European Parliament Rejects EU Budget Deal

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The European Parliament voted on Wednesday to reject a deal reached by EU leaders on the bloc's next seven-year budget unless significant changes are made to the 960 billion euro ($1.25 trillion) plan.

The Strasbourg vote ended any hope of rapid agreement on the 2014-2020 budget - which must be approved jointly by the parliament and EU governments - instead confirming the need for tricky negotiations that might delay the new spending cycle.

EU leaders agreed at a summit last month to the first ever real-terms cut in future spending, as part of a deal designed to reflect the cuts made by governments struggling to overcome the 27-member bloc's debt crisis.

"The European Parliament cannot accept the proposal from the member states without the fulfillment of certain essential conditions," the assembly's president, German Socialist Martin Schulz, said in a statement after the vote.

The parliament did not challenge the overall spending limit agreed by governments, but did insist on a legal review of the budget deal after EU elections in 2014, which could reverse the cuts if Europe's economy were to improve in the meantime.

Members of the assembly also called for "maximum flexibility" in shifting unspent funds from one priority to another, and from one year to the next - a demand likely to be rejected out of hand by several EU members, including Britain.

Because the large amounts of unspent money from the budget are currently returned to national coffers, such a move could mean an increase in actual spending compared with now, despite the headline limit being some 3 percent lower than for 2007-13.

One demand by members of the European Parliament that could delay an agreement by months is for governments to fill an expected budget shortfall for 2013, to ensure that the deficit is not carried over into the new spending cycle.

The parliament and the European Commission have estimated the shortfall at 16 billion euros, though some governments say the figure is closer to 10 or 11 billion, and the Commission is unlikely to present a formal budget amendment until near the end of this year.

Unrealistic Demands

Wednesday's resolution, which was backed overwhelmingly by members of the assembly, also called for more money for growth-oriented areas such as innovation, research and education.

That appeared to be at odds with the summit deal, which would still see about three-quarters of EU spending channeled to farm subsidies and major public infrastructure projects in poorer member states.

Schulz said in an interview with Reuters last week that the parliament was ready to insist on changes to the spending priorities and limits before giving its consent.

But one senior euro zone official said it was unrealistic for the parliament to try to renegotiate the spending limits agreed by governments, adding that the review clause was the most likely area where governments would give ground.

"At the end of the day I think we can accommodate what the parliament wanted on the mid-term review. What we can do on the flexibility, I am not sure," said the source, who spoke on condition of anonymity.

At about 1 percent of gross national income, the EU budget is small compared with total annual public spending of almost 50 percent of GDP. But with about 94 percent of the total allocated to spending programs in EU members, the Commission says the EU budget is more effective at stimulating growth than national spending is, since much of that goes on welfare, pensions and healthcare.

If governments and the parliament fail to reach a deal, the EU would be without a spending framework from the start of next year, forcing it into a system of provisional annual budgets and throwing its long-term spending plans into disarray.