European Union Bill

My Lords, it would be possible to make a well founded and persuasive argument to get rid of all the provisions of Schedule 1. At this point, however, I will focus on one provision where there is an absolutely demonstrable, concrete, national, economic and industrial issue at stake. I hope I shall persuade the House, and indeed the Government, that there is more than good reason to think again about this element of Schedule 1. The House will be well aware that military equipment is one of the rare exceptions and exemptions from the single market. That is achieved by Article 346(1)(b) of the treaty, which states: "““any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes””." That is an explicitly protectionist measure that allows individual member states to protect their own markets, as in generations gone by before the single market, or Common Market, were ever conceived of. It is an anomaly in what is otherwise a free market, and it is very difficult for some member states to give this up because they are protecting industries with considerable lobbying potential in their own countries. I have no financial interest to declare in the British defence industry. When I became Defence Procurement Minister, I made sure that I had no shares in defence industries and that has remained the case. I have not developed any relationships with the defence industry since I left government. Indeed, it would have been impossible under the rules for me to have done so in the last year. I acknowledge an admiration for the British defence industry, which I was able in the course of my job to get to know extremely well. The technologies that it has developed over the years, many of which you cannot even talk about the existence of let alone describe the nature of, are extraordinary. We really are at the front line in this area of technology. It is not surprising, and a demonstrable fact, that the British defence industry is by far and away the largest in turnover in the European Union. In other words, we are the losers through this protectionism. The EU market for defence procurement is roughly €70 billion, say £55 billion, or something of that order. Our own element in that is about £15 billion—say €18 billion—so we are talking about a potential market of some €50 billion to €55 billion. The French, who are very protectionist and make considerable use of Article 346, have about the same spend. The Germans and the Italians have rather less and are also very protectionist. Everyone else in the EU adds up to that sum. There is at stake a market for something like €55 billion, or £45 billion to £50 billion. Of its own nature and operating against the largest most productive sector in the EU, this protectionism deprives us of the opportunities for sales and therefore for employment and for investment, not least for sharing the considerable overheads of R&D with the Ministry of Defence, which is very much in the interests of this country—the interests of defence, the taxpayer and industry. It might be thought—indeed, I hope it would be—that any rational Government, and I am sure that the coalition Government are in no sense irrational, would want to seize any opportunity that could be identified to deal with that anomaly in the single market. We have been pioneers in, first, opening the single market initiative under Margaret Thatcher and Lord Cockfield and, subsequently, in pushing through the opening of financial services, intellectual property and many other areas in which there was hesitation on the part of our partners in moving forward to implement the principles of the single market. One would assume that it would be common ground between all the major political parties, in addressing the electorate in our own ways and in addressing the economic interests of the nation, to want to get rid of the protectionist barriers that face that particularly important industry. I think it would also be common ground to agree that the defence industry, perhaps after pharmaceuticals and biochemistry, is the area of manufacturing in which we have the greatest competitive technological advantages in the world market. It is very important, and we ought to be able to come, more or less, to a consensus on what should be done about it. How do you generate an opportunity to get rid of a form of protectionism when certain member states find themselves subject to considerable pressures and lobbies and find it difficult to move? It is difficult for some of them to vote openly, clearly and decisively for the abolition of Article 346. As I said in Committee, and as all of us with experience of negotiations in any context will know, often the best way to solve a substantive problem or make progress on a substantive issue, especially in a complex negotiation where people have strong and differing interests at the outset, is by a procedural route. I gave the example of setting up a committee to solve the problem rather than taking a decision around the board table, the Council of Ministers, or whatever. The qualified majority voting system is undoubtedly a very useful weapon that has proved its worth over the past generation in achieving substantive progress through procedural routes. I can see one or two noble Lords looking for the text of the provision in Schedule 1, so let me say that it is on page 14, the penultimate element in Schedule 1, and states: "““Article 346(2) (changes to list of military products exempt from internal market provisions)””." The provision does exactly the opposite of what I suggest is the obvious thing to be done in the national interest. It makes it impossible for us to agree to, let alone to propose, QMV to decide the future of that derogation from the single market without a referendum. We are putting a ball around our own necks, we are shooting ourselves in the foot, with that provision. It makes no sense at all. Where we have an interest in liberalising trade—I think I would carry a number of people on the opposite side with me in saying that we surely do—and where that means might be the only way to make progress in the area, as has proved to be the case in other similarly difficult areas in the past, we are preventing ourselves from doing so. We all know that if a British Minister is not allowed to agree and says, ““Well, we've got to have a referendum beforehand””, that in effect denies us the chance to seize the opportunity rapidly. It might need to be seized there and then, because if it is not you have lost it. You have your interlocutors in a favourable frame of mind in a particular situation when they agree to resolve the question through QMV. That element in Schedule 1 is entirely perverse. It goes in exactly the opposite direction from that in which any responsible Government would want to go. It is contrary to rationality and good sense; it is directly contrary to the national interest. The Government have been very statesmanlike in saying in the course of our debates that they will listen to new arguments, that their minds are not closed. Both noble Lords, Lord Wallace and Lord Howell, have said that in answer to me and to other noble Lords. I am sure that that is true, because they are both sophisticated men of the world who know that one always needs to look carefully at these things. When you have a schedule of 56 items, it is almost certain that something somewhere will have crept through when it should not really be there, and it needs to be looked at again. I claim no monopoly of wisdom in this matter, but I raise it because, as I said, I have a background in this subject and I was struck very forcibly on reading the text of the Bill. I hope that on the basis of the considerations that I have just set out there will be scope to reconsider this important matter. It is important for a major British industry which I think we all wish to support in every way we can. I beg to move.