Newcomers fail in final bid to save EU budget

BRUSSELS - Ten poor new European Union member states made a last-ditch bid to rescue a summit deal on the bloc's long-term budget by offering to give up some aid but the marathon negotiations ended in failure.

The collapse threatens the enlarged 25-nation bloc with financial paralysis on top of political uncertainty wrought by the rejection of the EU constitution by French and Dutch voters, which has unnerved financial markets and weakened the euro.

The mainly ex-communist east European states offered to sacrifice some of the funds they are due to receive from Brussels to salvage a deal, aware that a deadlock would delay urgently needed public investment in their countries.

"Something absolutely extraordinary is going on. The 10 new member states, led by Poland, are ready to get less money if a deal can be saved," a Luxembourg EU presidency source said.

But a senior EU official said the leaders were unable to overcome deep differences over Britain's EU rebate and French farm subsidies and had given up efforts to agree a compromise proposed by Luxembourg Prime Minister Jean-Claude Juncker.

Britain rejected a series of proposals to cap its annual refund from EU coffers, insisting that any reduction must be linked to a promise to reform the Common Agricultural Policy, anathema to French President Jacques Chirac.

But a British spokesman insisted London was not alone since four other west European countries had opposed the final compromise -- the Netherlands, Sweden, Spain and Finland.

The breakdown means British Prime Minister Tony Blair will inherit the presidency of a Union in crisis for six months from July 1 facing blame for the failure of the budget talks, even from the "new Europe" whose accession he championed.

BRITAIN DEFIANT

But his spokesman was defiant, saying the final compromise offered by Luxembourg was "even worse" for Britain, requiring London to give up 18 billion euros over seven years with no assurance of a reform in farm aid.

"What's being proposed is a guaranteed change in our rebate without any guarantee on the EU budget. That's unacceptable to us," the spokesman said.

While the European Commission said failure to agree on the 2007-13 budget would throw EU financial planning into chaos, British, Dutch and Swedish officials all said there was no rush.

Earlier, the leaders decided to put the EU constitution into the deep freeze, extending the deadline for ratification into mid-2007 to avoid more humiliating referendum defeats after the French and Dutch fiascos.

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

The charter was drawn up 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.

Throughout the day, negotiations focused on British demands for a trade-off between curbing the rebate won by Margaret Thatcher in 1984 and a commitment to overhaul the farm subsidies that mainly benefit the French.

The Dutch and Swedes demanded a substantial cut in their net payments to EU coffers, while Spain and Italy fought to preserve more aid for their poorer regions.

But in the end, it came down to the Franco-British feud that has been a central feature of EU politics for a generation.

Chirac, a veteran champion of farmers, was willing to accept a freeze in the British rebate instead of the phasing out he had demanded. But he insisted on a guarantee that farm spending would be ring-fenced at its current level until 2013, as EU leaders including Blair had agreed in 2002.

Juncker eventually proposed capping Britain's rebate at 5.5 billion euros a year, compared to 5.1 billion euros in a total budget of 106.3 billion euros this year. Without a change in the mechanism, it will explode to nearly 8 billion euros by 2013.

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 flatly rejected any linkage between the rebate and farm spending.

"The future of the British cheque after 2013 should under no circumstances be linked to a reform of farm expenditure," he said, according to speaking notes.

- REUTERS