THE E.U. BUDGET

The E.U. Budget is both small and big. Small, since it represents just over 1% of Member States' collective national income. Because Government spending in most of the respective countries is up around 50%, European contributions are only around 2% of the public purse, much less than (say) health, education or pensions. Against that background, it's hard to see why everyone gets so excited. On the other hand, since the E.U. has a funny way of doing budgets, agreeing them for seven years at a time instead of the more usual one, the 2014-20 proposals add up to just over Euros1 trillion (there's that trillion word again), which is more than quite a lot of money.

Adding to the complications are three twists. The first is that 80% of the money is earmarked for agriculture and cohesion funds (i.e. support for poorer parts of the union), an outcome which reflects the E.U.'s historic priorities and the arrival of poorer members from Eastern and Southern Europe more than the needs of a 21st century international political grouping. The second is that ever since Margaret Thatcher famously banged the table at a 1984 summit and demanded "her" money back, an otherwise straightforward calculation (Member States pay in money to a central pot and agree on how it should be used) is now bedevilled by a complex system of rebates for certain countries, all of whom cling tenaciously to their "rights". Even Denmark has joined this game, having just noisily demanded a rebate of Dkr.1 billion, an arbitrary figure which is nevertheless already included in Government revenue plans for the next few years, making it difficult for the Danish Prime Minister to compromise.

Thirdly, the 7-year framework must be agreed unanimously by all 27 Member States and the European Parliament, all of whom have different priorities and all of whom can use a veto to gum up the works if they so choose. Some countries in the midst of big deficit reductions (eg the U.K.) want big cuts in the proposals, which are bigger (there is disagreement as to how much) than the numbers in the 2007-13 framework. Poorer countries, and the Parliament, want the exact opposite. Member States with farmers and poor people want to preserve the agriculture and cohesion elements, economic liberals and federalists want more for other things, such as cross-border research and transport networks. Rebate beneficiaries want to keep their goodies, net payers want to pay less.

If that sounds like a recipe for gridlock, then it is. A summit on 22 and 23 November is supposed to find a solution, but my hunch is that it will end without an agreement and in a welter of recriminations and bad blood, not least from the Brits. In which case, the 2013 Budget will be rolled over into 2014, with an increase of 2% to take account of inflation. Since that end result would satisfy some of the parties just fine, it makes it more likely that it will come about.

UPDATE: Late this evening the British Government lost a vote in the House of Commons on the E.U.Budget, when 53 Conservatives joined the Labour opposition in backing an amendment calling for a real terms cut in the 2014-20 framework instead of a real terms freeze, which was the Coalition Government's position. Although the vote is non-binding, it does tie Prime Minister David Cameron's hands a bit in advance of November's crucial summit and make gridlock at bit more likely.

Walter Blotscher