Why the Europeans Don’t Really Want an E.U. Budget Deal

Three months after failing to reach agreements on whether to slash or bolster the E.U. budget, leaders gather in Brussels to find their positions still far apart

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French President François Hollande arrives for an E.U. budget summit in Brussels on Feb. 7, 2013

It’s difficult to designate an obvious villain in the European Union’s stalled budget negotiations. Virtually all 27 member states are advancing mostly national interests in what’s supposed to be the world’s largest team effort. That is why few observers expect E.U. leaders converging on Brussels Thursday for another round of budget summitry to come away with a mutually acceptable compromise. Indeed, no agreement may be the best agreement for all concerned.

The Feb. 7 and 8 summit seeks to establish the E.U.’s budget for the 2014–2020 period — a quest that went nowhere when leaders last huddled to talk finances in November. On the face of it, the cause of the impasse is fairly simple. Fiscally conservative countries like the U.K., Germany, the Netherlands and Denmark want to see Europe’s budget cut in the same way that spending by national governments has been slashed to remedy debt-plagued public accounts. Countries like France, Poland, Italy and Spain, by contrast, generally seek to maintain or inch up current E.U. funding levels and redirect money saved through austerity to other economic and social programs capable of stimulating slumping growth. If that seems like déjà vu all over again, it is: those are largely the same fault lines that split northern and southern E.U. members over how to respond to Europe’s financial crisis.

(MORE: A Deeply Divided European Union Faces Budgetary Cliff)

Though a degree of progress toward a budget compromise has been made, literally billions (of euros) of differences must be overcome to reach a deal. An original package of $1.3 trillion for the seven-year period (a 5% rise over the current budget) was revised in late 2012 to $943 billion, under pressure from the U.K. and its allies. London wants the total outlay lowered to under $900 billion, while Germany is aiming for steep but less drastic reductions than Britain. France and its backers want a final amount lifted closer to $980 billion, while E.U. officials reportedly view $920 billion as the most likely figure all members will be able to agree upon.

That may be wishful thinking on a number of levels. Though U.K. Prime Minister David Cameron does have some continental backing in his efforts to whack the next European budget down, his recent proposal to hold a national referendum on continued British membership in the E.U. has left him with a rather anti-European radioactive glow. His apparent slow back-out of the E.U. is even being cited as the disastrous example other members must avoid at all costs. Indeed, in launching a counterattack in the budget tussle, French President François Hollande suggested the real confrontation under way was between pro- and anti-Europeans. Addressing the European Parliament on Feb. 5, Hollande painted the budget battle as part of a struggle between people committed to a more integrated, united and activist Europe, and those looking to shrink Europe down to its smallest possible size and turn it into a deregulated, toothless free-trade zone where national interests trump common European social and economic ambitions.

“A Europe with differences is a Europe where states — not always the same ones — decide to go ahead, take on new projects, unblock funds, harmonize their policies and to go beyond the base of common competences that we’ve created and that must remain intact,” Hollande told European legislators — who, for the first time ever, will be allowed to approve or reject any budget E.U. leaders (might) agree upon. “Savings, yes; weakening the economy, no!”

(MORE: Is the E.U. Nearing a Landmark Banking Deal?)

But behind the wider collision of ideological and economic views lies a less virtuous slugfest between opposing camps of rebate brats and agriculture hogs. The first group is (again) led by Britain, which has steadfastly defended the refund Margaret Thatcher obtained in 1984 compensating the U.K. for funds it paid into the E.U. and didn’t get back through programs or payments. That rebate now runs about $4.8 billion annually — even though European critics argue the flow of payments to and from Britain has been corrected since Thatcher’s time.

Worse still, Germany, the Netherlands, Sweden, Denmark and Austria have over the years obtained rebates to address their heavy contributions in reimbursing London — “refunds on the rebate,” as they are known. Backed by Italy, Spain and other nonrefund recipients, Hollande has railed at the U.K. and its allies for blocking reductions in payments they get, while hypocritically insisting on huge budget cuts elsewhere.

To that refund nations reply “CAP” — or Common Agricultural Policy, which accounts about 40% of all E.U. spending (down from 70% in the mid-1980s). Boasting Europe’s largest farming sector as it does, France has dug its heels in to prevent any significant CAP cuts in the new budget — and in doing so has gotten solid support from big agricultural members like Poland, Spain and even Ireland. Detractors say the CAP funds farm activity the market won’t otherwise bear — and creates subsidized surpluses that hurt farmers in other regions like Africa.

Nevertheless, advisers to Hollande said during private briefings this week that the notion of further French compromise on CAP is as risible an idea as the U.K. surrendering its Thatcherian rebate would be. Little wonder, then, that those Élysée officials also advised against expecting quick results flowing from the Brussels summit.

Yet even if the blockage remains and no new budget is agreed upon, there are reasons to believe members may view failure with a mix of satisfaction and regret. If no deal can be reached before the current seven-year plan expires, rules call for the 2013 budget to be used as the basis for successive years, plus 2% for inflation.

Were that to happen, Britain and its partners would be denied the steep cuts they were after — but keep pocketing billions in rebates for years to come. France and its backers would lose the refund fight — and fail to notch up spending to simulate growth across Europe — but prevent any enormous slashes generally or big hits to the CAP. In fact, the only thing that would really suffer from the E.U. failing to agree on the budget is the notion of European unity and cooperation itself.

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