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British Prime Minister David Cameron and Czech counterpart Petr Necas each threatened to veto a deal in what would be the second collapse in negotiations after a breakdown in November -- although senior officials have maintained for days that failure is not an option.
German Chancellor Angela Merkel spoke in ultra-cautious terms as she headed into a session that was put back two-and-a-half hours to allow officials to try and bridge differences over the numbers that will shape priorities of the 2014-2020 budget.
French President Francois Hollande said cuts that did not protect support for farmers and investment for growth at a time of record unemployment in Europe would not win his backing.
Cameron said: "When we were last here in November, the numbers that were put forward were much too high.
"They need to come down -- and if they don't come down, there won't be a deal," Cameron added.
"We are ready to use a veto," Necas told Czech media, continuing in step with Britain in EU negotiations.
"We can not say yet if there will be an agreement," warned Merkel, who backs Cameron's demands for EU spending cuts to mirror national savings in a time of austerity.
"The positions are still quite far from each other," she added after overnight talks with Hollande in Paris to find common ground on a proposal drawn up by summit chair and EU president Herman Van Rompuy.
Clearly seeking a compromise during talks which could last well into the night, Merkel said it was of "great importance that we can plan and that we spend money carefully," but that it was equally crucial EU partners find "solidarity between net payers and receiving countries on the other hand."
Talks that were due to start at 1400 GMT were put back to 1930 GMT to allow backroom officials to haggle over proposals to bridge the gap.
Allies against spending cuts Hollande and Italian Premier Mario Monti met European Parliament head Martin Schulz to try and fix "red lines" ahead of the anticipated late-night negotiations, according to Schulz's spokesman.
For his part, Schulz said after these talks that it would be a case of "take it or leave it," stressing that the parliament "has the last word."
German Socialist Schulz has said lawmakers are ready to throw out any agreement they think stunts Europe's ambitions for the next decade, and in a possible foretaste of things to come, several leading MEPs have warned against "suicidal" or "fraudulent" fixes that undercut growth and jobs.
The biggest countries pay more to the EU than they get back in grants or rebates, but resistance at home has sharpened at a time of national spending cuts amid debt and recession.
Hollande said he would not agree to a budget that "abandons farming and ignores growth."
"I have come to seek an agreement -- but only if possible," he said, setting down a clear marker for traditional French EU interests. "Should some (partners) be unreasonable, I will try to reason with them -- but only up to a point."
Italy also wants to see money ring-fenced for investment in areas that can generate jobs in a faltering economy, such as cross-border energy, transport and digital networks.
The European Commission, the EU's executive arm, initially wanted a 5.0 percent increase in member state commitments to 1.04 trillion ($1.4 trillion) euros for the 2014-20 budget.
Van Rompuy cut that back to 973 billion euros in November, and EU diplomatic sources said he could reduce this figure -- the maximum amount member states agree to contribute -- to around 957 billion.
At the same time, the total money to be actually spent would be reduced by around 30 billion euros to 905 billion euros, the sources said -- about one percent of the EU's total gross domestic product, a modest proportion compared with national spending levels.
Most of the EU's budget goes to the Common Agricultural Policy to support farmers, and to Cohesion Funds, money spent to help new members catch up economically with more-established partners.