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EU leaders seen shunning growth for subsidies in budget deal

By Charlie Dunmore

BRUSSELS (Reuters) - European Union leaders began two days of high-pressure talks on a long-term budget on Thursday, with efforts to refocus spending on growth likely to be thwarted by demands for farm subsidies.

The negotiations on the 2014-2020 budget, which will assign nearly 1 trillion euros of spending, pit the EU's more fiscally conservative northern countries against those in the south and east that want money for infrastructure and agriculture.

Arriving for the talks, German Chancellor Angela Merkel described the balancing act that EU leaders will have to make.

"We have to be careful with the way we spend, but also show solidarity between net contributors and recipients," she told reporters, referring to those who pay the most towards the budget and those who get the most back from it.

Efforts to strike a deal at the last summit in November failed, and diplomats say that if an agreement isn't reached now, it may not be possible before late 2014 or even 2015.

That is likely to focus minds and in the build-up to the summit consensus was forming around a spending framework worth around 950 billion euros over the seven years - equivalent to around 1 percent of the EU's annual GDP, but lower than the long-term budget that is about to end.

That would reflect the region's gloomy economic backdrop and represent a victory for the likes of Britain, Germany and the Netherlands, which favor fiscal restraint.

But the bulk of the spending, around 40 percent, would still go on agriculture and related farm subsidies.

That is a frustration for many northern European states that want to see a shift towards research and investment to kickstart growth. Those ambitions will have to be put to one side if they are to at least get a deal that reduces spending.

Two of the biggest recipients of farm spending are France and Italy, both of which have hinted they could block the budget unless their appropriations are maintained. The budget needs to be unanimously agreed among all 27 countries.

French President Francois Hollande said ahead of the talks that the push for savings must not be allowed to destabilize Europe's economic recovery, and that he was only willing to negotiate "up to a certain point".

British Prime Minister David Cameron has also said he is willing to block an agreement unless there is a sufficient cut in spending, although he hasn't specified to what level.

"When we were last here in November, the numbers that were put forward were much too high. They need to come down and if they don't come down there won't be a deal," he told reporters after a cost-cutting walk to the summit venue in Brussels.

Smaller countries such as Denmark, the Czech Republic, Slovakia and Austria have also set out firm positions, making it almost inevitable that the negotiations will be drawn out and potentially divisive. Talks could even run into Saturday.

STATUS QUO

While November's talks fell short, there was less of the public squabbling that normally accompanies negotiations.

The chairman of the summit, European Council President Herman Van Rompuy, will be hoping for a similar level of engagement as the negotiations formally begin at 1630 GMT.

In recent weeks, Van Rompuy has been in touch with every EU leader to assess where the contours of an agreement may lie. He will present the 28 heads of state - all EU members and Croatia - with his compromise as they sit down, an effort to prevent the numbers leaking out and scuppering an agreement.

In November, Van Rompuy began talks by reducing the European Commission's original budget proposal by 80 billion euros, cutting the headline figure to 972 billion.

Thursday's talks will resume from that figure, although it will not be a simple question trying to bring the number down by cutting, since the budget also involves delicate negotiations over rebates - amounts countries get reimbursed after they have made contributions.

There is also a difference in how countries interpret the budget figures, with some focusing on commitments - the maximum amount that could be spent on projects or programs - and others concentrating on payments - the sums actually spent.

Payments are always less than commitments, and any deal may ultimately rest in the gap between the two.

If there is to be a deal, the expectation among diplomats is that it will require a reduction in commitments in the region of 15-20 billion euros, pulling Van Rompuy's headline figure down to around 950 billion.

But in terms of payments, the figure could end up closer to 900 billion, an amount that negotiators hope will satisfy Cameron and others adamant about belt-tightening.

The other major fight will be over rebates, with Britain the biggest recipient. Even opponents of its refund - including France, Italy and Spain - have so far only put up token resistance, and there is little chance of it being cut.

France and Italy, which in theory could qualify for a rebate, want payments to them for agriculture and regional aid maintained or boosted if they are to play ball on rebates.

(Additional reporting by Justyna Pawlak, John O'Donnel and Teddy Nykiel; Editing by John Stonestreet)

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