Britain heads for showdown over EU rebate

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Tony Blair faces an eleventh-hour showdown with European allies next Tuesday over the British budget rebate, after the outline of a broader deal emerged from hard-fought negotiations on EU financing.

Tony Blair faces an 11th-hour showdown with European allies over the British budget rebate, after the outline of a broader deal emerged from hard-fought negotiations on EU financing.

Crunch talks with Mr Blair on the British rebate have been left to next Tuesday ­ just before a crucial EU summit ­ in the clear expectation that the fate of the UK's annual cheque will be the last outstanding issue to be resolved. The move poses the most serious threat to Britain's rebate in its 20-year history. Mr Blair could find himself under mounting pressure to help extricate the EU from its constitutional crisis by giving ground on the rebate.

Jean-Claude Juncker, the Prime Minister of Luxembourg, which holds the EU presidency, said his meeting with Mr Blair will be the last of his talks with EU leaders before the summit, which is due to finalise a deal on spending. Mr Juncker described the timing as a "well-organised coincidence", hinting that he hopes to tie up the rest of the package beforehand, putting Mr Blair on the spot.

After informal talks at a meeting of EU finance ministers in Luxembourg yesterday, diplomats were upbeat about the prospects of an outline deal on the amount of cash that the EU will spend between 2007-2013. That will put huge pressure on Mr Blair to give way on the rebate. Moves to curb some spending on the common agricultural policy (CAP), from which France gains hugely, have increased pressure on Mr Blair to give ground, perhaps by agreeing to cap the rebate.

Negotiated by Margaret Thatcher in 1984, the rebate has been worth on average ¤4.6bn (£3.1bn) to the UK in recent years. Luxembourg wants to freeze it at this figure then reduce payments, and Britain is isolated in its defence of the cheque.

Gordon Brown, the Chancellor of the Exchequer, said the UK "would be prepared to use the veto if necessary to protect the British position". But he refused repeated invitations to rule out a freeze of the rebate.

In an interview with the Financial Times, Mr Blair appeared to shift his position, arguing that the rebate will be "retained", departing from an earlier formula that it is "non-negotiable".

Italy is still threatening to block a deal over a reduction of its structural funds. But if the rest of the package falls into place the UK would be under huge pressure to give ground.

Under fire from allies for putting its referendum on the EU constitution on ice, the British Government is in a difficult position, isolated 24-1 over the rebate. All countries, including eastern European nations, have to contribute to the rebate that the UK alone enjoys. But others, such as the Netherlands, Germany and Sweden, have become big net contributors.

Latest proposals from Luxembourg would put spending at 1.06 per cent of gross national income ­ ¤871bn (£583bn) over seven years ­ though the UK says this is too much. But there is an estimated 18 per cent reduction on farm subsidies devoted to a rural development fund, which would be cut to about ¤73bn over the seven-year period. Meanwhile only ¤2bn would be added to agriculture spending to account for Romania and Bulgaria's accession, instead of the ¤7bn expected.

Britain has always argued that CAP reductions are essential before changes to the rebate could be considered.

Following the constitution "no" votes, the EU is under pressure to show it can function effectively. Mr Juncker said: "It would be advisable to reach agreement on the financial perspectives." This would avoid the EU getting "bogged down in a crisis".