EU Leaders Face Late-Night Budget Battle

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EU leaders head into difficult talks on the bloc's 2014-20 budget Thursday under the watchful eye of a newly assertive European parliament hostile to any major spending cuts.

In November, they tried and failed to narrow sharp differences and while most expect a compromise to emerge this time, there is no certainty other than that the budget talks will be long.

An agreement depends on finding a balance between British and German calls for cuts, and French and Italian demands to ring-fence money for investment in areas that can generate jobs and growth.

Late Wednesday, French President Francois Hollande hosted Chancellor Angela Merkel for what a German spokesperson described as "a short but intense meeting ... to see what kind of agreement could be made."

The two leaders "set out their desire to see EU heads of state and government reach a good agreement," a French presidential adviser said.

The European Commission, the EU's executive arm, initially wanted a 5.0 percent increase in member state contributions to 1.04 trillion $1.4 trillion) euros for 2014-20 but EU President Herman Van Rompuy cut that back to 973 billion euros for the failed November summit.

Now the task is to get closer to 900 billion euros, or about one percent of the EU's total Gross Domestic Product -- modest on that basis but crucial at the margins for many member states.

The differences are serious enough but the situation has also been clouded by British Premier David Cameron's promise of a referendum on EU membership if he can re-negotiate London's ties with Brussels.

"I can't exclude that we fall for the sirens of ridicule," said Luxembourg Prime Minister Jean-Claude Juncker, Europe's longest-serving head of government and the doyen of such gatherings after eight years chairing the eurozone finance ministers' forum.

"We will correct the figures downwards, not upwards," Juncker said.

The EU parliament meanwhile, has been flexing its muscles as its approval is now needed for any budget deal, with assembly head Martin Schulz saying lawmakers were ready to throw out any agreement they think falls short.

In a possible foretaste of things to come, several leading MEPs have warned against "suicidal" or "fraudulent" fixes which undercut growth and jobs.

-- Deficit financing? --

Most of the budget goes to the Common Agricultural Policy and Cohesion Funds, the money spent to help new members invest in the social and economic infrastructure needed to catch up with their more-established partners.

The focus up to now has been on total contributions or commitments made by member states but with Britain pushing hard for cuts, the emphasis has switched to the other side of the ledger books -- the actual amount of spending.

In November, Van Rompuy proposed a budget based on "commitments" of 973 billion euros and diplomats say he will reduce that to 960 billion euros in search of a compromise.

He is also expected to lower the spending target closer to 900 billion euros, a level Britain's Cameron might be more comfortable with but which MEPs would likely condemn outright.

That leaves the question of what happens if the EU were to spend all the budget up to the 960 billion euros commitments agreed and then Britain and perhaps others refused to make up the gap.

In that event, the EU would face the prospect of running a budget deficit, uncharted territory for Brussels, if all too familiar to national governments.

Van Rompuy meanwhile, sounded positive Wednesday of getting a deal.

"I am confident that with some adaptations, the proposal I made on 22 November can constitute the basis for a deal," he said.

The budget tops the agenda for the two-day summit starting at 1400 GMT, with Friday's sessions set to cover relations with the EU's north African neighbors and progress on free trade deals with the United States, Japan and others.

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