The European Union’s annual budget will increase 2.02 per cent next year to €129bn, after negotiators representing the bloc’s 27 member states and parliament reached agreement in an all-night bargaining session.

The 2012 budget conforms to the austere terms demanded by David Cameron, the UK prime minister, who had argued throughout the negotiations that European spending should rise by no more than inflation. The European parliament, by contrast, had sought a 5.23 per cent increase.

The agreement, which came ahead of a Monday deadline, will avoid a repeat of the fractious and drawn out budget negotiations from a year ago, which seemed to enhance the EU’s reputation for dysfunction and institutional rivalry. All parties were keen to avoid such a display in the midst of a European debt crisis that has rattled financial markets and raised questions about the bloc’s future.

Mark Hoban, the financial secretary to the Treasury, called the agreement “an excellent deal” for the UK. “We have stopped the European commission and parliament’s inflation-busting proposals and have delivered on the government’s promise to freeze the EU budget in real terms,” Mr Hoban said.

However, the member states did give some ground by agreeing to top up the current year’s budget with an additional €200m, amid pleas from the commission, the EU’s executive arm, that its accounts were running dry. In return for the limited increase, they may be called on to again supply additional funds at this time next year.

Janusz Lewandowski, the budget commissioner, said: “This is clearly an austerity budget as most member states are in the midst of a serious financial crisis.” Mr Lewandowski expressed regret that member states had agreed to supply less than half the €550m in supplementary funding he had been seeking to close an expected shortfall this year. Those funds turned out to be the most contentious element of the talks.

Several MEPs were inclined to accept a smaller increase for next year’s spending – but only if they could trust an accompanying pledge from member states that they would plug any future shortfalls. The hard line taken by the UK, Germany and six other member states on the commission’s request called that pledge into question. Making matters more complicated, both sides expressed frustration with Mr Lewandowski for failing to present a clear picture of the bloc’s accounts.

The agreement must still be endorsed by the council of member states and the full parliament before it can be adopted. Member states and MEPs will now turn their attention to what are expected to be far more contentious talks over the EU’s next seven-year budget, which will guide roughly €1,000bn in spending from 2014 to 2020. Those negotiations formally began in June, and are now expected to intensify over the next six months.

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