EU Leaders Battle Over Budget With Cameron Demanding Cuts

European Union leaders sparred into the night over the bloc’s next seven-year budget, with calls by U.K. Prime Minister David Cameron for spending cuts at the center of a welter of competing national demands.

Spurred by an anti-EU faction at home, Cameron insisted on 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 less than 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 on his way into the two-day Brussels summit yesterday afternoon. “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.

Predictions abounded that the talks could drag into the weekend, in a 27-nation replay of the tensions that have marred efforts to cope with the fiscal crisis in the 17-nation euro zone. A stalemate “wouldn’t send a good signal to the outside world,” Luxembourg Prime Minister Jean-Claude Juncker said.

‘A Toothbrush’

Lithuanian President Dalia Grybauskaite told reporters about 4:30 a.m. that the talks look “quite difficult still, because for the first time really we do see the chances for a real budget cut.”

Asked if she’s optimistic a deal can be reached as the talks stretch into the night, Grybauskaite said: “The main problem is I never thought I will need a toothbrush.”

Whether spending pledges are brought down to 960 billion euros, a figure floated late yesterday, or go even lower, the budget’s overall economic impact will be limited. It will equal about 1 percent of EU-wide gross domestic product, compared to the average of 50 percent that each government spends at home.

Cameron is already sure to win the first-ever real-terms cut in EU spending, a demand he has made virtually non-negotiable as he bows to anti-EU voices in his Conservative party. The question is the depth of the cuts and whether they find the consent of poorer countries and the European Parliament.

Merkel’s View

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, pledging to “work hard” to bridge views that are “still far apart.”

Leaders of weaker economies 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 -- pressed for EU-level austerity.

France, which also pays in more than it gets out, was caught in the middle. President Francois Hollande assented to further savings as long as they don’t come from the farming budget, a mainly French perk since the early days of the EU.

Subsidy Programs

“I realize the need to economize, but we don’t want to weaken the economy,” Hollande said. “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.”

All governments have to sign off on the budget, giving leverage to countries on both sides of the European economic divide. Prime Minister Petr Necas of the Czech Republic, one of 16 net recipients of EU funds, threatened to veto any package that isn’t “fair.”

A breakdown might play to the recipients’ advantage. A failure to complete the package in time for subsidy programs to start up in 2014 would lead to the rollover of the 2013 budget, the biggest in EU history.

EU President Herman Van Rompuy called for new 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.

U.K. Voters

Spending on cross-border transport, energy and research projects was chopped in a first round of talks in November, when money was shuffled back into farming to placate France and to regional development to accommodate poorer economies. 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.

EU Bureaucracy

At the November summit, the political contortions culminated with Cameron consenting 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 EU 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 later this year will probably 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. “Europe, like the U.S. a few weeks ago, is heading for a fiscal cliff.”

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