EU attempts tricky balancing act in toxic budget row

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By Charlie Dunmore | November 22, 2012 10:21 PM EST

European Union negotiators believe they are close to securing British and German backing for a deal on nearly a trillion euros of spending over the next seven years, but last minute concessions may be needed to secure French and Polish support.

European Council President Herman Van Rompuy, who will chair an EU summit starting on Thursday, has taken pains to win over London and north European states furious at a proposed hike in EU spending between 2014-2020 at a time of austerity at home.

But in seeking to appease Britain's David Cameron and Germany's Angela Merkel, Van Rompuy risks alienating others, especially French President Francois Hollande, raising the prospect of a hard-fought few days of bare-knuckle negotiation.

Leaders began with a day of one-on-one meetings with Van Rompuy. All 27 heads of state and government will sit down to dinner together at 8.30 p.m. (1930 GMT) and only then begin to discuss a new compromise budget package as a group.

Failure to strike a deal would add to the impression that EU leaders are unable to take decisive action when needed, after endless rounds of wrangling to resolve the euro zone's long-running debt crisis over the past three years. It would further damage the EU's image with its 500 million citizens.

Dragging the talks into next year would also delay and throw into doubt hundreds of billions of euros of planned investments to boost Europe's economy, particularly in poorer ex-communist eastern member states, and divert governments' attention from contentious efforts to create a euro zone banking union.

Van Rompuy has sliced about 80 billion euros ($102.55 billion) from the European Commission's original budget blueprint, which officials say is close to the 100 billion euros of cuts needed to win the backing of Merkel and Cameron, whose countries are two of the largest contributors to the budget.

"Clearly at a time when we are making difficult decisions at home over public spending it would be quite wrong, it is quite wrong, for there to be proposals for this increased extra spending in the EU," Cameron said as he arrived for the talks.

Van Rompuy's plans for deep cuts to farm spending have incensed France, which receives the most in agricultural subsidies, and similar reductions to EU funds for the bloc's poorest members risk alienating Poland and others in the east.

The bulk of EU budget spending - around two-thirds of the annual 130-billion-euro outlay - goes on agriculture and funds to help poorer economies catch up with the rest.

"It will be difficult," French Foreign Minister Laurent Fabius said of the chances of a deal. "We are for a compromise, but a compromise that does not break Europe and that is not to the detriment of France," he told news channel BFM TV.

Merkel has said it may be necessary to return to negotiations early next year if a deal can't be reached this week.

TOXIC DEBATE

The depth of Europe's debt crisis has made the perennial arguments over farm subsidies and rebates all the more bitter.

Gone are any hopes poorer EU states may have had of a large increase in funds to cement the bloc's eastward expansion over the last decade, with negotiators instead contemplating the first ever real terms decline in future spending.

The current budget framework was agreed in 2005 in the midst of a credit-fuelled economic boom, and set a maximum limit of 1,034 billion euros on EU financial commitments for the period 2007-2013 - equivalent to about 1 percent of EU output.

The Commission initially demanded a roughly 5 percent increase in spending for 2014-2020, equal to 1,091 billion euros. But this has already been reduced to 1,010 billion euro under Van Rompuy's compromise, and is expected to dip below the trillion euro mark in the final reckoning.

Calls to refocus limited EU resources on growth-oriented areas such as innovation, energy supergrids or broadband connections have been largely ignored, as countries scramble to defend traditional spending that benefits them the most.

Officials close to the talks say Van Rompuy may be forced to reverse some planned cuts in farm subsidies in the final deal as a sweetener to win French support, which would imply deeper cuts to proposed funding for research and technology.

One issue negotiators fear could derail the talks is toxic debate surrounding Britain's budget rebate, worth 3.5 billion euros last year. Margaret Thatcher won the annual refund in 1984 to reflect the lower share of farm subsidies received by Britain compared with France, Italy and others.

Paris and Rome want an overhaul of the complex system of rebates, which includes linked payments to Germany, Sweden and the Netherlands to offset the cost of Britain's cheque. Denmark now wants its own refund.

But EU officials accept that Cameron cannot win the support of Britain's euro-sceptic parliament for any deal that scraps the rebate, and even a proposal to reduce its value may have to be abandoned to win Britain's backing at the summit, at the risk of further alienating other countries.

Cameron has threatened to veto a deal unless it is good for British taxpayers. But another veto, less than a year after he blocked a treaty change to allow stricter fiscal discipline in the euro zone, would further isolate Britain in Europe and could increase pressure for it to leave the EU. ($1 = 0.7801 euros)

(Additional reporting by Dagmara Leszkowicz in Warsaw and John Irish in Paris; Editing by Paul Taylor)

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