Today he will come under more pressure to accept a cut in the rebate, won by Margaret Thatcher in 1984, when he meets Gerhard Schroder, the German Chancellor, for talks on the EU budget at Downing Street. Privately, ministers admit Britain may have to give some ground to secure agreement on reform of EU finances at a summit of leaders in Berlin next week.
But Downing Street reiterated last night that the rebate was not negotiable.
The report by the Labour-dominated House of Lords committee on Europe warned Mr Blair that his determination to keep the rebate could wreck plans to reform the much-criticised common agricultural policy (CAP) and to allow Eastern European countries to join the EU. The peers admitted that Britain had a problem over its high contributions to EU coffers, but said the rebate might no longer be the best way to solve it. The refund should be "negotiable" as part of a fairer funding system.
"It would be regrettable if the entire package (including CAP reform and the possibility of funding enlargement) were to be lost because the UK government insisted there was only one way of solving its problem," said the report.
"Equipping the EU to handle enlargement is a very big prize; we urge the Government not to throw it away."
As a compromise, the committee proposed that Britain give up the rebate on condition that the loss be recouped through savings from a reformed CAP, a freeze on EU spending by 2006 and possibly by higher EU spending in this country.
Patricia Hewitt, the Treasury Economic Secretary, told the committee the Government was "prepared to look at other options" but insisted that Britain could not help other countries by worsening its own problems.
Downing Street said there were "bigger questions" to be discussed than the rebate at today's talks between Mr Blair and Mr Schroder.
But their common relief at last week's resignation by Oskar Lafontaine, the German Finance Minister, may be overshadowed by Germany's demand for the abolition of the British rebate.
Mr Blair's spokesman said he would insist the special deal was still justified. "Even with the abatement we are the fifth- largest contributor per head [to the EU] and by most accounts the 10th richest."
The Lords committee also called for much more openness over the way the EU spends its money. It said: "We are already being taxed to finance EU expenditure, yet we have virtually no knowledge of what we are paying - or what we are paying for. We call on the Government to consider without delay how this transparency can be achieved even under the present financing system."Reuse content