BRUSSELS (Reuters) - EU negotiators remain hopeful of a deal later this month on the bloc's next long-term budget, despite differences of opinion between Germany, Britain and other major financial contributors.
Talks on Wednesday between German Chancellor Angela Merkel and Prime Minister David Cameron failed to produce a compromise on the budget plan, worth a proposed 1 trillion euros (801.2 billion pounds) between 2014-2020.
While both countries want to cut the spending blueprint proposed by the European Commission, London is pushing for a deeper reduction than Berlin by insisting on a real terms budget freeze.
"There is still an important distance between Britain and Germany on the overall figure, but I don't rule out some convergence before the summit," said one EU diplomat involved in the negotiations, who spoke on condition of anonymity.
Hopes of a deal at the November summit - which could drag on for three days - appeared to recede last week when Cameron was defeated by opposition lawmakers and rebels in hos own party who voted for a real terms cut in EU spending.
The government had already threatened to veto any summit deal that went against Britain's national interests, and the parliamentary setback appeared to further restrict Cameron's room for manoeuvre at the talks.
"People will now know that we are serious when we talk about the need for a spending freeze," one British government official said.
While many governments share Britain's desire to limit their contributions to Europe, Cameron could find himself isolated at the summit if he is unwilling to look for a compromise.
"Everyone wants Britain to be a part of the EU, but the question is whether we will pay any price to keep them with us, which is something Cameron needs to consider," said another EU diplomat who also insisted on anonymity.
"Does he have the political capital necessary to keep saying no, no to the budget, no to banking union?"
One element that experts say could play a decisive role in winning Britain over is a deal to further limit EU administrative expenditure.
While only a fraction of the total budget is spent on officials' salaries and pensions, the perception that EU civil servants are immune to the deep public sector cuts imposed by national governments has fuelled resentment.
At the last EU summit in October, Cameron said that 16 percent of the Commission's 30,000 employees earned over 100,000 euros per year.
"What we've done in Britain, we have cracked down on central administration, the costs of Whitehall, on the numbers of people employed to release money for things that are more important, and we need to see in the budget proposals that sort of rigorous approach," he told reporters.
But governments face opposition from the Commission - which says the 5 percent reduction in EU staff it proposed for the next budget period is sufficient - and civil servants themselves.
Thousands of EU officials went on strike on Thursday to protest against the prospect of deeper pay and staffing cuts as part of any government deal on the budget.
Sylvie Jacobs, the head of the largest union of EU officials the Union Syndicale Federale, said the strikers accepted that the cuts already proposed were necessary, but that governments should not go further in search of extra savings.
"What we contest in the Commission proposal is not to make economies as such, because we can't live in a bubble, we know what's going on around us in Europe, so we're quite aware that everybody has to comply to some extent to an austerity policy," she told Reuters.
"But some member states have proposed cuts which are so drastic that we feel there will no longer be a Europe left, or at least not the Europe that we came to work for."
Asked how their strike would be viewed in Greece, where the parliament approved a fresh round of austerity cuts on Wednesday, one EU official protesting outside the Commission headquarters in Brussels said: "Just because they have problems, it doesn't mean that we can't fight for our rights."
(Additional reporting by Robin Emmott; editing by Ron Askew)