How Blair painted himself into a corner over Britain's rebate

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Why did EU leaders fail to agree on spending for 2007-13 in June?

Jacques Chirac, the French President, demanded British concessions over the UK's annual budget rebate from the EU, which is worth about €5bn (£3.3bn) a year. Tony Blair said he would only drop the rebate if the Common Agricultural Policy was scaled back. France is the main beneficiary from the CAP, which devours more than 40 per cent of EU spending.

What is the British budget rebate?

Negotiated in 1984 by Margaret Thatcher, the rebate compensates Britain for the fact that it gets little out of the CAP, compared to countries such as France. It gives the UK a two-thirds reduction on the difference between what it receives from Brussels and what it pays in.

Why is the rebate so contentious?

Because of the way it is structured, every country funds it, including poorer new members from central and eastern Europe. Meanwhile, successive reforms of the CAP have reduced the proportion of EU cash that is devoted to agriculture. And the UK, which was an economic weakling in 1984, is now one of Europe's richest countries.

Is it fair to say Tony Blair has surrendered on the rebate?

He has himself to blame for the headlines. In June he insisted that he could not compromise without getting a reciprocal deal on CAP reform. But because Mr Blair had already agreed to agriculture spending ceilings up to 2013, he cannot force France to back down. Though he will get a review of all spending - including farm subsidies - in 2008 or 2009 there will be no guarantee of reform by 2013. So he has changed tack, demanding lower overall spending - which helps net contributors like the UK. Most of that will come from 10 per cent planned subsidies to the new EU states. In exchange, Mr Blair will offer a reduction on the value of the rebate - though a smaller cut than that he rejected in June.

How will the rebate be cut?

In June the Luxembourg presidency of the EU suggested that the UK keep the rebate for all spending in the old 15 member states. But it would be given up for payments to the 10 new countries, with the exception of their spending on farm subsidies. The British plan scales that back. It keeps the rebate for all cash in the old 15 nations. For expenditure in the new countries, all CAP funding will be rebated as will a proportion of the rest of the spending. This will be calculated to ensure the UK pays, overall, around the same as France or Italy, which are countries of equivalent size.

Is Tony Blair trying to steal money from the impoverished new states?

Britain argues that the new nations will never be able to spend the cash they are allocated. They have been promised sums worth more than 3.7 per cent of their own gross national income. Since 1992 only one nation has spent that level of subsidy (Portugal in 1993). Poland has admitted problems in spending cash pledged for 2004-06, less than 5 per cent of which has been distributed. So the British argument is almost certainly true. The problem is it sends a terrible message to voters in eastern Europe, presenting their leaders with a political problem.