EU leaders face clash over seven-year budget

European Union leaders head into a fresh clash over the EU's budget at a two-day summit starting on Thursday, with the only certainty being that proposals for several years will be cut back.

The volume of EU expenditure, at a time of cuts in national budgets against a broad background of debt and recession, is the main issue dividing the 27 EU member states.

One group among those countries that contribute the most, led by Germany and Britain, wants spending cut from the current level of about one percent of EU gross domestic product.

This would mean trimming the European Commission's initial proposal for a budget of a trillion euros between 2014 and 2020.

These cuts should be applied across the board, they say, and reach right down into wages and tax-free benefits for about 35,000 EU civil servants -- some of whom have begun strike action for fear of redundancies.

Another group, led by France and Italy, want spending kept at a higher level and targeted more at investment likely to create jobs at a time when 26 million people are unemployed in the EU.

Getting an agreement is the task of summit chairman Herman Van Rompuy, the EU president who had to call time on a previous bid to settle the issue in November.

The EU's budget is financed from various sources. Member countries make contributions but also receive funding from the EU under various programmes, including policies to help poorer countries catch up.

This means that some countries are net contributors and some are net beneficiaries. In addition Britain for example receives a special rebate won by Margaret Thatcher to compensate for what was then a distortion in the balance, largely because of the way big subsidies for agriculture work.

The current negotiations will not change this basic structure, but might well change the way the budget is presented. The central focus concerns definition of an amount available for actual "payments" which often fall short of targets in the budget, and a higher absolute ceiling for the budget.

British Prime Minister David Cameron wants to focus simply on the payments limit -- meaning that if the EU goes beyond that in terms of its "commitments," there could be a problem for the EU but not for the Treasury department of the British government.

The European Commission initially proposed a five-percent increase and a budget for the seven-year accounting cycle of more than one trillion euros.

That was too much for Cameron, whose relations with the EU are already uncertain after he promised a British referendum on membership following talks to take back some powers.

In November, Van Rompuy proposed a budget for "commitments" of 973 billion euros and diplomats say he will reduce that to 960 billion euros. He would also lower the effective "payments" cap cherished by Cameron down to about 900 billion euros.

-- Deficit financing? --


The question would then be how to finance the outstanding 60 billion if the budget were used to the full and Britain refused to contribute to funding the gap? That in turn would raise the question of whether the EU would then run a deficit?

"I am confident that with some adaptations, the proposal I made on 22 November can constitute the basis for a deal," Van Rompuy said, adding that agreement was "becoming urgent" if EU machinery is to "run smoothly and deliver [its] potential for growth and jobs."

A senior negotiator said "the bottom line" is that the EU will "honour" its spending commitments.

In the European parliament in Strasbourg, however, leading conservative MEP Joseph Daul said that a deficit approach would be "suicidal" and warned that lawmakers would vote against any such deal.

Liberal counterpart and former Belgian premier Guy Verhofstadt labelled a deficit approach as "budgetary fraud."

A majority in the EU parliament is required to pass the budget.

Some arguments remain over which policy areas should be the target of cutbacks.

Commission President Jose Manuel Barroso, French President Francois Hollande and others worry that cutting funds for cross-border infrastructure projects in energy, transport and digital networks, for instance, would counter efforts to tackle unemployment.

But Van Rompuy's new plans will include an unspecified amount in billions of euros to help reduce unemployment among young people which is running at about 57 percent in Spain and Greece.

Barroso, and the parliament, meanwhile, still want the EU freed to raise funds via direct taxation. So far, most of its budget comes via member-state contributions.

If the leaders can turn the page on the budget, they will focus on Friday on securing rapid progress in free-trade negotiations with the United States and Japan, seen as key to delivering elusive growth, jobs and prosperity.