Millennium spending puts regional aid at risk Depressed regions face loss of pounds 500m in EU aid

THE European Commission will unveil proposals this week clearing the way for cuts in aid to British regions of up to pounds 500m a year. The proposed shake-up will expose the worst strains yet between the Blair government and Brussels, with up to 70 per cent of eligible United Kingdom regions in danger of seeing their money slashed.

Behind-the-scenes lobbying has been intense, but the Government has failed to convince the commission to drop plans it believes are framed to hit Britain hardest even though the UK is now the fourth poorest European Union member state.

In Brussels, officials are dismayed at the sums being pumped into millennium projects which are winning priority in terms of government support, over lower-profile job-creation schemes.

On Wednesday, Monika Wulf-Mathies, the EU regional policy commissioner, will outline details of a radical shake-up to the regional aid budget which with farm spending absorbs three-quarters of the EU's pounds 60bn spending each year. Reform is driven by plans to admit early next century millions of poor central and east Europeans whose income per head is on average less than half the EU average.

Peter Mandelson, the minister without portfolio, and Margaret Beckett, President of the Board of Trade, have been in Brussels to register the Government's protests.

But their negotiating strategy has been undermined both by Tony Blair's repeated claim that Britain has the best EU record on tackling unemployment, and the suspicion in Brussels that London is more interested in millennium projects than in stumping up "matching" investment for long-term regional development schemes.

Ms Wulf-Mathies claims that the Government's attitude is contradictory. On the one hand, Britain wants expansion to Eastern Europe, but at the same time is not willing to pay for it. "The biggest outcry has been in Britain, but the arguments we are getting are not very convincing," an aide said.

Britain has been receiving pounds 1.5bn a year since 1994, but that will run out in 1999. Under Ms Wulf-Mathies' proposals, Northern Ireland and the Scottish Highlands and Islands would lose the priority claim to aid they enjoy now, while nine of 13 regions in industrial decline could see their funding halved and axed. Merseyside is expected to retain top rates of aid and South Yorkshire, where wealth per head has fallen to about 75 per cent of the EU average, may win an increased share.

But overall, the regions claim they will be shouldering the brunt of the cost of EU enlargement because unemployment will be used as the yardstick and the jobless rates in Britain have fallen since the EU aid cake was last divided up.

Meanwhile, east Germany and parts of Italy will see their funding increased because the new drive is to "concentrate" cash on areas that need it most. The commission believes aid is now spread too thinly.

The commission's directorate for regional policy has also written to the Government to express concern that the focus on millennium projects could distort the economic regeneration strategy which EU money is supporting. "The Deep", a pounds 50m millennium scheme in Hull, will be given partial EU backing because it could promote tourism, but others have been rejected.

"Local regeneration seems to be the last priority when it comes to securing matching funds, but there is plenty of money floating around for the millennium," said one EU source.