Chirac and Blair clash over Britain's EU rebate

The simmering dispute over Britain's EU budget rebate burst into open confrontation yesterday, as France's President, Jacques Chirac, and Tony Blair clashed directly over the fate of the UK's annual €5bn (£3.4bn) cheque ahead of a crucial summit next week.

The French President called on Britain to surrender its annual budget rebate as a gesture of "solidarity", while ruling out any reduction in direct subsidies to French farmers. Within hours Mr Blair hit back, dismissing M. Chirac's call, and arguing that the UK had been demonstrating solidarity for the past decade by paying much more into EU coffers than France.

The exchange bodes ill for the summit in Brussels next Thursday, when leader are due to agree how to fund the EU from 2007 to 2013. It also coincided with a separate threat from Italy's Prime Minister, Silvio Berlusconi, to block the funding agreement if support to his country's poorer regions is cut.

The EU leaders will be under pressure to compromise to show that the EU is back on track after the crushing referendum "no" votes in France and the Netherlands.

The future of the UK rebate is likely to be a make or break issue, with Britain isolated in defence of its annual rebate but able to veto the financial package.

Designed to compensate the UK for its low receipts from the Common Agricultural Policy, the rebate is a prime target for France, and for Germany, which is a big net contributor to the EU. Speaking in Luxembourg yesterday, M Chirac said: "The time has come for our English friends to understand that they have to make a gesture of solidarity for Europe." He added: "We cannot accept a reduction of direct aid to French farmers."

Mr Blair responded: "Britain has been making a gesture because over the past 10 years, even with the British rebate, we have been making a contribution to Europe two and a half times that of France. Without the rebate, it would have been 15 times as much as France. So that is our gesture."

He added that the "unfairness" that required the rebate was due to the agricultural policy. "My view is that if we want the debate on future financing, one part of that has got to be what Europe needs to spend its money on to prepare Europe for the 21st century, which is not the same as Europe 30 or 40 years ago," he said.

Most aspects of EU farm spending were fixed in 2002 and reopening this deal would be difficult. One option remains further cuts to money devoted to rural development subsidies. Under the proposal put forward by the Luxembourg presidency of the EU, these would be reduced by 18 per cent to €72-73bn over the seven-year period. Alternatively, further spending on structural funds to countries such as Spain and Italy could be made, although these would prompt a revolt from their capitals.

Although Mr Blair has used tough language over the rebate, his form of words has left open the possibility that it could be frozen. But M. Chirac's frontal assault yesterday makes British compromise less likely.

Since Margaret Thatcher won the rebate in 1984, the proportion of the EU budget directed to farm spending has shrunk dramatically. The United Kingdom has become richer and 10 new, mainly former communist, countries have joined the EU and contribute to it.

But No 10 issued statistics showing that, without the rebate, Britain's contribution to the EU budget between 1995 and 2003 would have been 15 times that of France and 12 times Italy's. Even with it, Britain contributed two and a half times more than both.