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Battle of the budgets: US, Europe gripped by political rows

Jasper Juinen | Bloomberg | Getty Images

As the U.S. government shuts down after 11th-hour dealmaking failed to produce a budget, similar political rumblings can be heard across the Atlantic, where European politicians are locked in spending battles of their own.

Non-essential services began closing on Tuesday morning and more than 800,000 U.S. federal employees will be hit with unpaid leave and no guarantee of backpay for the days they were locked out of their offices.

The U.S lawmakers' wrangle bears startling similarities with a stand-off over the 960 billion euro ($1.3 trillion) seven-year spending plans for the 28-country European Union.

On top of the individual spending plans of the 28 member countries, the EU also has a budget which is invested across the region to bolster the region's economy. These projects include: subsidies for essential industries such as agriculture or fishing or on other joint projects such as border control and diplomacy. About 80 percent of the budget is redistributed back to the member states for spending, with the rest going to the Commission, the EU's executive arm.

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All 27 countries have to agree on the spending limit before the budget is approved and was agreed after 24 hours of negotiations at a summit in February.

However, EU lawmakers are now arguing that the EU needs an extra 3.9 billion euros to pay outstanding bills, mainly for regional projects to help disadvantaged parts of Europe create jobs and improve the economy. This is the second tranche of cash demanded by the European Commission, after an original demand for a further 7.3 billion euros earlier this year.

Members of European Parliament (MEPs) passed a resolution earlier this year stating that if the outstanding sums are not paid off, they will not agree to the so-called 960 billion euro the long term EU budget -- the Multiannual Financial Framework (MFF) -- which runs from 2014 to 2020.

If EU governments do not agree to the 3.9 billion euro fee, the 28-nation bloc could see a gridlock similar to that in the U.S.

"This issue is the single biggest stumbling block for getting the vote for the MFF. If there is not a resolution to the budget shortfall I don't think there will be a majority in parliament to support the MFF," British MEP George Lyon told CNBC.

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Britain has already opposed the extra funding and some MEPs feel the money is unjustifiable.

"My issue is the fact that the UK in times of austerity are paying too much within the EU," British MEP Nikki Sinclaire told CNBC.

"I get the same question, 'how comes we are suffering cutbacks when we can give money to the EU?', but that is the question on the lips of the ordinary person."

The 3.9 billion euro shortfall is not the only problem facing budget negotiations. The European Parliament's agricultural committee on Monday endorsed reforms for the Common Agricultural Policy (CAP), subsidies for farmers across the continent, but this still needs to be approved in a full vote in October.

Analysts say that parallels can be drawn between the budget battles in the EU and US, but Europe is in a better position to resolve their political conflicts.

"You have 28 member states that have different interest and sizes, and there you have one country which is a federation composed of 51 states and only two different political forces which cannot get into agreement," said Pawel Tokarski, senior analyst at the Polish Institute of International Affairs.

"We are always angry that something doesn't work in the EU, but the European politicians are reasonable enough to finish this on time. U.S. politicians cannot even get into agreement with only two political parties."

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Budget negotiations already jumped over one tough hurdle in February as EU heads of government negotiated a 3.3 percent cut to the long-term budget from the previous MFF, in hard bargaining that lasted through the night.

MEPs and the European Commission strongly opposed any reduction in the long term budget as they said this would hamper growth in the struggling euro zone. But austerity-hit national governments said they could not justify an increase especially as citizens of their own countries suffered in the economic downturn.

EU heads of governments are set to meet in October to decide whether to approve the 3.9 billion euro funding and MEPs are set to vote on the budget in the same month.

Tokarski said MEPs are unlikely to block the budget because they will not want to look "unconstructive" with European Parliament elections in 2014.

"Any uproar from MEPs is to show people that they exist and want to have their powers extended. They want to show voters they are acting in their interest. But they won't act in a way to bring more crisis to the European Union, there has been enough of that already."

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