Justification of UK's EU rebate wearing thin

Twenty years after Margaret Thatcher forced Britain's European Union partners to hand over a rebate on part of its annual net contribution to the EU budget, the arguments for its continued existence are wearing thin.

With her battle cry of "I want my money back", the then-Prime Minister argued that relatively poor Britain had received unfair accession terms and its taxpayers were being milked to subsidise continental - mainly French - farmers.

The executive European Commission is set to issue proposals on Wednesday to replace the British rebate with a generalised system of partial refunds for all major net payers into the EU budget, including the Germans, Dutch, Danes and Swedes.

The plan is bitterly contested by Britain. No successor of Ms Thatcher has dared give up the prize she won in 1984 for fear of retribution from europhobic media and eurosceptical voters.

British spokesmen insist the rebate remains fully justified, both because Britain is still the second highest net contributor in absolute terms, and because huge spending on farm subsidies continues to distort the pay-out from Brussels in their eyes.

The EU executive sees things differently. In a confidential paper obtained by Reuters, EU Budget Commissioner Michaele Schreyer argues that the justifications for granting an exclusive "correction" to Britain are less relevant today than at any time since 1984.

Britain is far richer in both relative and absolute terms than it was then, she argues. According to the EU statistics office, in 2003 it was the richest net contributor and the second wealthiest member state per capita after Luxembourg.

"In view of the dramatic shift in the UK's position compared to the other net contributors, it is legitimate to question the need for the existing UK correction," Ms Schreyer says.

"Several other member states can legitimately claim that their current situation is comparable to the UK's," her explanatory memorandum argues.

Furthermore, the balance of EU spending has shifted, with a smaller proportion going to agriculture. And the big need now is to redirect EU spending to help far poorer new member states in eastern Europe catch up with the wealthy West.

If the current system endures, the poorest EU countries such as Poland, Slovakia or Latvia will end up having to co-finance ever bigger rebates to wealthy Britain.

Ms Schreyer's staff project that if the current British rebate mechanism is retained in the 2007-2013 budget, refunds could explode from about €4 billion a year today to €7.1 billion.

That would leave Britain as the smallest net contributor. The alternative system she is suggesting would make it the biggest net contributor.

British officials deploy a panoply of financial and political arguments in defence of the rebate, but ultimately say Ms Schreyer's reform won't happen because Prime Minister Tony Blair secured the veto power to prevent it under the EU constitution.

Decisions on the funding of the EU budget will continue to be taken by unanimity under the charter agreed last month.

The British dispute Ms Schreyer's figures, citing prosperity surveys by the International Monetary Fund and the World Bank which rank Britain respectively sixth and 10th among EU countries in gross domestic product per capita in purchasing power terms.

While farm subsidies now account for less than 45 per cent of the EU budget, compared to almost three-quarters in the early 1980s, they are still the biggest spending policy, followed by regional aid, little of which returns to Britain.

British officials do not contest the need to spend more in the 10 mostly ex-communist new member states. They say the real problem is Commission plans to go on spending billions on farm payments and regional aid to old member states after 2007.

While moderately embarrassed that Poles and Latvians should be paying towards reimbursing Britain, they argue that those countries are paying far more to feather-bed French farmers or fund Spanish and Portuguese motorways.

Britain is willing to consider measures to address the net payment problem of the Dutch or Swedes "provided our position is protected", they say.