The agreement, at the annual Anglo-French summit, was the first time that Paris and London have joined forces to try to break new ground in the EU in this way.
The Prime Minister, Tony Blair, hailed the agreement as "historic". The French President, Jacques Chirac, said it marked - after the common market, the single market and the single currency - an "important new milestone" in the unification of Europe.
The aim is not to undermine Nato but to provide decision-making and military capabilities to allow the EU to intervene in regional crises. The agreement, which will be discussed with other European governments and the United States, is a feather in Mr Blair's cap after a week of misleading EU headlines in the British press.
The annual British rebate from Brussels negotiated in 1984 - worth about pounds 2bn this year - was barely mentioned at the summit. Lionel Jospin, the French Prime Minister, hinted that he expected it to be renegotiated as part of the wider package of reforms of the EU budget, farm policy and institutions to be tackled next year. This was a restatement of a well-known French position.
Asked about the rebate at the final press conference, Mr Blair said there was no question of Britain abandoning it. However, Mr Chirac butted in: "If we start from the principle that everything that is mine is mine, but everything that everyone else has is up for negotiation, we are doomed to failure."
Mr Blair gave a fixed grin, no doubt anticipating stories about a Chirac snub today. In truth, a bloody battle over the rebate has long been inevitable for next year. There was none yesterday.
In a separate meeting of the French and British transport ministers, John Prescott formally enlisted his like-minded French colleague, Jean- Claude Gayssot, in the struggle to delay for five years the abolition of duty-free within the EU from next July. As Mr Blair pointed out, the deadline, agreed by EU governments seven years ago, can be delayed only by unanimous vote. Several other countries are refusing to budge.
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