EU states squabble over contentious budget

The run-up to this month's EU 2014-20 budget summit is proving even more fractious than usual as the major contributors dig their heels in, demanding cuts and concessions while the Commission insists on a 5.0 percent spending hike. Britain has threatened to veto a deal which offers anything less than a freeze at the November 22-23 meeting, while France, resentful of being the largest contributor to London's jealously guarded budget rebate, will hear nothing against its sacred cow -- the Common Agricultural Policy. The CAP accounts for about 44 percent of the budget and France remains its biggest beneficiary, much to the dismay of some of its EU partners. "France cannot accept a budget which would not maintain CAP spending," French European Affairs Minister Bernard Cazeneuve said on Wednesday. "Other areas for savings should be looked at," Cazeneuve said, pointing at the British rebate, worth 3.5 billion euros ($4.55 billion) in 2011, of which Paris had to pay 965 million euros. The net budget contributors led by France, Germany and Britain have baulked at the prospect of paying more at a time when government spending is under pressure on all sides and they are having to adopt tough austerity measures. Against this backdrop, Cyprus, which currently holds the rotating EU presidency, proposed during the week cuts of 50 billion euros as a "starting point" for talks on the Commission's budget of 1.03 trillion euros. Some 11 billion euros of the cuts would be in the CAP, including 3.4 billion euros in direct aid for farmers, one of the most sensitive topics for France since such funds are crucial in disadvantaged rural areas. As for the contentious rebates -- Germany, the Netherlands and Sweden have them as well as Britain -- Cyprus offered options for everyone, suggesting tentatively that they be replaced with a system of lump sum payments, be eliminated or allowed to continue as is. British Prime Minister David Cameron has made clear he will not accept any change to London's rebate, negotiated by his Conservative Party predecessor Margaret Thatcher in 1984 as a great triumph over Brussels. On Wednesday, Cameron lost a non-binding vote in Britain's Parliament insisting that he push for a real cut in the 2014-20 budget, having attempted to stave off the move by promising to veto any above-inflation increase. The net effect was to lock him into an even more hardline position. Britain is counted with Finland, the Netherlands and Sweden in the 'Taliban' radical camp on the budget, to use the phrase of one EU official, while France and Germany have at least suggested there is some room for manoeuvre. "The French have become more reasonable and one can negotiate with them again," one EU source involved in the negotiations said. Germany meanwhile wants to ensure that the budget "is properly spent on necessary projects" to boost the single market so as to drive growth and jobs, the source said, with Austria on a similar line. "It is normal that positions are set out ahead of negotiations," German Chancellor Angela Merkel said Thursday. "Germany will do everything in its power to try to achieve a solution ... It is too early and I don't want to throw any more vetoes into the ring -- that doesn't help find a solution," Merkel added. Berlin and Paris are both looking at cuts of 70-100 billion euros, with savings to come from cohesion funds, the money spent helping new member states improve infrastructure and governance to match EU standards. Cohesion spending accounts for some 43 percent of the budget but since it mostly goes to the new states it is more vulnerable because the big contributors do not risk offending their own domestic interests if it is cut. "Everything is possible at November's summit, even miracles," said one senior European official. "Failure would have a disastrous effect on market and investor confidence because it would show that the EU cannot agree on how to distribute resources at a time of crisis," the official said. Should the summit fail to produce an agreement, the most likely outcome would be further negotiations, horse-trading until a solution is found. If that fails, then come 2014, the 2013 budget would be rolled over on a monthly basis plus an increase to cover inflation, put at around 2.0 percent.