EU Leaders Face-Off Over Budget

Day one of the gathering saw the leaders reach a tentative agreement that the EU should put on ice the process of ratifying the new European constitution. Day two might prove considerably less amicable, as they turn their attention to budgetary concerns.

"This is the one of the most difficult summits we have ever had," sighed Jean Asselborn, Luxembourg's foreign minister.

Chancellor Gerhard Schröder stressed the need for compromise. "The EU will only strike an agreement on its future financing if all sides are willing to be flexible at this pivotal summit," he said Thursday.

Tired of being paymaster

"Germany wants an agreement. But it is clear that it will only be possible if everyone moves," Schröder said on arrival at the metting which is deadlocked over the 2007-2013 budget plans "But whether that is possible is an open question," he added.

The negotiations are blocked by Britain's refusal to abandon its cherished European Union budget rebate, although there is also fierce disagreement over overall contribution levels.

Germany is the biggest net contributor to the European Union's roughly $100-billion-a-year budget. But with its public finances already very tight, Berlin appears increasingly weary of its role as Europe's paymaster, especially since the 2007-2013 spending proposals would suck billions more out of its budget.

Britain takes the rap

Before heading to Brussels, the chancellor took aim at Britain's EU budget rebate, secured by former British leader, Margaret Thatcher, in 1984 to compensate for the relatively small amount London received in EU farm aid. Britain is strongly against Luxembourg's proposal to freeze it in 2007 and later "set it on a downward path."

"There is absolutely no justification any longer for the British rebate," Schröder said. "Britain is the sixth biggest per capita beneficiary of the EU budget but ranks far below that as a contributor." But opposition leader Angela Merkel, on course to challenge Schröder if elections are held in September, voiced some support for Prime Minister Blair. "The British rebate is connected with agricultural subsidies," she said. "It isn't fair to say that agricultural subsidies are sacrosanct, but we demand flexibility from the other side."

Britain has threatened to use its national veto to preserve its rebate, while France continues to insist that agricultural subsidies -- which benefit French farmers -- are off-limits. For now, more than 40 percent of the overall budget is spent on the Common Agricultural Policy, with France the biggest recipient of farm funds.

Gearing up for a fight

Swedish Prime Minister Goran Persson weighed in Friday saying he thought it was unlikely a deal on the budget would be reached in one day, and pointed out the EU still had a year to sort out its differences. "I'm still very pessimistic and I think we should not rush into a deal today," he told reporters. "We all hope there will be a deal but it's better to take a year more and negotiate," he said, adding there was a need to re-examine the balance between EU farm and regional aid.

Jean-Claude Juncker, Luxembourg's prime minister and current EU president said he was ready for a fight. "I predict a day of many battle, and I'm going to be in shape," he warned.

Wrangling could carry over into an unscheduled session on Saturday, if leaders decide a deal is within their grasp after all.