Franco-German strategy robs Blair of high ground

LUXEMBOURG: There was a strong whiff of deja vu in Luxembourg yesterday as EU foreign ministers fought the opening skirmish of a big, old-fashioned budget battle that will reach its climax in Brussels on Friday.

On one side stood Britain, fiercely defending the budget rebate won by Margaret Thatcher in a famous victory at Fontainebleu in 1984. Lined up on the other side was, as usual, everyone else.

Until last week, it looked as if the Brussels summit would be dominated by the fallout from the French and Dutch referendums on the EU constitution. With President Jacques Chirac weakened by the No vote and German chancellor Gerhard Schröder facing an early election, Tony Blair looked set to emerge as the dominant political player in Europe.

As British commentators and officials gloated over the misfortunes of Chirac and Schröder, they trumpeted Blair's plan to rescue the EU with a strong dose of economic reform.

The Franco-German motor of European integration was dead and London was looking forward to doing business with new leaders - Angela Merkel in Berlin and Nicolas Sarkozy in Paris.

Everything changed when Schröder declared that Germany was prepared to make concessions on the size of the EU's budget for 2007-2013. Until now, the six net contributors to the EU budget, led by Germany, have insisted that the budget should be capped at 1 per cent of Europe's gross national income (GNI).

That would limit the seven-year budget to €851 billion, compared with the European Commission's proposal for a budget of €1,205 billion, or 1.24 per cent of GNI.

Luxembourg's EU presidency had almost given up hope of striking a deal on the budget but agreement now seemed possible, pushing the crisis over the constitution into the background.

Chirac said France was willing to compromise too but added that a deal would only be possible if Britain was prepared to "make a gesture" by giving up or reducing its rebate. Under the rebate, the EU returns to Britain two-thirds of its contribution each year, saving the British exchequer €4.6 billion a year.

Britain justifies its rebate on the basis that it receives much less in EU agriculture subsidies and cohesion funds than other net contributors.

This was certainly true in 1984, when farm subsidies accounted for 70 per cent of the European Community budget and Britain, one of the poorest countries in the community, was the biggest net contributor. Since then, agriculture's share of the budget has fallen to 40 per cent, while Britain has become more prosperous.

Blair says he will only consider renegotiating the rebate in the context of a thorough overhaul of the EU budget, including a sharp reduction in Common Agricultural Policy (CAP) spending.

Schröder and Chirac are holding firm to a deal approved by EU leaders in October 2002 that will keep CAP spending at current levels until 2013. Schröder said last week that the 2002 deal was a prerequisite for allowing 10 new states to join the EU last year.

Luxembourg has proposed a compromise that would limit the EU budget to about 1.06 per cent of GNI and would freeze the British rebate at its present level.

Other countries, such as Germany and the Netherlands, which pay a disproportionate share of the EU budget, would also receive rebates. Spending on agriculture would remain at the levels agreed in 2002 but the size of the CAP would not be increased to fund farm subsidies for Bulgaria and Romania, which are due to join the EU in 2007.

Few officials in Luxembourg yesterday held out much hope of a budget deal in Brussels this week but the Franco-German stratagem has achieved at least one tactical aim by robbing Blair of the high ground as he prepares for the start of Britain's EU presidency on July 1st.