Germany urges deal to solve EU crisis

TWO DAYS of intense horsetrading among Europe's leaders begins today with a blunt warning from Germany that only a deal on financial reforms can prevent a "serious crisis" which could alienate Europe's citizens.

The message, from Gerhard Schroder, the German Chancellor, came on the eve of a summit which must now grapple with two of the European Union's biggest problems of recent years: the need for agreement on future funding and the vacuum in Brusselsafter the mass resignation of the European Commission.

When leaders gather in the Intercontinental Hotel in Berlin, they face a multi-layered set of negotiations expected to go to the wire. Mr Schroder, who chairs the summit, has an uphill battle to win concessions from Tony Blair over the British budget rebate, and faces similar intransigence from France over agriculture. He must also try to meet hopes that a new Commission president, probably Romano Prodi, the former Italian prime minister, can be appointed as soon as Friday.

A deal is not expected until the small hours of Friday morning, when an array of compromises should be stitched together. Mr Schroder's pre- summit letter to fellow leaders stresses how "difficult" and "arduous" the discussions will be. This is because the bulk of the talks focus on the thing that matters most to member states: money.

Perversely, the convulsions in Brussels have improved the prospects of a deal on financial reform. Mr Schroder's letter argues that "following the resignation of the European Commission, it is even more urgent to conclude Agenda 2000 [EU reforms] in order to safeguard the EU from serious crisis - at least in the public perception".

Britain's role is likely to be central because of a continuing push by other members against its pounds 2bn annual rebate. Germany is determined to cut its net annual contributions of pounds 8bn and has for months been trying different tactics to target the rebate.

With deadlines looming, different ideas have been floated, including the notion that the rebate should be swallowed in a general mechanism helping all big-paying countries.

The latest German papers state that the rebate "will be maintained", but go on to suggest a series of moves which could cost the UK hundreds of millions of pounds a year.

Politically, Bonn realises that Mr Blair cannot return to the UK having surrendered the rebate negotiated by Margaret Thatcher. The Prime Minister has, however, some leeway because Britain stands to gain some "windfalls". Signs of a concession by Italy should allow a change in the way national budget contributions are calculated.

At present contributions are based on national VAT receipts, hurting countries such as the UK and Germany, which are efficient at collecting the tax, but benefiting Italy, which is not. A move to a system based on gross national product helps both Germany and the UK - which would gain around pounds 100m. Similarly, a move to allow nations to retain 20 per cent, rather than the current 10 per cent, of the cash they collect for Brussels from customs duties and levies will help big trading nations, including the UK, which gains pounds 49m.

This cash could simply be surrendered or used to finance reforms to the rebate that Bonn wants. Whitehall is resisting, but British officials concede that the aim is to ensure that the UK will not be worse off. The rebate does not cover spending outside the EU, including support for countries expecting to join; once new members are inside the cash would be rebated - something Germany wants to curb. An alternative is to exempt EU administration costs from the terms of the rebate. British concessions could depend on the outcome of agriculture talks which might also save money. Here the villain is Paris, which wants to postpone reforms.

President Jacques Chirac has described the common agricultural policy agreement as a "proposal" and has had to contend with large-scale protests by French farmers.

Will the total package be enough for Mr Schroder to sell to the German public? Wisely, the Chancellor is playing down expectations: he wants results, he says, but is "not expecting a big lottery win".