EU deal as Chirac is restrained by Merkel

Blair faces uproar at home after conceding £7bn of British rebate to secure funding for new members

Angela Merkel, the new German Chancellor, emerged as the key deal-maker at her debut EU summit, breaking the deadlock over plans to plough billions of euros into the economies of its new Eastern European members.

While Tony Blair faced uproar at home for ceding €10.5bn (just over £7bn) of the value of the British rebate, Mrs Merkel was widely hailed as the real victor of the marathon negotiating session.

After more than 18 hours of tense talks on Friday, European leaders finally clinched a deal over EU financing for 2007-13. But the turning-point came at a lunch on Friday when Mrs Merkel laid down plans for a spending ceiling, reversing some of the cuts planned for Eastern European nations.

Diplomats said Mrs Merkel had "restrained" President Jacques Chirac of France, rather than giving him the free hand he enjoyed under Germany's previous leader, Gerhard Schröder, whose relations with Mr Blair had become poisonous.

While the Chancellor returned to Berlin in triumph, for Mr Blair the summit was a gruelling and potentially politically costly affair. Under a complex agreement, finalised at around 2am yesterday, he agreed not to claim a British rebate on most of the spending applied to the 10 new countries by 2013, except on subsidies for farmers.

And although EU leaders agreed to launch a review of all spending in 2008, there is no guarantee that its findings - and therefore the reform of the Common Agricultural Policy that Britain craves - will kick in before 2013.

That has already provoked fierce criticism from the Conservatives, who will challenge the Prime Minister in the Commons tomorrow. While the shadow Foreign Secretary, William Hague, said the Government had "spectacularly failed" to get any guarantees in exchange for its money, the Liberal Democrat spokesman, Sir Menzies Campbell, concluded that the deal marked a "thoroughly disappointing" end to the UK's six-month presidency of the EU.

Though the agreement protects many essential elements of the British rebate, and the spending reform may prove significant in the long term, the package falls short of the hopes Mr Blair aired in June. Then, in a barnstorming speech to MEPs, he called for a revamp of the EU budget and a shift of cash from farming to boost Europe's competitiveness.

In cash terms, the deal for financing the EU from 2007-13 was oiled by British concessions. The rebate, which Margaret Thatcher won in 1984, refunds two-thirds of the difference between what Britain pays into the EU and what it gets out.

Mr Blair had already agreed to give up €8bn (£5.4bn) in rebate money ahead of the summit in Brussels. To that he added a further €2.5bn (£1.7bn) on Friday night.

Mr Blair went into the meeting proposing a budget equivalent to 1.03 per cent of the EU's gross national income - well down on the 1.06 per cent that he rejected in June. In the end, EU leaders agreed to an overall budget of 1.045 per cent, worth €862.3bn (£584.4bn) between 2007-13.

In all, Britain's net contribution to the EU over the seven years will be roughly €62bn (£42bn), significantly less than the €75bn (£50.8bn) Mr Blair rejected in June. It represents an increase of 63 per cent on the current seven-year spending plan because of resources directed at the new nations. France's contribution will rise 116 per cent over the same period.