Blair and Chirac still divided by rebate chasm

Britain and France were on collision course for the EU summit after Tony Blair admitted there were "real difficulties" over Britain's rebate following talks with Jacques Chirac.

Britain and France were on collision course for the EU summit after Tony Blair admitted there were "real difficulties" over Britain's rebate following talks with Jacques Chirac.

After the setback of the rejection by French and Dutch voters of the EU constitution, another crisis looms over funding and spending plans for 2007 to 2013.

The Prime Minister, speaking at the British embassy yesterday, looked relaxed, but he laid out a daunting task for the summit: to put Europe on a course of economic reform or face months of the impasse over the budget.

Having gone out of his way to inflame the budget quarrel last week, the French President appeared determined to seem conciliatory yesterday. He greeted Mr Blair at the Elysée Palace with a smile and vigorous handshake.

After their talks he did not give a press conference, but issued a statement through his spokesman, Jérôme Bonnafont, who said the meeting had been "amiable and constructive".

He said: "France is approaching this negotiation with the willingness to reach a reasonable and balanced agreement, which presupposes that everyone makes a contribution. In the political crisis in which Europe finds itself, it is important not to add financial problems."

Mr Blair indicated, however, that he was prepared to allow the British presidency from July to be dominated by the fresh crisis over the EU budget rather than to give ground this weekend in Brussels.

Describing his talks with President Chirac as amicable, he said: "I think it is difficult to see these differences being bridged but we continue to talk to people, including the presidency [now Luxembourg] about it."

One thing was increasingly clear, said Mr Blair: after the French and Dutch "no" vote, the EU required a clear political direction' on many issues, including financing, economic reform and immigration.

In a new approach, Mr Blair said he believed there had been a change of mood in Berlin, Luxembourg and France, which he had visited in the past 48 hours, in favour of halting further ratification of the constitution to allow "a pause for reflection for a period of months" .

The Prime Minister left little room for manoeuvre, insisting on the £3bn British rebate that he would only agree to review it if the French and Germans were prepared to cut subsidies to agriculture, a suggestion that M. Chirac and the German Chancellor have both rejected this week. He said: "I don't think it will send us into crisis provided we get the right answer eventually and do so within the political context people understand. The financing doesn't come into effect until 2007. We don't have to do it now; it is better to get the right deal than a slapped- together deal."

The Prime Minister's aides said the accumulated cost of freezing the British rebate between 2007 and 2013 would be €25bn (£17bn) to €30bn. That would mean Britain would be paying up to a third of its gross national income more than France.

It remains politically unthinkable for M. Chirac to allow a reopening of the debate on agricultural reform in a budget settlement in Brussels this week. However, France might accept a formula that meant that its own net contribution to the EU budget increased in the years ahead. A deal could then be sold to British public opinion, French officials argue, as London's contribution to the eastern enlargement of the EU.