Philip Webster, The Times Political Editor, says that neither side looks in a mood to back down

"It's impossible to tell whether the fact that both sides are taking a hard line means that they are prepared for the summit to fail, or whether they are taking this hard line now in the hope that it will force a situation in which they have to sit down and come to deal.

"At the moment that looks impossible, because the British are saying that the budget rebate is non-negotiable, unless the vast sums that France gets from the Common Agricultural Policy are also put on the table.

"There is no way that the French will suddenly allow the CAP deal, agreed in 2002, to be reopened. There might be some middle way to allow some kind of agricultural items to be discussed and the British to make a concession of some sort, but there's no sign of that so far.

"There is a lot of anger on the British side that France and Germany seem to want to make so much of this budget issue just so the spotlight is taken away from the 'no' votes in France and the Netherlands on the EU constitution. The French, in particular, are being accused of diversionary tactics. The French deny this - they say that this item was always going to be on the agenda of next week's summit.

"There is a very bad atmosphere around at the moment, but given that they don't want the whole enterprise to fall apart, I assume there will be efforts made before Wednesday night to smooth things and calm tempers.

"There is a foreign ministers' meeting in Luxembourg on Sunday night, and Blair is going to Berlin and Paris early next week, so there will be attempts then to prevent the showpiece summit of the Luxembourg presidency ending in a bloodbath.

"Despite that, once they get into the summit itself on Thursday and Friday, who knows what will happen? Chirac goes there from a position of weakness; Schroeder, too, goes from a position of weakness; Blair, having won an election, goes there from a position of strength. And he appears at the moment to want to make the most of that position, which is why he seems to be pushing an extremely hard bargain about this rebate, and calling for a fundamental debate on the finances of Eruope.

"What he and Brown see is that the rebate has become a symbol for a wider problem. They want the EU to sit down and try to curb its excessive spending on the CAP and structural funds. It doesn't look like an issue that's going to end with a nice happy handshake next week. It's going to roll on into the British presidency.

"And Brown, reappointed Chancellor, is speaking with added authority. He's about to take over as chairman of the council of finance ministers. I think the rest of Europe is taking notice - what they've heard about Gordon Brown being tougher than Blair on Europe questions is becoming clearer. He even said this morning that Thatcher would be pleased with him - I never thought I'd hear that."

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