Surprise deal to freeze farm aid averts showdown

The EU plan to admit 10 new countries in 2004 was back on track last night after France and Germany reached a surprise deal to freeze farm spending to help fund Europe's expansion.

After months of division, the French president Jacques Chirac, and the German chancellor Gerhard Schröder buried their differences at an eve of summit meeting in Brussels. The deal, which paved the way for a wider agreement among the 15 EU member states, means farm subsidies for the new countries will be phased in from 2004.

Mr Schröder said: "We will both take the position that phasing in [of direct farm aid] to acceding countries will start in 2004. From 2007, spending will be capped and will not increase beyond the rate of inflation up to 2013.'' Mr Chirac said that agriculture spending, which accounts for about half the Euro's 95 billion EU budget, would be frozen from 2007 at its 2006 level. But he also sent a warning shot to Tony Blair over the annual £2bn British budge rebate, suggesting it too should be capped.

"It is our joint will to control expenditure in more areas, not only in agriculture,'' the French president said, saying limits should also apply to structural aids to poorer regions and, in his view, to the British rebates.

The Franco German deal is a compromise between two sides who have been at odds over the EU's funding. Initially Germany, the EU's biggest paymaster, pressed for reform of the Common Agricultural Policy to begin next year. That request was dropped in favour of the imposition of a ceiling from 2007.

France, a big beneficiary of the CAP, had also staved off pressure from Berlin to reduce farm subsidies and agree wider reforms by its concession that spending will be frozen.

The deal was welcomed by Anders Fogh Rasmussen, Prime Minister of Denmark, which holds the EU presidency and is chairing the summit. However he stressed the deal had yet to be agreed among all 15 EU countries.

Mr Chirac was also due to meet Mr Blair last night, two days after the French president said that the UK's budget rebate should be reviewed. The two men were also due to discuss moves to get a UN resolution on Iraq.

The rebate, designed to compensate the UK for its low income from CAP, is guaranteed under current financial plans which expire in 2006 and can only be changed than by agreement of all leaders.

While the deal between Mr Chirac and Mr Schröder has defused the prospect of a major row at the summit over the rebate, Mr Blair knows that he will face pressure to reduce the UK's annual cheque in 2006. Any reform of the CAP would also strengthen the case for curbing the rebate.

The EU leaders must now agree one European commission plan to give farmers in the 10 new nations 25 per cent of the direct subsidies of their EU counterparts, phasing in the full 100 per cent over a decade.

Britain's position remains sceptical and other nations such as the Netherlands take a tough line. The UK argues that reform of the CAP is vital because the policy distorts the agricultural market. It says that direct subsidies - now the biggest part of the CAP - should not be extended to the new nations because they were designed as compensation for reduction in price support for agricultural products from the EU from which the new countries never benefitted.