Britain faces renewed threat to £2bn rebate

A battle over the future of Britain's £2bn annual cash rebate from the EU began yesterday when the European budget commissioner suggested sharing the refund with other nations.

Michaele Schreyer, who is drawing up plans on how to finance the EU after 2006, said the rebate should be replaced by a general "corrective mechanism" to relieve the burden on all nations that pay more to Brussels than they get back.

The rebate, won by Margaret Thatcher in 1984 after she famously demanded her money back, is designed to compensate the UK for the fact that it is one of the biggest contributors to the EU coffers, but receives relatively little in farming subsidies and grants from the common agricultural policy.

So great is the political symbolism of the rebate that Tony Blair defended it fiercely during the last budget negotiations in Berlin in 1999.

But pressure on the UK has been mounting, partly because all EU nations have to contribute to the rebate, including the 10 mainly ex-Communist countries which will join the EU next year. These countries, many of them poor, resent paying money which will go to the UK Treasury.

Ms Schreyer told the Frankfurter Allgemeine Zeitung newspaper: "With EU enlargement we face a completely new situation which the UK cannot ignore either."

She called for "a solution which distributes the burdens more fairly", although she acknowledged that there would be no consensus in favour of a cut in the UK rebate. The next budget can only be decided by the unanimous agreement of heads of government. Under the plans that Ms Schreyer intends to table, there would be a ceiling for net contributions which would be limited to a specific percentage of gross domestic product. This would mean that other nations, including Germany, the Netherlands, Sweden and Austria, could benefit.

British officials insist that the rebate is not negotiable and say that without it, the UK would be paying three times more than France after EU enlargement, putting its contribution on a par with that of Germany. However, diplomats know that the Government's position will be very difficult in the next budget negotiations.

The debate coincided with an internal rebellion over an academic study, commissioned by Romano Prodi, the European Commission president, which called for the dismantling of the EU's agriculture policy and its multibillion-pound fund for poorer regions.

The group, chaired by a Belgian academic, André Sapir, argued that if the EU was to make a success of enlargement, it had to rethink how it spent its €90bn (£63bn )annual budget, most of which goes on farming and regional subsidies. The study said that the cash should be directed more to research, education and the lowest income countries as well as those where economic restructuring was most urgent.

Michel Barnier, the commissioner for regional policy, described one part of the study, which proposed directing regional aid to the 10 new members rather than poor regions in existing states, as having "not taken account of reality".