No deal, but no drama

The Economist: AFTER two days of bargaining and grandstanding, Europe's leaders could not agree on their next seven-year budget on November 23rd. It is a pity, though not unexpected, that there was no deal. The EU could do with a show of decisiveness for once. What is important, though, is all the other things that did not happen: there was no veto, no isolation of Britain, no bitter falling out. In short, no drama.

The 27 leaders of EU countries (plus Croatia, which joins the club next year) decided to come back to Brussels early next year to try again. That is probably good enough, as they have some more pressing business to deal with in the coming weeks—notably trying to stabilise the euro zone.

The EU budget is a small transfer mechanism (representing about 1% of the EU's GDP, or one-fiftieth of all public spending). Negotiations are traditionally a zero-sum contest between net contributors and net beneficiaries.

To illustrate the point, our chart gives a taste of who does well and poorly out of the budget process. It also shows the effect of the various rebates granted to Britain, the Netherlands, Germany, Sweden and Austria.

In general the richer countries pay more, while poorer countries receive more. There are some outliers. By comparison with Portugal and Slovenia, Greece does particularly well from the EU budget. By contrast, Luxembourg does not appear to pay a share commensurate with its wealth.

Not all will agree with these figures, which are based on calculations by the European Commission. They exclude some sources of revenue (such as customs levies, which are considered to be the EU's “traditional own resources”) as well as administrative spending (which favours Belgium and Luxembourg). Those interested in how the money flows will find valuable information in the commission's 2011 financial report.

Britain has pushed hardest for a cut, or at most a freeze, in EU spending for the 2014-2020 period in real terms. The European Commission's opening bid was 5.5% higher in real terms over the 2007-2013 period.

“We cannot say that we've got a deal, but we have stopped a deal that was unacceptable,” declared David Cameron, Britain's prime minister. He did not directly criticise countries fighting for a bigger budget – France wants more agricultural spending and Poland wants more cohesion funds for poorer regions of Europe. Instead he attacked the European “institutions” for always wanting to spend more money. Above all, he made no concession over the British rebate won by Margaret Thatcher in 1984 (and partly conceded by Tony Blair in 2005).

By the standards of previous fights over money, indeed of recent euro-zone summits, this is tame stuff. Alexander Stubb, Finland's minister for European affairs, said on Twitter: "One of the most amicable EU summits I have experienced, even if we did not get agreement. Funny, really."

For that cordiality, much of the credit can go to Angela Merkel, the German chancellor. Despite all the talk of devising a way of sidestepping Britain, which had threatened to veto the budget, Mrs Merkel was keen not to isolate Mr Cameron, thereby avoiding a bust-up that could spin out of control. “I want to forge an agreement with all 27 countries, and not exclude any one in any way,” she said.

In part this is out of self-interest. Germany and several other net contributors need an agreement to secure their own rebates on the budget.

If there is no agreement by the end of next year, EU spending can be rolled over yearly by a qualified-majority (ie, Britain alone could not block it). But the refunds for Germany, the Netherlands, Sweden and Austria (sometimes known as the “rebate on the British rebate”) must for the most part be agreed to by unanimity.

But Mrs Merkel also has a broader European objective. First of all, she does not want to see Britain leave the EU, or fall out of it by political miscalculation. Secondly, a bad-tempered confrontation with Britain over the budget could easily carry over into next month's summit at which leaders are meant to agree to the legal framework for the euro zone's banking union.

This is perhaps the most important step the euro zone is taking towards creating a more robust currency union, in which weak banks and weak sovereigns can no longer bring each other down so easily.

The idea is to begin with the creation of a single euro-zone bank supervisor (centred on the European Central Bank). This should then pave the way for the possibility of the euro zone's rescue fund, the European Stability Mechanism, being used to recapitalise troubled banks directly instead of placing the burden entirely on already-vulnerable governments.

To achieve this, the euro zone needs the consent of Britain. Mr Cameron, in turn, wants assurances that Britain will not be isolated in the European Banking Authority, which sets common rules and mediates among bank regulators, if the 17 members of the euro zone start acting as one. In short, a budget confrontation now risked an even bigger one over banking union, which could push Britain and its European partners further down the path to divorce .

Before that, the euro zone must finalise the third bail-out of Greece at a meeting of finance ministers on November 26th (following a teleconference on November 24th) or risk seeing Greece default for lack of money. Mrs Merkel said a deal was at hand, but again rejected pressure from the IMF to write off some of Greece's debt to euro-zone partners to make it more sustainable. Athens says the sides are down to haggling over the last €10 billion euros.

Separately, Cyprus announced that it had reached agreement on a euro-zone bailout - the fourth country to need rescuing - pending details of a study of the recapitalisation needs of its banks, which were crippled by the Greek crisis.

Confronted with such pressing issues, the question of the EU budget could wait. Herman Van Rompuy, president of the European Council, who chairs the summit, at first pared back the European Commission's budget request to please Britain and other hawks (see chart, right).

Then, in a second compromise proposal, he shuffled the amounts within the headings. He allocated a bit more more for direct farm subsidies and for cohesion to ease the objections of France and Poland.

Either as an affront to fiscal hawks, or because he wants to hold back a final concession, Mr Van Rompuy made no change to the budget for the EU's administration. There are only a few billion euros to be found in this heading, but it is symbolically important at a time when governments are squeezing their own civil servants.

The victims of all this “tinkering”, as Mr Cameron put it, are “modern” areas of spending that Britain itself once favoured as promoting more growth—research and development, as well as cross-border infrastructure.

The EU, it seems, can either have less spending or better spending, but not both. That is probably sadder than the fact that leaders have postponed their budget fight.