EUROPE’S political and financial crisis will have to be resolved by Tony Blair when Britain takes over the presidency of the European Union in two weeks’ time. Although it presents a huge political problem, in a purely technical sense it is far more straightforward.

Mr Blair will have to perform a delicate balancing act between representing Britain’s crucial interests on both the budget and the constitution, and acting as honest broker of the EU’s 25 countries and their often conflicting priorities.

He is likely to give some indication of how he intends to perform this highwire act when he speaks to the European Parliament on Wednesday, setting out his priorities for the six months of the presidency.

The dual crises over the EU’s budget and the rejection of its constitution by French and Dutch voters has exposed the growing divide between the leaders, and also provoked disillusionment among citizens with the European project. José Manuel Barroso, the President of the European Commission, gave warning on the eve of the summit that if a budget deal was not reached then it would plunge Europe into “permanent crisis and paralysis.”

Despite the depth of the political crisis, the EU’s day-to-day business will continue as normal under its existing rules and its current budget, which lasts until the end of 2006.

The most pressing problem is resolving the dispute over the scale of EU expenditure up to 2013, and protecting the British rebate. He is expected to use the presidency to pursue his agenda of scaling back overall agricultural spending, and refocus funds on industry and research. He will also want to start a debate about the future direction of the European Union, which he believes is too focused on solving the problems of 50 years ago, and not those of an increasingly globalised world.

Tony Blair’s spokesman has already played down the sense of crisis, by insisting yesterday that: “It is a simple statement of fact that the budget doesn’t come into effect until 2007.”

Although that is 18 months away, EU diplomats give warning that it would be impossible to reach a deal under the British presidency, because Britain will not be able to oversee objectively negotiations to resolve its own demands.

The Commission argues that leaving agreement on the budget until 2006 will make it hard to implement their programmes. Last time, agreement was reached only in March 1999 in Berlin, nine months before the budget started.

Officially if a deal is not reached on the seven-year budget, EU leaders can agree on an annual budget. If they cannot agree that by the start of 2007, the fallback position is that the EU budget continues on a monthly basis at the same level as the year before.

Britain, as a net contributor to the EU, can be far more relaxed about not reaching a deal than recipients, in particular the Eastern European countries. They are to get a big increase in EU funding in the new budget, and will miss out if a deal is delayed. The Slovenian Government has estimated that the way EU financing works, it will lose a total of £1bn — or £500 per citizen – if a deal is not reached by January.

The crisis over the constitution is less urgent, with the deadline for ratifying the treaty postponed, and EU leaders agreeing to review the situation in a year. Those countries that wish to continue with ratification — basically those doing it through their parliaments — are free to do so. Those countries facing difficult referendums – such as Britain, Denmark, Ireland and the Czech Republic — are no longer under an obligation to proceed.

After what happened last night, the main task for Mr Blair will be to re-establish faith in the EU among its citizens by finding a way forward rather than letting the Union drift from crisis to crisis. He will have to convince citizens of the contemporary relevance of the EU and ensure its £600 billion budget is spent in ways that reflect their concerns.

With such deep splits among European leaders about the direction of the EU, such a task will not be easy. France and other countries will resist any attempts to scale back the agricultural deal agreed three years ago. A battle also looms over further enlargment, with growing opposition in France and Germany to admitting Turkey.

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