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.
European Union leaders have agreed on a roadmap for eurozone integration beyond the deal on centralized banking supervision, German Chancellor Angela Merkel said.
Specific dates have not yet been agreed for the phases of integration.
But the EU summit chairman, Herman Van Rompuy, said a deal should be reached next year on a joint resolution scheme for winding up failed banks.
Herman Van Rompuy’s far-reaching roadmap was the main topic of the two-day Brussels summit.
Speaking after the summit talks, French President Francois Hollande said: “There is no doubt today about the integrity of the eurozone – Europe cannot now be taken by surprise.”
But beyond the banking reforms, he said, Europe must address the problems of unemployment and feeble growth.
The deal to make the European Central Bank (ECB) the chief regulator should pave the way for direct recapitalization of struggling eurozone banks by the main bailout fund, the 500 billion-euro ($654 billion) European Stability Mechanism (ESM).
Spain is especially anxious to get that help for its debt-laden banks.
Direct recapitalization would help break the “vicious circle” in which bank debts have put a crippling burden on national budgets and led to massive taxpayer-funded bailouts.
However, Germany insists that the ESM should not be used to write off the existing “legacy” debts that have burdened Spain, Greece and the Republic of Ireland. Any ESM loans will be accompanied by tough rules on budget discipline.
At a late-night news conference, Angela Merkel said “we agreed a roadmap for the future development of the currency union and talked about different aspects of this that are important.
“Above all, it was important to define when we do what.”
Herman Van Rompuy aims to present detailed plans for deeper economic integration in time for the June 2013 EU summit. They would include “mutually agreed contracts for competitiveness and growth between governments and EU institutions”.
Much closer EU scrutiny of national budgets is envisaged, including penalties if governments rack up unsustainable debts.
Contractual agreements on things such as taxation and labor market policy are likely to require changes to the EU treaties – so these are likely to be put off until after the European elections in mid-2014.
The UK, along with Denmark, has a formal opt-out from joining the euro, and will not be part of the new banking union. But the UK’s banking pre-eminence in Europe means it is taking an intense interest in the negotiations.
New rules on prudent banking are seen as vital to bolster the euro, as bank failures triggered the financial crash.
Under the deal expected to take effect in March 2014, banks with more than 30 billion euros ($39 billion) in assets will be placed under ECB oversight.
The ECB would also be able to intervene with smaller lenders and borrowers at the first sign of trouble.
Speaking after the summit, Francois Hollande said Europe had been unprepared for the financial crisis but now had a “crisis management authority” which allowed for the “return of confidence and growth”.
The agreement on a financial transactions tax was, he told reporters, a good example of how countries could be brought into eurozone integration through closer co-operation, signing up to agreements at a later stage.
A non-eurozone country, Lithuania, joined the group adopting a financial transaction tax.
Eurozone integration – next steps
ECB takes charge of bank supervision no later than March 2014
Joint scheme to wind down broken banks, planned for launch in mid-2014
Joint deposit guarantee scheme, to prevent bank runs
Main bailout fund – ESM – gets power to recapitalize banks, under strict conditions
More centralized economic governance, including enforceable “contracts” between governments and EU Commission
Tighter co-ordination of national budget targets
Eurozone banking deal
ECB to act as chief supervisor of eurozone banks and lenders
ECB to co-operate closely with national supervisory authorities
Direct oversight of banks with assets greater than 30 billion euros ($39 billion) or with 20% of national GDP
National supervisors to remain in charge of other tasks
Non-eurozone countries that wish to take part can make close co-operation arrangements