Leaders of EU gather in Berlin to fix finances and solve crisis

European Union leaders arrived in Berlin last night for a summit aiming to overhaul Europe's finances and resolve the deepest political crisis in the EU's history. With the threat of NATO air strikes against President Slobodan Milosevic overshadowing the two-day meeting, the German Chancellor, Mr Gerhard Schroder, called on his fellow leaders to put Europe's interests first by showing a willingness to compromise on the Agenda 2000 reform package.

Last week's resignation of the European Commission has propelled a new item onto the summit's packed agenda - the nomination of a new Commission president to succeed Mr Jacques Santer. The former Italian prime minister Mr Romano Prodi consolidated his position as the frontrunner yesterday with a public endorsement from the British Prime Minister, Mr Tony Blair.

In a letter to the other heads of government, Mr Schroder argued that the Agenda 2000 reforms are essential to securing the long-term success of the euro and preparing the EU to accept new members in the next century.

"Following the resignation of the European Commission, it is even more urgent to conclude the Agenda 2000 to save the European Union, in the eyes of the public at least, from a deep crisis," he wrote.

The reform package includes a reduction in the subsidies paid to farmers and changes to the system of funding the Union. Germany wants to reduce its own contribution to the budget by moderating EU spending, cutting the British budget rebate and reducing assistance to poorer countries such as Ireland, Spain and Portugal.

Before he left for Berlin last night, the Taoiseach, Mr Ahern, acknowledged that Ireland stood to lose from the reform package but insisted a fair and balanced compromise was possible.

"While Ireland faces a larger per-head drop in EU funding over the coming period than any other member-state because of our recent strong performance, I remain confident that we can achieve a deal which is equitable and fair to all member-states, including Ireland," he said.

Mr Ahern views the agreement between EU farm ministers on the future of agriculture subsidies as a promising start to today's talks. But much remains to be discussed, including the fraught issue of structural and cohesion funds, which the richer countries believe have outlived their usefulness.

One issue on which almost all the leaders agree is duty-free, and they will make a further effort to save duty-free sales from abolition.

All the member-states except Denmark support a German proposal to charge travellers VAT on alcohol, tobacco and luxury goods but to exempt them from excise duty for a further 2 1/2 years. Excise duty accounts for most of the tax charged in Ireland on alcohol and cigarettes.

But the European Commission this month repeated its steadfast opposition to any extension of duty-free within the EU and there may be little that the politicians can do to save the industry.