EU deeper in crisis after summit budget failure

BRUSSELS - The European Union was plunged deeper into crisis yesterday after its leaders failed to agree on a long-term budget, just two weeks after French and Dutch voters rejected its proposed constitution.

The summit breakdown threatens the enlarged 25-nation bloc with financial paralysis on top of the political uncertainty wrought by the double referendum defeats, unnerving financial markets and weakening the euro, the EU's single currency.

In a welter of recrimination, many leaders blamed Britain for blocking a deal on the 2007-2013 budget by rejecting proposals to limit its annual rebate from EU coffers and demanding a reform of farm subsidies that benefit France most.

"Europe is in a deep crisis," French President Jacques Chirac told a midnight news conference, blaming "the selfishness of two or three rich countries" for the failure.

Luxembourg Prime Minister Jean-Claude Juncker, who laboured to forge a compromise as EU president, said he was ashamed that poor new members from eastern Europe had offered to sacrifice some funds from Brussels in a vain effort to salvage a deal.

The failure would weaken Europe in the long term and sharpen a clash of philosophies between believers in European unity and those who sought a glorified free-trade area, he said.

German Chancellor Gerhard Schroeder blamed British and Dutch obduracy for what he called "one of the worst crises Europe has known".

But Prime Minister Tony Blair was defiant, insisting London had not been isolated since four other west European countries had opposed the deal, and vowing he would only trade a reduction in the rebate for an overhaul of EU farm spending.

Asked if others had tried to isolate him, Blair said: "If that was the attempt, it failed. We weren't alone around the table in resisting this. I think people know exactly what the issues are here and I don't think they'll be fooled by any tactics and manoeuvres."

FRANCO-BRITISH FEUD

The Netherlands, Sweden and Finland also rejected the final compromise, seeking a bigger cut in their net contributions. Spain sought a longer phase-out of aid for its poor regions.

Blair rejected a series of proposals to cap Britain's refund, won in 1984 by Margaret Thatcher, insisting any cuts must be linked to reform of the Common Agricultural Policy.

The Franco-British feud over the EU budget and farm spending has blighted EU politics for a generation.

Britain, with few farmers, obtained the rebate when it was poor and agricultural spending made up nearly 75 per cent of the budget. It is now among the richest EU states and farm subsidies are down to 43 per cent of the total.

Chirac rejected any linkage between the rebate and farm spending, saying: "The future of the British cheque after 2013 should under no circumstances be linked to a reform of farm expenditure."

In a dramatic last-minute gesture, 10 mainly ex-communist east European states offered to forego some of the EU aid they are due to receive to avert a deadlock that will delay urgently needed public investment in their countries.

Chirac said it was "pathetic" that the poor countries were having to offer sacrifices, but Blair said it was not a question of money but a matter of fundamental reform of the way EU funds are spent.

The failure means Blair will inherit the EU presidency for six months on July 1 accused of torpedoing the budget talks, even by some in the "new Europe" whose accession he championed.

TIME ON BLAIR'S SIDE?

But Swedish Prime Minister Goran Persson said Blair was in a strong position to drive the reform agenda in Europe, whereas time was not on Chirac's side.

German opposition leader Angela Merkel, expected to replace Schroeder in a general election in September, has voiced greater sympathy for free-market British views and criticised the Berlin government for failing to press France on farm reform.

While the European Commission said failure to agree on the future budget would throw EU financial planning into disarray, British, Dutch and Swedish officials insisted there was no rush.

The leaders earlier decided to put the EU constitution into the deep freeze, extending the deadline for ratification into mid-2007 to avoid more humiliating referendum defeats.

Denmark, Portugal and Ireland immediately said they would postpone votes planned later this year.

The charter was framed to enable an enlarged Union to work more effectively, with a stable leadership and streamlined decision-making. But the EU will now limp on for years under the cumbersome Nice Treaty, widely seen as a recipe for paralysis.

- REUTERS