BRUSSELS (Reuters) - European Union leaders are expected to reach a deal on the bloc's next seven-year budget at a summit beginning on Thursday, overcoming divisions over spending and Britain's rebate rather than accepting failure.
With nearly 1 trillion euros (861 billion pounds) in spending across 28 countries weighing in the balance, the alternative to a deal would be to throw future EU finances into chaos and delay much-needed investment in new infrastructure, research and technology.
The meeting follows a failed attempt to agree the new spending plans in November, when France, Italy and others balked at demands by Britain and Germany for deep cuts to the European Commission's original blueprint.
While small in percentage terms - the annual EU budget is equivalent to about 1 percent of EU output - it is hugely symbolic, leading to battles along national lines as countries seek to maximise their returns from the common pot.
Britain and Germany are leading a bloc of fiscally conservative states seeking to limit future EU spending, taking the position that if individual member states are tightening budgets, then the European Union should do so too.
Others, mainly beneficiaries of EU largesse, oppose them.
In November, Britain and Germany pushed for cuts of more than 100 billion euros to the proposed 1,045 billion total, a reduction that was too much for others to bear.
Officials preparing for Thursday's meeting believe a deal is within reach that would fix EU spending at about 955 billion euros between 2014-2020, a net reduction from the previous 7-year budget.
European Council President Herman Van Rompuy has already outlined cuts of about 80 billion euros in a compromise circulated at the last summit. That included deep cuts to agriculture spending and to grants for poorer EU regions.
But France and Poland, two of the chief beneficiaries in those areas, rejecting any further cuts beyond those already proposed, a reduction of 15-20 billion euros on spending on research, administration and high-tech infrastructure projects will more than likely be necessary to reach a deal.
That would see EU leaders face uncomfortable questions over why they are opting to cut spending on growth-boosting measures while protecting much-maligned subsidy payments to farmers, given the continent's continued economic malaise.
Yet the alternative could be no deal and continued uncertainty over the EU's future finances, with elections this year in Italy and Germany and European Parliament elections in 2014 likely to delay a decision for at least a year.
"If we don't get a deal this time, the likelihood is that we won't be able to return to this until the second half of 2014 or even 2015," said an EU diplomat speaking on condition of anonymity.
The most likely outcome therefore is a less-than-optimal budget for most countries, but at least one that can get approval.
German Chancellor Angela Merkel has warned that agreement at the summit is far from certain, while French President Francois Hollande has said the elements of a deal are not yet in place.
But Poland's EU Minister Piotr Serafin said on Tuesday that he was confident a deal would be clinched this week, but warned that splits could yet emerge to derail the talks. The European Parliament would still have to approve any deal reached.
"Sentiment is better ahead of this summit and there are expectations that the chances for an agreement are high. However, as long as the ball is in play, anything can happen," he told reporters.
One issue that could throw the talks into doubt is the question of Britain's annual budget rebate, won by former Prime Minister Margaret Thatcher in 1984 and worth more than 3 billion euros in 2011, and related refunds for Germany, Sweden, the Netherlands and Austria.
The summit also comes hot on the heels of Prime Minister David Cameron's promised to renegotiate Britain's membership and put it to a referendum by the end of 2017.
Cameron has refused to discuss any reduction in Britain's rebate, and until now has been in a relatively strong position given that his consent would be needed for any changes.
But his hard-line position risks fuelling resentment among those EU countries forced to foot the bill for Britain's rebate, not least France, as well as those including Italy and Denmark who believe they deserve similar special treatment.
Having chosen to distance Britain from the rest of the bloc in the eyes of many of his EU partners, Cameron may struggle to find allies at the summit if Hollande decides the time is ripe to challenge the cherished rebate.
(Additional reporting by Luke Baker in Brussels and Karolina Slowikowska in Warsaw. Editing by Jeremy Gaunt.)