Blair prepares to do battle on budget

He then moves on to launch summit talks over dinner with fellow EU leaders – a prelude to intense make-or-break negotiations tomorrow.

Failure to resolve the EU’s budget crisis could mean “paralysis for at least a year” according to one British official in Brussels last night.

But British Foreign Secretary Jack Straw made clear in the House of Commons that no deal at all would be preferable to a bad deal.

At stake is the EU’s spending programme for 2007 to 2013. It will be the first EU budget designed to meet the financial needs of a larger EU of 25 countries and more on the way in the next few years.

Caught up in the number-crunching is the future of Britain’s 21-year old budget rebate and the long-standing wrangle over the Common Agricultural Policy.

That boils down to a repeat of the Anglo-French clash of wills that scuppered the last effort to agree budget terms, at a summit last June.

Little has changed since. The UK insists on keeping the annual rebate won 21 years ago to compensate for the fact that other countries – notably France – do much better out of lavish CAP subsidies.

French farmers receive €8.8bn a year in farm support from Brussels, much more than the rebate that reduces the British EU annual contribution by about €4bn a year.

France wants the rebate deal scrapped and Britain wants the reason for the rebate – an unfair CAP system – reformed first.

Mr Blair has offered to sacrifice nearly €1.2bn a year off Britain’s future rebate under the new budget, in return for a “review” of the CAP in 2008.

President Chirac wants Mr Blair to give back almost double the rebate amount, while refusing to accept CAP reform until at least 2014.

The summit stage is therefore set for a London-Paris stand-off, with Mr Blair trying to isolate France over farm spending by offering more budget cash to most of the other member states now to buy them off.

The tactic had largely failed last night, with countries including Spain, Latvia, Poland, Germany and Italy complaining that the terms were still not good enough.

European Commission president Jose Manuel Barroso derided Mr Blair’s attempt at good housekeeping yesterday, saying the budget offer on the summit table was not sufficient to fund the EU’s continuing expansion ambitions – ambitions he said were supposed to be shared by Mr Blair.

The commission insists the EU needs a future budget drawing on 1.24% of member states’ money – a potential annual budget of €147.3bn a year.

Mr Blair has proposed a spending ceiling of 1.03% – generating about €117.9bn a year.

The question as the summit loomed was how much more - if anything – Mr Blair was prepared to concede on the rebate to win enough support to secure a budget deal.

A British government spokesman refused to speculate on the rebate, but said: “The consequences of not reaching an agreement (at the summit) are very serious. You could have paralysis for at least a year.

“This is a tough but realistic budget. We remain convinced that these proposals remain the best basis for agreement and that there is very narrow room for negotiation. We urge our partners to work towards agreement on this basis. We will see no better deal this week or next year.”

Failure to agree the budget would be a disaster for Mr Blair’s six-month EU presidency and would deepen the continuing sense of gloom triggered by last summer’s Dutch and French referendum rejections of the EU’s constitution.

But it would not leave the union without funding: next year’s budget has been agreed and the new spending package is not due in force until the start of 2007.

“A deal now is desirable because we need to reassure the new countries about their EU spending programmes and get funding in place in time.” explained a EU official. “But failure will not mean we are bankrupt, except maybe politically“.