Governments reject latest EU budget compromise

BRUSSELS Tue Oct 30, 2012 12:23pm EDT

BRUSSELS (Reuters) - A compromise proposal on the European Union's long-term budget, cutting more than 50 billion euros ($64.5 billion) from the original blueprint, ran into a crossfire of criticism on Tuesday from governments on both sides of the spending debate.

The plan by the EU's Cypriot presidency, sent to capitals late on Monday, recommended the deepest cuts to infrastructure spending in the poorest member states to reduce the total bill, with a less drastic reduction in farm subsidies.

The document will form the basis of negotiations to seek a deal on the seven-year budget for 2014-2020 in time for what promises to be a marathon summit of EU leaders on November 22-23.

But it angered both richer Western states keen to minimize their contributions as they struggle to reduce national debt in the shadow of the euro zone crisis, and Eastern newcomers who rely heavily on EU funds for their future economic development.

"In times of austerity, the EU budget must not grow. We need to cut three or four times as much as in this proposal to stabilize member states' contributions," said Swedish Minister for EU Affairs Birgitta Ohlsson. Stockholm is a net contributor.

"No deal will be possible on the basis of cuts of only 50 billion euro," she added.

Sweden, Germany and Britain have demanded cuts of 100-200 billion euros to the European Commission's proposed 1 trillion euro total, slightly more than 1 percent of the 27-nation bloc's gross domestic product. By contrast national government spending accounts for between 40 and 56 percent of member states' GDP.

A diplomat from Poland, biggest net recipient of EU funds, criticized Cyprus for concentrating solely on wielding the axe.

Polish Prime Minister Donald Tusk said he had warned Britain, which seeks the deepest cut in spending, that if there was no deal, the current EU budget would remain in force provisionally with two percent added each year for inflation.

"We will try to persuade the British that a compromise would be cheaper for the UK," Tusk told reporters in Warsaw. "We will be looking for smart compromises. Here in Poland we will need to see what is beneficial for us and acceptable to others."

Cyprus, which holds the bloc's rotating six-month presidency, said the cuts outlined so far were just a start and deeper reductions would be needed to reach a final deal.

"Further reductions will require even bigger trade-offs and the need to prioritize between policies and programmes," it said.

As part of its proposal, Cyprus trimmed a further 58 billion euros of spending in areas such as nuclear fusion research and crisis response that the Commission had kept off the main budget, moving some of it back onto the EU's books.

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The compromise cuts the EU's seven-year regional development budget by about 12.5 billion euros compared with the Commission's original plan.

By contrast, spending on agricultural subsidies, of which France, Italy and Germany are the biggest beneficiaries, would only fall by about 5 billion euros under the compromise. Direct payments to farmers would total more than 277 billion euros over seven years.

About three-quarters of the current budget is spent on farm subsidies (40 percent) and airports, motorways, bridges, rail tracks and other infrastructure projects (35 percent).

Sweden, which alongside Britain, Denmark and the Netherlands has long called for a lower share of EU spending for farmers, criticized the balance of cuts proposed by Cyprus.

"It is unacceptable that the common agriculture policy is protected from cuts," said Ohlsson. "Nearly 40 percent of the EU budget is still earmarked for the CAP - a sector employing 5 per cent of the labor force and contributing only 1.5 per cent to EU GDP."

As expected, the proposal made no firm recommendation on the fate of Britain's multi-billion euro annual budget rebate, won by Margaret Thatcher in 1984, or related refunds subsequently granted to Germany, the Netherlands, Sweden and Austria.

"This was beyond our authority. It is up to our leaders to agree on the way forward on this issue," a Cypriot presidency source said.

The issue is likely to be one of the flashpoints when EU diplomats begin talks on the compromise on Wednesday, trying to lay the groundwork for a summit agreement in November.

Complicating matters, Danish Prime Minister Helle Thorning-Schmidt threatened last week to veto the EU budget unless Denmark too gets a 1 billion crown ($173 million) rebate on its contribution to Brussels.

"Denmark should not pay for rich EU countries' rebates. That is why we must also get a rebate and I think we will get that," she told Denmark's parliament.

British Prime Minister David Cameron has also threatened a veto unless London, which has demanded a freeze in EU spending in real terms, achieves its objective.

"It's going to be difficult to reach agreement," Cameron's spokesman told reporters.

"We're going into that negotiation with good intentions. We want to reach a deal but it needs to be a deal that we find acceptable and that's in our country's interests."

Italy and France could also demand rebates if Britain's is maintained.

"Italy and France are the biggest contributors to the British rebate. We cannot rule out asking for our own rebate," said an Italian diplomat who spoke on condition of anonymity. ($1 = 0.7749 euros) ($1 = 5.7803 Danish crowns) (Additional reporting by Francesco Guarascio in Brussels, Karolina Slowikowska in Warsaw, Daniel Dickson in Stockholm, Mette Fraende in Copenhagen and Matt Falloon in London; Editing by Paul Taylor)