Merkel hints at support for Blair over economic reform of Europe

Angela Merkel, the new German Chancellor, has put her country's relationship with Britain on an equal footing with its traditionally strong axis with France. In a break with 40 years of tradition, Ms Merkel told a Downing Street press conference after two hours of talks with Mr Blair: "The new German government has a great interest in good and friendly relations toward France, but not just with France but equally so with Great Britain." She also suggested that Germany would back Britain's drive to secure economic reform in Europe, which is opposed by France. "Without economic strength, Europe will not be able to maintain its social model, and that is why reforms are of the utmost necessity."

Her remarks, two days after taking office, may revive Mr Blair's hopes of a three-way partnership between Paris, Berlin and London which sets the agenda for the 25-strong European Union.

The German Chancellor sat diplomatically on the fence on the EU budget. She said she wanted a settlement acceptable to all sides at a crucial summit of EU leaders in Brussels next month, when Mr Blair will come under enormous pressure to cut the £3bn-a-year rebate on Britain's EU contributions. She said no country should be forced to compromise against its will, adding: "You can't expect one side or the other to concede everything."

Although EU funding and the stalled WTO trade talks were discussed, Downing Street said the meeting was a preliminary get-to-know-you session rather than a detailed negotiation.

Mr Blair said on the budget: "Obviously it is going to be difficult and tough but we will do our level best to try to get an agreement." He believed he would have "a very good and close working relationship" with his new German counterpart.

Kazimierz Marcinkiewicz, the new Polish Prime Minister, told Mr Blair over lunch at Downing Street that the EU's 10 new members were desperate for a deal on the budget.

He disclosed they had written a joint letter calling for an urgent resolution to the wrangle, and said he had told Mr Blair about the need for "solidarity" to overcome "selfishness". Stefan Meller, Poland's Foreign Minister, warned that another failure would provoke a disastrous reaction in eastern Europe and suggested that Britain could lose the support of its natural allies there. A breakdown at the Brussels summit next month would be "an extremely serious problem", he said, adding that this would have a deep impact on public opinion and attitudes to the EU.

Joaquin Almunia, the European Union's economic commissioner, increased the pressure on the UK to shift its position. He said that failure to reach an agreement next month would jeopardise the budgetary process, which would hit the EU's new members. He said France and other member states had given ground by agreeing to the cutbacks in the size of the Common Agricultural Policy, which the UK wants to trim further in exchange for the loss of the rebate.

"If other elements are moving the British rebate should also move," he said. "We need to ensure the situation in the UK from the financial point of view with the rebate should be revised." He said failure to strike a deal next month could delay planned enlargement of the EU to include Bulgaria and Romania in 2007 and Croatia and Turkey at a future date. "Everybody needs to reach a compromise and everyone has to move," he said.