Germany ups the stakes in rebate row

TONY BLAIR softened his language over Britain's pounds 2 billion annual budget rebate yesterday as Gerhard Schroder, the German Chancellor, raised the stakes in the battle over the funding of the EU.

On the eve of a summit of the EU leaders in Vienna, Mr Schroder warned that, without a sharp reduction in German's pounds 7.8bn contribution to the EU, the German people would lose faith in the European project. "Europe's problems cannot be solved with a German chequebook", he added.

Germany is insisting on a package of measures to resolve the budget crisis by another summit next March, and believes Britain's special rebate, won by Baroness Thatcher in 1984, should form part of an overall solution.

Although Britain warned earlier this week that the rebate was not up for grabs, Mr Blair adopted a more conciliatory tone in an interview with the Austrian daily tabloid, Neue Kronen Zeitung.

The Prime Minister conceded the issue will be "strongly debated", adding: "I think it is important again for Britain to realise that we have strong position in respect of the rebate, other countries will have different problems.

"Germany, Austria, other countries have got a problem on their net contributions. Now they will obviously argue their position strongly".

Giles Radice, a pro-EU Labour MP and chairman of the Commons Treasury Select Committee, went further than Mr Blair by suggesting Britain might be flexible over the rebate. He told BBC Radio: "Of course the UK would be prepared to discuss its rebate if there was reform of the CAP. The reason why we are in such a difficult position as regards contributions is of course that the CAP doesn't help us at all."

Michael Howard, the Shadow Foreign Secretary, said Mr Radice's "startling admission" suggested the Prime Minister might not be prepared to stand as firm on Britain's hard-won rebate as he claimed. "There must be no slippage from the Government." he said.

Last night Downing Street denied any change of policy on Britain's contributions and insisted Mr Blair would not give any ground during the Vienna summit. However, the Prime Minister's more conciliatory language reflected his concern that the Government needed to adopt a more positive approach to EU negotiations after the rows over demands for a common tax policy. Mr Blair is worried that repeated threats by Britain to wield its veto could prove counterproductive.

Mr Schroder's intervention, made before he arrived in Vienna, is likely to set the tone for the two-day event ending tomorrow. His speech to the Bundestag argued: "Without justice regarding contributions the people in our nations will rather move away from Europe than support it."

In another unwelcome development for Mr Blair, the Austrian Chancellor, Viktor Klima, who will chair the Vienna meeting, said its "central theme will be co-ordinated economic policy". In an interview with Der Standard newspaper he argued that a "common currency requires common fiscal policy, co-ordinated budget policy and co-ordinated general economic policy. That is an economic imperative."Austrian officials said the Vienna summit was likely to produce little more than skirmishes over the reform of the EU's finances, which is supposed to be resolved at the next summit in March under the Germany presidency.

"We do not expect everyone to put all their cards on the table until a minute before midnight," an Austrian official said.