EU budget plan puts Blair under pressure to freeze rebate

A new plan to freeze the British budget rebate but to phase it out only if there are cuts in EU farm subsidies has been tabled, in a bid to save crucial European budget talks from collapse.

Under the proposal, which will put Tony Blair under increased pressure to strike a deal, the rebate would be capped at £3bn.

But moves to put it on a "downward path" would be dropped until 2013, and only come into force then if the Common Agricultural Policywas reformed.

The plan from the current Luxembourg EU presidency would not inflation-proof the rebate, and is unlikely to be acceptable to the UK Government as it would cost at least £9.3bn over seven years.

Last night a British official remained downbeat about the plan, describing it as the same as one rejected by Downing Street on Tuesday. He added that spending overall - which the UK wants to see cut - would remain unchanged.

Nevertheless the new scheme is difficult for Mr Blair to dismiss out of hand because it keeps the rebate in existence while making the link between its reform and that of the CAP. And other big contributors to the EU, including Germany and the Netherlands, would benefit from separate plans to reduce one element of their contributions.

With France and Britain on a collision course over the UK's annual budget rebate, EU leaders conceded that the prospects of a deal at a summit today are slim. Luxembourg tabled its final compromise package designed to pressure warring participants into burying their differences and avert another dramatic setback after the French and Dutch referendums.

Jean-Claude Juncker, Luxembourg's Prime Minister, said he was "pretty sure" the main item on the summit agenda, the budget for 2007-13, would remain unresolved. And Jose Manuel Barroso, president of the European Commission, called on leaders to show "political maturity and political responsibility", to avoid playing the "nationalist card" and avoid a failure which could make the EU "sink into a permanent crisis and paralysis". But he increased pressure on Mr Blair by calling for a reform of the rebate, saying it is "not acceptable that the costs of enlargement [of the EU] are not paid equally by all member states".

Mr Barroso also backed the emerging compromise over the constitution under which there would be a pause, and countries would proceed with the ratification process at their own pace. There was, he said, a risk of "contamination" from the French and Dutch "no" votes to countries with referendums still pending.

British ministers believe the summit will fail to break the deadlock over the EU budget. Yesterday they played down the prospects of a compromise under which Britain would surrender the contributions to the rebate from the 10 new members who joined the EU last year, an idea floated by Peter Mandelson, Britain's EU commissioner. Ministers said they would consider such a move only if it was accompanied by genuine reform of the CAP.

British officials believe scope for a deal is limited because Luxembourg had based its compromise on sharing the proceeds from a freeze on the British rebate, an option flatly rejected by Mr Blair. "It's difficult to see a way through," a senior UK government source said. "We are prepared to try but we will discuss the rebate only as part of a much wider process." Mr Blair's official spokes-man said: "The rebate cannot be the starting point. It is a symptom of the problem, not the problem itself, which is the distortion of the EU budget."

In the Commons, the Prime Minister called for a fundamental debate on the EU's future. "The important thing, at this moment, is for us to think in Europe about how we make sure Europe is more relevant to the concerns of people in the early 21st century."

He sidestepped demands by the Tory leader Michael Howard to declare the proposed EU constitution "dead" following the "no" votes in the French and Dutch referendums. He wanted "a pause for reflection" but said the decision had to be made collectively at the Brussels summit.

Later Mr Howard wrote to Mr Blair, urging him to disclose whether he would be arguing at the summit for "the constitution to be brought back or declared dead". Bertie Ahern, the Irish Prime Minister said: "The only aspect that, as far as we are concerned, should not be on the table and is non-negotiable is the only part where there is a solemn declaration and deal, and that is the CAP. It is entirely inappropriate to be unravelling the only part of this agreement that we have already closed. It would be dishonourable to the farmers."

Jack Straw, the Foreign Secretary, told the Commons that, if necessary, Britain would use its veto to preserve the rebate. He said the European Commission's proposed budget for 2007-13 which would set the total at 1.26 per cent of gross national income was "completely unacceptable". The compromise proposed by Luxembourg for a 1.09 per cent increase was "a significant advance" but "still not good enough", he said.

Mr Straw added: "Until and unless a rebalancing of spending takes place, the UK's rebate remains fully justified and we will if necessary use our veto to protect it."

Most British voters support elements of theconstitution, an NOP poll showed yesterday. It asked people whether they agreed with three statements about the EU, without revealing they were taken from part of the constitution setting out the EU's objectives.

Unaware of the source, 62 per cent agreed with the constitution's position on freedom of trade, 79 per cent on its economic stance and 92 per cent on its definition of the relations between the EU and member states. A further 66 per cent agreed the right to work and live anywhere in the EU and the right to buy goods and services from anywhere in the Union was important.

Divisions across Europe

Britain

What they want

To retain the British budget rebate in full.

Overhaul of the Common Agricultural Policy spending which costs the EU around €44bn a year, from which France gets 20 per cent in receipts. Cut in overall EU spending to 1 per cent of gross national income.

What they will get

Deal would require a concession on the UK rebate. One idea is to surrender the amount paid by the countries that joined the EU last year. This would cost the UK €3.5bn over the period 2007-13 but is not enough to satisfy France which is determined to get at least a freeze. A quid pro quo could be some limited concessions on farm spending.

France

What they want

Backed by Germany, France wants a freeze of the British rebate in 2007 at €4.6bn and its total abolition by 2013. This would help France which is the biggest contributor to the rebate. Also wants full implementation of 2002 deal on farm spending and extra cash for to Bulgarian and Romanian farmers when their country joins the EU in 2007.

What they will get

Might get a limited concession from the UK on the rebate, but not enough to satisfy President Jacques Chirac, who has gone to war over the rebate. With support from Berlin, it should be able to protect most of the 2002 spending deal on the CAP but will probably have to fund some of the subsidies for Romania and Bulgaria from within this ceiling.

Italy

What they want

Protection of the lucrative subsidies from the EU for the south of Italy, which is traditionally the poorer part of the country. Reduction in annual payments of €1.3bn to the British budget rebate. Italy pays the most towards the rebate after France.

What they will get

Could hope to get an addition of more cash to help the south if the Luxembourg presidency of the EU can conjure extra cash from a revised plan. Rome can hope to benefit from any reform of the rebate, should that be achieved.

Netherlands

What they want

Drop in contributions to the EU. Tough curb on spending and possibly reduction of the CAP.

The Netherlands is the highest per capita contributor to the EU, one of the themes of the Dutch referendum on the EU constitution which led to a "no" vote.

What they will get

Could gain from any scaling back of the British budget rebate. At present, the Dutch and Germans pay less towards the rebate than many of the old 15 member states to reflect that they are big net contributors. These sums could be reduced further. Alternatively, a low budget would help The Netherlands.

Spain

What they want

A gradual phasing out of the generous EU funding which has helped transform the Spanish economy over the past two decades. Madrid knows it will lose this cash now that poorer countries are inside the EU, but wants to spread a period of transition over five years.

Would like to end rebate.

What they will get

Budget disciplinarians such as the UK believe Spain's big cash benefits from the EU should disappear as soon as possible. Instead the compromise could be close to the one on the table at present which gives the Spanish two years to get used to losing the bulk of the cash.

Poland/new members

What they want

Most are pretty content with the package because they stand to be among the biggest gainers from the 2007-13 spending period. The Poles want more help with their poorer regions in the east and technical changes to rules on structural funds.

What they will get

Most of their demands since they have already been recognised. The EU member states have decided that the first priority in terms of subsidies should go to the new member states to help their transition.

Commission

What they want

More spending for the period 2007-13.

The Commission plan was to shell out €929bn in payments over the seven years. The Luxembourg presidency of the EU's figures would shave about €136bn off that. Britain would like to take a further €40bn.

What they will get

Something close to Luxembourg's plan.

This would entail the Commission making cuts on its foreign policy work, and on its multi-billion pot of cash earmarked for research and development. The Commission says it is just this sort of project that is most needed if the EU is to revive its flagging economies.