EU Presidency Skeptical on Budget Deal

"I expect that a deal on the financial perspectives that we had planned on for mid-June has now become rather more difficult," Juncker told Deutsche Welle in an interview. "It would have been hard enough with out the German elections, but now they'll be even tougher."

Britain's refusal to surrender its long-cherished budget rebate is also a key sticking point, Luxembourg Prime Minister Jean-Claude Juncker, whose country holds the EU reins until July 1, said.

The budget discussion for the 2007-2013 period has been simmering for months. It pits EU's six biggest contributor countries -- including Britain, France and Germany -- against smaller states and the bloc's executive commission in Brussels.

The European Commission is angling for a budget of 1.24 percent of gross national income, while the six paymaster states want it frozen at 1 percent. The EU presidency has proposed a compromise of around 1.09 percent.

German election trouble

Luxembourg has consistently said it wanted an accord at a June 16-17 summit. But the political turmoil in Germany following the ruling Social Democrats' defeat Sunday in a key state election is threatening to make Berlin's stance less flexible.

The negotiations also risk being snagged on Britain's refusal to surrender its multi-billion-euro rebate on budget contributions that former Prime Minister Margaret Thatcher won in 1984. Juncker told the Belgian daily Le Soir on Wednesday it would be "serious" if the summit does not reach agreement, notably because no accord can be expected under the next, British presidency, because of London's refusal to budge over its rebate.

The task would then fall to Austria, which takes over the EU reins next January, and "they would have no freedom for maneuver, they will be under the gun to finalize a package which should be done calmly," he said. "The British are aware that without a change of position on their check, no solution is possible."

London goes on the offensive

But Foreign Secretary Jack Straw defended Britain's rebate on Tuesday and dismissed as "unacceptable" a European Commission demand for a one-trillion-euro ($1.3-trillion) annual budget.

"The proposals of the European Commission to increase spending from 1.0 percent to 1.24 percent (of Europe's gross domestic product), actually amount to an increase of spending of over 200 billion euros, which is more than the total gross national income of Poland," he said. "It is a 35-percent increase and it is unacceptable. We have got to focus on that, because if we get the spending down to acceptable levels, then the money any country has to pay will be less."

Britain was awarded its rebate in 1984 because of its disproportionately large net contribution to the EU budget, under fierce pressure from Thatcher. Straw has warned that Britain is ready to go as far as using its power of veto on EU spending issues to keep the rebate, which is

currently worth 3.2 billion pounds (4.65 billion euros, $5.87 billion).

The European Commission and smaller EU member states argue that it is time for Britain -- now one of Europe's most prosperous nations -- to give up the rebate, especially in light of the bloc's enlargement into poorer Eastern Europe. London counters the bloc should cut its vast spending on outdated agricultural subsidies, the largest beneficiary of which is France.