Feb. 7 (Bloomberg) -- A promised European Union investment budget to modernize the recession-hit economy is set to be scaled back in a bonfire of competing national demands.
U.K. Prime Minister David Cameron demanded cuts in a proposed seven-year subsidies package of 973 billion euros ($1.3 trillion). The blueprint was trimmed once, from 1.047 trillion euros in November, and is below the 994 billion euros spent in the budget period expiring this year.
“The numbers that were put forward were much too high,” Cameron told reporters before an EU summit in Brussels today. “They need to come down, and if they don’t come down, there won’t be a deal.”
The euro-area debt crisis leaves less money for the EU-wide budget, in talks haunted by echoes of the financial nationalism of France’s Charles De Gaulle in the 1960s and Britain’s Margaret Thatcher in the 1980s. A summit deadlock over the 2014-2020 budget would hobble subsidy programs, force the EU to fall back to annual budget extensions and add to concerns about Europe’s political cohesion that have been inflamed by the financial turmoil.
A stalemate “wouldn’t send a good signal to the outside world,” Luxembourg Prime Minister Jean-Claude Juncker said.
EU President Herman Van Rompuy took the afternoon to fine-tune a new proposal as leaders clustered in smaller groups, delaying the start of the summit to 8:45 p.m. from 3 p.m. Predictions abounded that the talks could drag into the weekend.
Chancellor Angela Merkel of Germany, the biggest contributor to the budget in absolute terms, said the most important thing is to leave Brussels with a deal. She positioned herself as a mediator between rich and poor countries, pledging to “work hard” to bridge views that are “still far apart.”
Leaders of poorer countries in southern and eastern Europe sought to stave off reductions. Wealthier countries that provide the financing -- including the U.K., Germany, the Netherlands, Denmark, Sweden and Finland -- insisted on EU-level austerity.
France, which also pays in more than it gets out, was caught in the middle. President Francois Hollande bowed to the further savings as long as they don’t come from the farming budget, a mainly French perk since the early days of the EU.
“I realize the need to economize, but we don’t want to weaken the economy,” Hollande said on the way into the summit. “It’s possible to have an accord. If some aren’t being reasonable, I’ll try to reason with them, but only up to a certain point.”
Whatever the outcome, the U.K.’s Cameron is assured of winning the first-ever real-terms cut in EU spending, a demand he has made virtually non-negotiable as he bows to the anti-EU faction in his Conservative party.
Prime Minister Antonis Samaras of Greece, suffering through the sixth year of a recession, pleaded for minimal cuts in the “structural funds” budget for infrastructure and transport projects.
“The big target now is recovery and growth,” Samaras said. “Structural funds is a key, is a guarantee for this success.”
Van Rompuy called for fresh money to combat youth unemployment, without saying how much or where it would come from. Southern countries battling the debt crisis such as Spain, with a youth jobless rate of 55.6 percent, would be the main beneficiaries.
Spending on cross-border transport, energy and research projects was chopped in a first round of talks, when money was shuffled back into farming to placate France and to regional development to accommodate poorer economies, especially in eastern Europe.
In the process, only 31 billion euros was left from the European Commission’s call for spending of 40 billion euros on international transport, energy and digital networks -- promoted as a driver of future growth.
Leaders as ideologically diverse as Hollande and Cameron connived to wield that knife. Cameron has less room for concessions after vowing to let U.K. voters decide whether to stay in the EU, assuming they re-elect him in 2015.
Cameron’s lodestar is Thatcher, who won a permanent annual rebate in 1984 to offset the U.K.’s small share of farm aid. Germany, the Netherlands and Sweden have since been granted temporary rebates, and Denmark wants a money-back guarantee as well, sowing divisions among the net payers. In turn, France wants a cap on its contribution to the U.K.’s refund, and Italy -- the biggest net payer in 2011, relative to economic size -- wants a better deal too.
At the November summit, the political contortions culminated with Cameron bowing to the restoration of some farm aid so he could take aim at another target: the salaries and pensions of the EU bureaucracy’s 55,000 employees, which make up 6.4 percent of the total budget.
Any deal will require the assent of the European Parliament, which gained greater powers over spending in a 2009 overhaul of EU treaties. The parliament’s president, Martin Schulz, a German Social Democrat, said a veto is a distinct possibility.
“The more you set priorities like today, the greater the probability of a no in the European Parliament,” Schulz told reporters. The parliament’s vote is likely to be by secret ballot, making its members less likely to succumb to pressure from national capitals, he said.
Schulz said an agreement is made trickier by quirks in EU accounting that distill the budget into two sets of numbers, one for spending commitments, the other for what is actually spent. Commitments that aren’t backed up by transfers from national capitals would throw the EU into deficit.
“I won’t sign a deficit budget,” Schulz said.
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