EU summit breaks up without agreement over budget

Herman Van Rompuy postpones negotiations after member states fail to resolve differences

European leaders face a grinding round of negotiations over the next three months to agree a new seven-year budget after the EU summit collapsed in Brussels amid a clash between rich and poor nations.

Herman Van Rompuy, the president of the European council, threw in the towel after an alliance of the EU's richest countries, led by Britain and Germany, declined to accept a أ¢â€?آ¬971bn (أ‚آ£786bn) budget for 2014-2020.

The decision to abandon the talks, which will lead to another emergency budget summit early in the New Year, will transform the position of David Cameron who arrived in Brussels amid criticism that he is wholly isolated in the EU.

The prime minister joined forces with Angela Merkel, the German chancellor, Mark Rutte, the Dutch prime minister, and Fredrik Reinfeldt, the Swedish prime minister, to say the proposed budget was too large.

Merkel was understood to have been furious with Van Rompuy and Josأƒآ© Manuel Barroso, the European Commission president, for an attempt to try and isolate Britain.

Speaking after the summit broke up the prime minister said: "It has been very heartening that, as well as myself arguing for significant reductions and being on the side of taxpayers the Swedes and the Dutch have made very strong representations too.

"I think attempts there might have been to try and أ¢â‚¬â€œ 'well, let's just put the British in a box over there and try and do a deal without them' أ¢â‚¬â€œ well that didn't work.

"There were other countries I have worked with together were making sure that we were all standing up together for taxpayers and to make sure we have a fair outcome to this budget when we are cutting our budgets at home."

Van Rompuy had informally proposed lowering his أ¢â€?آ¬971bn budget to أ¢â€?آ¬940bn according to the "payment ceiling" which covers the money the EU would distribute rather than the higher "commitment ceiling". This is described by Britain as a credit card limit.

The prime minister argued for a further cut of أ¢â€?آ¬50bn in the proposed أ¢â€?آ¬940bn budget, taking it closer to the original British demand of a أ¢â€?آ¬885.6bn budget. The Dutch demanded an even bigger cut of أ¢â€?آ¬100bn. Merkel was keen to see further cuts on the Van Rompuy proposal, though she believed that the أ¢â€?آ¬50bn suggested by Britain went too far.

The summit highlighted deep splits between rich "contributor" nations and poorer "recipient" nations.

France was the key swing country. It is a net contributor but Franأƒآ§ois Hollande was determined to protect billions of euros in agricultural payments. Van Rompuy proposed increasing the Common Agricultural Policy (CAP) budget by أ¢â€?آ¬8bn overnight. This was unacceptable to the Netherlands.

Cameron radiated satisfaction with the deadlock, but he was helped enormously and surprisingly by Merkel who blocked all attempts to isolate the veto-wielding prime minister and so prevent a much worse bust-up.

British and other senior officials said that Merkel, who saw her role as the central mediator in balancing the conflicting interests and crafting a compromise, came down strongly on Cameron's side in pushing for greater spending cuts, and supported awarding him a symbolic victory by cutting the costs of EU administration and civil service.

The Merkel backing for Cameron brought French complaints of the surprise emergence of a "Berlin-London" axis. But if this appeared to have some foundation, the alliance was directed not against Paris but at Brussels.

Participants confirmed that Merkel concluded that Van Rompuy and Barroso, who were running the summit, were pursuing a deliberate strategy of trying to quarantine Britain in the budget battle and produce a 26 against one situation in which Cameron would have been forced to play his veto.

She told the summit yesterday afternoon that if there was going to be an agreement "it has to be at 27."

The charge against the Van Rompuy-Barroso duo was that they were ignoring Cameron, acting as if he was not even in the room, engineering a situation where the British felt unwanted.

A Cameron veto would have torpedoed the seven-year spending programme, forcing EU leaders into messy negotiations every year over a new annual budget. Merkel was desperate to avoid that scenario.

"She's been very supportive," said a British official.

"People are unhappy with the way this summit was organised."

There may, however, be a price to pay for the help. Next month's summit is supposed to reach agreement on making the European Central Bank in Frankfurt the new banking supervisor for the eurozone, a policy to which Britain has serious objections and over which it is seeking concessions from the 17 countries of the eurozone led by Germany.

Cameron may find that Berlin will be less accommodating on British demands on the budget when they return to grapple with the issue in the new year unless he shows more flexibility on the banking union in three weeks time.

EU leaders will be keen to reach an agreement on the 2014-2020 budget because it will revert to more expensive annual budgets if no deal is reached.