In the last throw of the dice for Britain's presidency of the EU, European leaders meet in Brussels today to try and reach a budget agreement. Nick Morrison looks at the stumbling blocks - and the arguments raging over Britain's rebate and the Common Agricultural Policy.

IT began with a fanfare of optimism. Britain's presidency of the EU was a chance for Tony Blair to set the agenda in one of its most crucial periods, following expansion from 15 to 25 members. Coinciding as it did with the presidency of the G8 group of developed nations, it was an unprecedented opportunity for world leadership.

Six months on, and it is all threatening to end amid rancour and recrimination. EU leaders meet in Brussels today to try and thrash out a budget deal, but the signs are not promising.

The principal sticking points are Britain's EU rebate and reform of the Common Agricultural Policy (CAP). To try and broker some agreement, Mr Blair offered to give up some of the rebate in exchange for CAP reform, a move roundly rejected by France, the principal beneficiary.

Yesterday, the Government tabled new proposals, involving an increase in UK contributions but retaining the rebate, but still Foreign Secretary Jack Straw sought to dampen expectations, warning that no deal was better than a bad deal.

So what are the arguments at this week's summit about? What does it mean for Britain and its rebate? And what happens if no deal is agreed?

Q What are the arguments about?

A The dispute revolves around the EU's framework budget, specifically over spending limits in each of its policy areas over the seven years from 2007 to 2013. Principally, the issues of disagreement are the overall level of spending, the size of the UK rebate, aid for the ten countries which joined the EU earlier this year, and reform of the CAP.

Luxembourg, which held the presidency in the six months before Britain, had proposed a budget which would have averaged 1.06 per cent of national income across the EU, or 871 billion euros. Britain has argued that this is too much, and has set a long-term goal of reducing the budget to less than one per cent of EU national income.

The UK rebate is opposed by most of the other EU members. It was introduced in 1984, when Britain was the third poorest member of the then European Economic Community, but on course to become the largest net contributor to the budget. Now, Britain is one of the richer EU nations but gets a rebate paid for by the other 24 members. Particularly vocal in their opposition to the rebate are France and Italy, which between them contribute about half of the total, but the ten new members resent having to pay when Britain is much richer than they are.

Q What about the CAP?

A The CAP has long been a source of disquiet, criticised both for subsidising inefficient farming practices and for hindering Third World producers from competing on a level playing field. Although the proportion of the EU budget spent on agriculture has fallen from 70 per cent to 46 per cent, it is still the largest single area of spending. France is the main beneficiary, getting 22 per cent of CAP funding, followed by Spain (15 per cent), Germany (14), Italy (12) and the UK (nine).

But as efforts to reduce the CAP have foundered in the teeth of opposition to changes led by France, attention has switched to the next largest budget heading, regional aid. Mr Blair's first budget plan was criticised for reducing aid to the ten new members by ten per cent, although Britain argued that since most countries did not take up their full allocation, this was only a theoretical cut.

Q What is Britain's proposal now?

A Britain's plans would set the EU budget at 1.03 per cent of EU national income, or 849 billion euros. It would see UK contributions increase, rough parity between the UK contribution and similar sized countries, notably France and Italy, a reduction in development aid to the new members, reducing rural development aid to old members and a mid-term review of the budget.

Q What is the likely reaction to this?

A The package has been seen as an attempt to isolate France, by providing something for just about every other country. Although the development aid cut will be greeted warily, balancing it with steps to make it easier for them to get this aid may help offset concerns. The exceptions will be the Baltic countries, which have been the most effective in making use of the aid available.

The British proposal also offers extra money to Slovakia and Lithuania for decommissioning nuclear power stations, and development money for Poland, Hungary, the Czech Republic, Estonia and Latvia. Poland, the most likely of the new members to reject the deal, will get an additional 1.2 billion euros. Germany, the Netherlands and the UK will be better off than under the Luxembourg plan.

Reductions in rural development aid to the old member countries is less controversial than reforming the CAP, but the proposal to hold a mid-term review will arouse suspicions among the French, who are anxious not to dilute the deal on agriculture spending agreed in 2002.

Q What does it mean for Britain's rebate?

A The plan fails to address the issue of the rebate. The increase in UK contributions is expected to come from reducing the rebate, but since it is expected to grow sharply over the next few years anyway, in effect this will be limiting its increase rather than an overall cut.

Britain's position is that if it gives up all of its rebate it would become the biggest net contributor to the budget, and the main beneficiaries would not be the poorer countries but would be France and Italy.

Without the rebate, Britain's contribution would be 9.9 billion euros, while France's would be 1.6 billion.

But the rules governing the rebate mean that if it continues in its present form, Britain would go from being the fourth biggest net contributor, to ninth. Mr Blair has linked a reduction in the rebate with reform of the CAP, but France argues that the CAP has already been set up until 2013 and should not be changed

Q What are the prospects for a deal?

A Much will rest on the reaction of the ten new states. If they accept the proposals, other countries might have to swallow their reservations.

And while France is firmly against the mid-term review, it may be persuaded to drop its other objections.

In the end, the decision may be dictated by the desperation of the new members to get the development aid available.

Although the lack of a deal will not affect the EU's ability to operate, it will mean countries will not be able to plan how to spend the aid, and in practice the less they are able to plan the less they will be able to get.

The EU is also keen to end the year on a high note, after the setbacks caused by the French and Dutch referendums rejecting the proposed EU constitution, and by the acrimonious dispute over the budget at the last major summit in June.

Britain, too, will be anxious for its six months' presidency not to be seen as a failure and, despite Jack Straw's pessimism, this determination to salvage something, and to put the EU train back on the tracks, may help to concentrate minds in Brussels.