Stage is set for Prodi vs Brown on EU spending plans

The European Commission and the EU's biggest countries were at loggerheads last night over how much to spend on modernising the former communist countries of Eastern Europe after they join the bloc.

Romano Prodi, the president of the European Commission, used a speech in London yesterday to attack British-backed moves to freeze the EU's multibillion-pound budget after its expansion.

Mr Prodi argues that the EU is being asked both to do more things and to spend less money. He said: "We are on the eve of the biggest enlargement in the EU's history, which many people see as uniting for the first time in history the European continent. This is an odd moment to propose lowering the ceiling on resources."

His comments raised the stakes for a meeting of EU finance ministers today at which Gordon Brown, the Chancellor, is expected to say that Britain remains determined to freeze spending at current levels after 2007. Mr Brown, who is renowned as an outspoken critic of the Commission, is likely to take a tough stance during informal discussions over lunch.

The dispute comes ahead of a key debate next month when the European Commission will decide on its proposals for the next financial period, 2007-13. The final decision will be taken by all heads of government next year in what is destined to be a difficult negotiation. Ten states join the EU in May and spending until the end of 2006 has already been decided.

In December, six net-payers into the EU budget - France, Germany the UK, the Netherlands, Austria and Sweden - said average expenditure during the next EU budget period should not exceed 1 per cent of gross national income.

The current annual budget of nearly €100bn (£69bn) is equivalent to about 1 per cent of gross national income even though the legal ceiling is 1.24 per cent. Although the European Commission has yet to decide how much to bid for in the next spending round, discussions documents suggest it will seek a budget of 1.24 per cent, equivalent to €147bn a year.

Of this almost half would go towards enhancing the EU's competitiveness and towards regional policy, seen as vital in Eastern Europe. More than one-third would be devoted to supporting agriculture, under a deal agreed in October 2002 in which rises in farm spending would be pegged to 1 per cent. This is less than expected inflation rate, but nothing like the cuts demanded by those who want to reform the common agricultural policy.

With hefty farm subsidies protected, the fear is that the EU's spending over the next decade will be lop-sided. Countries such as Poland would benefit from agricultural support but miss out on the big infrastructure investment that helped nations such as Ireland and Spain modernise their economies when they joined the EU.

The position of the six member states may have been hardened by the breakdown of talks on the EU constitution last month. The effect of a new ceiling on EU spending would be that subsidies to Spain would have to be cut substantially after 2006 if the Poles are to get injections of cash to regenerate their economy.

But the tough line from Berlin also reflects Germany's determination to shed its role as the EU's biggest paymaster. A combination of poor economic growth and a greater willingness to promote national interest has prompted a significant change of heart in Berlin recently.

Net-payers are also expected to exert pressure on the UK to relinquish some of its annual €3bn budget rebate. The Commission is expected to propose a generalised rebate system from which all net-contributors would benefit.