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1. The UK's rebate negotiations in the financial perspective for 2007-2013

1.1. Introduction

This dissertation investigates the evolution of the UK's positions and preferences during the financial perspective negotiations in 2005 when the UK's position on its rebate changed. Initially, at the Fontainebleau European Council in 1984, Margaret Thatcher argued that the UK's share of the budget was too high and therefore she ‘wanted her money back'. A rebate was then agreed, and it was retained for about twenty years, despite strong pressures by the European Commission and various member states. A similar scenario confronted EU leaders in the context of the negotiations for the 2007-2013 financial perspectives. However, after lengthy and difficult negotiations, under the 2005 British Presidency the Blair government unexpectedly accepted a reduction in the size of the UK rebate. Why did this change occur? This dissertation tests competing explanations, but ultimately argues that the UK's position in the negotiations can be mainly explained by looking at the responsibility of the UK presidency for events, the enlargement of the Eastern Europe Countries, and the new Labour government's vision of Europe. Faced with uncompromising positions by other larger member states over the reform of the Common Agricultural Policy and of the Cohesion Policy, the UK sacrificed its own interests to pay Euro 10.5 bn for the costs of the Eastern enlargement.

This dissertation consists of two main parts: examinations of the review of the financial perspective negotiations in 2005, and of the change of the UK's position on its rebate. In the first part, the research will describe the progress of the financial perspective negotiations in 2005. For the second part, the dissertation will concentrate on the UK rebate negotiations and the investigation of elements which effected change in the UK's position.

1.2. The progress of the 2005 EU budget negotiations

The 2005 EU budget negotiations were initiated by the Commission's proposal which was established for the financial perspective for 2007-2013, considering the purposes of the Lisbon strategy in 2000 and the enlargement of the Eastern Europe countries in 2004. The financial negotiation was firstly taken at the Brussels European Council on June 16-17, 2005 and was discussed by an informal European Council at Hampton Court Palace on October 28-29, 2005 and several Ministerial meetings to prepare the UK presidency compromise. Finally, the financial perspective for 2007-2013 was decided at the Brussels European Council on December 15-16, 2005.

1.2.1. The financial perspective for 2007-2013

On February 10, 2004, the Commission published the financial perspective for 2007-2013: Building our common future: Policy challenges and budgetary means of the enlarged Union 2007-2013 (COM 2004a).

(Table 1.1) The Commission proposal: The EU Budget Plan for 2007-2013

Commission's Proposal

in Euro (bn)

Heading 1A

Competitiveness for growth and employment

132.8

Heading 1B

Cohesion for growth and employment

344.9

Heading 2

Natural resources: environmental spending and CAP

Of which: agriculture

404.7

301.1

Heading 3

Citizenship, freedom, security and justice

18.5

Heading 4

External policies (the EU as a global partner)

95.6

Heading 5

Administration

28.6

Total commitments

1,025

(Adopted from Begg, I. and Heinemann, F. (2006) ‘New budget, old dilemmas')

The proposal considered two issues relating to EU integration: the Lisbon Strategy and the enlargement to include Eastern European countries. First of all, the member states of the EU agreed on a new EU strategy, which considered the significance of employment, economic reform and social cohesion to strengthen the EU's competitiveness in the global market by 2010, at the special European Council in March 2000 in Lisbon (Bache and George 2006:194). The financial perspective for 2007-2013 planned to incorporate the Lisbon strategy during the financial period. Secondly, in 2004, the 10 Eastern European countries became EU members. The Commission's proposal pointed out the enlargement and the development of the new member states might provide unprecedented opportunities to the EU, particularly improvements in economic prosperity and the creation of more jobs (COM 2004a).

The Commission's proposal was structured around five headings: Heading 1A - Competitiveness for growth and employment; Heading 1B - Cohesion for growth and employment; Heading 2 - Preservation and management of natural resources; Heading 3 - Citizenship, freedom, security and justice; Heading 4 - The EU as a global partner, and Heading 5 - Other (Administrative cost of EU Institutions) (COM 2004a; Lorca 2005: 4).

To address the headings in the Commission's proposal, the Commission proposed a new financial framework which would cover the seven-year period from 2007 to 2013. In the financial perspective, the EU budget covered 27 member states, including the 10 Eastern countries which joined in 2004, and Bulgaria and Romania, which became EU members in 2007. The Commission predicted that the enlargement would add 5 per cent to the EU's GDP and revenues but would expand the EU by 30 per cent in terms of population. In order to match this enlargement and development of the EU, the Commission proposed increasing the EU budget. The ceiling was set at 1.24 percent of Gross National Income (GNI), which was similar to the outcome of Agenda 2000 (COM 2004b). However, as a result of the enlargement from 15 countries to 27 countries, 1.24 per cent of GNI would total Euros 1,025 bn (Financial Times December 6, 2005; Jančárik 2006: 8). Looking at Figure 1, it is clear that in the Commission's expenditure plan the main expenditure would be allocated to Headings 1 and 2, which included regional aid and sustaining the CAP in the period 2007-2013 (Financial Times July 30, 2004; September 9, 2004; COM 2004b).

Furthermore, the Commission introduced a new correction mechanism to reduce the member states' budgetary burden, which would otherwise become excessive in relation to member states' relative prosperity. The Commission's plan was that this generalised correction mechanism would replace the existing one, and would focus on reducing the UK's abatement. The Commission faced up to the root causes of the UK rebate and aimed at reduction of the UK's unfair budget contribution. The Commission now saw that Britain's income per head had risen to the point where it had become the richest large country. Applying the old model mechanism, the UK rebate would actually go up even though Britain was now the richest county. Britain would contribute less than any of the other rich member states - the British contribution would be 0.25 per cent compared with 0.56 per cent for the Netherlands, 0.54 per cent for Germany and 0.37 per cent for France (The Economist July 10, 2004). In fact, based on research by the Commission, the President of the European Commission, Josè Manual Barroso, argued that even Bulgaria and Romania would pay more than Britain unless the old financial mechanism was not changed (The Times May 21, 2005). Barroso was interviewed by The Times on May 21, 2005 and said,

‘…when the UK got its rebate there were good reasons. The situation has changed. Britain is much more prosperous that it was 20 years ago and the EU has changed … I believe a good solution can be found if there is goodwill on all sides. I think British taxpayers will understand that the rebate has to go if people have the courage to explain that it is not fair for Bulgarians and Romanians to be paying more than the British' (The Times May 21, 2005).

Due to the obvious unfairness of the level of the UK's contribution, the Commission proposed the reduction of the UK rebate and pressured the UK to agree the loss of its special status and to accept its share of the EU budget.

1.2.2. The financial negotiation at the Brussels European Council in July 2005

After the ‘No' vote by the French on 30 May 2005, and by the Dutch on 2 June 2005, in referenda on the EU constitutional treaty, the Luxembourg Prime Minister, Mr Juncker, who had held the presidency of the EU since January 1, 2005, urged the member states towards compromise in the financial negotiations as a step towards overcoming this political crisis in the future of Europe (Financial Times June 21, 2005). In the financial negotiations at the Brussels European Council in July 2005, Mr Juncker was faced with the UK's opposition to the new financial mechanism and the opposition from the net contributor nations, including Britain, to the 1.24 per cent of GNI budget ceiling. The presidential compromise indicated a middle point between the UK and the net contributors group' oppositions, and the Commission's proposal. The Luxembourg presidency compromise proposed freezing the UK rebate at the average for 1997-2003, i.e. Euro 4.6 bn, in 2007, and then gradually reducing it from 2008 to 2013 (European Report June 11, 2005: Times May 21, 2005; Financial Times June 15, 2005; Hearl 2006: 54). The Luxembourg position during its presidency was that the reduction of the UK abatement would allow the excessive Dutch, German and Swedish contributions to be reduced in turn (Hearl 2006: 54).

Mr Juncker also suggested a compromise of 1.06 per cent, Euros 870 bn above the largest contributor nation's demand of 1 per cent and significantly below the Commission's proposal of 1.24 per cent (Financial Times June 14, 2005; June 16, 2005; European Report June 11, 2005; Hearl 2006: 54). To cut the total EU budget, the compromise involved reducing all areas of budget expenditure: competitiveness - 39 per cent, cohesion policy - 10 per cent, natural resources - 5 per cent, citizenship, security and justice - 20 per cent, global partnership - 19 per cent, and administration - 12 per cent (European Report June 11, 2005).

(Table 1.2) Member state positions on the Luxembourg Compromise

Member state positions

UK

Unacceptable

UK - an agreement was possible if there was a major reform of the EU's spending priorities, particularly the CAP.

France - reform of the CAP before 2013 unacceptable, but the compromise including CAP reductions and more aid for Romania and Bulgaria, if the UK accepted the reduction of its rebate to around Euros 5.5bn, was acceptable.

Germany - Schröder considered the UK abatement unacceptable; reform of the CAP also unacceptable. Merkel: could understand the UK's insistence on retaining its rebate.

Net contributors

Unacceptable

Germany - ‘ready to move' in order to get a deal.

Old net recipients

Unacceptable

Spain - willing to accept the Luxembourg compromise.

New net recipients

Unacceptable

Poland - willing to make some sacrifices in return for a deal.

On the Luxembourg presidency compromise, there were conflicts with regard to fairly sharing the financial burden within the net contributors group, to reducing and to increasing the EU budget between the net contributors group and two net recipients group, and to sharing the financial benefits between the old net recipients group and the new net recipients group.

The UK thought that the increase in the EU budget for 2007-2013 mainly resulted from the enlargement of Eastern European countries. The UK's position on the Luxembourg compromise was that the UK contribution was enough to cover its share of the cost of the enlargement of the EU. The UK opposed increasing the UK contribution through reducing its rebate and increasing the EU budget to 1.06 per cent of GNI (Financial Times June 13, 2005, June 15, 2005). The UK also demanded as a condition of reducing the rebate an acceptance of reform in EU spending priorities, particularly CAP spending . The UK rebate resulted from its low level of receipts from EU expenditure policies, particularly the CAP and the structural funds, even though it was a big contributor (Financial Times June 13, 2005). The interrelationship between reducing the rebate and reforming the EU's spending plans meant that, to reduce the UK rebate, the EU had to solve the UK's unbalanced net contributions and receipts. The UK government prevented the UK from becoming a martyr in the financial negotiations (Financial Times June 13, 2005, June 15, 2005).

There were two groups in the net contributors group: a first group (particularly the Dutch, Danish and Swedish governments) which supported the UK position which insisted on limiting the EU budget to 1 per cent of GNI and reforming EU expenditure policies; and the second group (mainly France and Germany) which was amenable to the Luxembourg compromise of increasing the budget to 1.06 per cent of GNI to sustain the EU's spending plans. The Prime Minister of Sweden, Mr Goran Person, and Denmark's Prime Minister, Mr Anders Fogh Rasmussen, insisted on a reform of EU spending priorities and modernization of the EU budget to focus on research and development. After the failure of the Dutch to ratify the constitutional treaty on June 1, Dutch Prime Minister Jan Peter Balkenende faced domestic political pressure on the issue of European integration. Regarding the Luxembourg compromise, he insisted that the Euro 500m reduction in the Dutch net contribution was not enough, and called for a cut of 1.5 bn (European Report June 18, 2005; June 22, 2005). The Netherlands, Denmark and Sweden's main points with regard to the Luxembourg compromise were the reduction of the EU budget in order to reduce their own contribution and reform of EU expenditure policies to benefit their own priority policies in consideration of the Lisbon strategy.

In the other group, it was mainly France that supported retaining the EU expenditure plans, in particular the CAP, and argued for the reduction or elimination of the UK rebate, especially considering the cost of the enlargement of the EU, and in order to avoid any reduction of benefits. Considering the British position on the Luxembourg compromise, France was faced with the UK's criticism of the total CAP spending which gave justification for retaining the UK's abatement. In fact, France received substantial benefits from CAP subsidies and the government would face enormous domestic unpopularity if France went back on an agreement which the President Jacques Chirac of France and Germany's Chancellor Gerhard Schröder had agreed in a deal on the 2007-2013 rate in 2002 (Guardian June 14, 2005; European Report June 15, 2005). French President Jacques Chirac insisted on respecting the 2002 deal on CAP spending. For France, the UK's insistence on linking any reduction in the UK rebate to a reform of EU spending priorities was not an option in the financial negotiations (European Report June 15, 2005). Initially, Mr Chirac refused the Luxembourg presidency compromise as it involved a cut of Euro 8 bn from the CAP to fund the enlarged EU's farm sector, and Romanian and Bulgarian farmers who would join the EU in 2007 (European Report June 18, 2005). However, at the summit on June 16-17, 2005, finally, France said that it could accept the Luxembourg compromise to retain the CAP spending (European Report June 22, 2005).

Germany's position on the Luxembourg presidency compromise focused on reducing its contribution, which would flow to the new member states, and, as an ally of France, it rejected a call for a recasting of the EU farm spending deal. The Chancellor of Germany, Mr Gerhard Schröder, said, ‘ in the past, if there has been a problem, the Germans would just write a cheque to sort it out. The Germans aren't willing or able to do that any more' (Financial Times June 18, 2005). The financial framework for 2007-2013 not only indicated a doubling of the German contribution but also foresaw a reduction in German benefits from regional aid, which would be quietly allocated to poorer regions in the new member states from the former Soviet bloc (Financial Times July 30, 2004). The German argument in favour of reducing the EU budget to 1 per cent of GNI might be taken to mean that Germany was not willing to pay the cost of the enlargement of the EU. In addition, Mr Schröder might envisage that, in the EU budget negotiations, the UK rebate issue was ‘the central point' which made for conflict amongst the western member states in the net contributor group. He pointed out that the UK had the sixth highest per capita income among the member states but its contribution to the EU budget was far behind this, due to its rebate. Mr Schröder had the same opinion as President Jacques Chirac of France on British attempts to tie the rebate issue to cuts of Euro 377 bn from EU farm aid up to 2013 (Financial Times June 17, 2005). Mr Schröder made it clear that Germany would not reopen discussions on reform of the CAP, as demanded by the UK (Financial Times June 18, 2005).

The old net recipients group was opposed to the net contributors group's attempt to reduce the EU budget, as they aimed to sustain the level of the Commission's proposal which allocated regional aid on EU expenditure policies. The group also supported France and Germany's insistence on reducing the UK rebate in order to increase the EU budget for sustaining their benefits. The group's position arose from the consideration that they had to share their benefits from regional aid with the new member states as the new net recipient group. To prevent the reduction of the group's benefits, the member states in the old net recipients group paid significant attention to securing the EU budget for sustaining regional aid. Thus, the old net recipients group was in favour of reducing the UK rebate and of increasing the UK contribution to the EU budget in order to sustain the Commission's proposal level for EU expenditure policies which were benefiting their economies. In particular Italy and Spain in the old net recipient group persisted in demanding a reduction in the UK's abatement. Italy's Silvio Berlusconi complained that the Luxembourg compromise to reduce structural funds would mean a substantial fall in Italy's receipts from the EU. He said that a radical revision of the UK rebate was one of the key Italian demands in the negotiations under the Luxembourg presidency (European Report June 11, 2005). Spanish President Alberto Navarro and Foreign Minister Miguel Moratinos also said that Spain would be able to accept the Luxembourg compromise, especially a reduction of regional aid and a modification of the UK rebate (European Report June 11, 2005).

The new member states constituting the new net recipients group seemed to have timing rather than the amount of their receipts as their priority. Based on the Lisbon strategy, the new member states were due to receive Euro 9.7 billion in 2006 under the cohesion policy for boosting innovation, competitiveness and job creation (European Report June 29, 2005). Delaying an agreement might mean that it would become difficult to launch the new cohesion policy in good time (European Report June 11, 2005). Thus, the leaders of the new member states preferred to accept lower receipts as part of the Luxembourg compromise in order to ensure that agreement was reached (European Report June 29, 2005).

A European Council meeting on June 16-17 2005 on the future EU budget was unable to overcome conflicts within the net contributors group, between the net contributors group and the net recipients group, and between the old net recipients group and the new net recipients group. In particular, Britain, the Netherlands, Denmark and Sweden could not accept a request for ‘additional money' to cover the cost of the EU enlargement. Moreover, in the old net recipients group, Italy refused to adopt the Luxembourg compromise because Italy would have had to share the regional aid with the new net recipient group. The financial negotiation for 2007-2013 therefore became the responsibility of the UK presidency which started on July 1, 2005.

1.2.2. The informal European Council in October 2005

Following the failure of the European Council to reach accord on the financial agreement on June 16-17 under the Luxembourg presidency, the UK presidency called an informal summit of EU leaders on October 28-29 at Hampton Court Palace in England. At the informal European Council, the UK presidency aimed to have an opportunity to explain to EU leaders why the UK required the reform of EU spending priorities before the Brussels European Council in December 2005 at which the member states would statistically negotiate an agreement of the financial perspective for 2007-2013 (European Report October 28, 2005).

At the informal summit on October 28-29, the UK presidency focused on the challenges of globalisation. In response to the challenges of globalisation, the UK insisted that EU policies would concentrate on trade and scientific research, and development efforts to boost economy and to reduce unemployment (The Guardian October 27, 2005). To achieve these objectives, the UK presidency, therefore, argued that the EU needed to modernise the Union's budget on the expenditure side. On the expenditure side, the UK suggested a cut in spending on the CAP to change EU spending priorities towards the areas of trade, research and development to compete with the United States, China and India (The Guardian October 27, 2005). However, France and Germany opposed the UK's arguments for modernisation of EU spending priorities. Germany's Chancellor Gerhard Schröder explained that, considering the challenges of globalisation, the EU was confronted with a choice between liberalisation and the retention of basic European values. He argued that the UK's vision for the EU's future direction was ‘social dumping' or undermining the European social model by liberalisation, and rejected the UK's Anglo-Saxon economic model (Financial Times October 28, 2005).

Furthermore, President Jacques Chirac of France used the informal summit to caution Europe's Trade Commissioner Peter Mandelson's plan which would promise the reform of the CAP in the WTO talk in Hong Kong in December 2005 and the UK's attempts which would reform EU spending priorities in the financial perspective negotiation in December (The Guardian October 24, 2005; The Guardian October 28, 2005; Financial Times October 28, 2005; The Birmingham Post October 29, 2005). He argued that the EU had to respect the CAP agreement which was modified in 2003 with a process to open up to the world, and that France had to protect its traditional CAP benefits at the December summit (The Guardian October 28, 2005; Financial Times October 28, 2005; The Birmingham Post October 29, 2005). Hungary's Prime Minister Ferenc Gyurcsany, who chaired the Visegrad group, argued that the new member states were angry with the UK presidency for delaying the financial negotiation until December 2005, and pressured the presidency to call in strong terms for the EU budget agreement to match their needs (The Guardian October 27, 2005; European Report November 3, 2005). Artis Pabriks, the Latvian foreign minister, and Danuta Hubner, Poland's European Commissioner, also argued that delaying the EU budget agreement would cause them to be unable to implement key regeneration projects (The Guardian October 24, 2005; The Guardian October 27, 2005).

Throughout the informal summit, Mr Blair understood that securing the EU budget was a priority issue for the future of the EU and it was important for the new member states to be given a chance for their economies to regenerate. Mr Blair vowed that he would do his ‘level best' to ensure EU budget agreement in December 2005. However, he said that the EU budget would be guided in the right direction to assure an EU future in response to the global order (The Irish Times October 27, 2005). The UK presidency organised two meetings: of the 25 Foreign Ministers on November 7, and of EU ambassadors on November 10, to discuss the financial issue in preparation for the European Council in December. The presidency expected that its compromise on financing the EU would be on the table after these two meetings (European Report November 3, 2005).

1.2.3. Preparing the UK presidency compromise

The UK presidency organised several meetings at the Ministerial level to discuss EU financial issues, and to gather member states' opinions and preferences in order to establish the UK presidency compromise which sought to balance and resolve conflicts amongst member states' preferences. The UK presidency also planned to explain the UK's vision of a modernised EU in response to the global challenge. Initially, the UK presidency planned two Ministerial meetings on November 7 and 10, 2005. However, the number of meetings was increased due to tension amongst member states' preferences on financial issues and EU spending priorities.

The Foreign Ministers' meeting on November 7

On November 7, the 25 foreign ministers in the EU member states met in Brussels for their first formal discussions on the EU budget after the collapse of the EU budget negotiations in June (Financial Times November 7, 2005). The main debate at the meeting was whether the UK presidency compromise would adopt the Luxembourg presidency compromise or further change the previous compromise for achieving a modern budget, in response to the challenges of globalisation (European Report November 11, 2005).

The UK presidency needed more time to persuade its EU partners to understand the need for modernisation of the EU budget. At the meeting, the UK Foreign Secretary, Jack Straw, and his European Affairs Minister, Douglas Alexander, argued for further change of the Luxembourg presidency compromise. For them, the compromise under the Luxembourg presidency was unacceptable for the UK's vision (European Report November 6, 2005). Considering the global challenges, Mr Straw said that the UK presidency needed to propose a change to the Luxembourg presidency compromise to concentrate on restructuring and modernising the EU budget which would balance EU spending between traditional EU expenditure policies, particularly farm subsidies, and new areas such as ‘the hi-tech challenge' (The Independent November 8, 2005). Furthermore, Mr Straw focused on the UK's contribution to the EU budget. He insisted that although the UK was a low recipient from EU budget spending, especially CAP spending, the UK's contribution was more than that of France and Italy even with the abatement. He said that if the UK presidency adopted the Luxembourg presidency compromise, the UK contribution would significantly increase, at the level of the EU's second largest net contributor (The Independent November 8, 2005; The Guardian November 8, 2005). Mr Straw, therefore, argued that the EU budget would need to adjust CAP spending and insert a review clause. These options could thus change the position the UK took on its abatement in December 2005 (The Independent November 8, 2005; The Guardian November 8, 2005)

Philippe Douste-Blazy, the French Foreign Minister, insisted that the UK's demands for retaining its abatement were causing delay in the EU budget agreement. This insistence might have been a manoeuvre to isolate and to pressure the UK into reducing the rebate. Retaining the abatement meant that the French contribution towards the cost of EU enlargement would increase (The Independent November 8, 2005; European Report November 9, 2005). Mr Douste-Blazy warned against change of the Luxembourg presidency compromise, which was agreed by 20 member states, and proposed the reduction of the UK rebate at Euro 5.5 bn a year for the financial period 2007-2013, and respecting the agreement of the CAP in 2003 as per the French demands in the financial negotiation for 2007-2013. He said that France would not accept change of the Luxembourg presidency compromise in the European Council in December (The Independent November 8, 2005).

On the UK presidency's challenges around modernisation of the EU budget, four net contributor states ( the Netherlands, Sweden, Austria and Germany) accepted the UK's proposal and required the reduction of their contribution to the EU budget (European Report November 9, 2005). In particular, Dutch Foreign Minister Bernard Bot said that the Netherlands welcomed the presidency's challenges as a step in the right direction, but required further changes and the reduction of their contribution by Euro 1 bn (European Report November 9, 2005). However, as to the net contributor countries' demand for reduce of their contribution, the net contributors group joined in the French criticism of the UK rebate (Financial Times November 7, 2005; The Guardian November 8, 2005).

The new member states, as part of the new net recipients group, stressed the need to achieve a financial agreement in December 2005. The new net recipients group also criticised the UK abatement discussion which was delaying the agreement, as the French argued, and sought the UK's concession over the rebate (Financial Times November 7, 2005; The Guardian November 8, 2005). Furthermore, as Czech Foreign Minister Cyril Svoboda mentioned, the new member states had no objection to the shift of an extra 1 per cent of direct aid on CAP spending into rural development schemes (European Report November 9, 2005).

Although the European Foreign Ministers reopened the financial discussion, substantial progress toward the financial agreement did not occur. The Foreign Ministers recognised deadlock on the UK presidency's challenge on the Luxembourg presidency compromise, the modernisation of EU spending priorities, and the UK abatement position in exchange for reform of farm subsidies (The Irish Times November 8, 2005). The Foreign Ministers organised the next meeting for November 21 but a detailed presidency compromise would be presented in early December (European Report November 9, 2005).

The meeting of the EU member states' ambassadors on November 10

For the meeting of EU member states' ambassadors, the UK presidency issued a structure for EU spending priorities, detailing which EU spending policies would help to modernise the EU budget for boosting the EU's competitiveness in response to the challenges of globalisation, compared to the CAP subsidies as per traditional EU expenditure policy (European Report November 11, 2005). However, a large number of delegations criticised the presidency paper for not concentrating on issues essential to the financial negotiations in December 2005. Even though the UK presidency attempted to persuade the EU member states to understand the need for challenging the Luxembourg presidency compromise in response to globalisation, the EU member states did not consider the UK's point of view on EU budget issues important. The EU member states were focussed on benefits to themselves from the EU financial perspective for 2007-2013. They said that they could understand these attempts by the UK presidency as indicative of reluctance to make an agreement on the EU budget negotiation. They pressured the UK presidency to table a detailed compromise and to address its position on the question of the UK rebate (European Report November 11, 2005).

Responding to the criticisms, the UK ambassador Kim Darroch understood the import of the meeting, and he promised that he would discuss his understanding with London (European Report November 11, 2005). A meeting of EU member states' ambassadors was organised to discuss the modernisation of the EU budget and the timing of a review clause on EU spending priorities and revenue on November 17. The outcomes of the meeting on November 10, and of the next meeting on November 17 would be examined at the Foreign Ministers' meeting on November 21 (European Report November 11, 2005).

The meeting of EU member states' ambassadors on November 17

At the meeting of EU member states' ambassadors on November 17, the UK presidency did not present a detailed proposal for the EU budget negotiation in December 2005. At the meeting, a Globalisation Adjustment Fund, which was one element of the UK's challenge - a response to globalisation - was discussed and was opposed by the delegations. The delegates said that the Commission's proposal on the fund was negative because the December summit was too late to decide, and some countries in the net contributor group were not willing to add extra money to the EU budget (European Report November 19, 2005).

The Foreign Ministers' meeting on November 21

The Foreign Ministers' meeting on November 21, 2005 was the final meeting at which the UK presidency compromise could be determined. Mr Straw was confronted with opposition from 20 member states who had agreed the Luxembourg presidency compromise in June 2005. The 20 member states pressured the UK presidency not to deviate too far from the Luxemburg presidency compromise, including the reduction of the UK rebate at Euro 5.5 bn a year for the financial period for 2007-2013 (European Report November 23, 2005; European Report November 30, 2005). In particular, Mr Douste-Blazy, the French Foreign Minister, argued that the UK must concede its rebate to pay its fair share of enlargement, and to achieve financial agreement in line with its presidency responsibilities (European Report November 23, 2005; The Irish Times November 22, 2005). This argument might be understood as the member states requiring the UK to take responsibility as one of the rich countries in the EU to contribute towards EU integration even though the UK still received few benefits from EU expenditure policies.

Responding to the opposition, Mr Straw said that the UK presidency would do its best to reach an agreement in December 2005 (European Report November 23, 2005). He promised that the UK presidency compromise would be presented on December 5, 2005. The UK presidency organised a special meeting of the Foreign Ministers on December 7, 2005 to prepare for the European Council on December 15-16 (European Report November 23, 2005). Considering conflicts amongst the member states on financial issues, Mr Straw expected that the UK presidency compromise would challenge the Luxembourg presidency compromise as much as possible (European Report November 23, 2005). Basically, Mr Straw expected that the total EU budget would be reduced to 1.03 per cent of GNI, as compared to 1.06 per cent of EU GNI under the Luxembourg presidency compromise (European Report November 30, 2005). This might have meant that to reduce the EU budget, the UK presidency would propose reduction in regional aid, which would involve reduction of the net contributors group's contribution. Moreover, a lower EU budget would reduce pressure for reduction of the UK abatement from the net contributor group.

1.2.4. The negotiation at the Brussels European Council in December 2005

On December 5, 2005, the first UK compromise was presented. It reduced the total ceiling to Euro 847 bn at 1.03 per cent of GNI compared to Euro 871 bn at 1.06 per cent of GNI under the Luxembourg compromise and Euro 1,025 bn at 1.24 per cent of GNI under the Commission proposal of 2004 (European Report December 3, 2005; December 7, 2005).

(Table 1.3) The UK presidency compromise

Proposal

1st Compromise (December 5, 2005)

The UK rebate - reduction of Euro 8bn.

The EU budget - reduction of Euro 839bn (1.03 per cent of GNI) compared to the Luxembourg compromise

2st Compromise (December 14, 2005)

The UK rebate - reduction of Euro 10.5bn

The EU budget - Euro 849bn

Outcome

The UK rebate - reduction of Euro 10.5 bn

The EU budget - Euro 862bn (1.045 % of GNI)

To reduce the EU budget, the compromise suggested that regional aid for the old and new net recipient groups would be cut by 10 per cent, about Euro 14 bn compared to the Luxembourg compromise (European Report December 3, 2005; Financial Times December 2, 2005; December 3, 2005; December 5, 2005; December 6, 2005; House of Lord December 5, 2005; Whitman and Thomas 2007: 71; Whitman 2006: 61). UK officials gave two reasons for this reduction in regional aid. First, the UK argued that the structural funds were not fully spent each year (European Report December 3, 2005). Secondly, the UK pointed out that Euro 150 bn of regional aid was twice the value of the Marshall Fund for the economic reconstruction of Western Europe after World War II. For these reasons, the UK asserted that reduced regional aid would still be enough to help build the ten new member states' economies (European Report December 3, 2005; December 7, 2005).

As regards the issue of its own abatement, the UK presidency proposed to cut the UK rebate by Euro 8 bn over the seven-year budget period. Reducing the UK rebate by Euro 8 bn would mean an exclusion of the new net recipient group's benefits under CAP spending (European Report December 7, 2005). The UK presidency compromise proposed a review of EU spending priorities as part of future reform of EU policies, but that this reform would not actually need to start before the end of the financial period 2007-2013 (European Report December 3, 2005). The UK presidency proposed to cut Euro 7 bn from the rural development budget for the old net recipients group, Euro 2 bn from farm spending for Romania and Bulgaria, Euro 0.7 bn from internal policies, and Euro 1 bn from administrative costs (European Report December 7, 2005).

At the special meeting of the Foreign Ministers to discuss the UK presidency compromise, the new net recipient group criticized the UK presidency compromise since it would reduce their benefits from EU regional aid. In particular, Poland's Prime Minister Kazimierz Marcinkiewicz envisaged that cutting 10 per cent of regional aid would result in a 20 per cent reduction in structural funding for Poland (European Report December 3, 2005). Due to some structural and cohesion funding being allocated to rural development funds, Poland would also lose Euro 530-650m in rural development funds (European Report December 10, 2005). Mr Marcinkiewicz said that it was a ‘bad budget' and a ‘bad proposal', and required improvement before he could continue with the budget negotiations (European Report December 7, 2005).

In the net contributor group, France and Sweden were typical of the countries taking an opposite stance to that of the new net recipient group. Under the UK presidency compromise, France, whose net contribution would increase by 0.01 per cent, criticized the reduction by Euro 8 bn of the UK rebate. French Foreign Minister Philippe Douste-Blazy asserted that Euro 8 bn was unacceptable in terms of solidarity and fairness, and called for a new compromise with a further reduction of the rebate to Euro 14 bn to ensure that the UK paid its fair share of the costs of enlargement, instead of reducing regional aid (European Report December 7, 2005; December 10, 2005). With regard to the UK presidency compromise, France had domestic political difficulties which related to the deadlock around reducing the UK rebate and reviewing EU spending priorities, particularly the CAP. Sweden was not likely to benefit under the UK presidency compromise as it reduced the Swedish net contribution by 0.01 per cent; the Swedes were unhappy with this lack of improvement in the country's net contributor position (European Report December 7, 2005). Moreover, in the old net recipient group, and due to receive a cut of Euro 7 bn from the rural development budget under the UK presidency compromise, Portugal and Spain would lose 20 per cent and 33 per cent of their rural development allocations respectively, compared to the Luxembourg presidency proposal (European Report December 10, 2005). European Commission President Jose Manuel Barroso criticised the UK compromise as ‘unacceptable', and labelled the proposed UK budget one for a ‘Mini-Europe' (European Report December 7, 2005).

However, the Netherlands and Germany, in the net contributor group, were positive about the UK presidency compromise, involving as it did a trimming of EU expenditure. Dutch Finance Minister Gerrit Zalm welcomed the cut of Euro 700 m in the Dutch contribution, as they had demanded a Euro 1 bn saving in June. Germany also had a positive position on reduction of the EU budget, which would now flow towards the new net recipient group instead of the East German regions. However, Germany was concerned that the UK proposal would not be accepted by the old and new net recipient groups, and by members of the net contributor group whose net contribution would not be reduced under the compromise (European Report December 7, 2005).

Under the UK presidency compromise, reducing the UK abatement by Euro 8 bn was not a large enough concession to obtain a deal for the financial negotiations in December 2005. The old and new net recipient groups criticised the reduction of the ceiling on the EU budget and regional aid as this would affect their benefits. In the net contributor group, the French and Swedish governments refused to accept an increase in, or maintenance of their net contribution. However, the Dutch and German governments were satisfied with reductions in their contribution. Although the UK presidency took account of the net contributor group's desire for a reduction in the EU budget and their net contribution, and proposed a ‘Mini-budget', the presidency compromise still failed to fulfil all member states' demands. France and Sweden were especially adamant in demanding reductions in their net contributions. The old and new net recipient groups also argued for increases in the regional aid budget to build their economies. To obtain a deal with these countries, the UK presidency would need to reduce its rebate by more than Euro 8 bn over the financial period, much as the French had been insisting. Such a move seemed as if it might be the only solution that would allow an increase in EU expenditure simultaneous with a reduction in the net contributor group's contribution to the EU budget.

At the Brussels European Council on 15-16 December 2005, there were many criticisms of the UK presidency compromise. Of course, the two net recipient groups condemned the UK presidency compromise to reduce the regional aid. Not only the net recipients groups, but also the net contributors groups found fault with the UK presidency compromise. Both France and the European Commission's President, Mr Barroso criticized the UK presidency compromise. Mr Barroso pressurised the UK to propose a new presidency compromise with Euro 855 bn of the total EU budget at 1.04 per cent of GNI, to offer a significantly higher level of regional aid to the new net recipient group, and to permanently adjust the UK rebate mechanism (European Report December 14, 2005). Mr Chirac demanded that the UK rebate be cut by up to Euro 14-15 bn to ensure the UK made a fair contribution to the costs of enlargement and to increase the EU budget for regional aid. Mr Chirac also argued that the UK must consider accepting the new collective system with permanently abolition of the UK rebate in order to avoid the debate recurring in future negotiations. Spain and Germany also agreed with the French demands for adaptation of a new permanent UK rebate mechanism. In particular, the new German Chancellor Angela Merkel demanded a cut of Euro 11 bn in the UK rebate (European Report December 14, 2005; European Report December 21, 2005).

The UK presidency accepted the criticisms in order to achieve a financial agreement at this summit. Considering the criticisms, the UK presidency proposed a new compromise. The new compromise indicated an increase by Euro 2 bn in the total EU budget to Euro 849 bn for the financial period for 2007-2013, compared to the December 5 proposal. The rate of EU GNI, however, was to remain around 1.03 per cent of GNI (European Report December 17, 2005; December 21, 2005; Financial Times December 17, 2005). The new compromise allocated an increase of around Euro 2.175 bn to competitiveness for growth and employment, including structural and cohesion funds, and increased by Euro 340 m the budget for rural development compared to the first presidency compromise of December 5. The new compromise also allocated an additional Euro 465 m to cut the Dutch and Swedish net contributions in order to induce them to accept the deal. Increasing regional aid meant that the compromise would represent a total of Euro 260 bn for the new net recipient group (European Report December 17, 2005). The UK conceded reducing the rate of the UK rebate to Euro 10.5 bn as a maximum reduction that would constitute the UK's contribution to increasing the EU budget for the cost of enlargement.

The new presidency compromise closely followed the criticisms made of the first presidency compromise of December 5, 2005. However, the UK was continuously faced with opposition from the new net recipient group, as well as from France (European Report December 17, 2005). As opposition group: France and the new net recipient group, however, insisted that the compromise was not enough for them to participate in the deal. The new net recipient group argued that only a reduction of the UK rebate by Euro 14bn, as the French had insisted upon all along, would be enough to generate additional funds that would satisfy their demands (European Report December 14, 2005). Furthermore, the review of EU spending priorities was caused by France's blocking tactics and pressure for a Euro 14 bn UK rebate reduction in the UK presidency compromise. France allied with the new member states to press for reduction of the UK rebate to increase regional aid.

At the European Council on December 15-16, 2005, Mrs Merkel decided to concede Euro100m, which would have been allocated for German regional aid, to Poland (Nicoll and Delaney 2007: 1). She mediated the debate between the UK and France on the review clause for the financial agreement. France finally accepted a compromise with a clause which stated that the European Commission would undertake a ‘full, wide-ranging review covering all aspects of EU spending', including the CAP, and would report to the European Council in a mid-term review by 2008. EU leaders in the European Council could then make a decision about the reform of EU spending priorities (European Report December 23, 2005; Financial Times December 17, 2005; House of Common December 19, 2005).

The financial perspective negotiation for 2007-2013 achieved an agreement in dramatic fashion on December 16, 2005. The UK's offer to cut its rebate to Euro 10.5 bn and Mrs Merkel's payment of Euro 12 bn extra had persuaded the net contributor group and the net recipient groups to agree with Euro 862.3 of the EU budget at 1.045 per cent of GNI. Due to the increase in the EU budget, regional aid was slightly increased to 0.37 per cent from 0.36 per cent in the second presidency compromise. Rural development funds were Euro 69.25 bn compared to Euro 66.34 bn (European Report December 21, 2005; Financial Times December 17, 2005; House of Common December 19, 2005; Whitman and Thomas 2007: 71; Lorca 2005: 6). Most EU leaders seemed satisfied with the outcome. Mr Chirac proclaimed victory in his campaign to defend the CAP against reform. Although the new net recipient group had wanted to get a slightly higher regional aid allocation, it was satisfied with achieving the outcome of the financial negotiation on time (Begg and Heinemann 2006; Lorca 2005: 6).

1.3. The Change of the UK's position on its rebate

In the financial perspective negotiations for 2007-2013, the Commission and the member states pressured the UK to reduce its rebate to increase the EU budget for securing enough regional aid to invest in poor areas in the old and new recipients' groups. This was despite their being aware of the UK's unbalanced contribution, in that it had the lowest per capita receipts of EU spending resulting from the EU budget allocation, compared with over 80 per cent going to two traditional policies: the CAP and regional aid. This had been a controversial issue since the 1988 financial negotiations. It might have meant that the Commission and the member states in the EU would require the UK to take responsibility for sharing the EU budget burden as ‘the rich generally pay more than the poor' - even though the UK had unbalanced financial problems in the EU budget. Considering this concept of the UK rebate, the UK's position on its rebate during the financial perspective negotiation in 2005 was different between the Brussels European Council in June and in December.

Initially, the Commission proposed the financial perspective for 2007-2013 with a correction mechanism which would focus on the reduction of the UK abatement (Financial Times December 6, 2005; The Economist July 10, 2004; COM 2004 b). In relation to the Commission's proposal, the UK position was that the it did not want to bear responsibility for measures which required increasing the UK's contribution through reducing the UK rebate. Mr Gordon Brown, the UK Chancellor of the Exchequer, made the UK's position clear in an interview with The Guardian. He insisted that ‘The rebate is not the issue - the real problem is the Commission's desire to increase overall spending by 25 per cent' (Guardian February 10, 2004). There were two reasons to take this stance. First of all, the UK's unfair budget contribution was as justified in the financial negotiation for the period 2007-2013 as it had been in 1984. In the financial framework for 2007-2013, the UK would receive relatively few benefits from farm subsidies and regional aid - which would account for over 80 per cent of the EU budget. Compared with France, which has a similar size of population and economy as the UK and would benefit from the CAP, the UK would pay more than France for the EU budget but would receive fewer benefits (Guardian July 15, 2004; Financial Times July 8, 2004). Without the UK rebate, the net British contribution would soar from 0.25 to 0.62 per cent, i.e. 50 per cent more than France (Economist July 10, 2004; Financial Times July 9, 2009). This might have meant that the UK financial burden would be too heavy without the UK rebate compared to France (European Report June 15, 2005).

Secondly, the UK and other member states, i.e. Germany, France, Italy, the Netherlands, Sweden and Austria, as the net contributors group, did not see any reasons to increase the EU budget. Due to an analysis of then-current spending levels which represented only 0.98 per cent of GNI, the UK insisted that keeping the ceiling at 1 per cent of GNI would be enough, even though the Commission proposed an expansion of the EU budget to match the enlargement of the EU from 15 to 27 member states (Guardian February 10, 2004; Peet 2005: 1).

These reasons implied that, from the UK's point of view, the UK did not want to contribute to the cost of EU enlargement because there was no reason to do so. Mr Blair, therefore, vowed to use the UK's veto, as allowed under EU rules, to block any such move on the UK rebate at the Brussels European Council in June 2005 (Financial Times July 8, 2004). The UK's arguments for freezing the 1 per cent of GNI and retaining its rebate would inevitably bring about conflicts within the net contributors groups about sharing of the financial burden, and with the new member states about the meagre magnitude of their benefits from the new budget.

The Luxembourg presidency proposed as a compromise to mediate conflicts within the net contributors group, and between the net contributors group and the two net recipient groups. Mr Juncker presented a proposal at 1.06 per cent of GNI and reducing the UK rebate at Euro 4.6 bn in 2007, reducing more from 2008 to 2013 (European Report June 11, 2005; Times May 21, 2005; Financial Times June 14, 15, 16, 2005; Hearl 2006: 54). The presidency compromise, as did other member states in the net contributors group, pointed out that due to the UK's rebate, the UK had made a small contribution, compared to the UK's prosperity. The Commission and the UK's colleagues in the net contributors group demanded the reduction of the UK rebate in order to fairly share the net contributors' financial burden which would be increased by the boost in the EU budget for securing regional aid to the new member states.

At the Brussels European Council on June 16-17, 2005, Mr Blair argued that reducing the UK rebate in line with the Luxembourg presidency compromise and other member states' arguments was unreasonable. Mr Blair argued that the UK should not be sacrificed in order to equalise the EU financial burden within the net contributors group, and to contribute to the increase in the EU budget for the new member states in the financial perspective negotiations. Mr Blair focused on the distortion of the CAP, which meant that the UK received the lowest per capita receipts of EU spending of any member state (Financial Times June 13, 2005; June 15, 2005).

Mr Blair insisted on the reform of EU spending priorities, particularly the CAP, and keeping the ceiling at 1 per cent of GNI, instead of reducing the UK rebate and increasing the ceiling to 1.06 per cent of GNI (Financial Times June 18, 2005). Mr Blair pointed out that under the planned financial framework for 2007-2013 nearly 42 per cent of the EU budget would go on supporting 5 per cent of the population, and 20 per cent of CAP spending would go to France alone (European Report June 15, 2005). This financial plan would never satisfy EU citizens' desire to tackle sluggish economic growth and the problem of 20 million unemployed. Thus, it could be said that the extant EU expenditure policies in the financial perspective for 2007-2013 had delivered neither the economic prosperity nor the social justice that its citizens desired (Financial Times June 13, 2005).

Mr Blair argued that the CAP funds should flow instead towards the modernization of the EU, in particular the new member states, and must go towards alleviating the impoverishment of farmers in underdeveloped areas, rather than to French farmers (Financial Times June 13, 2005). He therefore criticized the Luxembourg presidency compromise on reducing the UK rebate and increasing the EU budget as the wrong way to rebuild public support and trust (Financial Times June 13, 2005; June 15, 2005). He insisted that if the increase in the EU budget was for securing regional aid for new member states, the EU should reform EU spending priorities to cover the increase in the EU budget, instead of reducing the UK rebate and increasing the EU budget ceiling to 1.06 per cent of GNI. This reform could also solve the fundamental problem of the UK's receipts from the EU funds which had been the root cause of the UK rebate. Mr Blair argued that the UK abatement would still be justified, unless there was reform of EU expenditure policies (European Report June 15, 2005). The Luxembourg presidency compromise could not overcome the opposition of the UK and four other member states. The financial agreement at the Brussels European Council on June 16-17, 2005 failed due to conflicts within the net contributors group, and between the net contributors group and the net recipients groups (European Report June 29, July 1, 2005).

However, the UK position on its rebate changed to its polar opposite during the UK presidency in the second half of 2005. The UK presidency organised the informal European Council in October and several Ministerial meetings to prepare the presidency compromise for the Brussels European Council meeting on 15-16 December 2005. During the preparation period, the UK presidency planned to persuade member states which had agreed the Luxembourg presidency compromise why the UK presidency needed to challenge the latter, and to gather member states' opinions on the financial issues involved in order to find solutions for a new presidency compromise.

At the informal European Council on October 28-29, 2005, Mr Blair emphasised the reform of EU spending priorities as essential to the future direction of Europe in response to the challenges of globalisation (European Report October 28, 2005). Mr Blair explained that the reform of EU spending priorities was a financial implement of the Lisbon Strategy which was agreed by the member states for the modernisation of EU policies in order to preserve European values instead of being ‘victims of globalisation' (The Guardian October 27, 2005; European Report October 28, 2005). Considering global competitiveness and 20 million unemployed Europeans, Mr Blair argued that the Luxembourg presidency compromise should be challenged to focus on the reform of EU spending priorities. In particular, the reform of the CAP would allow transferring the EU budget towards modernization of EU economies, placing the emphasis on creation of jobs and high-tech development. This modernization would be much more helpful to all EU member states by strengthening economic competitiveness more than the CAP did (European Report October 22, 2005). Mr Blair urged putting the reform of EU spending policies on the table at the negotiation of the financial perspective for 2007-2013 at the Brussels European Council on December 15-16, 2005 (The Guardian October 27, 2005).

The UK presidency also recognized the member states' positions on financial issues during the summit. France had a non-negotiable position on the CAP, which had already been modified in 2003 to progressively ‘open up to the world' by 2013; it had been agreed to sustain the CAP until 2013. Mr Chirac observed that the UK presidency's challenge on the reform of EU spending priorities before the end of the financial perspective period would undermine the credibility of the EU. Mr Chirac insisted that France had to protect its traditional CAP benefits at the December summit (The Guardian October 28, 2005; Financial Times October 28, 2005; The Birmingham Post October 29, 2005). The French argument for keeping its traditional CAP benefits was in direct conflict with the UK's desire to reform EU spending priorities. This might have meant that, to accept the French position on the CAP in order to secure French financial agreement at the European Council, the UK would have had to propose a presidency compromise with a concession on the reduction of the UK rebate and the increase of the EU budget.

The net contributors group was strongly opposed to the increase of its contribution to the EU budget to pay the cost of the Eastern enlargement through regional aid (European Report October 28, 2005). This opposition required the UK to fairly share the EU financial burden through the reduction of the UK rebate and would bring about a conflict with the two net recipients groups on the size of the EU budget. Thus, the UK presidency would have to mediate between the two adversarial positions in the financial negotiation in December 2005. In addition, the new member states were pressuring the UK presidency to ensure the EU budget agreement matched their needs on time (The Guardian October 27, 2005; European Report November 3, 2005). For them, delaying the EU budget negotiation to the next Austrian presidency in the first half of 2006 would make it almost impossible to implement key regeneration projects through regional aid which would be allocated by 2006 (The Guardian October 24, 27, 2005). The new net recipients group's demands placed a harsh spotlight upon the responsibility of the UK presidency to make a financial agreement work at the European Council in December 2005. Finally, the old net recipients group had concerns over the amount of regional aid they might secure in the UK presidency compromise. They had to share regional aid with the new net recipients group, and might have had to concede regional aid to the new net recipients group in consideration of national economic prosperity (Financial Times October 28, 2005). This position would pressure the net contributors group to accept an increase in the EU budget.

Considering these positions on the financial issues, the UK presidency was confronted with five attitudes within the member states' arguments: no reform of EU spending priorities until 2013, fairly sharing the financial burden, increasing the EU budget, reducing member states' contributions, and achieving financial agreement in the December summit. These arguments seemed to be complicated and difficult to resolve. However, it was clear that these arguments converged around the reduction of the UK rebate as a means of solving conflicts. This might have meant that if the UK presidency wanted to broker a financial agreement at the Brussels European Council on December 15-16, 2005, the UK would need to concede some or all of the UK rebate to contribute to an increase in the EU budget. At the Ministerial meetings to prepare the UK presidency compromise, a group of 20 member states which accepted the Luxembourg presidency compromise pressured the UK presidency to present its compromise along similar lines as the previous compromise in June 2005 (European Report November 23, 2005; European Report November 30, 2005). On the other hand, the other 5 member states, which vetoed the Luxembourg presidency compromise, demanded the UK presidency significantly reduce the presidency compromise compared to the previous compromise (European Report November 9, 2005).

On December 5, 2005, the UK presidency compromise was presented. The UK presidency compromise, as expected, proposed the reduction of the UK rebate by Euro 8 bn during the financial perspective period for 2007-2013 (European Report December 7, 2005). However, it could be assumed that the UK presidency had given

(Table 1.4) The member states' net contributions

The Luxembourg presidency compromise

The UK presidency compromise

Britain

0.5

0.41

Germany

0.53

0.51

Italy

0.43

0.44

France

0.39

0.40

The Netherlands

0.73

0.67

Sweden

0.51

0.50

a lot of consideration to the reduction in size of the UK rebate. This might have meant that the UK presidency was more focused on making the UK contribution a responsible and fair share as against other member states' contributions, which had comparable levels of economic prosperity in the net contributors group, rather than concentrating on a particular size of EU budget which would be needed to implement the EU integration plans during the financial period for 2007-2013.

The UK Foreign Secretary Jack Straw explained that under the Luxembourg compromise, the UK's net contribution would have been 0.5 per cent of GNI compared to Germany's 0.53, Italy's 0.43 and France's 0.39 per cent, whereas under the UK compromise the UK's net contribution would be 0.41 per cent of GNI compared to 0.51 per cent for Germany, 0.40 per cent for France, and 0.44 per cent for Italy, in other words it would be at a similar level to that of France and Italy. In addition, in the net contributor group, the UK compromise would reduce the Dutch and Swedish net contributions, which would be reduced to 0.67 per cent from 0.73 per cent, and to 0.50 per cent from 0.51 per cent respectively, compared to the Luxembourg compromise (European Report December 7, 2005). At the special meeting of Foreign Ministers on December 7, 2005, the reduction in size of the UK rebate was criticised by the member states, particularly France and the new member states (European Report December 7, 10, 2005). The net contributors group pressured the UK presidency to reduce the UK rebate more to minimize their contribution while two net recipients groups also made representations to the UK presidency to reduce the size of the abatement in order to increase the EU budget for securing regional aid (European Report December 7, 14, 17, 21, 2005). Finally, the UK presidency proposed the reduction of the UK abatement at Euro 10.5 bn during the financial perspective for 2007-2013 and the UK presidency compromise was agreed by the member states at the European Council on December 15-16, 2005 (European Report December 17, 21, 2005).

1.4. Questions

Considering the UK rebate negotiations in 2005 in review, some questions arise which may be helpful in analysing the UK's concession to reduce Euro 10.5 bn of the UK rebate in December 2005. First of all, during the UK rebate negotiation in 2005, there was a position change by the UK. Although under the Luxembourg presidency in the first half of 2005, the UK vetoed the reduction of the UK abatement, the UK's position on the rebate changed to one of willingness to consider reducing the UK rebate, and then it decided to reduce it to Euro 10.5 bn when the UK held the presidency. It could be assumed that the role of presidency affected the change in the UK's position on the rebate issue in the financial perspective negotiation in 2005. What was the significance of the UK presidency for the UK?

Secondly, the UK presidency might have exercised the option to reduce the size of its rebate by less than Euro 10.5 bn, or to retain the UK rebate as it was. The previous financial perspective, named Agenda 2000, covered the financial period for 2000-2006. The new financial perspective was negotiated by two European Councils in 2005 and was organised to cover EU policies during the financial period for 2007-2013. The UK presidency had one year remaining - 2006 - to decide the UK rebate issue. The gesture of delaying the financial agreement might have been sufficient to bring about concessions by the other member states. Why did the UK presidency make the concession to reduce the UK rebate for the financial agreement in December 2005, instead of threatening to delay the financial agreement?

Finally, considering Linder's argument (2006: 6), it could be said that the UK rebate had been a political symbol since it was accepted in 1984. Two previous Conservative government leaders, Mrs Thatcher (1984, 1988) and Mr Major (1993), succeeded in retaining the UK rebate. The New Labour government leader, Mr Blair, also succeeded in keeping the abatement at the European Council in 1999. The symbolic political value of the UK rebate might have been strengthened by UK citizens' viewpoint of EU integration which might have assessed the government's EU diplomacy on whether the UK was judged a winner or loser in the financial negotiations. Did the Blair government consider domestic politics when the government decided on its concession in December 2005?

1.5. The elements of the effect to change the UK's position on its rebate

The above questions for analysis of the UK's concession in December 2005 contain three implicit elements: the responsibility of the UK presidency, the enlargement of the Eastern Europe countries, and the New Labour government's policy on EU integration, which might have affected the UK's EU diplomacy in taking the decision on the UK rebate negotiation at the Brussels European Council in December 2005. These elements are progressively connected. The UK presidency conceded the reduction of its rebate in order to achieve a financial agreement at the European Council in December 2005. The UK presidency's concession might have considered the new member states' time schedule for obtaining cohesion funds in 2006 for their economic regeneration - which met with the New Labour government's vision of leading the EU towards the modernisation of EU policies in order to strengthen the EU's competitiveness in response to globalisation.

1.5.1. The responsibility of the UK presidency

The UK changed its negotiating position in 2005. In the first half of 2005, the UK totally opposed the Luxembourg presidency compromise with regard to securing the UK rebate. At that time the UK was one of the member states which ran into conflicts through arguing in order to obtain benefits rather than seeking possible concessions for the sake of agreement in the financial negotiation in June 2005. The UK did not consider making a concession to achieve a financial agreement for the financial perspective for 2007-2013, and vetoed the Luxembourg presidency compromise (European Report June 29, 2005).

However, when the UK took the Council presidency in the second half of 2005, the UK position changed to that of a mediator which conducted the member states to reach a financial agreement during the presidency. As its privilege warranted, the UK presidency organised the informal European Council meeting and Ministerial meetings to collect member states' opinions on the relevant financial issues for establishing a presidency compromise which would mediate conflicts among the member states for an eventual financial agreement in December 2005. After the meetings, the UK presidency recognized the member states' arguments which involved the reduction of the UK rebate (European Report November 23, 2005; European Report November 30, 2005).

The UK presidency could have exercised two options in response to the member states' demand to reduce the UK rebate at the Brussels European Council on December 15-16, 2007. First of all, the UK presidency could have used its privilege to delay the financial agreement to the next Austrian presidency in the first half of 2006 as a means of pressuring the member states (especially the new member states ) into making concessions. The financial decision had a one-year period remaining in which the agreement for the financial perspective 2007-2013 had to be made, because the new financial perspective would have started in 2007. Considering ‘Chicken' game theory, it could be said that the gesture of delaying might pressure the new member states to concede their benefits, given their time schedule for reaching financial agreement in order to obtain the cohesion fund in 2006, which was agreed at the Lisbon European Council in March 2000. The new member states would reduce their demand on the increase of the EU budget for securing regional aid, which would in turn affect the reduction size of the UK rebate and the reduction of the UK's contribution. Furthermore, due to the time schedule of the EU budget decision-making framework, if the UK delayed the financial agreement to the next presidency, other member states in the net contributors group might concede an increase in their contributions to achieve a financial agreement for 2007-2013, as France (1984), and Germany (1988, 1993, 1999) did.

Secondly, the UK presidency could invoke the powers of the Council presidency and actually took this option in December 2005. With this option, although the UK had to reduce its rebate to solve conflicts which involved the UK's contribution, the UK could assure it achieved the financial agreement in December. During the preparation of the UK presidency compromise, the UK presidency recognized the financial difficulties of the new member states in modernising their economies, and the new member states' precarious time schedule under which the new members would obtain cohesion funds in 2006 if the financial perspective for 2007-2013 was agreed in December 2005 (The Guardian October 24, 27, 2005; European Report November 3, 2005). The new member states' regeneration matched with the Blair government's vision of the EU: modernisation of EU policies in response to globalisation. Furthermore, interviewees said that in general, the big three member states ( the UK, France, and Germany ) may have a responsibility to make agreements in EU integration negotiations. In particular, Mr Blair had a distinct responsibility for the financial agreement at the Brussels European Council on December 15-16, 2005. For these reasons, the UK presidency decided to attract the member states to participate in the financial agreement in December through the reduction of the UK rebate.

To meet the member states' demands, the UK presidency proposed a compromise with the reduction of the UK rebate set at Euro 8 bn during the financial period for 2007-2013 on December 5, 2005 (European Report December 7, 2005). But the reduction size of the UK rebate did not satisfy all the member states. Thus, the UK increased the reduction size of the UK rebate to Euro 10.5 bn at the Brussels European Council (European Report December 17, 21, 2005). It merits consideration that the UK presidency's willingness to compromise twice to reduce its rebate implies cognizance of its responsibility to conduct the member states towards the financial agreement in December.

1.5.2. The enlargement of the Eastern Europe countries

There were two reasons for the UK presidency concededing the reduction of the UK rebate to achieve the financial agreement in December 2005, in consideration of the new member states' time schedule for the regeneration of their economies. First of all, the UK presidency had a political reason. In the House of Commons, Mr Blair said that the UK presidency politically considered the UK's ‘moral uprightness' in decisions on the rebate at the European Council in December 2005. If the UK had received its rebate from the poor new member states through retaining the UK rebate, it would have been invalid on the UK's contribution for the EU integration. The new recipient group would have had economic difficulties in modernising Eastern Europe, if the UK presidency had decided to delay the financial agreement to the next Austrian presidency in the first half of 2006. Both retaining the UK rebate and delaying the financial agreement would have caused blame to fall upon the UK presidency (House of Commons, December 19, 2005).

Secondly, The UK presidency considered the economic extension of the internal market from the Atlantic to the Baltic (Nugent and Mather 2006: 144). From consideration of Mr Blair's speech in the House of Commons, the enlargement and regeneration of the Eastern Europe countries as new trade partners would expand the single market with 70 million customers for British products and services. The regeneration of the new member states would lead to their rapidly joining the net contributors group, which would mean that they would share the EU financial burden (House of Common December 19, 2005).

1.5.3. The New Labour government's EU policy

One of the reasons for the UK presidency compromise which reduced the UK rebate was that the New Labour government's vision of modernised EU policies matched with the regeneration of the new member states. The New Labour government's EU policies focused on the modernisation of the EU to strengthen EU competitiveness in response to globalisation. During the financial perspective negotiation for 2007-2013 in 2005, the Blair government argued for reform of EU spending priorities to stimulate financial flow into hi-tech areas and strengthen EU member states' competitiveness in the world market. The UK presidency organised the informal European Council in October 2005 to explain the appropriateness of reform of EU spending priorities to the member states and to persuade them accordingly. Even though the UK's plan seemed to fail, the UK presidency might not ignore the new member states' arguments which demanded adequate levels of regional aid and a financial agreement to modernise Eastern Europe in December 2005.

According to Gamble and Kelly's research (2000), in the period following the rejection of withdrawal membership in 1987 general election, the Labour party's position changed. The Labour party thought that, for the purposes of reviving the British economy and keeping socialism, membership of the EU provided opportunities for the UK economy to compete and to survive in the global market. In the 1997 general election, the Labour party pledged in their manifesto that ‘Britain would play a leading role in Europe, with an active agenda: completing the Single Market, enlarging the Union, reforming the CAP, and signing the Social Chapter etc (Gamble and Kelly 2000: 3). In the 1997 general election the Labour party replaced the Conservative government. The Blair government sought a solution to domestic economic matters by looking towards the boundaries of European Community membership. The UK tried to drive EU policies in beneficial directions by helping to formulate the Lisbon strategy in March 2000 in order to modernize EU policies in response to the extension of global trade (Sherrington 2006: 70). At the Lisbon European Council in 2000, a new EU strategy was agreed, to strengthen EU competitiveness as a dynamic knowledge-based economy in the world market by 2010 (Bache and George 2006:194).

In the financial negotiation in 2005, the Blair government explained that the financial perspective for 2007-2013 was the first financial plan of the EU after the agreement of the Lisbon strategy. To implement the Lisbon strategy by 2010, the financial perspective negotiation had to concentrate on the modernisation of EU policies in order to preserve European values, instead of being victims of globalisation (European Report October 22, 2005). The Labour government argued that the EU spending priorities would address this by shrinking the percentage of the EU budget spend on traditional policies over the financial period 2007-2013 while increasing the share spent on EU policies for boosting global competitiveness (European Report October 22, 2005). The UK demanded reform of EU spending priorities for these reasons and politically packaged them with the UK rebate at the Brussels European Council under the Luxembourg presidency in June 2005 (Financial Times June 13, 15, 2005). However, under the UK presidency, while preparing the presidency compromise, the UK might have recognized some difficulty in balancing an agreement between the UK rebate and reform of EU spending priorities. France argued for securing the credibility of the EU to prevent the reform of the CAP which was already agreed for the period 2003-2013. Thus, France argued that the reform of the CAP would undermine the credibility of the EU, and rejected the Blair government's vision of modernising EU policies. (The Guardian October 28, 2005; Financial Times October 28, 2005; the Birmingham Post October 29, 2005). In addition, the Labour government's vision gelled with the new recipient group's arguments for increase in the EU budget to secure regional aid and to have a financial agreement in December 2005 in order to modernise its members' economies (The Guardian October 27, 2005; European Report November 3, 2005). Given the UK presidency's responsibility, if the UK presidency continued to argue for reform of EU spending priorities, the financial agreement would not have been achieved at the Brussels European Council, even though the new member states demanded the agreement be brought in on time for obtaining cohesion fund monies in 2006. It could be said that, finally, to achieve the financial agreement at the European Council in December 2005, considering the UK presidency's responsibilities and the new net recipient group's demands, the UK presidency conceded changing the reform of the EU expenditure policies to the ‘review' by 2008, and the reduction of the UK rebate (European Report December 23, 2005; Financial Times December 17, 2005; House of Common December 19, 2005).

The Labour government's EU diplomacy had been constrained by its domestic electorate (Bulmer 2008). Regarding Bulmer's Utilitarian Supranationalism (2008), the Blair government exercised considerable caution about fighting the election on European issues as against domestic politics. The Blair government used the structure of a rules-based approach to de-politicise electoral salience on EU issues. The reduction of the UK rebate set against the cost of the enlargement of the Eastern Europe countries in December 2005 would serve to persuade the UK public and other domestic political parties, particularly the Conservative party, because the issue was agreed by bi partisan: the Conservative and Labour parties in the UK in 1993 (Bulmer 2008: 599-602; House of Common, December 19, 2005). This might mean that the reduction of the UK rebate was made to de-politicise electoral salience of European issues. Due to the bi-partisan agreement, even though it was a difficult decision to reduce the UK rebate, Mr Blair could concede the abatement in order to bring about the modernisation of the new member states.

1.6. Conclusion

Regarding to the UK presidency's concession on its rebate, Mr Blair forcefully stressed the UK's sense of responsibility which led the UK to pay its ‘fair share' for the cost of the EU enlargement, for the regeneration of the new net recipient group and to underwrite the solidarity of the EU. Thus, he could claim that the UK's presidency had achieved a reasonable and successful solution to the financial perspective negotiation for 2007-2013 (Financial Times December 21, 2005). This presidency concession resulted from three elements: the successfully implemented responsibility of the UK presidency, the enlargement of the Eastern Europe countries, and the new Labour government's policy on EU integration, which might have affected the UK's EU diplomacy.

Initially, this research focuses on the change in the UK's position on its rebate between the first half of 2005 under the Luxembourg presidency, and the second half of 2005 when the UK held the Council presidency. Under the Luxembourg presidency, from the UK point of view, the financial perspective for 2007-2013 and the Luxembourg presidency compromise required the UK's sacrifice to reduce its rebate in order to share the EU financial burden. The UK stubbornly refused to agree to the two proposals. At the Brussels European Council in June, the UK's position on the rebate issue involved an absolute refusal to discuss it at the negotiation table unless all member states agreed to reform of EU spending priorities, including farm subsidies. The UK's position was in direct confrontation with France's determination to defend EU farm subsidies. As a result, the financial negotiations in June under the Luxembourg presidency failed.

In the second half of 2005, the UK was no longer a complainer but a mediator interested in resolving conflicts among member states' positions on financial issues, as a responsibility of the Council presidency. Confronted with the new net recipient group's demand for a deal within a reasonable time limit during the presidency compromise preparations, finally the UK sacrificed its rebate to pave the way for agreement on time. The UK abatement had been reduced by Euro 8 bn in the first compromise, rising to Euro 10.5 bn in the European Council on December 15-16, 2005 in order to reach an agreement. For the agreement to happen on time, the UK presidency took a flexible line on the review of EU expenditure policies to convince France to participate in a deal.

The UK's position change on its rebate resulted in the UK presidency exercising responsibility in considering the new recipient group's time schedule for regeneration of its members' economies. This modernisation, and the extension of the Single Market, also caused the UK presidency to concede the reduction of the UK rebate. This was because the New Labour government's vision to modernise EU policies to strengthen the EU's competitiveness in response to globalisation met with the need for regeneration of the new net recipient group. Even though the UK's insistence on retaining the UK rebate was a high-profile issue within the UK that generated significant domestic political pressure on the government, the Blair government could carefully concede the reduction of its rebate due to the bipartisan agreement to welcome the enlargement of the Eastern Europe countries by two leading parties: the Conservative and Labour parties in the UK. The reasoned concession was powerful in persuading the UK public and the other domestic political parties. It could be argued that in fact, the agreement at the Brussels European Council on December 15-16 could be considered a diplomatic success for Mr Blair.

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  1. In 2004, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU . See Barnes and Barnes (2007).
  2. From the terms of the UK's entry operant until the 1980s, Britain had been the third poorest country among the EC member states, but the biggest net contributor. Thus, under the Thatcher government, the UK rebate was accepted at the Fontainebleau summit in 1984 and significantly reduced its contribution.
  3. The EU member states on the EU budget are identified into three groups: the net contributors group: Britain, Austria, France, Germany, Italy, the Netherlands, and Sweden; the old net recipients group: Greece, Portugal, Spain, etc; the new net recipients group: Eastern European Countries. See Maruhan and Emmanouilidis (2005).
  4. Europe's Trade Commissioner Peter Mandelson offered farm concessions to cut over 60 per cent of EU's highest agriculture import tariffs in WTO negotiation in Geneva on July 8, 2005. See the Birmingham Post (October 29, 2005).
  5. In the ‘Doha Development Round' in the WTO, it was agreed negotiations would conclude in December 2005 in Hong Kong. The agricultural negotiations in the Doha Round mainly focused on the reduction of tariff and export subsidies which distorted trade in the CAP. In light of the WTO negotiations, the Commission proposed the reform of the CAP to introduce the Single Farm Payment (SFP) to reform the CAP direct payment in 2002. In 2003, the agricultural council agreed to shift 3 per cent of direct payment each year towards EU rural development measures from 2007-2013. See Fouilleux (2007) and Smith (2007).
  6. The Visegrad group is an alliance of four states - the Czech Republic, Hungary, Poland and Slovakia.
  7. The UK, the Netherlands, Sweden, Austria, and Spain vetoed the Luxembourg presidency compromise in June 2005 (European Report November 9, 2005).
  8. Angela Merkel, who was a new leader in a grand coalition of the Christian Democratic Union (CDU)-Social Democratic Party (SPD), restricted increasing the EU budget, and objected to the improvement of the German Economy and the reduction of unemployment (Heisenberg 2006: 113).
  9. The new member states would receive Euro 9.7 bn from the cohesion fund in 2006 under the Lisbon treaty. Delaying a financial agreement meant that it would be difficult for the new member countries to receive the cohesion fund monies in good time (European Report June 29, 2005; European Report June 11, 2005).
  10. Mr Blair's analysis was that the EU constitutional crisis in the French (May 30, 2005) and Dutch (June 1, 2005) constitutional referenda resulted from EU citizens' dissatisfaction with sluggish economic growth and 20 million unemployed. See Financial Times (June 13, 2005).
  11. In Lisbon in March 2000, there was a special European Council at which the EU member states agreed a new EU strategy on economic reform, employment, and social cohesion; this was to bring about a stronger, more competitive and dynamic economy by 2010 with reference to the challenge of globalisation. The strategy sets out EU spending priorities, namely investment in research, development, innovation, entrepreneurship, and improving the rate of employment to 70 per cent overall, including a minimum of 60 per cent for women (Borras and Jocobsson 2004: 187-188; Bache and George 2006: 194).
  12. The visibility of net contributors' budget figures has a high symbolic value to their domestic electorate who accesses governments whether winner or loser in financial negotiations. See Linder (2006).
  13. In general, being a mediator is one of the most important roles of the Council presidency in EU integration negotiations at the European Council. To implement the role of a mediator, the presidency has been given the privilege of collecting private information about member states' preferences through formal and informal European Councils and Ministerial meetings. After discussions in these meetings, the presidency presents its compromise to achieve agreements and shapes its strategies to bring about member states' concessions as part of successful agreements. See Kirchner (1992) and Tallberg (2006).
  14. The Council presidency has the privilege of controlling the procedure for negotiations. The privilege may be utilized to wring concessions from member states which are eager to achieve agreement considering the time schedule of the EU decision-making framework. See Tallberg (2006).
  15. Privilege of the Council presidency has been given to encourage agreements through the presidency compromise, which effectively mediates conflicts with regard to member states' preferences on EU integration issues. In other words, it can be said that the Council presidency feels politically responsible for achieving agreements. See Kirchner (1992), Tallberg (2006)
  16. In Lisbon in March 2000, there was a special European Council at which the EU member states agreed a new EU strategy on economic reform, employment, and social cohesion for the strength of the competitive and dynamic economy by 2010 with reference to the challenge of globalisation. The strategy indicate the EU spending priorities to invest in research, development, innovation, entrepreneurship, and improving the rate of employment to overall 70 per cent, including a minimum of 60 per cent for women. See. Borras and Jocobsson (2004), Bache and George (2006)
  17. ‘Utilitarian Supranationalism' explains the Blair government's domestic strategies following the 1997 general election. The approach argues the Blair government's strategies were an attempt to depoliticise European issues in response to a perception of the British public's indifferent attitudes towards EU integration. See. Bulmer (2008).
  18. Electoral salience refers to those issues which are significant and important issues to the public compared to other political issues. The salience of these issues is only apparent when they are the subject of general election competition between government and opposition. See Oppermann (2008).

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