But today the Commission President Barroso told the European Parliament that Britain's demands were unreasonable and would have threatened the internal market.
Financial services are part of the internal market, and are covered by Article 114 TFEU. This article provides for the regulation of the internal market, and the legislative procedure is the ordinary legislative procedure (i.e. the Commission proposes, and the Council and Parliament have an equal say in amending and passing the legislation). Britain wanted to insert a protocol which would grant every Member State a veto if the regulation was concerned with the financial services sector. Because every Member State would have a veto, the British government argues that it wasn't merely seeking to protect the City or asking for special treatment for itself.
However, this does threaten the legal and political basis of the internal market. To make it harder to regulate one sector of the internal market is to privilege one sector of the internal market over all other sectors. While it may be technically correct that Britain wouldn't be legally privileged over the other Member States, this would have created a separate legal procedure for introducing regulations for a separate sector of the market, so it would have introduced a legal division in the treaties between financial services and the rest of the internal market.
Then there's the political concept of the internal market. That internal market legislation is passed by majority voting is not only necessary to ensure that legislation can be passed at a pace that more closely reflects the pace of innovation in the market (compared with unanimity - we don't want to return to the days of waiting years for a single regulation to be passed), but also this politically underlines the mutual trust between the Member States in each other as they work on the internal market. If legislation is passed by qualified majority vote, then everyone has to work together to get legislation passed (and can't simply oppose all legislation outright to get its way) and Member States also have to be sensitive to the needs of the others (in other words: if you outvote me here, I'll outvote you there, so let's not play the zero-sum game). By introducing special protections for parts of the market that have been identified as a key interest by one Member State, in political terms you are privileging that Member State over the others in the overall internal market negotiations, and weakening the trust that is supposed to underwrite the market.
So Barroso was right to say that what Britain was asking for was unacceptable (or at least that it would be unacceptable for other Member States). Why should the financial sector be treated differently to other parts of the internal market? Should Germany have a protocol so there's a veto in the area of environmental policy when it comes to the car industry? Why shouldn't economic sectors of interest to other Member States be more protected? Because the more you reverse the integration in the internal market, the more you break up that market. Similarly, most other Member States see the social chapter as protecting their welfare states from a race to the bottom while entrusting their economies to the competition of the internal market. Yes the UK is one of the most committed Member States to free markets and a liberal internal market. But it fails to see how these trade-offs are part of the "Single Market Pact" sometimes, and how unacceptable its position can appear to others. If you can't understand the position of those you negotiate with, then you don't stand a good chance in negotiations.
It should also be noted that there are plenty of EU regulations that only set minimum standards, above which Member States may regulate more heavily. It should be easy to negotiate this minimum standard approach, rather than pitch for a full legal division of the internal market.
Finally, Barroso claims that he tabled a motion that should have met key British demands on protecting the internal market from a Eurozone caucus:
"In search of compromise, I tabled a clause providing, in the EU treaties, that any measures adopted by the Council and applying to the euro area only, must not undermine the internal market including in financial services. Unfortunately this compromise proved impossible."
Joseph Daul, the leader of the European People's Party group in the European Parliament, said:
"I believe that the British rebate should be put into question. Our taxpayers' money should be used for things other than rewarding selfish and nationalistic attitudes."
For the UK, the rebate is like the EP's Strasbourg seat for France or the protection of the low corporation tax for Ireland. For Britain the rebate is a question of fairness: otherwise it would contribute more to the EU, which isn't fair as others get back more in the Common Agricultural Policy.
But times have changed since Thatcher demanded Britain's money back. Back then the EU was a club of fairly wealthy countries, but now it has expanded to include the former post-communist, Warsaw Pact countries. During the negotiations for the "Big Bang" enlargement - which the UK was a huge supporter of - the question of the British rebate was raised. With 10 new Member States joining, which would all be poorer than the then-current members, there would be greater pressure on the EU budget to cover the structural funds and CAP costs. Would Britain, who supported this enlargement so much, not either give up or reduce its rebate to help cover the costs of greater solidarity with the new members? No. In fact there was the sad situation where Poland had to ask how much more the new members would have to pay to make membership a reality. Because the EU budget cannot be based on debt, so other countries have to fund Britain's rebate.
Of course it's not as simple as saying that Britain should have surrendered its rebate at that point. It's not to say that there are not other interests that are protected in the EU budget and that these shouldn't be seriously negotiated over. But it is an odd policy to drive forward enlargement, while demanding the EU budget to remain static on the one hand, and defending the British rebate on the other. If Britain is to make the case for the fairness of the rebate, it will have to move on from the arguments of Thatcher.
The key point is that the EU is a compromise. The internal market isn't something that can be viewed in isolation, and it is a mistake of British politics that the EU is often only presented in that way. Without the solidarity with poorer regions, opening them up to the competition from the more advanced economies is a hard sell. A minimum level of solidarity is required to ensure that the welfare states and the communities in Member States won't be too negatively affected by the downsides of the internal market - and in some countries where euroscepticism is mainly on the left it is argued that the EU is neo-liberal and there isn't enough solidarity. So when discussing the internal market, social policy and the budget, we need to have a more nuanced and fuller idea of the fairness that's required in the EU for even a minimalist internal market to work.