A CRISIS over the financing of the European Union became inevitable last night as Tony Blair said that he would veto any plan that did not protect Britain’s £3 billion annual rebate. He was told to give way or risk a stormy six-month presidency.

The French warned Mr Blair and Gordon Brown not to believe that refusing to reach agreement at next week’s EU summit would mean that they were more likely to succeed when Britain takes over the Union presidency on July 1.

The French Government is understood to have been irritated by reports that the Treasury is drafting alternative proposals for the British presidency to cut wasteful spending and leave the rebate intact.

European diplomats said that British movement over the budget rebate was vital as next week’s summit tries to recover from French and Dutch rejections of the constitution. They insisted that the budget, rather than the constitution, was the central issue.

But Mr Blair told the Commons that Britain’s rebate “will remain and we will not negotiate it away, period”.

Mr Blair has also said privately that he believes that proposals floated by the Luxembourg presidency to freeze the British rebate are not acceptable.

Mr Blair’s spokesman said: “The position is very simple. Others may raise the rebate as a subject, that is their prerogative. We believe that, given the balance of payments in Europe, it is wholly justified. We will argue our case. We have a veto and, if necessary, we are prepared to use it. End of story.”

Senior European diplomats said that Britain’s decision to shelve its constitution referendum could mean that it comes under greater attack on the rebate. One said: “If Gordon Brown truly believes it will be easier for him when Britain is in charge to get a deal that he wants through, then I wish him the best of luck.”

The European Council will consider draft proposals to freeze the British rebate in 2007 at £3.1 billion, the average over the previous seven years, and then reduce it gradually.

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