only when—the loss can be made up (as your Lordships have heard) on a permanent basis through the savings of a reformed CAP, a stabilisation of expenditure and possibly through increased expenditure in the United Kingdom. All these provisos were directly in line with the Government's negotiating stance. We did not expect that this recommendation would pass without criticism, and nor has it. But I was surprised that the word "undermine" appeared in several newspapers which are not normally bedfellows. A touch of spin there, I thought.

We did not undermine the Government's negotiating position; we preserved it carefully by the conditions that I have just mentioned and, in so doing, we believed that we were demonstrating a practical way in which this country could negotiate in the spirit of the Community and, it is to be hoped, set an example. We matched the loss of a cherished national objective with gains elsewhere in the interests of the Community. This is a proposal that I unhesitatingly support. As our report declares, the Community is a concept, an ideal, of great significance. The original objective was to replace successive centuries of devastating wars with a system that could secure lasting peace. Economic—let alone political—integration came later.

A basic weakness in the constitution is the fault line between the Commission and the European Parliament. The responsibilities of the two have never been clearly defined, but what is relevant is that the Members of the European Parliament are elected, whereas the members of the European Commission are appointed. The Community cannot survive without compromises. There is nothing new about this. The last ditch settlements—usually achieved at the latest hour of the morning—are evidence of hard-fought victories for compromise. But the issues are now more complex. The accession of five new states will present a major financial on-cost. The application by the European Central Bank of "one cap fits all" for interest rates increases the strain. Severe charges of financial mismanagement and neglect are well made. Fraud over VAT is alleged to cost 8 billion euros a year. For too long the CAP has consumed 50 per cent. of the budget. Several countries, not least our own, wish that cost to be substantially reduced.

In all this there is the dual responsibility of the Commission and Parliament. Neither body has survived the past six months without serious criticism of its financial control, and the good life incidentally that many of its members enjoy. To quote the evidence of the Economic Secretary, the role of Parliament in setting the budget is significant. It is part of the inter-institutional agreement which forms the framework with which Agenda 2000 and the financial perspective must be settled. Finally, once the Council has decided on a common position it becomes a matter for discussion with the Parliament.

There are further issues for the Parliament and the Commission; for instance, the transparency of the Community's activities. The people are entitled to know what they each pay for the Community's costs and what they get back from it, and how the finances are collected, distributed and spent. We are talking of hundreds of millions of people; this is no minor constituency. They must be assured of democratic accountability. This is a prime duty of elected representatives who have long been too far distant from the lives of the people whose livelihoods they influence. In my opinion, it is inevitable that the responsibilities of the elected but, I trust, much reformed Parliament should be extended and those of the unelected Commission should be reduced.

The Council is composed of commissioners allocated posts by the president on the basis of nomination by their member states. That is not a democratic process. The damning revelations of the recent report on the Commission, followed by its mass resignation, have elevated into stark public prominence issues of which many people have been well aware and kept silent, although there are some who conspicuously did not.

I am not a stalwart defender of everything that is printed in our newspapers—indeed, that would be a difficult position to substantiate with any confidence—but at least from the tabloids to the broadsheets there have been strong criticisms. There is an opportunity now to put this right, but it will be extremely difficult and take a long time. A comfortable ticket on the gravy train rapidly becomes a way of life, but root and branch reform there must be.

We hope that we have helped to clarify these issues. Stabilisation of expenditure is critical. The cost of the CAP must be reduced. Misuse of public funds must be ended. Confidence in the government of the Community must be restored and transparent accountability introduced, leaving no doubts in the minds of the people of Europe about the fairness of the proceedings and the manner in which they have been conducted. I hope that this report will be seen to be courageous and fair. I commend it to your Lordships.

8.28 p.m.

Lord Shore of Stepney

My Lords, I am well aware of the work that went into the compilation of this report as I attended at least one of the committee meetings and I could see it for myself. I certainly congratulate my noble friend Lord Grenfell on his presentation of a large and discursive report. However, I believe that it has suffered from a serious defect. The defect is not really the fault of those who participated in the work of the Select Committee, but of whoever set for them the timetable which is referred to in the introduction to the report. January and February were available for the compilation of this report; the period ending on 21st February. All the events which happened after that inevitably could not form part of the report.

Much has happened since 21st February. I wish to comment a little more about what, on reflection, was an impossible task. What were my noble friends on the Select Committee able to do in two months? Yes, they were diligent and they managed to hear four witnesses give oral evidence: one from the Commission; a rapporteur on budgetary matters from the European Parliament; a junior Minister very fresh from the Treasury; and a professor, an academic. Frankly, that is not enough. If one has seriously to write a report on the financing of the European Community, with all its complexity—not only on the revenue side but also on the expenditure side—one cannot do it in so short a time span and with so little evidence.

I make that comment at the start with genuine regret because the subject is important. Given the time span available, I wish that the committee had decided to be minimalist in its approach rather than to take on what is really an impossible task. By being minimalist, I would have hoped the committee would have concentrated on what needed to be done to make possible the cost of the new entrants into the European Union. That is the practical problem. The long-term financing, quite frankly, can and will take its time and, within that particular remit, make it possible for new members to join. Surely concentration should have been placed heavily on the CAP.

The remarks of my noble friend Lord Stoddart about the CAP are justified. I do not think that anyone will seriously dispute that. It is a system which not only imposes unnecessary costs for food on virtually every family in the whole of the European Union, but it discriminates against other food producers in a very unfair way, particularly those in developing countries who are denied a market which might otherwise be theirs. Helping us to make an assault on the CAP, we have of course not only the support of large numbers of countries outside but increasingly the influence of the World Trade Organisation which is seeking also to bring about rationality into the food policy of the EU.

Lord Desai

My Lords, given the structure of the committee system, the noble Lord should perhaps note that the CAP is outside the remit of Sub-Committee A.

Lord Shore of Stepney

My Lords, I accept what the noble Lord says, but that may be a problem for those who draw the limits, as it were, in the terms of reference of the committees. Clearly if one is going to study the budget one has to cover the CAP—certainly if one is going to deal with the expenditure side—and to say that that is not within one's terms of reference is not adequate.

Putting that aside, there are plenty of reasons why we should have concentrated on the CAP. There is an additional reason. I share the anxieties that I think many members of the committee feel about whether the financing within the 1.27 per cent. GDP ceiling of Community expenditures, let alone preparation for enlargement, will be sufficient given the rate of growth of GDP in the Community. Every forecast brings a lower expectation of growth in the years ahead. In Italy the latest growth rate is reduced to 1.7 per cent. GDP this year, with a pretty ghastly outlook next year, and Germany is in very serious shape. It is now very dubious that they will be able to stick to the present levels of expenditure consistent with an overall ceiling of 1.27 per cent. That is an additional reason why we should add, as it were, all the weight that we can to reforming the CAP and securing a year-by-year reduction of a substantial kind until something very different from the present CAP is left at the end.

The second point I wish to make concerns the complex subject of Community financing. I think a list of 10 potential taxes is to be found somewhere in the text, but, if one turns one s mind seriously to the subject of Community financing, there is much more than that. With a slightly longer historical perspective, my noble friend would have been able to recall that the present mix of own resources has developed quite considerably. Indeed, up until the very year that we decided to negotiate for entry into the Common Market, as it then was, a GDP system of financing was in place and the own resources system was brought in to welcome the new British intake. How well designed it was to make Britain pay the maximum penalty! There were levies on imported agriculture produce. Who compared with the UK in terms of imported agriculture from the Commonwealth and elsewhere? Of course they knew it. Who other than the United Kingdom traded so heavily with the world outside of Europe and therefore would have to pay the very special brunt and burden of the tariffs and excise duties which are the second of the own resources components? It was no accident that the system was introduced in 1971. They knew perfectly well that we would be making a quite disproportionate contribution to the overall Community budget.

Against that background, I must say that I find some of the things that have been said today quite extraordinary. The report of the committee was careful, but a little uncertain about the justification for our rebate. I was very glad to hear the remarks of the noble Lord, Lord Hussey, which so strongly emphasised that there is no question of changing it until some equivalent benefit is available, and even then the onus of proof will be on the advocates of change.

Having said that, some of the speeches today have been quite extraordinary. The noble Baroness, Lady Sharp of Guildford, was quite unhelpful in what she said about the UK's position and the retention of the rebate. The most culpable of all was my noble friend Lord Barnett, whose remarks were really quite absurd and quite wrong. He described the British rebate or contribution as being peanuts. No, he went further than that. He said that we had to get it into perspective first; it was petty cash. I know a little about this and the whole balance of my noble friend's thinking about Europe was probably reflected in those remarks.

We did an estimate, based on information from the House of Commons Library—I think the Government did so, too—of how much money we had paid net (after the rebate) at 1995 prices in the years since we joined the European Community. In 1995, the figure was £30 billion. I do not know what it has been since, but I would suggest around an extra £8 billion or £9 billion. Perhaps my noble friend, when he comes to reply, can give us the up-to-date figure.

To suggest at any time that that is petty cash is preposterous. To say it on the eve of the Berlin heads of government meeting is irresponsible. My noble friend should know, if he does not know, that what he has had to say and what others have had to say will undoubtedly be used and quoted against us by those in the Community who clearly have a vested interest in our giving up the rebate. As I said earlier, the rebate has to be set against the very fact that we were always doomed to pay more under the own resource formula at the moment of its design.

I conclude by saying that the debate is badly timed. The report has, frankly, been far too hastily put together. But I do rather agree with the noble Lord, Lord Howell, that we are approaching, as it were, a fork in the road. A centralist Europe as against a constitutional Europe, as he put it, is developing. Between those alternatives, I have no doubt at all which one I would prefer. Following the events of the past week or so and the revelations, which have now been made public, about abuse and corruption, it is quite extraordinary that anyone should even contemplate giving more power and resources to be administered, decided and used by the European Commission. Surely our thoughts and self-interest should point to the repatriation of a great deal of the power it already has, including expenditure on projects and policies which should properly be run by the governments of the nation states that form the European Union.

8.42 p.m.

Lord Boardman

My Lords, I begin by adding to the tributes that have already been paid to the noble Lord, Lord Grenfell, for his admirable chairmanship of the committee and for producing in albeit a short time—that was not his fault—a unanimous report. I must take issue with the noble Lord, Lord Shore of Stepney, who said that the report should have covered the vast amount of ground to which he referred. However, he will see that the report concerns "who pays and how?". It does not concern how the money is spent. As was pointed out by the noble Lord, Lord Desai, it has nothing to do with the CAP. Although expenditure, of necessity, crept into the report from time to time, the inquiry was not into expenditure. So I congratulate the noble Lord, Lord Grenfell, on preparing the report and thank too, as he did, the Clerk to the committee, Dr. Elizabeth Hopkins, who was of considerable help to all of us.

While I am in the thanking mood, perhaps I may thank the Government for responding to the report so rapidly. They did so very well indeed. I thank the noble Lord the Minister for sending the response round to all of us so that we had an opportunity of seeing it over the weekend. That was very courteous and was much appreciated.

Perhaps I may turn to the abatement, which has been discussed at length during the debate but does not seem to have been understood. Perhaps it is the fault of the committee that we did not make it clear. It was my view, and I believe it was the view of all members of the committee, that there should be no question of surrendering the abatement. That was never in our thoughts. It was suggested that if no progress could be made because of the abatement—if proposals were put to the Government to provide something at least as permanent and valuable—they should be prepared to negotiate. I share that view. In their response, the Government said that no proposition was likely to come forward and that in those circumstances they would stand firm on the abatement. I entirely agree with them on that point.

Perhaps I may move from the abatement to the funding system. It has been said by a number of noble Lords that traditional own resources represent a dwindling amount and produce a far smaller amount for the European economy than was previously the case. The VAT resource, although it is capped, produces about 35 per cent. of the total but the main resource comes from GNP. I was surprised—I share the view of the noble Lord, Lord Renton of Mount Harry—that the Government agreed with the Commission that the shortcomings of the present system do not provide grounds to justify an urgent modification of the own resources decision. Yet there is unlimited evidence of maladministration, fraud and massive bureaucracy arising within the common market, primarily with regard to traditional own resources. Indeed, the former Commissioner for the budget, Mr. Liikanen, said in reply to Question 104 on page 50 of the report: we should replace all the different own resources by the GNP resource. It is simply the most objective criterion for national capacity to contribute. We would do away with a major part of bureaucracy in member countries and Brussels and, thirdly, there would be no fraud on the revenue side". He continued at some length to justify the decision to do away with traditional own resources and to rely on GNP.

I believe that GNP per capita or GDP should be considered. However, that would require unanimous agreement. It would also mean, as far as one can calculate, that some countries—France, Italy and Belgium—would be worse off. It is generally recognised that they should pay considerably more. That change would also benefit those which we consider are paying well over the odds—Germany and the Netherlands. To achieve unanimous agreement on that might be somewhat difficult. But it is logical to do so and to do so now and not to put off doing it, as the Government seem minded to do. They should try to get it done now.

VAT produces some 35 per cent. of Community revenue. But the amount produced is falling. A tremendous amount of fraud and bureaucracy goes with VAT. If a country fails to meet the threshold for VAT forecast for it and is short of a few hundred million pounds, instead of it having to make up the amount out of its GNP contribution, the deficiency is spread among all the members of the Community. A country which has fallen well below the threshold does rather well out of it, which is perhaps an encouragement for less than accurate reporting on that system. I suggest that GDP or GNP per capita would provide a fairer and more equitable basis for membership.

I agree with the Government that, in so far as that would create discrepancies between the prosperity of individual countries, the remedy should not be by jigging about with the contributions they make but should be dealt with on the expenditure side. We should not fiddle with contributions but increase the grants to countries such as Greece where need may be greater. We should keep a uniform contribution from them all, based on whatever is the correct percentage of GNP.

The matter of transparency has been raised a number of times during this debate. Far too little is said about what actually happens. Neither the Government nor the Commission seem anxious to promote any figures that make it clear to the general public who pay, how much they are paying to the Community and how the money is spent. I searched through the Red Book—no doubt the Minister will tell me where I should have looked—in an attempt to find a nice table containing all the information. But such information was not apparent to me. It is a great pity. There should be a summary, clear to all, of items of revenue and expenditure between the United Kingdom and the Community. It could and should be done.

Some noble Lords, including the noble Lord, Lord Barnett, said that it was not a large sum. I believe the noble Lord described it as "peanuts". It is I per cent. of the GNP of the European Community as a whole. The noble Lord shakes his head. Perhaps I misunderstood him. One per cent. of GNP represents more than the total budget of certain countries—Ireland, for example. It represents more than the total expenditure of this country on welfare. So it cannot be written off as peanuts.

Turning to the expenditure side—

Lord Barnett

My Lords, I do not expect the noble Lord to be quite so violent as my noble friend Lord Shore, but I was putting in perspective the cost, at £1 billion, out of £925 billion GDP. That is all I was doing.

Lord Boardman

My Lords, I appreciate the noble Lord's point. It is still a substantial sum of money. The unfortunate point is that it is never openly presented to the public.

The expenditure side was not the object of our inquiry; however, it arose in various forms. First, manifest inefficiency and fraud, which is topical, was one of the first points. As I am a farmer and therefore have an interest to declare, I shall not comment on the CAP. I agree with the point in the committee's report that those who qualify for EMU should not be allowed in on the Cohesion Fund. In relation to the Structural Fund, many noble Lords who have visited parts of Europe where some of that money has been spent—for example, the island of Madeira—must wonder about such lavish expenditure at public expense. The report touched on co-financing. Co-financing has advantages, provided that the savings made are not applied by the Community in other ways so that the total bill by the Community is as large as it was before the Community passed part of that burden on to the nation states. I believe also that member states must be bound to make up the deficiency received from the Community to whatever grant was co-financed. It will mean that those states which make a large CAP contribution, such as France and Ireland, will inevitably suffer severely from any co-financing. On that basis, I assume that obtaining the support of such countries for this method is somewhat remote.

I hope that the report, which has been prepared over a short period, is of some help to the Government in their forthcoming negotiations in Berlin.

8.54 p.m.

Lord Bruce of Donington

My Lords, it is normally easy for me to find common ground with the noble Lord, Lord Boardman. I was therefore surprised to hear him complain today that there had been so much argument about expenditure on the European Union when the title of the report referred to future financing. On reflection, I believe the noble Lord will agree that in the latter part of his excellent address to your Lordships he himself ventured onto the expenditure side.

It is immediately clear, if one is to bring the question of fairness and justice into the financing of the European Community, that one must have regard to how the sums are expended to the benefit of the various states that contribute. Therefore I must repudiate that whole approach, and emphasise that it is vital that we concentrate on the expenditure of the European Union, particularly under circumstances where regularly, year after year, a sum of 3 billion ecus (£2 billion) disappears into thin air. I should have thought that the expenditure did merit some consideration. Indeed, the whole question arose from the Commission's own proposals in that regard, which followed the plan for the year 2000. I refer, for the purposes of greater accuracy, to the communication published by the European Commission on 7th October last year. In that document the whole case for the revision of the scheme for financing the European Union was set out, together with a considerable endeavour to show how the benefits were distributed and how, therefore, the whole matter could be made clearer.

On the question of budgetary balance, the Commission states at page 17 of its report: Budgetary balances (also called net balances), measured by the simple difference between contributions to and receipts from the EU budget, represent only a narrow view of, and fail to fully account for, the benefits accruing to Member States from participating in the EU". It is precisely because the Commission, with all the skills available, either indigenously or as a result of the lush hiring of consultants, has been unable to specify in any monetary terms the benefit, for example, that the United Kingdom might have received in return for the contributions it has made--always, of course, agreeing immediately that every member state has to pay for the cost of administration. That cost should be shared roughly proportionately among member states.

At page 21 of the report, the Commission elaborates. It states: Graph 7 shows that the mechanism has been effective in reducing substantially the negative balance [the British abatement] of the United Kingdom. However, even after the rebate the United Kingdom remains a larger net contributor to the EU budget than Member States with a higher capacity to pay". So the case for something reasonably approaching—I am careful not to say absolutely equal monetary terms— a juste retour is clearly envisaged.

I congratulate my noble friend on the report. It has been a matter of infinite ingenuity to secure the result that was achieved. The difficulty is that it is a unanimous report, and in that it differs substantially from the reports produced by Select Committees in another place. There, differences of opinion on the Select Committees are permitted, indeed encouraged, because they make for sharper thinking and greater articulation of arguments, and they provoke discussion. I doubt whether noble Lords are surprised to learn that that does not apply to the Select Committees of your Lordships' House. A tradition has grown up which is not in the Companion to the Standing Orders, nor in the Standing Orders themselves.

Lord Grenfell

My Lords, will my noble friend give way? I am grateful. Perhaps I should inform the House that at the beginning of the inquiry I told the committee that I did not regard unanimity as an end in itself and that if necessary I should be quite happy to see differences of opinion and minority views expressed in print. So although I may have been transgressing what might be an old tradition in these committees, I changed it in my committee.

Lord Bruce of Donington

My Lords, I immediately accept that and congratulate my noble friend on having taken that attitude. Perhaps I was harking back to when another report emanated from Sub-Committee A. It was dealt with by the full European Committee, drafts were presented and, in my innocence, I submitted 129 amendments to the draft. Some 20 were accepted, but thereafter, immediately Parliament resumed and even though the statutory year had passed, I was eliminated from all Select Committees on European legislation. It is not a matter of great gravity. At a later, more convenient stage I shall present the House with the facts in a like manner. But that is what happened.

I congratulate my noble friend on having advised the committee accordingly. Nevertheless, the report was unanimous. Whether it was due to the personal magnetism of the noble Lord or his close colleague, my noble friend Lord Barnett, we shall never know. On looking down the list of members of the committee, and having the honour of knowing most of them personally and liking all of them, I was surprised to see them arrive at an agreed opinion. However, that is the way it is, and the report suffers a little because of it.

That is nowhere better illustrated than by the events that followed immediately after the draft report was closed and the various documents became available. At page 23 of the report the committee unanimously came to the view which was referred to by the noble Lord, Lord Howell: we have virtually no knowledge of what we are paying—or what we are paying for". That seems an extremely frank admission by the committee, speaking unanimously. It was supplemented by the report of the wise men, which states in its concluding paragraph on page 144: It is becoming difficult to find anyone who has even the slightest sense of responsibility. However, that sense of responsibility is essential. It must be demonstrated, first and foremost"— I emphasise the words "first and foremost"— by the Commissioners individually and the Commission as a body". Did they ever pause to wonder what an extraordinary statement that is? It was a virtual admission. In any negotiated settlement, with whom are we going to negotiate? If we are to negotiate a different formula for determining the abatement negotiated by a previous Conservative Prime Minister, with whom shall we negotiate? People who have no sense of responsibility? We have reached a point where we ourselves as a committee and as a House do not know what the money is being spent on. I leave your Lordships to contemplate that possibility. What confidence can we have?

It is clear, on reading the report, that considerable changes must take place, both in the type and composition of the Commission. And there must be a complete clean-out of those who have no sense of responsibility and of those who so conducted the Commission's affairs that the committee of this House could not be certain what the money was spent on or how much it was. I suggest that that is an inferior position in which to place your Lordships' House.

I would have hoped that that proposition would have been received with acclamation. We must have people who are not of necessity politicians. The Government have already demonstrated a certain scepticism about politicians by ensuring that the interest rate is controlled independently by a bank and not politicians. There is therefore an instinctive disgust of politicians. What we want at commissioner level is not another series of politicians but skilled administrators, managers and those on whose integrity we can rely; in a word, people we can trust. If we follow that precept we may find that we do rather better in Europe than before.

My noble friend Lord Barnett referred to peanuts and all the rest of it.

Lord Barnett

My Lords, I never did.

Lord Bruce of Donington

My Lords, my noble friend did not but he may have referred in somewhat minimalist terms to the significance of the monetary contribution of the United Kingdom. I believe that my noble friend will accept that. I am content to let the matter he on the record. I have a good memory, too. We have to do something very different. We cannot rely on promises and prospects of reform of the common agricultural policy as any substitute for the rebate that has been negotiated. I applaud the decision of the Government to insist on the retention of the rebate. If one considers this year's expenditure, the net payment out of the pockets of United Kingdom taxpayers after the rebate will be £3, 457 million. That is not small beer. When one considers expenditure on kidney machines, for example, suddenly it is discovered that they are far too expensive; one cannot possibly contemplate 10 new kidney machines each costing £20, 000. Hard choices have to be made. Single mothers must make sacrifices. Yet we do not seem to be too much troubled about £3, 457 million. I am very glad that my noble friend has indicated on behalf of the Government that something firm and definite is far better than some myth projected into the future by those politicians who control the Commission and the Council.

9.11 p.m.

Lord St. John of Bletso

My Lords, it is always a pleasure to follow the noble Lord, Lord Bruce of Donington. Noble Lords will be pleased to learn that, given the hour, I shall keep my comments this evening quite brief. I endorse the point made by our chairman, the noble Lord, Lord Grenfell. At the beginning of the inquiry and on several occasions during the evidence he made it emphatically clear that he wished to promote open debate. I am grateful to the noble Lord, Lord Grenfell, for having steered the sub-committee in such a masterly way that it has completed its report in time for the summit in Berlin later this week. Like the noble Lord, Lord Boardman, and other members of the sub-committee, I am also grateful for the invaluable assistance of our Clerk, Dr. Elizabeth Hopkins.

It is inevitable that the forthcoming Council meeting will be a bruising battle over finances as each of the member states jockeys to keep as much of the Union's largesse as possible while making substantial financial provisions for the new accession members who will be joining between 2000 and 2006. Clearly, the significance of Agenda 2000 and the entry of several eastern European neighbours is likely to be obscured by horse-trading over CAP reform, members' net contributions and the abatements. While compromises and concessions will have to be made, it should be noted that Germany stands to profit most from the almost 64 million additional consumers when the first tranche of six new applicant countries joins the European Union.

I entirely agree with the noble Lord, Lord Skidelsky, that it is difficult to devise a formula for the European budget which is fair to all member states. What is critical however—it is a point made clearly by the noble Lord, Lord Tomlinson—is that there is an essential need for strict budgetary discipline with greater scrutiny of EU expenditure. There have been many calls for European Union money to be used more effectively. Commissioner Erkki Liikanen has been given the responsibility to knock some rigour into the Commission's financial planning and financial controls.

A common theme throughout most of the inquiries of Sub-Committee A, of which I have been privileged to be part, has been the need for greater accountability of funds spent by the EU. I was encouraged to note in the Government's response to our report that the Government invest significant resources in scrutinising EU spending through the processes of the Council and official committees in co-operation with like-minded states. However, I also believe—it is a point made by the noble Lord, Lord Howell—that it is vital that UK taxpayers should have a clearer understanding as to their stake in EU policies and operations. I was pleased that the Government agreed that such transparency is important, especially in the lead up to the referendum when the British electorate will decide whether or not to join the single currency.

Although the Government have made their position clear that they wish to maintain the UK abatement, I hope that they can agree to some form of future compromise such as a quid pro quo on CAP reform, or possibly through increased EU expenditure in the United Kingdom. It would reflect badly on Britain if the main reason for the Berlin Summit not reaching an agreement on the financial framework was as a result of the refusal of the British Government to contemplate any change in the present system.

Despite the strong arguments of my noble friend Lord Williamson for a retention of the UK rebate, we cannot ignore the point made by Commissioner Liikanen that a lot has changed in Europe since 1984 and it is therefore difficult to defend the UK abatement on its own without considering abatements for the other major net contributors. I entirely agree with paragraph 18 of the report which states that, the rebate should be negotiable as part of an overall settlement delivering the result of fairer net contributions". A point that several noble Lords have made is that if every net contributor were to seek a similar rebate to the UK, this would result in a collapse of the EU budget.

As regards the level of funding needed in the period of the next financial perspective, when we interviewed Commissioner Liikanen and Mr. Naval, they were both confident of the Commission's proposal that maintaining the own resources ceiling at 1.27 per cent. for the next seven years would be sufficient to finance the necessary priority measures of Agenda 2000. However, that proposal was based on the assumption of annual growth of 2.5 per cent. per year for the existing member states, and 4 per cent. for the applicant countries. While I agree that the headroom provided by the 1.27 per cent. own resources ceiling is sufficient at present, I have my reservations with the onset of enlargement as to whether that will be sufficient in the future, particularly if GNP growth forecasts fall short of expectations, and if the reforms of the present spending programmes are not achieved. Clearly it is essential that stabilisation of expenditure and reform of the: CAP are achieved soon.

Time and again those Eurosceptic speakers such as my noble friend Lord Harris—he is not present at the moment—refer to the constant problem of fraud and (I think in his words) the "Brussels pantomime". Even though our report did not recommend in the short term a renegotiation of the own resources system, I agree that if in the medium term traditional own resources and the VAT-based resource are abolished leaving only the GNP-based resource, this would considerably reduce both bureaucracy and the constant problem of fraud.

In conclusion, unlike the noble Lord, Lord Desai, I support enlargement of the European Union. Enlargement is now the European Union's major challenge. If the financial hurdles are not overcome in Berlin, it is likely that the timetable for enlargement will be delayed. I refer back to paragraph 18 which states: Equipping the European Union to handle enlargement is a very big prize: we urge the Government not to throw it away". I commend the report to your Lordships.

9.20 p.m.

Lord Randall of St. Budeaux

My Lords, I start by saying what a pleasure it was to be on the committee which produced the report that we are debating. As this is a high quality report, which is what is expected of the House of Lords.

Also, I add that our new chairman, my noble friend Lord Grenfell, played a superb role in the production of that report in such a short time, and it was a unanimous report. In particular, he created a good working atmosphere which made being on the committee so enjoyable. I add my thanks also to Dr. Elizabeth Hopkins, our Clerk, for the effective contribution she made.

This report is about funding the European Union in the period between 2000 and 2006. However, I believe that we need to put the whole matter of funding into perspective. We are funding an institution which is vitally important to the security of Britain and the rest of the European Union. Thank goodness the European Union is stable and the possibility of having war within it is negligible.

That contrasts with our recent history in which we had two world wars within a 25-year period with indescribable death and destruction—about 60 million lives being lost. In your Lordships' House, we have noble friends on all sides who have lost their sight and have damaged or lost their limbs. They gave all that for us and we should never forget it. At the same time, we should never again allow conditions to prevail in Europe where others would have to forfeit so much in the same way.

The threat to our security goes beyond the boundaries of the European Union. The current death and destruction in the former Yugoslavia is right on our doorstep. The European Union has a leading role to play, in conjunction with the United Nations and NATO, in order to stifle conflict there. We could be on the edge of war again, according to the news to which I listened at lunchtime today.

The key question which arises is: what can the European Union do to reduce possible threats from countries just beyond its boundaries? In my view, the answer is the enlargement of the European Union. There is now a group of 10 countries, called the CEEC 10—the central and eastern European countries—which can be expected to join the European Union in the not too distant future. Five countries, including Cyprus, will be likely to join in the next phase.

The institutional bonding of the CEEC 10 into the European Union will have the effect, over a period of time, of diminishing the threat of conflict and war. However, in addition to all this, the economic advantages of increasing the size of the European Union to perhaps 25 countries will be enormous. Enlargement, both in terms of security and economic benefit, is a prize we must not lose.

When one considers Agenda 2000, which presents the EU budget for the period 2000 to 2006, one big item is missing; that is, radical reform. The budget appears to be out of balance because of the disproportionate level of spending on the agricultural policy. That has to change if we are to have sufficient funding for enlargement and if we are to introduce greater fairness in the way that member states contribute to the EU budget.

Since the Select Committee report was published, the whole of the European Commission has resigned and there are uncertainties about the future. However, I believe that the crisis we are in can result in advantage to the European Union. Certainly, there now appears to be a greater chance of radical reform in the European Commission, but we will have to wait and see.

To use the words of the Prime Minister, we must make the European Union more of a "people's Europe". Presently there is—we must admit it—a considerable sense of detachment of the British people from the European Union. They contribute their money to it but, as the report states, they have no idea on what that money is spent. I say that as somebody who is very pro European Union. Certainly, the people are not aware of whether or not the money is spent wisely. That situation cannot be allowed to continue. The Select Committee report advocated greater transparency in the EU budget. Will the Minister tell the House the Government's position regarding the conclusion of the select committee on transparency, as laid down in paragraph 15 of the report? I look forward to my noble friend's reply on that point.

If the Commission is to be seen as a servant of the people, which is what I believe it should be, there has to be greater accountability of the European Union on budgetary matters. Whether we like it or not, there is, unquestionably, a perception that Brussels is too isolated, too distant and not approachable. Again, I believe we have to face up to this. Our MEPs who, on the whole, do an excellent job, do not have the powers or means to make the EU more accountable. There are several ways in which financial accountability could be achieved, but there appears to be no agreed strategy on how that should be done. Can my noble friend the Minister tell the House the Government's position on the question of financial accountability and what they intend to do about it? I look forward to my noble friend's reply on that.

The third question that I should like to ask my noble friend is whether the Government believe that the two Houses that make up the British Parliament should have greater powers of scrutiny of the EU finances, which would lead to greater accountability of the EU both at national state level as well as at the European Union level.

I should like to say a few words about the contributions made by member states to the EU budget as well as about Britain's abatement. The first thing that should happen is for all member states to feel contented with their net contributions. At the moment, that situation does not prevail and it must therefore be dealt with. Reference has already been made to the countries which are not content. I shall not go into the details, but they include Germany, Austria, Holland and Sweden. I do not believe that it is particularly difficult to determine the fair gross contributions to be made by member states to the EU budget. We can draw up a list. What is difficult—or seemingly impossible—is to draw up a simple list of net contributions which is seen to be fair to all member states. I think that the fundamental reason for that is that member states receive different benefits from the EU budget.

To be specific, Britain receives the abatement partly—I think, probably mainly—because we are in receipt of relatively small benefits from the common agricultural policy because of the nature of British farming, which is efficient and very advanced. There is, in my view, a case for Britain to negotiate its abatement if, for example, there were radical reforms to the CAP, stabilisation of expenditure, and possibly if more EU money was given to Britain.

If—and I stress the word "if"—those conditions were met, I see no reason why Britain could not be made content with its net contribution while the current abatement changes or even disappears. As I have already stressed, this is all a matter for negotiation, as well as for EU reform. My noble friend Lord Shore of Stepney, who is no longer in his place, suggested that there was surrender here, but it is not a question of surrender; the report proposes a negotiating stance or a way forward, which would have to be negotiated.

In that context, it is worth pointing out that the system of "own resources", together with VAT, forms the basis for funding the European Union. In my view, that system acts as an impediment (because of its complexity) in determining the fair, net contributions to be made by member states.

Finally, I support the comments made on this in the Select Committee's report which suggested that a system based on GNP per capita might be better than the current own resources and VAT arrangement. One additional advantage of that approach is that it would help to reduce fraud in certain member states.

9.35 p.m.

Lord Shaw of Northstead

My Lords, I should like to follow others who have already expressed their thanks to our new chairman for the way in which he has led us in the discussion of this report. The noble Lord has already shown that he is equal to the standard of his distinguished predecessors. We all look forward to a considerable number of reports as a result of his leadership.

This report arises from the need of the EU to look ahead at its future financial needs. I say that because if one is to raise money, it is always good to know what one is to raise it for. The other aspect is that we have to discuss the means by which the monies are to be raised.

Since I first took part in European parliamentary budgetary discussions not only has membership of the European Union greatly increased, but also the size of the EU budget. It has increased enormously. At the same time the diversity of need between the large number of member states has also increased. It will continue to increase as and when further enlargement takes place. One of the troubles is that the systems do not seem to have changed much or certainly have lacked a great deal of control.

While our review is primarily concerned with the limited period covering the years 2000 to 2006, it must be helpful for thought to be given to the longer financial perspective. In planning for the short-term it would not be helpful to pursue policies that would make things more difficult for the fulfilment of longer-term policies. The need for such a longer view of our finances and expenditure methods has been greatly increased by the resignation of the Commission and the report of the independent committee.

The report seems to have come as a surprise to many people. Frankly, to me it has come as a tremendous relief. Those of us who have been concerned with these matters have long known what is going on. Neither our words of warning, nor even the warnings of the Court of Auditors seemed, for too long, to have had any effect. Incidentally, I believe that the work of the Court of Auditors has been greatly undervalued in this affair. The strengthening of its status at Maastricht and its subsequent qualified report are the background to the present independent report and the more active role that is now being taken by the European Parliament.

The Berlin European Council meets this week to try to complete the Agenda 2000 negotiations. I am not clear as to where the need for reforms brought out in the independent committee report comes in the council's agenda. Will that committee's report be discussed and what effect will it have on the original agenda? I firmly believe that no further progress can be made on enlarging the EU until those reforms that result from the inquiry have been put in place and prove to be effective. The overwhelming feeling that has come out of this report is that there has to be a deep-seated review of the composition of the Commission and its responsibilities and that it must come quickly.

As regards the raising of revenue, that makes paragraph 64 of our report all the more relevant. It quotes the Court of Auditors as saying, In order to eliminate repeated irregularities, the Commission should … improve collaboration between itself and the Member States as regards the management and control of traditional own resources". It goes on to say, The persistence of irregularities in the collection of traditional own resources despite constant pressure for improvement suggests that the problems are inherent in the system". That makes it all the more urgent that the own resources decision should be renegotiated a soon as possible with a view to funding being based entirely on a GNP-based resource.

Incidentally, I feel that there should be no question of any form of direct EU taxation. Filling in one UK tax return is quite enough and the bureaucracy and complications involved in filling in a European one makes the mind boggle.

The independent committee report must have a direct bearing on the subject of our report and, in my view, on what goes on in Berlin this week. It is essential that the opportunity is now taken to look in depth at the manning and scope of the Commission's activities. How many commissioners do we need? How are they and their staff to be appointed? To whom will they be accountable? What are to be their future responsibilities? Until those questions are quickly addressed, slowly but surely we shall slip back into the same old ways, and the answers that have to come in the end will be disastrously delayed.

I have always regarded the Commission as the executive Civil Service of the EU. That it has taken on a greater role is because it has been allowed to do so. A redefinition of the Commission's responsibilities is required. I believe that there are a number of areas where EU activities should be returned to the responsibility of the member states themselves. In broad terms, I would wish to see the Council of Ministers playing more of a Cabinet role; the Commission more of a purely executive role; and the European Parliament, among its other duties, a greater scrutinising role.

In relation to revenue raising and expenditure, it must be remembered that much of the work is carried out by the member states themselves. That being so, the degree of bureaucracy and fraud depends on how simple the systems are made, the clear way in which responsibility is placed on those member states, and the clear and effective audit arrangements that are put in place. That is why Commissioner Liikanen, as my noble friend Lord Boardman said, argued solely for the GNP-based resource as a means of improving the fairness of the system. He said that moving to such a resource would, do away with a major part of bureaucracy in member countries and Brussels … and there would be no fraud on the revenue side"— or nearly no fraud.

In relation to expenditure, much of the administration is carried out either by the member states or by independent agencies of one sort or another. Here again, the objectives and stages of fulfilment must be clearly defined and reported on. The programmes must be open to continuous scrutiny. When we set up the Budget Control Committee in the European Parliament in 1977, I had hoped that it would act as effectively as our own PAC. In those early days I am afraid that those hopes were not immediately fulfilled. I hope that now the strictures of the Court of Auditors are being followed up both by that committee and by Parliament itself. I hope that the changes which must come about will be brought about with great urgency. I hope that priority is given to them even over the priorities already given to the Agenda 2000 programme in Berlin this week.

One of the difficulties of the present system is that the presidencies last for six months at a time and it has always been necessary that the presiding presidency should have some success story at the end of that six months. Frankly, if a way could be found for the fundamental reform that is now so urgently needed, that would be a much greater success for the German presidency than the success of Agenda 2000. Perhaps they have a priority. I do not know. My personal feeling is that the priority should be deep-seated reform.

I hope that the report is a preface to other reports based on what will come out of proposals for reform from the Berlin Summit later this week. I fully support the work of the committee and the report that it has achieved. I hope that it will not be long before we produce another report, further along the line of reform.

9.45 p.m.

Lord Taverne

My Lords, I do not have a great deal to say by way of comment on the report, which was excellently summarised and elucidated in the introductory speech of the noble Lord, Lord Grenfell. The report is excellent and I have few comments because I do not want to repeat what others have said. My only comment is on the rebate.

I listened to the remarks of the noble Lord, Lord Skidelsky, about the need to veto an end to such a rebate unless we secure certain concessions. I listened to the noble Lord, Lord Barnett. I agree much more with his approach than that of the noble Lord, Lord Skidelsky. Then I listened to the noble Lord, Lord Williamson, who made me think again because he has unrivalled experience. On reflection, it does not seem that there is a profound difference between their comments. No one is suggesting that we should give away the rebate without concessions. No one is suggesting that we should fight to the last ditch for the rebate, whatever concessions may be offered. It is a question of tactics. I prefer the approach advocated by the noble Lord, Lord Barnett, and many others.

It does not do much good to brandish a veto. Too often our deliberations in Brussels are represented as a tennis championship—game, set and match to Britain. It is a sort of macho contest. We win or we surrender. That is not the way to negotiate. A much more sensible approach is advocated by the committee, and I strongly endorse it.

The proper way is shown by the BSE experience. The last government threatened and exercised a veto, using the doctrine of the empty chair, and got nowhere. The present Government have been much more emollient. One person who paid tribute to the better results of that stance was the noble Lord, Lord Plumb, who said that the ban on British beef would not have been lifted if we had continued to negotiate in the way that the last government did.

My main question concerns the total size of the budget. The committee reached the reasonable conclusion that it would be possible up to 2006 to stay within the ceiling of 1.27 per cent., which could even accommodate enlargement. That may be true but a bigger question arises. Will the budget be sufficient for European monetary union? It is likely that within the next two years two new member states will join EMU. Personally, I regard it as more likely than not that by 2004 Britain will be a member of EMU. So all 15 present member states will be members.

Is the budget large enough for EMU? I remember reading the MacDougall report, which demanded strong central resources, at the time of the Werner plan. I actually wrote a pamphlet about it in 1972. I have not re-read my pamphlet because I am not sure that it was particularly good. However, the question arises of the need for central resources. It is extremely significant that there is no push for increasing the EU's central resources. The noble Lord, Lord Shore of Stepney, is not in his place, and it seems to me that debates could be shortened if noble Lords who are not present for the wind-up speeches would refrain from speaking. That would certainly make our debates end somewhat earlier.

The noble Lord, Lord Shore, always frightens us—as indeed do many of the anti-Europeans—with the thought of a terrible federal superstate that the Germans are advocating. It is perfectly true that many Germans talk about the need for political union and Mr. Tietmeyer talks about the need for an economic government. But you cannot have an economic government and a federal state without much bigger central resources. You cannot have a federal government with central resources of 1.27 per cent. of GDP of the federal state. This is why I sometimes think it is necessary to draw a distinction between the rhetoric and the reality. The German politicians are not advocating that they should contribute more. They want to contribute less. They are the keenest to limit the total resource to 1.27 per cent. of GDP.

It rather knocks on the head the idea that what we are about to face is a federal superstate when every country is agreed that we shall not increase the central resource of the EU. The next question is: is that right? Is it possible to limit the central resources of monetary union to such a small central budget? Was MacDougall right to say that you needed a much bigger budget? People draw a parallel with the United States because of the stabilising effects on depressed regions of a strong federal budget. If, for example, Texas is in depression, Texans pay less tax and receive more benefits, and therefore the recession is mitigated. Some people have calculated that US federal taxes and transfers offset variations from the national average by as much as 40 per cent. Others put it much lower at 10 per cent.

I have changed my mind about this matter. I used to support MacDougall but I think it is possible that monetary union can function perfectly well without a large central budget. I have been much reinforced in this by an excellent study which I commend to the House. It was done in 1996 for the OECD by three authors, Hoeller, Loeppe and Vergriete. I found that study convincing. They say that the comparison with the United States is not valid as Europe is a completely different animal. The states of the United States do not have the resources for stabilisation. In the European Union there are not the central resources, and they will not exist. However, the resources of the member states are infinitely greater, and the responsibility for dealing with unemployment or regional variations in employment lies primarily with the nation state and will continue to do so.

Lord Skidelsky

My Lords, I thank the noble Lord for giving way. How does he address the issue that unemployment may be a regional phenomenon which does not conform to the jurisdiction of national budgets?

Lord Taverne

My Lords, if it is a regional phenomenon, it will correspond to the question of national budgets.

Lord Skidelsky

Across frontiers?

Lord Taverne

My Lords, in national terms it will be a matter for national governments. The other aspect of the matter which is pointed out in the study is that if one looks at the experience of the countries which tied themselves to the deutschmark—particularly Austria and the Netherlands—one sees that there were times when they suffered from differential economic growth and when they needed differential fiscal policies which they managed to carry out perfectly well while tying themselves to the single currency, in their case the deutschmark. I do not want to discuss this study in detail but I believe it makes an extremely convincing case for saying that there is no need for a strong central budget. It seems to me therefore that although this was not a matter for the committee's consideration, it is something that one ought to bear in mind when looking at the total budget. There is no reason to suppose that in EMU the central budget must be greatly increased.

9.55 p.m.

Viscount Bridgeman

My Lords, many noble Lords have spoken with expertise about the report of the committee, as one would expect, and in view of the lateness of the hour I will be brief. I, too, wish to add my congratulations to the noble Lord, Lord Grenfell, on the excellence of the report. As noble Lords have reminded us, it was produced in a very short time. Through no fault of the committee, its timing is unfortunate, coming as it does on the eve of the Berlin Summit, a subject to which I shall return.

The report emphasises one or two points—for instance, that reform of the CAP must not be used as an excuse by certain member countries to frustrate the enlargement of the Union under Agenda 2000. Intrinsic to the budget reform is the reassessment of the cohesive and the structural funds. It must be a matter of no disagreement—certainly in this House and throughout the Union—that it is quite inequitable, even grotesque, that countries having achieved convergence should continue to receive cohesive funds. Structural funding is more politically sensitive and the report was right to confine itself to the observation that any adjustments here must be seen as equitable.

Several noble Lords have referred to the question of co-financing the CAP. The committee had two reservations with which we agree. First, the level of support given by each member state must be centrally agreed. Giving discretion on the make-up of any shortfall to individual states could open all sorts of soft subsidies, which is protection by another name. Any co-financing must be accompanied by degression, though the Treasury's misgivings on any substantial net benefit to this country must be noted. We also agree that there are very pertinent concerns that co-financing must not be used to mask the real basic root and branch reform that the CAP needs.

My noble friend Lord Skidelsky and several other noble Lords—Lord Tomlinson, Lord Howell, Lord Renton and Lord Randall—referred to the need for accountability in the Commission. We were interested to hear the suggestion of my noble friend Lord Renton of Mount Harry of a hypothecated tax for the Union to be collected by member governments. Transparent, yes, but who is to fix it? Surely there is no alternative to the Commission centrally? Is it uniform; are there not shades of the community charge here? The fixing of this charge would need to be transparent and, crucially, understood by the average citizen. However, it could have the important, possibly political, effect of surprising the average citizen in the Union by informing him or her, in practical terms, of just how small his or her contribution is, a point referred to by the noble Lord, Lord Desai, and, from a different perspective, by the noble Lord, Lord Taverne.

Accountability is a thread running through the report. My noble friend Lord Shaw in particular, has drawn attention to the significance of the coincidence of the resignation of the Commission and the issue of this report. We look forward to hearing from the Minister whether Her Majesty's Government intend to take advantage of the unique opportunity presented by the report of the Court of Auditors, and the subsequent resignation of the Commission, to institute accounting and reporting controls, so ably flagged by my noble friend.

I return to the central point of the debate, the treatment of our budgetary rebate. Many different contributions have been made today and I wish to quote an emphatically non-exclusive example of two opposite views: those of the noble Lords, Lord Barnett and Lord Williamson. The coming conference in Berlin will rightly be regarded by Germany, as President, as a unique chance to air its understandable grievance at the level of its contribution, though it is worth bearing in mind the words of the noble Lord, Lord St. John of Bletso, that the coming accession of the CEEC countries will present a unique preferential market to Germany. That point should be made at the conference. Germany will not want to be distracted by the events of the past week.

In many ways this report has come with unfortunate timing. Quite understandably, in the time available, the committee was not able to come up with alternatives to the present system. I would draw your Lordships' attention to the rider in paragraph 18 of the report that it would be regrettable if an inviolate stance were taken on the level of contribution which would prejudice the reform of the CAP or the enlargement of the community.

Therefore, from these Benches—I echo the sentiments of my noble friend Lord Skidelsky—we should like to give the Prime Minister and his right honourable friend the Foreign Secretary our support in holding basically to the present structure at this time. That is important. In this connection, it was interesting to hear the surmise of the noble Lord, Lord Grenfell, that the rebate would probably be continued, though perhaps attenuated. I was certainly interested to hear his accompanying remarks on Spain and Italy. There will certainly be the usual panoply of special pleading and horse-trading at the conference.

If the report is read, as I know Select Committee reports are read in Brussels and throughout the Union with great respect, as a deeply thought-through discussion paper, it will have done a great service to this country and to the Union in addressing the problems of the Union in the next century.

Once again, I thank the noble Lord, Lord Grenfell, and his colleagues. From personal experience on a sister committee, how right he was to include the Clerk in his thanks. They all deserve the gratitude of the House.

10 p.m.

Lord McIntosh of Haringey

My Lords, I welcome the opportunity to respond to what has been a most interesting and varied debate. I welcome the fact that many elements of the report, which was produced so ably by my noble friend Lord Grenfell and his colleagues, echo the views of the Government. There are obviously matters on which we disagree but, like the noble Lord, Lord Taverne, I believe that many of those differences are on tactics rather than on principles.

The noble Lord, Lord Renton of Mount Harry, referred to the precise timing of the report. I do not know whether he was suggesting that the Commissioners resigned because the report came out at 01.00 hours on Tuesday morning. One has to be careful about causality in these matters. The timing of the debate is significant because later this week, as is well known, the heads of government of the 15 members of the European Union are meeting in Berlin to seek agreement on the financing of EU policy reform over the next financial perspective, covering the years 2000 to 2006. Obviously, this negotiation is of great importance. I agree with my noble friend Lord Grenfell that the report is still relevant. It is certainly the case, as the Government said in their response to the report, that it will be taken seriously into account in our preparations for Berlin. On that point, I disagree with the noble Viscount, Lord Bridgeman.

The issues that will be discussed in Berlin are broader than the remit that the committee set itself in the report. The committee has been concerned with the revenue side of the budget, but the debate in Berlin—and it has been the case quite properly in the debate today—will also be about the expenditure side of the budget—the noble Lord, Lord Hussey, referred to that point—and how Europe spends our money.

Other issues have forced themselves onto the agenda: the appointment of a new Commission, whether temporary or permanent; the improvement of financial management under the control of the Commission; and discussion of the broader economic reform agenda. I was challenged on those points by my noble friend Lord Randall, the noble Baroness, Lady Ludford, and other noble Lords. I do not think that it can be my responsibility to broaden out the debate, which is supposed to be about the financing of the European Union, into the wider issues. But it is the case that in preparing our stand in Berlin, we plan as always to work constructively with our partners while remaining committed to defending British interests.

Before I leave that point, perhaps I may say a word or two on accountability and transparency. Those matters were raised by a number of noble Lords. They were mentioned by the noble Lord, Lord Randall; and the noble Lord, Lord Boardman, seemed to think that there was nothing about these matters in the Red Book. In our response to the committee's report, we agree that transparency is important. We publish an annual White Paper on European Community finances; we publish in the Red Book estimates of net contributions; and of course we welcome the scrutiny which both Houses of the UK Parliament provide. Improving financial management and strengthening the fight against fraud were the priorities of the UK's presidency of the European Union last year, and they remain the priorities.

I now turn to the UK abatement. Perhaps I may set out our position, which does not differ from that of the committee by as much as some noble Lords make out, although there was some fairly strong disagreement among noble Lords on this point. The UK wants to see a fair financing system for the European Union. We recognise the broad principle that wealthier member states should contribute more to the EU budget and poorer states should be net recipients. But the structure of EU financing means that that is not the case. The UK remains, after the abatement, the fourth or fifth largest net per capita contributor to the EC budget, despite being only the ninth, tenth or eleventh most prosperous, depending on the measure used. For example, we pay three times more per capita than France, yet France is wealthier than we are. So the UK abatement is in place because of the inequity which is present in the system of contributions.

The root cause of the injustice is the low level of Community spending in the UK. In 1995–97 per capita spending in the UK was 55 per cent. of the EU average. The UK receives an even lower share of per capita common agricultural policy spending—just 47 per cent. of the average over the same period. It is that divergence on spending levels which means that the abatement remains fully justified.

The committee recognises that fact. I quote: We accept that, without the abatement … some way of remedying the situation would need to be found". The noble Lord, Lord Williamson, whose baby this is and who is glad to have its paternity acknowledged after this period of time, confirmed that point. The problem of the UK's large contributions will remain for as long as the fundamental problem of inequity of spending continues to exist.

With the majority of other member states, the Government have actively supported a number of ways of controlling EU spending, including stabilisation of the budget and reform of the expensive and economically inefficient common agricultural policy. I shall say more on both those matters in a moment.

The fact remains that, after stabilisation, CAP reform and enlargement, the UK will continue to contribute more to the EC budget than a number of member states with a higher capacity to pay. So there is no justification in the claim that the UK Government should negotiate the UK abatement as part of an overall settlement.

I now turn to the issue of whether the abatement should be on the negotiating table. This is the area of the debate where there is wider disagreement between the committee and the Government. The committee's report suggests that the abatement should be on the negotiating table.

Last week, I was able to send noble Lords taking part in this debate the Government's response to the inquiry. In it, we explain clearly why we disagree with the report on the subject of putting the abatement on the negotiating table at Berlin, on the basis that, savings of a reformed CAP, stabilisation of the budget, and increased receipts would make up the value of the abatement.

Perhaps I may explain why in our view that cannot be the case. As the Government's response: spelt out, CAP reform will reduce the amount spent on intervention prices, but the amount spent on direct aids to farmers will rise. The Government cannot therefore predict with any confidence that CAP reform will have a significant effect on the UK's net contribution.

Stabilisation of the budget, the second proposal, is vital to large net contributors. However, the UK does not receive the full benefit of stabilisation because the abatement works as a corrector mechanism. The UK receives only one-third of the benefit it would otherwise receive from stabilisation. This illustrates the purpose and reasoning behind the abatement. It is not a set amount paid to the United Kingdom regardless; it is a self-correcting mechanism. Here again, we were grateful for the definitive contribution of the noble Lord, Lord Williamson. It is a self-correcting mechanism which corrects an inequity to the UK which arises from the EU financing system. If that inequity did not exist, there would be no reason for the abatement. So long as that inequity remains—and stabilisation would not correct it—the UK abatement will remain justified.

The committee also suggested increasing EU expenditure in the UK as a possible solution to our contributions imbalance. But a massive redistribution would be required of an order which could not be contemplated in the Agenda 2000 negotiations. If we put aside the CAP and the structural funds, we would have to receive virtually all the rest of the available funds if we were going to go any way towards sorting out the imbalance.

So let me be clear. There is no possible outcome to the Agenda 2000 negotiations which could compensate the UK for forgoing the abatement. Even if I find myself on the same side as my noble friends Lord Stoddart, Lord Bruce and Lord Shore of Stepney—a most unusual situation for me—I am afraid that they are right and those noble Lords who are serious about putting the abatement into the negotiating procedure are wrong. So the Government will resolutely defend the abatement. I am grateful not only for the support of my Eurosceptic friends, but for support from a number of noble Lords from all sides.

My noble friend Lord Tomlinson probably knows as much as the noble Lord, Lord Williamson, and more than any of the rest of us about it. He is right to say that we must continue to reform the policies of the European Union. He mentioned CAP reform, co-financing and degressivity. I might add the better targeting of structural funds, which was referred to by my noble friend Lord Grenfell. The Government are among the strongest advocates of European Union policy reform.

Perhaps I may say something briefly about the own resources decision. Paragraph 58 of the report suggests that the financing of the European Union on the present basis could continue only if all member states were content. I cannot accept that; it is an incorrect assumption from which to begin. The correct assumption would be that changes to the financing of the European Union could happen only if all member states agreed. So long as not all member states agreed, the current financing basis would continue.

In her answer to Question 122, the Economic Secretary to the Treasury was quite clear on the point. One would see a small improvement in equity, but to achieve it one would have to go through a rather large and painful process of negotiation. One would have to get a new "own resources" decision which would have to be unanimous. In turn, it would have to be ratified through the appropriate procedures in each member state. In our case, that would mean a fresh Act of Parliament. It is for that reason that we agree with the Commission's assessment in its paper last year. Despite the many valuable contributions which have been made on new possible alternative sources of revenue—the problems with the traditional own resources element, the need for the Cohesion Fund money to be thought out again, since many of the Cohesion Fund recipients meet EMU criteria, the better targeting of structural funds, to which I referred—they do not overcome the profound difficulty of achieving a reform of the own resources decision and the rather limited results which would be available to them.

Lord Renton of Mount Harry

My Lords, I thank the Minister for giving way. Surely, he realises that to say it will be a painful procedure is not an adequate answer to the fact referred to constantly in our report that own resources, particularly the collection of the resource based on VAT, is riddled with fraud. Everyone says that. Commissioner Liikanen agreed with that and the European Court of Auditors said it. Therefore, simply to say, as the Economic Secretary said in her answers to us, that the Government agree with the Commission that the shortcomings are there but they do not themselves provide grounds to justify a modification, that it is all too difficult and so the Government will not try, is simply not good enough for those who genuinely want to reform the European Union for its own good.

Lord McIntosh of Haringey

My Lords, I have two problems with that. First, we would be prepared to embark on a difficult and painful process if the quantum were sufficient to justify it, but now agricultural levies account for only 2 per cent. and customs duties 13 per cent. of revenue. Already we are returning to a GNP-based revenue system, even though no formal decision has been taken to do so. The second reason is that in order to start this painful process, unanimity is required and we do not have it.

I am very conscious of the time and the fact that many noble Lords, including myself, have more work to do tonight when this debate is concluded. If your Lordships will forgive me, I shall pass over the issue of stabilisation. However, stabilisation is essential in helping to solve the contribution imbalances of member states. I shall also pass over the common agricultural policy. The position of the Government on both issues is well known. However, they relate to expenditure rather than revenue and therefore, strictly speaking, they fall outside the subject of the debate.

In conclusion, there is no doubt that the Council later this week presents an opportunity for the heads of government of the 15 member states to set a path of stability for the finances of the Union over the next seven years. I welcome tonight's debate as an opportunity to air our views on these important issues. There is hard negotiation ahead, but the potential benefits are clear to all. The Government will go to Berlin to demand an outcome that is fair to all member states and to taxpayers and consumers.

10.17 p.m.

Lord Grenfell

My Lords, the hour is very late. I have no intention of adding to the long and excellent debate that we have had. I shall make one substantive point. I suppose that the sub-committee and the Government will continue to disagree on the subject of the abatement. I believe that it is more a matter of interpretation than anything else. We stated what we believed would be a realistic negotiating result for the United Kingdom and said that it was highly conditional. We made no apology for the fact that when we talked about what would be a realistic negotiating result we did not necessarily mean that it had to be on the table right now but that it was something that the Government should consider over the course of time. What disappointed me about the response of the Government and also the very authoritative speech of the noble Lord, Lord Williamson, was that in their very spirited defence of the British abatement no reference was made to the fact that there were others in the same position. That problem will not go away.

This has been a very good debate. I am glad that it has provoked such a lively discussion. Some noble Lords have been very severe in their condemnation of the time frame in which the inquiry took place. I can assure noble Lords that I did not set the date of the Berlin Council, but I take full responsibility, and make no apology, for my decision to seek the agreement of the sub-committee to take on this inquiry. We were tempted to go straight to what might have been considered the rather sexier subject of tax harmonisation, but I and my colleagues believed that we would be derelict in our duty if we did not examine the budget issues in the framework of Agenda 2000 expected to be settled during the German presidency, and in particular at the Berlin Council. That is why we decided to go ahead within this brief time frame.

Much as I long to comment on the many authoritative and interesting speeches made in the course of the debate, I must refrain from doing so because of the lateness of the hour. I warmly thank all who took part in the debate for their contributions. I am particularly grateful to those who wound up from the Front Benches for their interesting summations and comments.

To the credit of all noble Lords, I believe that their interest through these long hours demonstrated that there was no noticeable suffering from degressivity. I thank all noble Lords for the attention they have paid to the report. It only remains for me to thank again all noble Lords for their contributions to the debate, for making it such a lively debate, and for giving a good response to the report. I commend the report to your Lordships' House.

On Question, Motion agreed to.