After more than 12 hours of negotiations on the European Union's next seven-year budget, EU leaders were preparing last night to abandon hope of reaching agreement at the Brussels summit. The future of Britain's rebate, which refunds two-thirds of that country's contribution to EU funds each year, remained the sticking point.
Shortly after 9 pm last night, Britain rejected a proposal that would allow its rebate to rise to €5.5 billion after 2007 before freezing it until 2013.
As they gathered yesterday morning in the Justus Lipsius building in Brussels, most EU leaders said that the shape of a budget deal was clear. But at their first formal session, it became clear that some of the biggest net contributors to the budget found the compromise proposal before them unacceptable.
The Dutch prime minister, Jan-Peter Balkenende pointed out that his country made the biggest per capita contribution to the EU budget and said he wanted a cut of €1.5 billion a year in the Dutch contribution.
Sweden's Goran Persson said instead of spending 40 per cent of the budget on agriculture the EU should target its funds towards research, education and innovation in order to boost economic competitiveness.
He called for a delay of up to a year "to negotiate on a better budget and on better distribution in the budget".
Italy's Silvio Berlusconi said the Luxembourg proposal was a move in the right direction but that it needed modification. He said that, by clinging to the British rebate, Mr Blair was looking to the past rather than the future and called on the British prime minister to compromise.
Mr Blair replied that he was willing to compromise on the rebate, but only in the context of a more comprehensive budget overhaul. "We are ready to accept that there is a need in principle to renegotiate the budget structure," he said.
Jacques Chirac said the level of funding for the Common Agricultural Policy (CAP) until 2013 was not negotiable and he insisted that the British rebate should be initially frozen at its present level and ultimately phased out altogether. The mood lightened over lunch when Mr Chirac declared that France could accept the proposal to freeze Britain's rebate at about €4.6 billion until 2013. The leaders were due to return to a working session at 3 pm but Mr Juncker postponed the session for two hours in order to hold bilateral meetings with the leaders of Britain, France, Sweden and the Netherlands.
The postponement was extended again and again into the evening as Luxembourg circulated a new compromise plan that would allow Britain's rebate to rise to €5.5 billion and would then freeze it. Any change in the rebate after 2013 would be conditional on a reform of EU farm subsidies.
Britain rejected the deal on the basis that it would mean a loss of between €25 billion and €30 billion to the British exchequer and would leave the CAP unchanged until 2013. Sweden and the Netherlands also remained unconvinced, with the Dutch holding out for more than the €500 million cut in its annual contribution envisaged in the compromise proposal.
A budget deal is unlikely during Britain's EU Presidency, which starts on July 1st, because Britain's defence of its rebate makes it an unlikely "honest broker". If EU leaders fail to agree a deal before 2007, the current 2000-2006 budget can be rolled over into the next budget period, with the approval of the European Parliament, with spending fixed at the level agreed for 2006.
If the European Parliament does not approve such a move, the EU would revert to annual budgets, making funding for multi-annual projects unlikely.