Shocked, fractious, and blaming each other, the EU's leaders face a challenging summit if they want to find a common way forward, writes Denis Staunton in Brussels
Two weeks after the French and Dutch referendums on the EU constitution, Europe's leaders remain in shock, watching helplessly as confidence in the European political project seeps away. Over dinner in Brussels this evening, they are likely to call an indefinite halt to the process of ratifying the constitution while Europe enters a "period of reflection".
A decision to suspend the ratification process has been made almost inevitable by mounting evidence that planned referendums in Denmark, Britain, the Czech Republic and Ireland would reject the constitution. Even Luxembourg, traditionally the most pro-integration member state, cannot be sure of a Yes vote if its referendum goes ahead next month.
The Taoiseach is hoping that a decision to halt the process will be binding on all member states, so that the future of Ireland's referendum will be taken out of his hands. European Commission president Jose Manuel Barroso called yesterday for such a mandatory pause in the process for a year or more if necessary.
Luxembourg's presidency hoped that this week's summit could send out a signal of the EU's enduring capacity for political action by agreeing a deal on the Union's next seven-year budget, known as the financial perspectives. Luxembourg's prime minister Jean-Claude Juncker admitted yesterday that his chances of concluding such a deal are disappearing.
"I am pretty sure we won't get the financial perspectives through at this summit," he said.
Most EU diplomats agree that the shape of a budget deal is already clear, if Britain is willing to budge in its opposition to a reduction in the multi-billion euro rebate it receives each year. The rebate, negotiated by Margaret Thatcher in a famous display of "handbag diplomacy" at Fontainebleau in 1984, returns to Britain two-thirds of its contribution to EU funds every year.
Britain justifies the rebate on the basis that, because it receives much less than other countries in EU farm subsidies, its net contribution to the budget would otherwise be disproportionately high. France and Germany, which have led calls for a cut in the rebate, point out that the Common Agricultural Policy (CAP) now accounts for 40 per cent of the EU budget, compared to 70 per cent in 1984 and that Britain is much more prosperous than it was then.
The battle over the rebate has become something of a grudge match between British prime minister Tony Blair and French president Jacques Chirac, with Blair declaring that he will only move on the rebate if CAP funding is drastically reduced. France is the biggest beneficiary of EU farm subsidies and Chirac helped to draft a 2002 deal that guarantees the size the CAP until 2013.
The Government accepts that Ireland will lose up to 85 per cent of its regional funding from the EU between 2007 and 2013, but insists that farm subsidies are protected by the 2002 deal. Irish farmers could see their subsidies reduced by about 4 per cent if part of the cost of extending the CAP to Romania and Bulgaria is taken from the current agriculture budget.
The impasse over the budget reflects a fractious mood among EU leaders, none of whom wish to accept the blame for the lack of popular support for the EU demonstrated in the French and Dutch referendums.
Chirac blames "Anglo-Saxon" economic policies that make French voters fearful for their jobs, Blair blames the failure of continental governments to embrace economic reform, and the Dutch government blames the high level of its EU budget contribution.
Europe's leadership has become more timid than ever in the face of change, even shying away from commitments already made. In Luxembourg this week, EU foreign ministers were unable to agree on a couple of bland sentences reaffirming their commitment to admitting new member-states in 2007 and to starting membership talks with Turkey.
The current climate does not bode well for Blair's ambition to launch a crusade for economic reform when Britain takes over the EU presidency next month. EU trade commissioner Peter Mandelson, who remains close to Blair, offered a glimpse of the British vision in a speech to the Fabian Society this week.
He said: "Europe must press ahead with painful economic reforms. But reform is for a purpose: not to Americanise Europe but to make our European model of society sustainable for generations to come.
Essentially, we need a new social consensus for economic reform as New Labour has achieved in Britain, based on a social justice argument, which is capable of uniting mainstream opinion in France and Germany and the rest of the EU."
The leaders' task this evening is to limit the damage by avoiding a succession of No votes in new referendums on the constitution and to encourage an atmosphere of political calm in which to debate the future direction of the European project.