Last updated: November 22, 2012 4:43 pm

Growth funds likely target of EU cuts

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The portion of the EU’s long-term budget billed as the most likely to spur economic growth has emerged as the piggy bank that negotiators will have to raid to satisfy French and Italian demands for more money for farmers and poor regions.

EU officials were bracing on Thursday evening for Herman Van Rompuy, the European Council president, to remove as much as €20bn from the draft budget’s €152.6bn “growth and competitiveness” heading – which funds research and development and cross-border infrastructure projects, such as high-speed rail lines and broadband internet.

Hollowing out that heading to pay farm subsidies would appear to undermine the argument that the EU’s long-term budget is an essential instrument for growth and modernisation, particularly in the midst of an economic crisis that has dragged the eurozone into recession.

But diplomats and policy makers acknowledged that such a move may be part of the horse-trading necessary to seal a deal among 27 member states with competing interests on a seven-year budget that will cover roughly €1tn in spending from 2014 to 2020.

Mario Monti, the Italian prime minister, threatened to sink the negotiations on Thursday if adjustments were not made. “We will not accept a deal that we deem unacceptable,” Mr Monti told reporters. “It is absolutely essential that Italy obtains a result better than the one presented in initial drafts, on the cohesion funds, agricultural funds, and on mechanisms.”

David Cameron, the British prime minister, vowed to win a good deal for UK taxpayers and reiterated his stance against an increase in the bloc’s long-term budget.

“These are very important negotiations,” Mr Cameron said as he arrived at the summit. “Clearly at a time when we are making difficult decisions at home over public spending it would be quite wrong – it is quite wrong – for there to be proposals for this increased extra spending in the EU.”

Expectations have been rising in Brussels that an unlikely deal with the UK over the EU’s long-term budget was taking shape, although the chief negotiator was trying to resolve a deluge of last-minute complaints from other countries on the eve of what could be a gruelling summit.

The cautious optimism about the UK represents a significant shift: David Cameron, the prime minister, was seen as the biggest obstacle to a deal on the budget.

The changed mood reflects the encouraging reception that British officials have given to the latest proposal from Herman Van Rompuy, the European Council president. The draft set a ceiling of €940bn for payments over the seven-year period, a €3bn reduction from the current long-term budget.

That would fall short of the real-terms freeze from 2011 levels that Mr Cameron has demanded – which Treasury officials have calculated at €886bn – but still allow the prime minister to tell a sceptical public that he had won a budget cut.

“Our feeling is that Mr Cameron got what he wanted,” one EU official said.

To close a deal, Mr Van Rompuy may have to abandon his suggestion that the UK should pay towards its own EU budget rebate, a move which would cut its current annual value of about €3.5bn by some €1bn.

“We are going to be negotiating very hard for a good deal for Britain’s taxpayers, for Europe’s taxpayers and to keep the British rebate,” Mr Cameron said on Thursday.

France is particularly unhappy with the UK rebate of which it pays about a quarter. President François Hollande has also vowed to block proposed reductions in agricultural spending. French officials said French farmers, the main beneficiaries of the common agricultural policy, must not be “the adjustment variable” in the budget negotiations.

Mr Cameron told MPs on Wednesday he would not surrender any of the rebate, claiming that his Labour predecessor, Tony Blair, had signed “half the rebate” in 2005 and had “cut away our feet” in the process.

The UK is also demanding reductions to the EU’s administrative budget to show that the Brussels bureaucracy is not immune to the economic crisis. France and other countries are also demanding big cuts to overheads.

The prime minister discussed his position with Mr Van Rompuy on Tuesday evening, and Downing Street has said he plans to approach the summit “constructively”.

A truer gauge of the UK’s position will come on Thursday morning when the prime minister goes behind closed doors with Mr Van Rompuy for a 10-minute “confessional” meeting.

Those private sessions with each of the EU’s 27 heads of government will precede a sprawling and bruising negotiation that participants believe could either collapse quickly into failure or drag into the weekend.

The late move towards the UK’s position has complicated matters by stoking tensions with other member states. The French were described as “exasperated” by one diplomat at proposed reductions in agricultural subsidies, and the Italians hinted on Tuesday evening that they were prepared to wield a veto.

Mr Van Rompuy was also grappling with demands from Denmark and Austria for their own rebates – and complaints from eastern European members, including Hungary and Romania, aggrieved at their share of development funds.

Several EU officials speculated that many of the initiatives touted for the ability to generate economic growth, including a €46bn “connecting Europe” infrastructure fund, could be raided to help solve those problems. “It looks vulnerable,” one official said.

Additional reporting by Hugh Carnegy in Paris

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