France hangs on to its CAP subsidies as Blair caves in over EU rebate

Tony Blair admitted defeat in his battle for swift reform of EU farm spending and said he would reduce the value of the UK's annual budget rebate, providing the bloc spends less overall.

In a significant climbdown from his earlier pledge to revamp the EU's common agricultural policy (CAP), Mr Blair made clear yesterday that he will compromise over the rebate under a less ambitious deal. With France refusing to countenance changes to cash limits agreed for farming spending up to 2013, Britain's change of tack presented the only hope of salvaging a deal on spending for 2007-13.

But the concession provoked a domestic political row, as the Conservatives accused the Prime Minister of surrendering and of breaking his promise to defend the rebate won by Margaret Thatcher in 1984. Graham Brady, the party's Europe spokesman, said: "The deal he's proposing breaks his election pledges and would be bad for Britain. He's giving up his trump card for nothing by agreeing to cut the rebate without any progress on CAP reform. The EU budget would grow and British taxpayers would have to pay more to Brussels. He needs to learn to play hardball."

Speaking in Kiev, Mr Blair said that if the EU could not secure "a large deal which alters fundamentally the way the budget is spent", then there will have to be a "smaller EU budget". He added that the UK will pay "its fair share" for EU enlargement and that any agreement on the budget should ensure "rough parity on a national income basis between Britain and like-sized countries".

The only way to do that is to reduce the scope of the rebate, worth about €5bn (£3.4bn), which refunds two-thirds of the UK's net contribution to the EU. Britain, which holds the EU presidency, will put forward a plan under which large areas of spending in central and eastern Europe would be taken out of the remit of the rebate so that the UK's net contribution would be roughly similar to that of France or Italy.

A plan rejected by Mr Blair in June would have removed all spending in the EU's 10 new member states from the remit of the rebate, except for farm subsidies. Under the new proposal the rebate will apply to more areas than that, making its value higher than under the deal offered in June.

Mr Blair's official spokesman recalled that Britain had, in 1999, given up its full rebate entitlement on all spending in the 10 new members after they joined last year. The "same kind of spirit would guide our approach in these [budget] discussions," he said. Such a concession was inevitable since, if the rebate were not changed, the UK would become the second lowest net contributor to the EU by 2013, despite being one of the richest member states.

Yesterday's comments increase the possibility of a breakthrough at a key summit this month, though one is by no means certain. Mr Blair needs to persuade the 10 new members, who are the biggest victims of his plans to curb spending.

The British argument is that the cut can be made without any hardship because the ex-Communist nations will not be able to absorb the money pledged to them. Since 1992, only one nation - Portugal - has managed to use the amounts of money promised to the new members.

But that strategy provoked anger in the Baltic states, which Mr Blair visited yesterday. The Estonian Prime Minister, Andrus Ansip, said: "Solidarity means for us that rich countries have to help those countries that are not so rich."

Mr Blair travels to Budapest today to discuss EU finances with Hungarian, Czech, Slovak and Polish leaders. Britain will still press for a review of all spending, including CAP reform, though without any assumption that it will happen before 2013.

Mr Blair said yesterday: "We can, if we are intelligent, agree on a mid-term review of the budget led by the commission. This would allow us, not force us, to change the second half of the budget for the coming years. We will pay our fair share of the costs of enlargement, but we cannot give up the rebate."