EU: Financial Management and Fraud (EUC Report)

My Lords, I only recently became a member of this sub-committee, after this report was written, so I think it is okay for me to congratulate my noble friend Lord Radice on it. In contrast to the previous speaker I find the report scrupulous, detailed and important. As we know, the EU budget is only a tiny proportion of the GDP of member states, but when spent, as the report notes, it can amount to very large sums indeed. There are quite a lot of jokes about this topic, and it is probably not wise to tell a joke to such a small audience as this, but I will have a go anyway. Europhobes might actually like this joke, so maybe I could expect a laugh from the other side. There are these two wealthy businessmen, and they are talking about how they have made their fortunes from EU funds. One is from western Europe, and the other is from what used to be eastern Europe. The one from western Europe takes his friend to his country and says, ““You see that stretch of road? I got €10 million to fund that, and it only cost €5 million to build. You go figure the implications””. Then the one from eastern Europe takes his friend to his country and says, ““You see that road?””. The one from western Europe says, ““What road?””—because there is no road there. The guy from eastern Europe says, ““I got €10 million in EU funds to construct that road. You go figure the implications””. Unlike the previous speaker, I have no quarrel with most of this report. I shall make five brief comments upon it. First, it is surely right to say that the current state of audit of the EU budget is a serious problem. It is regularly used, as we can see from the previous speech, by those who seek to bash the EU. The issues are well put in the Treasury’s memorandum of evidence in the second volume of the report, where it says that the audit methodology is very precise and hence it tends to be used as a negative assessment—in other words, as the memorandum says, the bar has been set very high by the European Union. The memorandum also says something more qualified: the quality of financial management is consistently not good enough. We have to ask why that should be so. Secondly, however, as the report correctly indicates and previous speakers have noted, the major difficulties happen at the level of member states, since most of the funds are allocated to, and spent by, them. I would see the issue here as a bit like that of the Lisbon agenda as it relates to the structural issue of the European Union. You have the European Commission, which is nominally the government of Europe, but a lot of what the Commission wants to do is determined by powers that remain in the hands of the member nations. I will come back to that in a minute. Thirdly, I am not sure whether I should say this, but I only got my job as director of the LSE because the Comptroller and Auditor General, Sir John Bourn, decided he did not want it. Maybe he did not want to face all the fractious academics you have to deal with. Anyway, it is interesting that, as was previously mentioned, he says that he could not have signed off our national accounts using this system—again, surely an expression of the fact that the bar has been set very high. I find his comment interesting. He says: "““By setting a test which is so high, when you explain or put this out publicly, people feel how hopeless it all is””." It is not all hopeless, but it is part of the same point. The EU has got itself into a bit of a bind, because I do not see how it could possibly relax its auditing procedures now. Fourthly, I fear that that latter point might apply to the suggestion in the report that the audit of revenue and expenditure be separated from the statement of assurance. That seems a sensible proposal, but it could be taken as something of a weakening of the strict rules the EU has set itself. Fifthly, since many of the problems are concentrated at member-state level, it is surely right to place a great deal of emphasis on tightening up at that level. Again, maybe the way forward is a bit like the Lisbon agenda. As we know, the agenda has not worked too well, partly because the Commission does not have the capability of fully controlling the policies that member nations institute. In recent publications about the Lisbon agenda, countries—and the European Union as a whole—are much closer now to meeting the agenda's objectives than seemed possible two or three years ago. That is because member states have taken the initiative into their own hands and some have served as active models for others. That is also the way forward for this issue. The report mentions that the Dutch Government are producing their own statement of assurance. Since the report was written, the Netherlands has been joined by Sweden and Denmark, who will do the same thing—that was announced recently on 27 February. It makes sense for the Dutch to pilot a scheme that others could follow in conjunction with other member states. Like the Lisbon agenda, this might be more successful as a bottom-up rather than a top-down exercise. I am not sure whether my joke got a laugh from the other side of the House, but fraud is the most difficult issue in all this. I am not sure how the EU can be confident that fraud amounts to only 0.3 per cent of total expenditure, as was said. We know that the EU does not have the data to allow it to make such a precise statement. Commissioner Kallas says that, "““fraud has not penetrated the European budget””." That may be true, but nothing in this report and nothing in his evidence shows that to be the case. Since estimates of fraud depend on the self-reporting of member states, there is still a lot to do. Resistance to more rigorous pan-European measures is strong among nation states, but it must come. At the end of the report, the commissioner makes a clear distinction between irregularity and fraud, but I am not sure that the distinction is so clear. He says that these two are very different, but I would have thought that there was a fair amount of merging around the edges. An interesting point was made quite well by one of the witnesses, Mr Wynn, on delegation risk: if you think that funds are not just yours but that they come from the European Union, you may tend to treat them in a somewhat less scrupulous way than funds that you have generated yourself. That is a point worth reckoning. We have to ensure that member states treat EU funds as being every bit as important as funds those they generate themselves. On delegation risk, one might quote the celebrated statement of the economist Larry Summers, which is an example of the same thing. He said: "““In the history of the world, no-one has ever washed a rented car””."