BRITAIN is completely isolated in Europe on its rebate, but can gather a formidable cluster of allies when it comes to the wider issue of reforming the European Union’s stagnating economy and its notorious budget.

Britain receives no support over the rebate because it is the only country to receive it and all other countries must pay towards it, pushing up their own EU contributions.

The four other big net payers to the EU — Germany, the Netherlands, Austria and Sweden — get a “rebate on the rebate”, which means they do not have to pay much to Britain.

This means that the payments fall even harder on France, which has to pay about a third of the British rebate, more than any other country — about €1.6 billion (£1.07bn) in 2003. In that year, Italy had to pay €1.3 billion (£869m) and Spain €800 million (£535m). Were it not for the rebate, both France and Italy would make virtually no net contribution to the EU.

Britain insists that the rebate is justified because it compensates for the inbuilt unfairness in the European budget, which pays Britain less in agricultural and development subsidies per capita than any other country.

Without the rebate Britain would be the EU’s biggest net contributor, paying more than Germany, the Union’s largest economy.

It would also have paid €69 billion (£46bn) more to the EU than it got back between 1995 and 2003, fifteen times more than France (with a net contribution of €4.5 billion) and twelve times as much as Italy (€5.7 billion).

Other countries insist that, while the rebate may have been justified when it was secured by Margaret Thatcher in 1984, when Britain was one of the poorer EU countries, it is no longer justified now that it is one of the richest members of an enlarged Union, which includes eight poor former communist countries.

Although Britain is isolated on the rebate, it has far more support when it insists that the EU’s “distorted” Common Agricultural Policy must be reformed. The CAP makes up 40 per cent of the entire EU budget and one quarter of that goes to France alone. In contrast, Britain receives less per capita from the CAP than any other EU country.

Although the CAP has been structurally reformed to stop it encouraging farmers to produce “wine lakes” and “butter mountains”, the overall scale of subsidies has remained steady.

President Chirac of France and Gerhard Schröder, the German Chancellor, privately agreed in 2002 to keep the level of CAP subsidies the same until 2013, forcing an angry Mr Blair to comply.

However, many other EU countries, particularly net contributors, would like to see the CAP scaled back. The Netherlands, Denmark and Sweden all strongly support Britain’s insistence that the scheme should be reformed.

The rebate will form just one small part of the agenda for the EU summit on Thursday, which is intended to agree the entire EU budget for the period from 2007 to 2013. While the European Commission, the EU’s executive, has demanded a total budget of more than €1 trillion, increasing it by nearly a quarter, Britain wants effectively to freeze it. Here too Britain has allies, being supported by France, Germany, Austria, Sweden and the Netherlands, who all wrote a joint letter to the Commission insisting on a more limited budget.

On wider issues of economic reform, Britain has even greater support and is increasingly playing a leading role in the EU. With record unemployment and stagnating economies, France and Germany have few followers when it comes to reform.

By contrast, Britain’s more free-market approach, which has led to low unemployment and high growth, is increasingly seen as the model to follow, attracting supporters from across Eastern Europe, as well as Scandinavia, the Netherlands and Ireland.

Times Recommends

• UN may halt 400-year-old 'freedom of the seas'
• Where the Rosetta belongs can’t be set in stone
• Gas deal on hold, but Ukraine may pay in the end