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EU budget deal on knife edge as deadline looms

Adam Jeffery | CNBC

European finance ministers and parliamentarians are locked in last-ditch talks to hammer out a European Union (EU) budget for 2014 ahead of Wednesday's looming deadline, after a long-running battle over spending limits failed to bring an earlier resolution.

EU member states make a contribution to the overall EU budget, which is then invested across the region to bolster the bloc's economy. Many countries rely on key subsidies in areas such as farming. Poland is the biggest beneficiary from the budget, while Germany is the biggest net contributor.

In 2013, the budget added up to 144 billion euros. For 2014, the EU's 28 member states are proposing 135 billion euros.

Members of European Parliament (MEPs), who are calling for a larger budget than initially proposed by the European Commission, the EU's executive arm, have been in a stand-off with member states who are calling for a cut to spending.

(Read more: Budget tensions flare up in Europe)

MEPs have called for a budget with an additional 1.4 billion euros of payments and 855 million euros commitment to future investment, above the numbers proposed by member states for 2014.

Monday's so- called "conciliation meeting" will look to flesh out a budget for the coming year.

"This negotiation brings to the fore the fault lines in the way the EU is structured. The MEPs are not really held accountable for the money that they spend. That is the difficulty," professor Kate Jenkins, visiting professor at LSE, told CNBC.

Last month, MEPs threw out cuts made to the EU budget in areas such as research, business investment and youth unemployment measures – initiatives they argue are vital to boosting the region's economy.

(Read more: Battle of the budgets: US, Europe gripped by political rows)

MEPs have also negotiated with member states to fund an 11.2 billion euro shortfall in the previous budget.

But national governments, which have been forced to impose austerity measures at home, want to slash the budget for next year as part of the long term budget which covers 2014 to 2020.

The challenges from Parliament to member states are a way for MEPs to flex their muscles, according to analysts.

"European Parliament has quite a large say over how the budget is spent, but little voice in how to raise the money. So from its perspective they have an in-built tendency to want bigger EU spending," Pawel Swidlicki, research analyst at think tank Open Europe, told CNBC.

"The reason why there are a lot of these arguments is because of politics. A billion here or there isn't going to make a huge different relative to the size of the budget, but are viewed with a political significance and Parliament likes to see itself as speaking for the European people."

(Read more: Why Europe is crying over spilled milk)

If European lawmakers manage to flesh out a deal before the Wednesday deadline, the saga will not be over. They still need to finalize the long-term budget framework which covers the 2014-2020 period. This was agreed on earlier in the year but needs to be sealed with a vote in Parliament later this month.

Analysts are warning that the EU could be in the same situation next year, particularly after the European Parliament gets a shake-up in May with elections.

"There is the risk that the EU budget in 2015 will run into the same problems. There are more anti-European politicians expected after the elections and we have no idea what could happen next year," Pawel Tokarski, senior analyst at the Polish Institute of International Affairs said.

This article has changed from an earlier version to clarify the 2013 budget total.

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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