EU rebate storm looms for Britain rebate battle

THE FUTURE of Britain's European budget rebate came under threat yesterday when a report said the case for the pounds 2.85bn annual refund had fundamentally weakened. In a hard-hitting document the European Commission argued that many of the conditions of 14 years ago, when Margaret Thatcher demanded her money back, no longer apply.

The move, which touches one of the Government's most sensitive nerves, raises the prospect of Tony Blair's first big clash with Europe after a year in which Labour has sought to foster a new relationship with Brussels. As Conservatives yesterday seized on the issue, Britain insisted the rebate was not up for negotiation, saying Mr Blair could veto any move to alter it. An official said: "Britain will continue to fight to maintain the rebate."

But Jacques Santer, the European Commission president, said four other countries "are today in a worse position than the United Kingdom was before the rebate ... In effect, the United Kingdom is no longer in a unique position and will be even less so after enlargement [of the EU]. Its case for a rebate has gradually become weaker."

Diplomats in Brussels are in little doubt the British rebate will have to be tackled when the EU is enlarged, if not before. One said: "Things have changed since Maggie Thatcher's `I want my money back', therefore we will have to talk about the British rebate. It is unacceptable."

The election in Germany of Gerhard Schroder, whose approach to Europe is more pragmatic and hard-headed than that of his predecessor, is also likely to raise tension over the issue. However, yesterday's document, the opening shot in a longer battle to reshape EU finances, also makes uncomfortable reading for France and other governments that gain substantially from farm subsidies. They would end up footing more of the farmers' bills themselves under one of the report's three options.

The Netherlands, Austria, Sweden and Europe's biggest paymaster, Germany, have demanded changes to the budget.

The Commission document says Britain is no longer alone in paying much more in than it gets out. In 1984 it was one of the poorest countries, yet one of the three biggest net contributors to running costs, qualifying for fewer EU grants and subsidies, particularly in farming, which offset gross contributions to Brussels.

Now it is relatively better off, and its advantage will become conspicuously unfair if the rebate continues when the next wave of countries joins the EU, the paper argues.

"The gap in relative prosperity between the UK and some other large contributors to the EU budget has narrowed", the report says, arguing that "the UK has a relative prosperity (and a corresponding relative capacity to pay) around the EU average". Because of the way the mechanism works it "would put into question an equitable sharing- out of the burden resulting from enlargement".

As well as the option of phasing out the rebate and implementing a new system, the document suggests two other choices. The first, proposed by Germany, would see a cap on contributions, perhaps at 0.3 or 0.4 per cent of gross domestic product, with relief on all contributions over that.

This, the document argues, would be "not only very costly in a situation where many member-states benefit from the system, but is also fraught with risks".

That leaves as much more likely a reform to the Common Agricultural Policy that would help big contributors to the EU. This option, which would hit France, Ireland, Spain and Greece, would involve the EU paying 75 per cent of subsidies for EU farmers, while governments would be forced to fund the rest from their own budgets.

Winners under this arrangement would include Germany, Britain and the Netherlands. Opponents of the measure sayit would be a fundamental dilution of the principles of the CAP and would effectively "renationalise" spending.