The European Union budget. About a rebate

A bluffer's guide to the European summit's squabble over the budget

THE EU summit on June 16th-17th was bound to be fraught, because it followed the French and Dutch referendums that decisively rejected the EU constitution. But France's president, Jacques Chirac, then cleverly changed the subject, by demanding that Britain make a “gesture of solidarity towards Europe ” - -and give up most of its budget rebate. The summit, which began after The Economist went to press, looks highly unlikely to agree on the budget. But it is worth asking why the rebate suddenly became so contentious.

The EU budget, at just over €100 billion ($120 billion) is quite small (around 1% of EU GDP). But because almost half goes on the common agricultural policy (CAP) and a third on regional aid, it gives rise to widely different net contributions and receipts. In 1979, when it became clear that Britain, which because of its small farming sector gets few CAP receipts, would be the biggest net contributor, Margaret Thatcher asked for Britain's money back. Several bad-tempered summits later, she got it. Ever since, the European Commission has calculated (roughly) the gap between what Britain pays in and what it gets out every year, and handed back a rebate of 66% of that gap, paid a year in arrears.

The chart shows net transfers, before and after the rebate, for the 15 EU members in 2003, as shares of national income, along with each country's CAP receipts. Even after the rebate, Britain is the fourth-biggest net contributor by shares of national income. In cash, it is the second-biggest after Germany. Hence Tony Blair's retort to Mr Chirac, that “Britain has been making a gesture because over the past ten years, even with the British rebate, we have been making a contribution into Europe two and a half times that of France.”

Mr Chirac's real worry is that the rebate is growing, and that France pays disproportionately towards financing it (under a special deal, Germany, Sweden, Austria and the Netherlands pay only one-quarter of their normal share of the rebate's cost). Commission forecasts show that, by 2013, Britain's net contribution might even - quelle horreur! - fall below France's. Britain is exploring with the ten new members how to refund their share of the rebate, a suggestion also made this week by Peter Mandelson, the British commissioner. Yet Mr Blair has a grievance too: that the budget negotiations, which are meant to set spending ceilings from 2007 to 2013, have omitted the biggest item: the CAP.

That is because, in October 2002, Mr Chirac got first Germany's Gerhard Schroder and then other EU leaders to agree to keep CAP spending unchanged until 2013. About a quarter of CAP spending goes to France: that €10 billion-plus every year is worth two and a half times as much as the British rebate. No wonder Mr Chirac, who cut his teeth as a farm minister fighting for the CAP, is so eager to protect what some British officials disdainfully term the “French rebate”. And no wonder Mr Blair will not discuss his own rebate unless the CAP, the main cause of Britain's budgetary burden, is also discussed.

Why has the row broken out now? The EU must agree, unanimously, a budget for 2007-13. Yet it need not do this until early 2006, when the commission draws up a budget for 2007. It is hard not to conclude that Mr Chirac ambushed Mr Blair mainly to divert attention from France's non.

• Primary Source