Government faces another defeat as Euro-sceptics unite

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Brussels and JOHN RENTOUL Political Correspondent

Once a year, to the delight of Euro-sceptics and Brussels-bashers everywhere, the European Union's spending watchdog, the Court of Auditors, is unleashed from its Luxembourg kennel.

This year, the row it has sparked has been bigger than ever. In an unprecedented move the court has said there were so many serious and substantial errors in the transactions underlying the pounds 56bn 1994 budget that it was impossible to guarantee the legality of the accounts.

The court's report has sparked a furious reaction. Labour and the Conservative Euro-sceptics yesterday united to condemn fraud, raising the prospect of another Commons defeat for the Government, albeit on a largely symbolic issue. Labour accused the Government of complacency in the face of losses from "lax controls" put at pounds 400m.

Seizing on the admission by Treasury Minister David Heathcoat-Amory that it did "not surprise me how serious the problems are", Andrew Smith, a Labour economic spokesman, demanded an early Commons debate on the issue. And a statement by five of the eight rebel Tory MPs recalled the issue which forced their six-month suspension from the party in the Commons: "In November 1995 the above MPs refused to condone more money to be wasted on the European Union, and argued that no more taxpayers' money should be handed over to the EU until the fraud and waste is controlled."

The statement, issued through the office of Sir Teddy Taylor, MP for Southend East, said: "There is an urgent need for the Government to make it clear to the officials of the European Commission that the people of the UK will not stand by and allow fraud and corruption to drain the income of the nation."

The court was yesterday exercising for the first time new powers under the Maastricht treaty brought in to answer accusations that Europe pours millions in taxpayers' money down the drain each year. These powers call on the auditors to supply a "statement of assurance" on both the reliability and the legality of the annual accounts.

The auditors' inability to provide that global assurance on both counts could trigger an immediate crisis if, as a result, the parliament refuses to vote through discharge of the 1994 budget. But it raises fundamental longer-term issues not just for Brussels but for all the member states who execute 80 per cent of the Union's spending.

The President of the Court of Auditors, Andre Middelhoek, told MEPs yesterday that up to 4 per cent of the budget had not been properly accounted for. In other words, over pounds 2bn of the total payments last year could have been handed out in error. A further 14 per cent of transactions could not be satisfactorily verified because accounting procedures were not adhered to. The suggestion was that errors in this category were less serious, but the overall conclusion was that only 80 per cent of the budget could be certified as beyond doubt - in other words, 20 per cent need closer scrutiny.

Examples of the type of sloppy financial control which underlie the conclusions make required reading for Euro-sceptics. But Britain does not escape the criticisms.

The auditors found the UK accounted for around 14 per cent of irregularities reported by member states in 1992 and 1993. Foot-dragging by the British Customs lost over pounds 600,000 to EU taxpayers.

Mr Heathcoat-Amory, theformer European Affairs Minister, admitted financial controls were inadequate, even in Britain. "Britain's record, although not perfect, is good in this respect [fraud], but there is a wider issue of mismanagement, lack of discipline," he said.