EU budget talks deadlocked Friday

BRUSSELS, Belgium -- Budget talks among the European Union's 25 nations deadlocked Friday over how much each should pay into EU coffers and how the money should be spent, diplomats said.

Failure to agree on the 2007-13 annual budgets of $120 billion would deepen the sense of crisis touched off by the rejection by France and the Netherlands of the proposed EU constitution and reinforce impressions the process of European integration has lost direction.

Leaders did not even get into details of the most contentious budget issue, the $5.5 billion annual rebate Britain gets, the British spokesman said. Britain gets the rebate based on a 1984 agreement dealing with farming subsidies.

The EU summit of national leaders is the first since the rejections, but they put aside problems on the

charter to devote the entire second day toward getting agreement on a new budget for the grouping.

On the constitution, the leaders were to endorse a declaration that the proposed document could still one day take effect, despite the two rejections and plans by more countries to put ratification on hold, diplomats said.

A draft declaration said the referendum results "do not call into question either citizens' attachment to the construction of Europe or its continuing development."

European leaders did not even get into details of the most contentious budget issue, the $5.5 billion annual rebate Britain gets, the British spokesman said. The other 24 nations want the rebate reduced or even scrapped.

Britain gets the annual cash rebate based on a 1984 agreement dealing with farming subsidies; most of the EU's $120 billion annual spending is in aid to both farmers and poor regions.

Because Britain has fewer farmers as well as poor regions, it was not getting as much money as other countries, particularly France. In 1984, then-Prime Minister Margaret Thatcher demanded and won compensation in the shape of the $5.5 million rebate.

Britain is willing to discuss the rebate, but within the context of a reform of the budget's structure, the spokesman for British Prime Minister Tony Blair said.

The budget must "reflect the needs of today rather than 30 or 40 years ago," the spokesman said. Blair has argued the EU also must look at other spending, such as the huge subsidies that go to French farmers, before discussing the rebate.

French President Jacques Chirac led the charge against the rebate, saying a cut in the rebate should "in no case be conditioned on the revision of farm spending," French diplomats said.

Chirac said France would be willing to accept a compromise to solve the budget deadlock, but was not willing to concede more than $12 billion in reduced funding. "I am ready to make this effort if, and only if, we stop there," Chirac said.

Luxembourg Prime Minister Jean-Claude Juncker, chairman of the meeting, suggested a freezing of the British handback until 2013, after which a reduction of the rebate would be linked to cuts in farm handouts. Britain and France rejected the compromise.

Sweden's Prime Minister Goran Persson called for a delay of up to a year "to negotiate on a better budget and on better distribution in the budget."

German Chancellor Gerhard Schroeder, however, called on leaders to "send a signal that we are able to get an agreement" and end the appearance of deadlock.

European Commission President Jose Manuel Barroso said it was vital leaders reach an agreement even if not perfect to show that Europe works. He suggested a 2008 review of the budget to assess spending plans.

"We have a window of opportunity and we should grasp that opportunity and get a deal," said Danish Prime Minister Anders Fogh Rasmussen.

The Netherlands and Sweden want to reduce their contributions, while Italy, Spain and Portugal are resisting cuts in aid to poorer regions.

The latest proposal foresees cuts in EU farm handouts of $7.2 billion during the 2007-13 budget years and lowers overall contributions from EU member states.

The Netherlands, Germany, France, Austria, Sweden, and Britain contribute more to the budget than they get back in benefits. They want spending in 2007-13 capped at 1 percent of the EU's annual gross national income.