A Deeply Divided European Union Faces Its Own Budgetary Cliff

France, Germany and Britain become central antagonists in more general discord over a multiyear E.U. budget — and risk preventing Europe from fulfilling one of its most basic operational tasks

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The E.U. headquarters in Brussels

The U.S. may plunge over a fiscal cliff if a budget deal can’t be concluded first, but the European Union is hurtling toward a budgetary precipice of its own amid clashing views over the bloc’s future financing. To avert that collision, E.U. officials and leaders of the 27 member states will huddle in Brussels starting Nov. 22 in search of that elusive fiscal compromise they can all live with. Don’t bank on any of them returning home with an agreement very soon.

Not only are France, Germany and the U.K. each dug into conflicting positions on a number of budgetary items. Those disagreements also center on issues central to the E.U.’s functioning, financing and even conception. In many ways the fractures over the next European budget reflect the differences on policy, reform and austerity separating Germany and France in managing the euro crisis. Wrangling elsewhere also directly echoes debate in the U.K. over Britain’s continued membership in the E.U. All else failing, summiteers might agree on a name change to the European Disunion.

(MORE: Why Britain and the E.U. Still Need Each Other)

European leaders converge on Brussels Thursday for a series of bilateral meetings with top E.U. officials, ahead of the opening of Friday’s summit seeking agreement on a budget for the 2014–2020 period. No time or date has officially been set for adjournment, advisers to French President François Hollande say, because nobody knows yet if persisting disagreement will cause participants to give up, cut their losses and come right home. Conversely, if enough flexibility is detected all around, leaders may choose to negotiate through the weekend and hammer out essential elements of an accord.

“The scenarios span from everyone disagreeing on everything and going home, to observing sufficient movement on key positions meriting continued discussion towards an eventual agreement,” said an Élysée official on Nov. 20. “The middle option is there’s enough consensus on a compromise budget for a majority camp to form and move ahead on its own. But the first step in Brussels will just be seeing whether enough margin for negotiating has developed to prolong discussions.”

That minimalist objective is probably wise. The task in Brussels will be to hack down the proposed seven-year European budget from $1.34 trillion — a figure representing a 4.8% increase in funding allotted to 2007–2013. Most member states agree that in a period of national spending cuts in response to dizzying public debt, the E.U. must learn to live with less money too. But how much less is a matter of considerable disagreement.

E.U. President Herman Van Rompuy has tabled an alternative budget of about $1.25 trillion. Austerity-minded Germany wants a further $166 billion lopped off that, while Britain insists at least $258 billion be slashed to lower the 2014–2020 budget to the same preinflation level as the current package. France approves slimming the Van Rompuy proposal further — though not down to German, much less British, targets.

More significantly still, Paris hotly rejects additional slicing of the Common Agricultural Policy (CAP), which accounts for nearly half of the E.U. budget. The reason: France — which has Europe’s largest farm sector — is the main CAP beneficiary and already resents 2007–2013 agricultural funding of $539 billion being lowered to $494 in the new proposal. Hollande was vowed to reject further CAP reduction as well as harder pinching of research, innovation, infrastructure and stimulus financing France insisted on in June to accept the E.U. fiscal pact.

France isn’t alone in playing E.U. team-ball with its own national priorities foremost in mind. In addition to pushing for a de facto reduction in Europe’s budget, U.K. Prime Minister David Cameron flatly rejects new taxes being accounted as future and permanent E.U. revenues — an outgrowth of Britain’s hostility to a new financial transaction level many other E.U. members have adopted and which it believes would damage activity in the City.

(MORE: London Stalling: Why the U.K. Relies on the City to Keep the Country Afloat)

Cameron has also refused any revision of the annual $3.5 billion rebate the U.K. receives from the E.U. Initially attained in 1983 by then Prime Minister Margaret Thatcher, that refund is now decried by opponents as no longer justified by claims that Britain pays more into Europe than it takes out. That rigidity, combined with London’s warning it will rebuff any budget not fulfilling its other demands, produced the front-page headline in Wednesday’s Le Monde that “Europe, Hostage to the British.”

But not just them. France and its backers are also seething at Sweden, Austria, the Netherlands and Germany getting refunds resulting from the British rebate too — a $10.25 billion annual envelope Paris pays roughly half of. Unsurprisingly, German financial interests being served by the rebate scheme stiffens Berlin’s objection to it being revised or scrapped — though Germany finds itself with an awkward ally in Britain. In recent months, Cameron has played on growing British debate on whether E.U. membership isn’t far more cost and trouble than it’s worth — fueling calls for the U.K.’s departure. That runs 180 degrees contrary to German Chancellor Angela Merkel’s push for a more integrated, federal Europe.

(MORE: Not So Great Britain: After E.U. Summit, U.K. Drifts Toward Isolationism)

Rising anti-Europe sentiment in the U.K. has bolstered Cameron’s inflexible line on the proposed E.U. budget. But it’s also placed Merkel between the Europe-wary positions of Britain and the Euroenthusiasm of France — which she regards as a spendthrift even in the midst of a debt crisis. Merkel’s trick in the budget battle will therefore be championing the kind of frugality the U.K. demands on fiscal matters — and which Germany has imposed on debt-swamped euro nations — without alienating her neighbor, currency partner and fellow E.U.-booster France by snuggling up to Europe’s most frequent outlier.

“More than ever, the side Germany falls on in a compromise will be critical,” the Élysée adviser says, adding that while positions on the budget remain far apart among partners, there has been some significant movement of late. “We’re starting to get closer to final descent towards the landing zone … We’re packing lots of extra shirts in case more progress is made in Brussels.”

Unlike the U.S., failure to get a budget agreement won’t send the E.U. over a fiscal cliff. Absence of a package spanning 2014 to 2020 will cause the 2013 budget to simply be extended each year with a 2% rise for inflation. But that backup option would leave no one happy — and only harden and inflame the national positions that led to the budget clash in the first place. Worse still, it would be a direct result of the E.U.’s inability to execute one of the most basic procedures in its collective functioning — and send the entire logic of a united Europe off an existential precipice.

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