10 key questions for Britain and Europe at the Brussels summit

David Cameron Profile

The EU sets a budget for seven-year periods and the one for 2014-20 has to be decided soon.

What is the EU budget row about?

EU leaders will attempt to thrash out a deal at this week's summit in Brussels. But agreement will be even more difficult than normal because of the state of the EU economy. Britain is leading those "net contributor'' nations that say hard times mean the EU must cut back just as national governments have had to. But the poor "net recipient'' countries which rely on EU spending say it is the EU's job to help boost growth when times are hard and argue that the success of the euro depends on spending, in order to spread wealth around more equally.

Is the EU budget out of control?

It depends who you talk to. Eurosceptics would say "yes'' because they do not agree with Europe's aim and objectives, but supporters of the EU project argue that it is far too low. The reality is that the EU budget remains tiny compared with those of national governments, and has grown less than many of them in recent years. In 2011 it was €140bn (£112bn) compared with the €6,300bn total of national budgets across the 27 member states. So national budgets are, cumulatively, almost 50 times the EU budget. The EU budget represents around 1% of GDP in the 27 member states.

What is David Cameron's problem at the summit?

The prime minister said, originally, that he wanted a real-terms freeze – meaning the budget could not rise by more than inflation. But earlier this month Tory eurosceptics were joined by Labour in supporting a real terms reduction. By contrast the European commission's opening bid was for a 5% rise, while the European parliament wants a 6% increase. Cameron's negotiating position was hard enough before his Commons defeat. But now it is close to impossible. His chances of achieving a real-terms reduction are zero. But if he is to prevent meltdown in his predominantly anti-EU Tory party, that is what he needs to come home with.

Can Cameron wield the veto?

He can, because a budget deal needs to be agreed by every member state. But it is not the easy, heroic option that many eurosceptics believe it is. Cameron dislikes much about the EU but he does not want the UK to leave it. A veto on the seven-year budget would be seen as a declaration of war by other member states. Questions about whether the UK should remain a member would be raised in Brussels and other capitals. What is more, by blocking the seven-year deal, Cameron would force the EU to set annual budgets instead, which they would do by qualified majority voting, meaning no veto for the UK. Annual budgets would almost certainly be higher than under a seven-year deal signed up to by all member states.

How does all this relate to the euro crisis?

The money being argued over this week has nothing directly to do with the euro. It is mainly money for agriculture and economic development across the EU. But if the EU cannot agree a budget at a time when the euro remains in peril and anti-austerity marches continue across much of Europe, then the financial markets will hardly see it as a positive sign of Europe's unity of purpose and ability to resolve its problems. And if new instability hits the euro as a result, the fact that it had been caused by UK actions would add to resentment against London.

What is Labour up to?

Labour under Ed Miliband and Ed Balls is still pro-European – at least in comparison to the Tories – but less so than it was under Tony Blair. It is conscious of rising euro-scepticism in the UK and is keen to be seen as sensitive to it, while distancing itself from any move that might hasten a UK exit. It is a difficult, tortuous balance. Politically Labour wants to paint Cameron as another John Major who is "weak at home and weak abroad". Controversially it backed Tory rebels' calls for a real-terms cut in the EU budget, arguing that the pro-European cause was harmed by unquestioning loyalty, in defiance of economic pressures. The big question will be how Labour votes in the Commons if and when Cameron fails to bring home an EU budget cut. Sources refuse to say it will vote down the deal.

Can Cameron demand the repatriation of powers as the price for agreeing a budget deal?

The prime minister has said he wants to win back powers from the European Union and it may be he will try to sell this future possibility hard to his eurosceptics if he fails to get a budget deal they think is acceptable. Formally, though, EU leaders will not want to get into talking about the UK's demands to repatriate powers over police and justice or any other policy area this week. Cameron also faces huge problems inside the coalition with Nick Clegg and his Lib Dems being firmly opposed to any attempt by the government to repatriate powers on a large scale. Clegg has said it amounts to "a false promise wrapped in a union jack" and will resist at every turn.

Are we heading for an in/out referendum that could take us out of the EU?

Political leaders are worried about granting a referendum on the UK's membership of the EU for fear that the people might indeed vote to leave. But pressure is growing because euroscepticism is hardening in this country. Our poll today shows a majority of the public, including almost half of Labour supporters and well over a third of Liberal Democrats, would vote to leave if given the chance. Cameron suggests that a referendum will be the best way forward when the shape of the new EU is known, and a new treaty is agreed. But that could be years away. Both he and Ed Miliband will be under intense pressure to promise one much earlier, in their next election manifestos.

Could Britain punch its weight outside the EU?

Eurosceptics say there is no reason why not. They cite the likes of Switzerland and Norway as examples of countries that have done perfectly well outside the EU. But the UK has long been a keen supporter of the single market and the vast majority of UK businesses would not want to see this country outside and unable to take part in setting its rules. Internationally, the UK would be locked out of EU foreign policy debates on key security issues. Foreign secretary William Hague, while a eurosceptic, now speaks enthusiastically about the EU's role in foreign affairs, making the point that 27 nations acting together can pack a punch far more powerful than when they act alone. The Foreign Office fears any exit from the EU would damage the "special relationship" with Washington.

Can the tide of UK euroscepticism be halted or reversed?

Interestingly it is not just opponents of the EU who are now calling for a referendum on the UK's membership. Many pro-Europeans in the Labour party, including Peter Mandelson and Jon Cruddas, are in favour. Cruddas, Labour's policy chief, has yet to convince Ed Miliband but he believes that a referendum is the way to clear the air, clarify views about the EU in this country, and put a stop to the endless arguments. Cruddas, although an opponent of the euro, believes that Labour can form a strong pro-EU alliance alongside the business community to argue the business case for Europe in a referendum. With business alongside Labour, the public will be won round he says. For Labour, a referendum would also have the benefit of splitting the Tories, as Cameron would support staying in while much of party would vote to leave.

Powered by Guardian.co.ukThis article was written by Toby Helm, for The Observer on Saturday 17th November 2012 22.51 Europe/London

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