Blair takes tough line over EU rebate

Tony Blair dug in his heels today in the EU budget row as a political crisis in Germany threatened to derail talks.

Foreign Secretary Jack Straw spent a second day in Brussels, where all 24 other states demanded an end to the £3billion British rebate won by Margaret Thatcher in 1984.

But Britain's opponents were pitched into confusion when Germany's Gerhard Schroeder was forced to call an early election after his party suffered a crushing defeat in North Rhine-Westphalia.

EU officials admitted the possible fall of his government made the chances of a budget deal even less likely.

Germany pays more than any other country into the EU's budget and its negotiating position could change after the election. "It's certainly not going to make things easier, and they were difficult enough as it was," said an official.

Downing Street continued to take a tough line and insisted the rebate was justified. "We believe the abatement is justified and that remains our position," a No10 spokesman said. "We have put our case and it is up to others to make their own arguments."

No 10 appeared to be keeping open the option of changing the way the rebate is calculated, however. The spokesman refused to state categorically that the Government would veto any reduction in its value and would not use Gordon Brown's phrase "non-negotiable" to describe the rebate.

There were warnings that the row could cause deadlock when Britain takes over the EU presidency in July.

Luxembourg's deputy foreign minister Nicholas Schmit said the UK would find its sixmonth stint grinding to a halt. "I just wish good luck to the next presidency," he said.

EU budget commissioner Dalia Grybauskaite said the British position was "not serious" while Commission president Jose manuel Barroso claimed the blockage would halt third-world aid programmes and undermine projects such as high-speed rail and road links. "When I'm going to the UN in September, then I will be forced to tell them the EU will not be able to achieve the Millennium Development Goals, it will be difficult for me to explain that," he said.

Lady Thatcher fought for a rebate because farming and structural subsidies to other countries meant Britain was paying billions more to EU coffers than it receives.

Its exact value varies from year to year, but it currently cuts the UK contribution from £5.8billion to £2.3 billion.

Despite being one of the wealthiest states, France pays only £1.4 billion after farming handouts are taken into account. Spain takes £5.8billion out of the EU system.