Eastern Europe lines up to confront Blair on subsidy cuts

Eastern Europe's leaders are preparing to confront Tony Blair in a show of unity over British plans to cut their planned EU subsidies. Mr Blair, who holds the presidency of the EU, faces a frosty reception at meetings in Tallinn and Budapest tomorrow and Friday amid growing gloom over the prospects of a deal on the EU's budget for 2007-13.

Mr Blair hopes to persuade the central and eastern European countries to go along with his plan to reduce their aid on the basis that, under the EU's complex rules, they will never be able to spend all their cash allocation.

The UK's as yet unpublished plan is expected to reduce the total budget for 2007-13 from a proposal made in June for 1.06 per cent of the EU's gross national income to 1.03 per cent. By concentrating cuts on the new member states, it would remove from the equation funds which will never be spent. The UK hopes to pave the way for a deal that gives other nations more cash. The UK argues this would help the eastern Europeans' main objective of clinching an early deal to help plan their spending.

The British claim about the difficulty of spending EU cash is backed by historical evidence from previous EU enlargements and by the experience of Poland which, of the €8.3bn allocated to it for 2004-06, has spent just €380m so far - less than 5 per cent.

Since 1992 only one country, Portugal, has ever absorbed anything like the proportion of cash envisaged for the new member states - and it managed that only in one year, 1993.

But the new member states face a domestic political backlash if they agree to lower subsidy allocations. The Czech, Hungarian, Polish and Slovak leaders released a joint letter yesterday, arguing: "Spending EU resources in new member states to upgrade infrastructure, to strengthen innovation and human capital addresses this challenge, which is one of the greatest at the beginning of the 21st century for the EU."

Poland's outgoing President, Aleksander Kwasniewski, described the UK's plans as "unacceptable" yesterday, adding: "New member states need more funds for investment to be able to catch up. I cannot imagine the new budget will be stripped of the concept of solidarity." The Hungarian Prime Minister rejected the cut proposed by Britain after a telephone call from Mr Blair.

But there was more flexibility from the Czech Republic. Its Deputy Prime Minister, Martin Jahn, said the proposals "are not pleasant for us, but if they were compensated by significant concessions in terms of the conditions for drawing the money, we could start talking about it."

The new countries have already had trouble spending structural fund grants because they have strict conditions attached. These include strict rules for tendering for projects or raising matching national sums of cash. Poland has already begun reforms to diminish the demands that the beneficiaries have to fulfil.

That mood of gloom on the budget was reinforced when Mr Blair reiterated his defence of the UK's annual €5bn budget rebate. He said yesterday: "If people want a budget deal which means we end up giving up the rebate on the CAP [Common Agricultural Policy], there has got to be fundamental reform of that policy and it's as simple as that."