EU leaders approve budget, and everyone wins - at least politically

Europe's leaders, in agreeing to a seven-year, 960 billion euro budget today for the EU, can all claim political victory for their constituents, but the practical implications are modest.

After a vigorous all-nighter of horse-trading, European Union leaders in Brussels overcame what appeared to be unsalvageable differences and on Friday approved a 960 billion euro ($1.3 trillion), seven-year budget for the 27-member block.

But while the new 2014-2020 budget allows the leaders involved to claim victory to their constituents back home, the agreement's significance is mostly political, rather than practical – and could still be subject to a veto from the EU Parliament.

The core divide at the summit was a familiar one, once again pitting the French-led block, backed by Italy and Spain, that wanted to secure funds to spur economic growth, against the British-led block, backed by richer and smaller northern European nations, that demanded more austerity and shrinking of what they see as an giant EU bureaucracy.

The ultimate broker was – not surprisingly – Germany's Angela Merkel, who supported cuts, but prioritized clinching a deal in order to avoid exposing the EU as a dysfunctional block unable to agree on common policies: a scenario that could have undermined its credibility when it comes to economic recovery policies.

Ultimately, all parties agreed on a 45 billion euro ($60 billion) reduction from the current budget cycle, and a symbolic 12 billion euro ($16 billion) less than a November proposal that Britain and its allies rejected, raising worries that a deal was not forthcoming. The cuts will come mostly from energy and transport projects.

"Deal done!" EU President Herman Van Rompuy said in Twitter. "We simply could not ignore the extremely difficult economic realities across Europe, so it had to be a leaner budget," he said in a press conference.

Everyone wins

The apparently irreconcilable positions among Europe's leaders are driven by domestic politics and opposing visions of what the EU should be, rather than actual number-crunching. Those contrasting visions are not easily smoothed over, as the budget must be unanimously approved by country leaders.

In addition, the EU Parliament has veto power and it has threatened to still block approval if the cuts are too big.

But EU President Herman Van Rompuy, who is responsible for proposing compromises to bridge the budget differences, designed a budget that allowed all major participants to claim victory with their constituencies.

British Prime Minister David Cameron, who threatened multiple times to veto the budget in order to placate growing euroskepticism from his coalition partners, imposed the symbolic austerity. France's Francois Holland can claim he blocked an overly thrifty budget to show his citizens that he would defend French interests.

Ultimately, it appears that every nation can claim victory. The UK can claim the EU yielded to its demands; Denmark will get the bigger rebate it asked for; Germany will reaffirm its leadership role, and France will not lose its agriculture subsidies.

Italy and Spain secured little change to their net receipts, though Spain will be the main beneficiary of a 6 billion euro fund aimed at cutting youth unemployment.

Much ado about nothing?

But for all the political significance, the practical implications of the agreement are limited, as the EU budget is not designed to finance national expenditure. Every country has to contribute to the budget, depending on numerous factors, especially the size of its population and economy. But every country also received rebates toward specific policies, the biggest being agricultural subsidies, rural development, and infrastructure projects, that mostly benefit France, Poland, Spain, Italy, and Eastern Europe.

The budget is designed to bridge the economic and development differences in Europe. Rich northern European countries, and France, are net contributors, while southern and eastern European countries are net receivers. The logic is that rich countries ultimately benefit from having a more balanced EU.

No member country actually depends on the EU budget, though. The headline EU budget is equivalent to around 1 percent of the EU's gross domestic product. The net benefit of each is minute, as a share of overall government expenditure. And the 12 billion in additional cuts, equivalent to less than 2 billion annually, are insignificant.