Hamish McRae: Britain's rebate isn't such a big deal

Making the EU more competitive is hugely important and should be the main policy goal

Here is the trade. Britain gives up part of its rebate on payments to the European Union in exchange for radical reform of the project that eats up more than half of the EU's spending, the subsidies to farmers under the CAP. That, put crudely, is the proposition that may or more likely may not be negotiated before the UK presidency of the EU expires at the end of the year.

Here is the rationale. The UK rebate is an anomaly, born of the fact that Britain does not get much back from the EU, largely because we have quite a small farming sector, and the payments into it were intolerably large. Margaret Thatcher declared that she wanted her money back and won the day. But that was the early 1980s, when British GDP per head was one of the lowest in the EU; now it is one of the highest - particularly if you look at a slightly different measure of national wealth, GNI. That stands for gross national income, and includes net payments from overseas assets, on which the UK makes a large profit. In addition there are new demands on the EU from its much poorer new members.

On the other side of the deal, one key thing that Europe needs to do is to spend its money on fostering innovation and entrepreneurship rather than propping up inefficient farmers - and damaging Third World countries' agricultural exports.

Now here is the emotion. Britain, even with the rebate, is still the second largest net contributor to the EU after Germany. If Tony Blair gives back part of Margaret Thatcher's hard-won rebate, we become an even larger net contributor. It is a bit rich to be told by the French to give up the rebate when they make hardly any net payment into EU themselves. The CAP has eventually to be reformed anyway, despite the French, so we would be giving up hard money for no advantage. Tony Blair would appear Europe's poodle in the same way that he is already George Bush's lapdog.

It is a pretty glum debate, so what should we sensibly make of it? Three ideas - try them for size.

The first is that the rebate is not terribly important in the global scheme of things. The second is that reform of the CAP is quite important but not as important as is often claimed. And the third is that making the EU more competitive is hugely important and that should be the main policy goal of all its member states.

The rebate has a symbolic significance because it was needed to counter the unfairness of the deal that the UK had struck when it joined the EU. But to put it into context, were it to be modified, we would be talking of increasing our payment into the EU by something like £3bn a year. We don't know exactly because the deal has not been done, but were it that sort of figure it would not make an enormous difference to public finances or indeed the current account deficit.

You have to be careful because while people fret about government wasting a few millions they tend to glaze over when the b-word comes up. But in a good year the UK economy adds £30bn to its GDP so we would be losing the fruits of a month's growth, maybe a bit more. As for tax, well the chancellor looks like being £5 to 10bn short on his sums this year, so I suppose the extra few billions would merely a bad-ish situation a bit worse. So yes, it does matter, but it is not crucial to UK prosperity to retain the rebate.

The CAP matters more. Reform for the next few years has been blocked by an agreement between France and Germany. Yet failure to move is undermining progress on world trade talks, which begin next month in Hong Kong. So if the UK could somehow prise open the Franco-German pact, it would very helpful, to put it mildly, for the future growth of world trade. It would also make for much more rational use of EU funds to support growing industries instead of propping up declining ones.

But the agricultural subsidies of the developed world are not going to end overnight, or indeed in five or 10 years. They will gradually be pared back by all governments, including the US and Japan. And all post-war experience of trade talks is that they are always bad-tempered and impenetrable, that there are periodic impasses, but eventually the mutual benefits of further trade liberalisation win the day. Or at least they have so far.

Politically, then, it would be very helpful to be able to show that there might be some early move on the CAP, over and beyond the minor changes on offer. It would put pressure on the US to modify its trade subsidies, though whether that would really affect US policy is another matter. But it is not of itself a deal-breaker or a deal-maker. The principal threat to world trade comes from the relationship between China and the US, not the talks in Hong Kong.

What does matter most of all is that the entire EU economy performs better. Growth has picked up a tiny bit and is now strong enough to allow the European Central Bank to increase interest rates in the next few weeks. Some small economies, most notably Ireland, are still growing well, but living standards across Europe are mostly rising by less that 2 per cent a year. There has been a decade where Europe has lost ground to other developed countries, most especially the United States. Even the UK, a former star performer, has slowed sharply in recent months. Something has gone wrong.

That surely is the thing - almost the only thing - that matters for Europe. Some loss of relative position in the world is more or less inevitable, given European demography. We are becoming, with the partial exception of Japan, the oldest region the world has ever known. So we will lose ground, at least in relative terms. But it would be intolerable for our continent to lose influence faster than it needs to, and until it is more successful in economic terms that is what will happen.

So lifting Europe's game should surely be the main aim of EU policy. We all know this. We also know, if we are honest, that the main drive to do so, the so-called Lisbon agenda, has failed. But we are not having the necessary conversations to try to figure out what is going wrong. Why, for example, do so many European science graduates move to the US? Why are business start-up rates half those of North America?

Instead a vast amount of bureaucratic time and political energy is being expended on a budgetary squabble that is bound, whatever happens, to end in tears. Now, old-European hands will say that this is the way the EU has always worked. There have always been last-minute deals, clocks being stopped at midnight, rows, walk-outs - yet eventually the union has made progress. That is fair enough. But that was in the good days. The world has moved on.