Germany is planning to warn Britain that it will seek to cancel next month's European budget summit if David Cameron, the prime minister, insists that he will veto any deal other than a total freeze on spending.
Angela Merkel, Germany's chancellor, does not believe there is any point in holding the budget summit to agree on a seven-year framework for EU spending if Britain intends to veto any deal, say people close to the negotiations.
Ms Merkel is trying hard to persuade Mr Cameron to back a German compromise that would cap EU spending at 1 per cent of European gross domestic product. The European Commission has proposed a figure of more than €1 tn for the years 2014 to 2020, or nearly 1.1 per cent of European GDP.
After last week's summit, Mr Cameron bluntly stated his willingness to veto any deal involving increases in EU spending. "If there isn't a deal that's good for Britain, there won't be a deal," he said. "We can't have European spending go up and up and up when we are having to make difficult decisions in so many different areas."
His most senior officials are delivering a similarly uncompromising message behind the scenes, much to the dismay of other EU diplomats. One said at a recent gathering to discuss the budget that Britain's ambassador to Brussels was by far the most pessimistic about a November deal, saying it would be an achievement to "open discussions" genuinely, and that even this modest outcome was far from assured.
Although EU officials realize Mr Cameron will be treated as a hero at home for blocking the budget, they are strongly warning Britain that the diplomatic fallout from any veto could be seriously damaging, not least because it will come less than a month before a December summit on building a banking union.
Ms Merkel raised the subject last Monday in a telephone call with Mr Cameron, and it was discussed in Berlin during the week by Michael Link and David Lidington, the European affairs ministers from the two countries.
"We are trying to show the UK that they have in us an honest partner," one official said.
In particular, Ms Merkel has sought to persuade Mr Cameron that she will stick to the letter of the German compromise, and not use it as a starting point for negotiations to raise the budget ceiling further. But the officials say that she is not very optimistic about the chance of success.
She is planning to meet Mr Cameron in London in early November, when the budget negotiations will be the top item on the agenda. That is when she is expected to tell him there is no point in holding a summit if he insists on a veto.
Ms Merkel is keen to get agreement at the summit, scheduled for November 22 and 23, to clear the way for the next big round of eurozone crisis negotiations in December. She sees confrontation over the budget as a dangerous distraction from the main EU priority.
The German compromise proposal has the backing of at least six other EU member states – the Netherlands, Sweden, Denmark, Austria, Finland and the Czech Republic, according to Berlin officials. France and Italy are also officially members of the group, although their support is less certain.
Some 15 other countries, known as the "cohesion group", back the European Commission's proposals for a bigger budget to provide more money for spending to boost competitiveness and economic development in the poorer member states.