'Pathetic. Tragic. Embarrassing.' And then things got really nasty

Tony Blair knew he'd be in for a rough ride over his rebate and CAP reform. But the slanging match that ensued took all Europe by surprise. By Stephen Castle and Andy McSmith

The conversation on the fifth-floor meeting room of the Justus Lipsius building in Brussels is usually polite, stage-managed and, above all, diplomatic. In a few explosive minutes late on Friday night, 50 years of European protocol was blown away in a row that has shaken the EU to its core.

As he had done all day, Tony Blair defended Britain's budget rebate and demanded reform of Europe's system of farm subsidies. By 10.45pm on Friday he still had two key allies - the Netherlands and Sweden - albeit both were anxious to reduce farm spending rather than save the rebate.

Then, in a dramatic 11th-hour gesture, the Polish Prime Minister, Marek Belka, and his Czech counterpart, Jiri Paroubek, led a group of former Communist nations in offering to forgo some of their countries' cash in the interests of a deal.

That was the cue for the French President, Jacques Chirac, to launch one of the most furious verbal volleys in EU history. Britain's stance, he said, was "pathetic and tragic", before thundering: "This will change Europe." Warming to his theme, Mr Chirac added: "I ask myself what will be the dignity of those that have said 'no' when the poor member states say at the same time that they want to make sacrifices."

As the talks collapsed in disarray, some EU officials were predicting a deep split in the EU or a revival of Franco-German efforts to build an inner core. British officials privately admitted that they were taken aback by the strength of the opposition to the whole range of what Britain proposed, particularly the angry reactions from Mr Chirac and Jean-Claude Juncker, Luxembourg's Prime Minister, who was chairing the summit.

With Britain set to take over the EU presidency, the prospect is for more of the same for six months. Mr Blair is making it known that he believes ordinary Europeans support his desire to "modernise" the EU, and plans to appeal to them over the heads of their leaders. If the stage were not already set for further crisis and disarray, such a campaign should ensure further bitter recriminations.

On Friday night even Mr Blair's normal allies, like Ireland's Bertie Ahern, were dismayed at the sight of such open vitriol. He called Britain's arguments "simplistic", adding that the spectacle had been "pathetic and embarrassing". "I hate to see grown men bickering like that," he said.

The bust-up had been looming all day. As Mr Blair left his suite at the Hilton Hotel in Brussels just before 9am on Friday, he knew he had one of his toughest days of negotiation ahead.

A week of cross-Channel polemic about the future of the British rebate had hardened positions. Mr Blair had said publicly that the UK's annual cashback from the EU, worth €4.6bn (£3.1bn) a year, could be discussed, but only if the Common Agricultural Policy was debated too.

For Britain, the position was one of perfect logic: its only tool in winning a reform of the CAP was the precious rebate gained by Margaret Thatcher in 1984 to compensate the UK for its low farm subsidy receipts.

The problem with that was the farm spending for the period in question, 2007-13, had been agreed at a summit in 2002. Though Mr Blair was unhappy at the time, he did not veto the deal, and the British Government even endorsed it 18 months ago in a letter, agreed with France, on the need to keep spending low.

So when he arrived at the Justus Lipsius building, Mr Blair's position was defensive. When he rejected a package freezing the rebate at €4.6bn until 2013, Mr Juncker tried other figures on him. Mr Blair said no, arguing that the problem was not just about the rebate but about reform and expenditure. However, the Prime Minister made a counter-offer, promising to exempt the new, ex-Communist countries that joined the EU last May from their contributions to the rebate. Mr Juncker was not impressed.

At around 11am, all 25 nations met for their first formal session. With no movement from any side, the talks seemed deadlocked, and Mr Chirac put out a statement demanding further concessions on the rebate.

As the atmosphere soured, the leaders retreated to the office suites reserved for each country. Mr Chirac and the Italian Prime Minister, Silvio Berlusconi, went back to their hotels for a siesta. Mr Blair stayed.

Mr Juncker promised to reconvene the talks at 4pm, the assumption being that he would draw stumps. Instead, he decided to try to bridge the gulf dividing the key players.

The first sign of movement came when Mr Chirac summoned favoured French correspondents to an off-the-record briefing at his hotel. In the interests of a Europe battered by the French and Dutch referendum "no" votes, he announced France would accept the deal on the table. Even at this stage the French President was hardly complimentary about Mr Blair, describing him as a hypocrite.

Back in the Justus Lipsius, Mr Juncker was preparing his final pitch. Instead of convening all 25 countries, he talked to key allies, confirming tactics on how to buy off or ensnare his opponents. Around 6pm Mr Chirac, the German Chancellor, Gerhard Schröder, and the European Commission President, Jose Manuel Barroso, were invited to the fifth-floor presidency suite for a council of war. Mr Blair was not on the guest list.

The result was an inventive piece of diplomacy with which Mr Blair was confronted in the same room at about 7.30pm. This time the idea was not to freeze the rebate, or limit it in timescale, and was calculated to be much more difficult for the UK to reject. The mechanism, under which two-thirds of the difference between what Britain pays into the EU and what it gets back, would be kept.

The difference would be that money going to structural funds for the new countries joining the EU would be taken out of the equation. The effect would be to reduce the value of the rebate over the period 2007-13 from more than €7bn to around €5.5bn.

Since the rebate is only worth an estimated €5.1bn this year, Mr Juncker calculated that Mr Blair ought to be able to sell such a compromise. This concession, moreover, was linked directly to a calculation of the costs of EU enlargement - a policy that the UK backs enthusiastically.

In normal circumstances, such a deal might have appealed to Mr Blair. But a week of cross-Channel polemic with Mr Chirac, accompanied by tabloid headlines, had locked the Prime Minister into a tough position.

His resolve stiffened by two meetings with his Eurosceptic Chancellor and political rival, Gordon Brown, Mr Blair had pledged to defend the rebate unless he won a reform of the CAP. Though the offer made a reference to a review of agriculture spending, the words were judged to be too weak. Mr Blair said "no", putting him on collision course with most of his EU allies.

Still Mr Juncker ploughed on. Rebuffed by Mr Blair, the Luxembourg premier then sought to isolate him. There followed two hours of bilateral meetings with the other main nay-sayers, the Dutch and the Swedes, "throwing money at them", as one diplomat put it. It was hardly the most edifying of spectacles. As one official put it: "It really started to become like a bazaar, giving something to the Swedes, then something to the Dutch."

Both those countries' deals improved, at the expense of the offer to Mr Blair, and at 10pm the British Prime Minister was presented with the final spending plan. Within 10 minutes, Downing Street's official spokesman had appeared in the cavernous basement press area to reject the offer. What it meant, he said, was "a guaranteed change in the rebate without any guaranteed change in the CAP".

Shortly after 9pm, Mr Juncker held a final meeting with Mr Barroso and Dalia Grybauskaite, the European budget commissioner. By this time it was clear even to Luxembourg's leader that his deal was heading for the rocks. After venting his rage at Mr Blair, the final formal session of prime ministers had to be postponed, as one official put it "so that Juncker could calm down".

Finally, at around 10.45pm, all 25 heads of government made their way back to the fifth floor for the final showdown. A day of negotiation had degenerated into nothing more than a blame game. Fortunately for Mr Blair, the seating plan dictated that he was the last of the band of refuseniks to reject the deal.

Clearly discomforted by Mr Belka's offer, Mr Blair said the disagreement was not about money but about principle, adding that, while a deal was possible, it was not going to happen that night. But the Spanish Prime Minister, Jose Luis Rodriguez Zapatero, offered to drop his opposition to the budget.

By the time the leaders left the conference room, there was no attempt even to pretend that there had been anything other than a catastrophic rift. Mr Juncker's allies were furious. "There were two countries that came with no intention of striking a deal: the UK and the Netherlands," said one.

Questions at Mr Blair's midnight press conference began with one from Andrew Marr. He began by remarking that he had never seen the Prime Minister looking so angry at an EU summit. Having listened to Mr Chirac's invective inside the room, Mr Blair let rip. The French President was not mentioned by name, but his defence of the CAP was targeted with venom.

"What I cannot justify," said Mr Blair, "is a budget so skewed in the way it is now. To hear some of the statements around the table, to say that the CAP represents the future, I find bizarre. If the rebate goes on the table, the CAP goes on the table."

Asked about the effort to isolate him, Mr Blair did not even try to deny it. "If there was such an attempt, it failed," he said. "We were not alone, I think people know what was at stake, I don't think people will be fooled."

Next door in the French briefing room, Mr Chirac was more aggressive still, proclaiming that "Europe is in a deep crisis", and blaming "the selfishness of two or three rich countries". In an extraordinary breach of protocol, he added: "Personally, I deplore the fact that Britain refused to pay a fair and reasonable share of the cost of enlargement."

Mr Schröder blamed British and Dutch obduracy and "national egotism" for what he called "one of the worst crises Europe has known".

Though he avoided having to wield the national veto, most other Europeans saw Mr Blair's summit as little short of a catastrophe. As one official put it: "He had quite a few allies on the points that he raised. But you cannot suddenly demand a fundamental review of the EU budget three days before the meeting."

A Downing Street spokesman admitted yesterday: "There will be a bit of anger, but we hope that things will settle down." Mr Blair believes, however, that among Europe's citizens, if not their leaders, there is majority support for Britain's "pragmatic" way of doing business. His officials claim that commentators and columnists in the French, Spanish, Dutch and German press are beginning to recognise that the British have a serious case.

Such an approach means that there is likely to be no reduction in the rancour for several more months. On 1 July Mr Blair takes over the rotating presidency of an EU that has had to put its constitution on ice. Europe is questioning its expansion plans, and is now deadlocked over its spending plans. Indeed, the EU is in the midst of a fierce ideological struggle over its future, heightened by the deep personal animosity between Mr Blair and Mr Chirac.

An EU presidency is a time during which a country's prime minister traditionally calls in favours from his counterparts. After Friday night in Brussels, Mr Blair is owed precious few of those.

WHAT'S ALL THE FUSS ABOUT?

The EU is in the midst of one of the worst disputes since the Treaty of Rome was signed in 1957.

What was the big row about?

The small matter of €870bn. That's the amount of money the EU planned to spend for the period 2007-13 on all its activities from foreign policy to research and development. EU leaders were due to agree a figure something like this and identify how the cake would be carved up. That involved allocating how much all 25 countries (plus the two expected to join in 2007) would get in receipts from farm subsidies and structural aid.

If Britain's rebate was on the table, why did they not discuss farm subsidies?

No fool, Jacques Chirac, the French President, stitched up a deal in 2002 laying down a financial plan for farm subsidies until 2013. Tony Blair didn't like it at the time but did not block it. Most other countries thought that re-visiting this deal would be like re-opening Pandora's Box.

So now there is no deal, will the EU run out of cash?

No, or at least not yet. The financial plan does not start until 2007, so there is some time to agree a new package of measures.

So why all the pressure to get an agreement?

Because time is limited. Britain takes over the EU presidency in July and, since the rebate is so controversial, is in a bad position to forge a deal on financing. That means that the next realistic chance for a breakthrough will be in the first half of 2006, cutting things a little fine.

Moreover the countries of eastern Europe which joined the EU last year wanted some certainty over spending plans. They stand to gain most from the funding plan and therefore wanted as much time as possible to prepare themselves for an influx of cash designed to regenerate their economies.

So is that why we heard all the apocalyptic language?

In fact many countries were more worried about the message sent out by a collapse of the talks. The EU has been in disarray since the French and the Dutch rejected the EU constitution. There was then a row over whether to shelve the constitutional treaty. Now the 25-nation bloc is in a full-blown crisis over its direction.

What does this mean for Tony Blair in Europe?

A big headache. True, the Prime Minister has stirred up a necessary debate over the future of Europe and its spending priorities. He takes over the rotating six-month presidency of the EU on 1 July, and the UK will now be chairing all the key meetings. But against the background of Friday's summit, the UK presidency could become a six-month nightmare for Mr Blair. He is unlikely to get a much better offer than the one produced on Friday. Relations with Mr Chirac are poisonous, but Mr Blair will probably worry more about the damage to his image in other EU countries, in particular the eastern European nations that desperately wanted a deal.

Stephen Castle