Blair says Europe is 'back on track' despite revolt

The Prime Minister came away from a one-day summit in Hampton Court claiming progress on a strategy to tackle the threat of competition from China and India but brushing off a threat from France to veto global trade talks if they threaten farm subsidies. Mr Blair also played down an outburst from Gerhard Schröder, the outgoing German Chancellor, who warned that Germany, under Angela Merkel would not provide more money for a Blair-backed plan to set up an EU "shock absorber" fund to cushion the social impact of globalisation. The Prime Minister said: "I never thought that the new Chancellor Merkel would be a soft touch. We are in a lot of agreement. The fact that people are in a good mood and good spirit is a definite improvement since June."

Mr Blair conceded he had a mountain to climb to reach a deal in December on the EU budget package for 2007-13, after the breakdown on the issue in June. But he said there was "a strong feeling among the leaders of Europe that we have to put Europe back on track and go in the right direction".

Nevertheless the harmony was shattered when the French President, Jacques Chirac, said that he would not allow any future deal on farm subsidies in world trade talks to go beyond a deal on EU agriculture spending, struck in 2003.

That, he said, "must be respected in its entirety," describing it as "a red line for us in all hypotheses", and reminding fellow leaders that each EU member state needs to approve any deal struck on its behalf.

Yesterday's meeting was designed to pave the way for a possible deal in December on the EU budget.

The 25 leaders met, with almost no officials, in Hampton Court's Great Hall, their movements tracked by cameras relaying images to translators. One official compared the meeting to Big Brother.

The leaders gave broad backing to a blueprint for modernisation, setting out priorities including research and development and energy policy.

But while the atmosphere was better than at the last meeting in June, the globalisation fund provoked a string of objections.

Mr Schröder, attending his final EU summit, questioned whether the fund "can be financed," and rejected the idea that Britain's social model had much to offer Europe.

Goran Persson, Sweden's prime minister, said the globalisation fund was "old fashioned", adding: "It doesn't belong to a modern strategy. If such adjustments should be done it is for the national economies to do so."

Wolfgang Schüssel, the Chancellor of Austria which takes over the EU presidency in January, said a proposed EU law to liberalise the market in services - strongly supported by Mr Blair - should be scrapped, and work begun from scratch. Mr Schröder described the proposed directive as dead and his successor, Angela Merkel, also raised doubts about it.