A new EU summit is getting under way in Brussels with issues of jobs and growth expected to dominate its agenda.
The eurozone as a whole has been in recession for more than a year and unemployment is now just under 12%.
France and some other countries want more flexibility in the budget targets set by the EU Commission, as austerity has provoked widespread protests.
France and Spain, hit hard by the debt crisis, expect to miss their budget deficit targets this year.
But Germany’s Chancellor Angela Merkel remains determined to keep Europe focused on budget discipline, to prevent any resurgence of market jitters about eurozone stability.
Cyprus, whose major banks are crippled by debts, wants to secure an international bailout of up to 17 billion euros ($22 billion). There is unlikely to be a deal on that at the Brussels summit, as EU finance ministers are still working on the details.
A eurozone summit will follow the main EU summit late on Thursday. Foreign policy issues, including relations with Russia, will be the focus on Friday.
Proposals to deepen eurozone integration will dominate an EU summit in June. The first “building block” of that will be a banking union, which will give the European Central Bank (ECB) far-reaching supervisory powers.
A new EU summit is getting under way in Brussels with issues of jobs and growth expected to dominate its agenda
There is a big debate in the EU about whether austerity is making the prospects for recovery worse.
The debate has been given new impetus by last month’s Italian election, where an anti-austerity protest movement led by the comedian Beppe Grillo performed very strongly.
This is expected to be the last EU summit for outgoing Italian PM Mario Monti, an unelected technocrat who had firm backing from Brussels but got just 10% in the election.
Some economists argue that in current circumstances austerity can actually make government borrowing rise, partly because of the impact that declining production has on tax revenue and welfare spending.
There is a drive in the EU to pursue tax evaders, including some big corporations who exploit the complexity of commercial law to reduce their tax bill.
European Union leaders are due to begin a two-day summit in Brussels to try to strike a deal on its next seven years budget.
High EU expenditure at a time of cutbacks and austerity across the continent is the main issue dividing the 27 member states.
They failed to reach a compromise at a similar summit last November.
The summit will almost certainly demand cuts in EU administration.
However, whatever is agreed still has to go to the European Parliament and MEPs are big backers of EU spending.
The EU Commission – the EU’s executive body – had originally wanted a budget ceiling of 1.025 trillion euros ($1.4 trillion) for 2014-2020, a 5% increase. In November that was trimmed back to 973 billion euros and later revised down to 943 billion euros.
However, with other EU spending commitments included, that would still give an overall budget of 1.011 trillion euros.
The UK, Germany and other northern European nations want to lower EU spending to mirror the cuts being made by national governments across the continent.
Another grouping, led by France and Italy, wants to maintain spending but target it more at investment likely to create jobs.
European Union leaders are due to begin a two-day summit in Brussels to try to strike a deal on its next seven years budget
French President Francois Hollande told reporters on Sunday that conditions were “not yet in place” for a deal but also signaled that Paris was prepared to make compromises.
Francois Hollande and German Chancellor Angela Merkel held talks in Paris on Wednesday before attending a France-Germany football match.
Angela Merkel’s spokesman said she and Francosi Hollande had had “a short but intense meeting… to see what kind of agreement could be made”.
angela Merkel – seen as the powerbroker in the summit – has already acknowledged that the talks will be “very difficult”.
In Brussels, a European Parliament spokesman warned that more severe cuts would leave the commission unable to do its job as the EU integrates more deeply in response to the financial crisis.
“How can we imagine that an EU institution can ensure a proper banking union with a budget that is cut by whatever billions in figures we hear, here and there?” said spokesman Olivier Bailly.
“At the moment, there is a need for a reality check between the requests that are sent to the commission, the council, the parliament, or the European Central Bank, and the budget – the means – that are given to these institutions to fulfill their commitments.”
The split in the EU reflects the gap between richer European countries and those that rely most on EU funding.
The argument for higher spending is supported by many countries that are net beneficiaries, including Poland, Hungary and Spain.
Others, mostly the big net contributors, argue it is unacceptable at a time of austerity.
Germany, the UK, France and Italy are the biggest net contributors to the budget, which amounts to about 1% of the EU’s overall GDP.
Analysts say failure to reach an agreement on its seven-year budget would mean the EU falling back on more expensive annual budgets.
German Chancellor Angela Merkel says she doubts an agreement can be reached on the European Union’s 2014-2020 budget at the summit taking place in Brussels.
Angela Merkel spoke after negotiations on the 2014-2020 budget were adjourned until midday on Friday.
The opening of the summit was delayed for three hours because of stark differences over the budget plans.
Most EU members support an increase in the budget but several countries say it is unacceptable at a time of austerity.
Earlier, President of the European Council Herman Van Rompuy circulated a revised proposal for the new budget and said he believed that a compromise was possible.
“I think we’re advancing a bit, but I doubt that we will reach a deal,” Angela Merkel said.
She has previously said that another summit may be necessary early next year if no deal can be reached now.
French President Francois Hollande also cautioned that an agreement might not be possible.
But he added: “We should not consider that if we don’t get there tomorrow or the day after, all would be lost.”
German Chancellor Angela Merkel says she doubts an agreement can be reached on the European Union’s 2014-2020 budget at the summit taking place in Brussels
The 90-minute session late on Thursday followed a grueling day of face-to-face meetings between Herman Van Rompuy and each of the bloc’s leaders, followed by a flurry of backroom discussions.
Before suspending talks, leaders nominated Luxembourg’s Yves Mersch to the executive board of the European Central Bank.
The EU Commission, which drafts EU laws, has called for an increase of 4.8% on the 2007-2013 budget.
The UK is the most vocal of EU member states seeking cuts in the budget to match austerity programmes at home.
“No, I’m not happy at all,” Prime Minister David Cameron said about Herman Van Rompuy’s offer to cap spending at 973 billion euros ($1.2 trillion).
“Clearly, at a time when we’re 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.”
The statement called the rebate “fully justified”. The EU Commission and some EU governments want the rebate scrapped.
David Cameron has warned he may use his veto if other EU countries call for any rise in EU spending. The Netherlands and Sweden back his call for a freeze in spending, allowing for inflation.
Poland and its former-communist neighbors, which rely heavily on EU cash, want current spending maintained or raised.
Francois Hollande has also called for subsidies for farming and development programmes to be sustained for poorer nations.
France has traditionally been a big beneficiary of EU farm support.
Failure to agree on the budget would mean rolling over the 2013 budget into 2014 on a month-by-month basis, putting some long-term projects at risk.
A deal after intense negotiations which may continue into the weekend
Failure to agree and a follow-up budget summit
If no agreement is reached by the end of 2013, the 2013 budget ceilings will be rolled over into 2014 with a 2% inflation adjustment, amid uncertainty over long-term EU projects
EU leaders are to begin talks on the bloc’s 2014-2020 budget, with many of them calling for cuts in line with the savings they are making nationally.
Countries that rely heavily on EU funding, including Poland and its ex-communist neighbors, want current spending levels maintained or raised.
The UK and some other net contributors say cuts have to be made. At stake are 973 billion euros ($1,245 billion).
The bargaining in Brussels will continue on Friday, or even longer.
The draft budget – officially called the 2014-2020 Multi-Annual Financial Framework (MFF) – was drawn up by European Council President Herman Van Rompuy, who made cuts to the European Commission’s original plan.
France objects to the proposed cuts in agriculture, while countries in Central and Eastern Europe oppose cuts to cohesion spending – that is, EU money that helps to improve infrastructure in poorer regions.
They are the biggest budget items. The Van Rompuy plan envisages 309.5 billion euros for cohesion (32% of total spending) and 364.5 billion euros for agriculture (37.5%).
The EU budget is a small fraction of what the 27 member states’ governments spend in total.
German Chancellor Angela Merkel says another summit may be necessary early next year if no deal can be reached in Brussels now.
In a speech to the European Parliament on Wednesday, the EU Commission President, Jose Manuel Barroso, complained: “No one is discussing the quality of investments, it’s all cut, cut, cut.”
Arriving in Brussels, UK Prime Minister David Cameron said: “These are very important negotiations.
“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.”
David Cameron, who was due to meet Jose Manuel Barroso and Herman Van Rompuy, has warned he may use his veto if other EU countries call for any rise in EU spending. The Netherlands and Sweden back his call for a freeze in spending, allowing for inflation.
Any of the 27 countries can veto a deal, and the European Parliament will also have to vote on the MFF even if a deal is reached.
Failure to agree would mean rolling over the 2013 budget into 2014 on a month-by-month basis, putting some long-term projects at risk.
If that were to happen it could leave David Cameron in a worse position, because the 2013 budget is bigger than the preceding years of the 2007-2013 MFF. So the UK government could end up with an EU budget higher than what it will accept now.
The European Commission says that the EU budget accounts for less than 2% of public spending EU-wide and that for every euro spent by the EU the national governments collectively spend 50 euros.
EU talks about 2013 budget have collapsed, after negotiators from the EU and member states were unable to agree on extra funding for 2012.
The EU Commission and European Parliament had asked for a budget rise of 6.8% in 2013.
But most governments wanted to limit the rise to just 2.8%.
The failure of the talks will dent hopes of agreement on the 2014-2020 budget, which is up for discussion later this month, correspondents say.
Friday’s dispute was over an extra 9 billion euros ($12 billion) in “emergency funding” for 2012, to cover budgets for education, infrastructure and research projects.
But Germany, France and other governments questioned the funding, and eight hours of talks produced no agreement.
“Under these conditions, we felt that negotiations which hadn’t really begun by six o’clock in the evening couldn’t reasonably be expected to finish during the night,” said the parliament’s lead negotiator, Alain Lamassoure.
At the European parliament, UK Conservative MEPs clashed with Parliament President Martin Schulz, a German Social Democrat, over the extra 9 billion euros shortfall for 2012.
In 2012 the budget was 129.1 billion euros, a 1.9% increase on 2011.
Among the schemes facing a shortfall this year is the Erasmus student exchange programme.
It has allowed nearly three million young Europeans to study abroad since it was launched 25 years ago.
In an open letter to EU leaders on Friday more than 100 famous Europeans, including film directors and footballers, warned that “thousands could miss out on a potentially life-changing experience”.
Friday’s talks did produce a declaration of political will to provide 670 million euros to earthquake victims in Italy, but no agreement on how to finance it, the European Parliament said.
It said that if no agreement on the 2013 budget could be reached in the next 21 days, the European Commission would look to revise its budget proposal.
The UK’s Financial Secretary to the Treasury, Greg Clark, said the EU needed to practice “fiscal discipline”.
“The UK and a number of other countries were very clear from the outset that the Commission and the European Parliament should not be asking taxpayers for billions of extra euros when the spending in member states is being reduced,” he said.
The UK government, led by the Conservatives, has also objected to a proposed increase in the multi-year budget for 2014-2020, threatening a veto if necessary.
An EU summit aimed at reaching a deal on that budget will be held on 22-23 November.