The EU can still be pulled back from the brink

It was one of the most unseemly ends to a summit in the history of the European Union. Patience on all sides was utterly exhausted. The usual diplomatic politeness was ditched. The recriminations were bitter. The breakdown of the EU budget meeting in Brussels late on Friday leaves the European project - already gravely damaged by the rejection of the EU Constitution in France and the Netherlands - looking more forlorn than ever.

It was one of the most unseemly ends to a summit in the history of the European Union. Patience on all sides was utterly exhausted. The usual diplomatic politeness was ditched. The recriminations were bitter. The breakdown of the EU budget meeting in Brussels late on Friday leaves the European project - already gravely damaged by the rejection of the EU Constitution in France and the Netherlands - looking more forlorn than ever.

What is required now is a period of reflection. Indeed, there should have been such a pause immediately after the rejection of the constitution by the French and the Dutch. The last thing the EU needed was a summit in which the vexed question of the British budget rebate was the main topic. The meeting always had the potential to become a disaster. And so it proved.

The prospects for any rapid healing of the wounds are remote. Tony Blair's tough negotiating tactics in Brussels have not made the task facing Britain when it takes over the Presidency of the EU in two weeks' time any easier. It is difficult to see how Britain will be able to play the role of "honest broker" in meetings when it is at the heart of some of the most volatile questions facing the EU. There are unlikely to be any significant breakthroughs on the British budget rebate or the Common Agricultural Policy (Cap) in the next six months. And the animosity between Mr Blair and the French President Jacques Chirac also threatens to thwart any progress.

Yet the truth is that, in most respects, Mr Blair is on the right side of the debate as regards the future of the EU, while the behaviour of Mr Chirac, trying to restore his battered image in France, and Jean-Claude Juncker, the Luxembourg Prime Minister chairing the summit, left much to be desired. True, the justification for Britain's rebate is diminishing and the payment is clearly unsustainable in the long run. But the need to dismantle the Cap is far more pressing: it is economically unjustified and deeply damaging to agricultural producers in the developing world - especially Africa.

In a broader sense, too, Mr Blair's proposal that the EU rethink its purpose is sensible. He is one of the few leaders to give the impression of having listened to French and the Dutch voters. He also appears to have a better grasp on the nature of the world in which Europe hopes to compete. The real challenge for the EU will not be how to entrench social welfare provisions, but how to meet the challenge of rising economic powers such as India and China. This will mean spending Europe's capital on research and development - not on subsidising an unproductive agricultural sector.

The danger in this country is primarily one of indulging in triumphalism. Eurosceptics have rejoiced in Britain's retention of the rebate. But Europe is in crisis and this affects Britain profoundly. Many valuable aspects of the European project are under serious threat, such as further enlargement and greater European co-operation on defence. If these progressive measures stall, Britain loses out. Mr Blair should also be wary of assuming that his own views on Europe are in the ascendancy. The French referendum vote indicated a deep attachment to extensive social protections. He may be politically strong in Europe at the moment, but Mr Blair still has to win the argument.

This crisis has occurred at a time when the political plates beneath the EU are shifting, with elections looming in Germany and Mr Chirac's power ebbing away. This could help Mr Blair in his efforts to re-forge Europe on more economically liberal lines. But pulling the EU back from the brink will require intense commitment and hard work right across the Continent. Now is the time for Europe's leaders to step forward.