At stake is a spending plan for the years 2014-2020 that would total about 1 percent of EU-wide gross domestic product. While that sum is paltry compared to the average 50 percent of GDP that each country spends inside its borders, the political resonance is far larger.

Wealthier countries such as Germany, the U.K., Denmark, Sweden and the Netherlands have banded together to cut what they pay in to the budget, pounding away at the original proposal of 1.033 trillion euros ($1.3 trillion) that came out in mid-2011.

By the time the summit started yesterday, the figure on the table was 973 billion euros. Overnight talks shaved the number to the neighborhood of 950 billion euros and triggered a battle to allocate the cuts among the host of subsidy programs.

Merkel, Luxembourg Prime Minister Jean-Claude Juncker and Austrian Chancellor Werner Faymann floated the prospect of another summit in January or February to nail down a deal. In the absence of an accord by late 2013, the EU would roll over its annual budget.

“We are really not there yet,” Dutch Prime Minister Mark Rutte said. “There are huge differences.”

The euro was little changed, trading at $1.2899 at 1:15 p.m. in Brussels, compared to $1.2880 late yesterday. Greek bonds declined, snapping 10 days of gains, while debt of Portugal, Spain and Ireland slipped. The Euro Stoxx 50 index dropped 0.1 percent to 2,531.59.

New Proposal

Leaders met in shifting configurations with each country determined to pay less in or get more out. EU President Herman Van Rompuy was set to release a new proposal this afternoon and gauge reactions in the evening.

Led by Poland, defenders of EU financing pointed out that spending at the European level goes further than money that stays within national borders, since EU subsidies back international projects like pipelines, bridges and airports.

European Parliament President Martin Schulz countered the wealthier countries' insistence on paying less with the contention that it is cheaper for them to promote European projects, since contracts in Latvia or Slovenia go to companies in places like Germany and Sweden.

“Every euro invested by the EU attracts an average of between 2 and 4 euros in additional investment,” Schulz told the leaders. “The EU budget is not a zero-sum game in which one country wins what another loses. Synergies are generated which benefit the net contributors as well.

At a time of austerity at home, that argument failed to sway leaders like U.K. Prime Minister David Cameron. Cameron zeroed in on the salaries of the EU's more than 50,000 civil servants, and said a discussion of a rebate won by Margaret Thatcher in 1984 is off-limits.

“It isn't the time for moving money from one part of the budget to another,” Cameron said. Cuts are “what's happening at home and that's what needs to happen here.”

Using language out of the postwar era, when food shortages led to the setup of programs to promote beef, cereal and dairy production, French President Francois Hollande defended farm aid as a guarantor of “food security.”

Farm subsidies make up over a third of the budget. French farmers picked up 9.5 billion euros in European subsidies in 2011, the biggest single share. Spain, Greece, Italy, Ireland and Poland also number among the defenders of farm support.

“The reduction is still too large,” Hollande said of a new proposal that would restore 8 billion euros of a proposed 25 billion-euro farm-aid cut. He countered Britain's refund claims, saying “they can't ask for a smaller budget and a larger rebate.”

Bloomberg News

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