Deal expected early 2013
CNN — A European Union summit aimed at setting the bloc's next seven-year budget broke up without a deal amid divisions over EU spending at a time of wide austerity.
EU leaders had entered a second day of talks in Brussels struggling to overcome divisions over a proposed increase to the European Commission budget for 2014 to 2020 to about to $1.2 trillion (1 trillion euros).
Leaders of the 27 member states that comprise the European Union talked late into the night on Thursday without reaching agreement on a revised budget plan put forward by European Council President Herman Van Rompuy, who chaired the summit.
German Chancellor Angela Merkel said after the summit adjourned that it was important to take the time to agree to a strong and durable plan.
Leaders expect to resume their discussions early next year, and there was some indication they may be able to come together to resolve differences on the size of a budget and questions about fairness.
The European Union's yearly spending amounts to about 1% of the region's annual economic output and current budget wrangling comes as the continent struggles with serious economic challenges that have reverberated globally.
Disparities have persisted within the European Union between economically strong members, such as Germany, which has fronted European bailout money, and economically weaker ones, like Greece, which are experiencing strict austerity and unemployment.
Van Rompuy told reporters his proposal had prioritized growth, jobs and innovation -- and that it was 80 billion euros lower than the initial budget proposed by the European Commission, making it a real cut compared to the 2007-2013 period.
"This is a first in EU budget talks," he said
Van Rompuy also pointed out such negotiations are complex and said it was worth taking the time to agree a solid deal.
"This is the budget for the rest of the decade. And the next seven years will be crucial to put Europe back on the path of recovery and growth. So we must get it right," he said.
Some countries believe the EU budget should be frozen or reduced since they have to make heavy cuts to their own national spending plans. Other countries, particularly those that draw more EU funding than they contribute, are opposed to cuts or a freeze.
Most funding comes from member-state contributions. Germany is the largest contributor, providing about 20% of its total budget. Other net contributors include Britain, France, the Netherlands, Denmark and Sweden.
"Our position is very simple. We cannot increase spending at the EU when we are cutting it at home. We argued for a cut or, at the very least, a freeze in spending," British Prime Minister David Cameron said.
He said that Britain had approached the talks constructively, but it and other net contributors were not prepared to make a deal "at any cost."
"Frankly, the deal on the table from the president of the European Council was just not good enough," Cameron said.
However, Cameron added that there was progress in establishing the positions of various nations and that a deal was still "doable" in the future.
Ahead of the summit, Cameron had threatened to exercise Britain's veto, if necessary, to protect its interests.
The European Council said in a statement that the talks had shown "a sufficient degree of potential convergence to make an agreement possible in the beginning of next year.
"We should be able to bridge existing divergences of views. A European budget is important for the cohesion of the Union and for jobs and growth in all our countries."
The biggest chunk of the proposed budget is set aside for cohesion funding, or spending that seeks to narrow the economic gap between different EU states. Another large slice goes to the Common Agricultural Policy, or aid for farmers.
The CAP has historically been a bone of contention among EU member states, with those that don't have a large agrarian sector getting less out of it than those that do. France is among those that oppose cuts to CAP funds.
Many countries in central or eastern Europe also oppose cuts to cohesion funding, which helps pay for big infrastructure projects such as new roads or public transportation links.
The budget also earmarks substantial funds for competitiveness and growth, a major concern as many EU states face record levels of unemployment. Efforts to try to boost growth and job creation are a high priority, but cost a lot of money.
Administration costs and international development aid outside the EU also make up part of the total.