By Tony Connelly, Europe Editor, Brussels

This week 27 EU leaders will gather in Brussels to thrash out the next seven-year budget round.

While Europe needs to demonstrate to the world it can function in the face of a crisis, a number of pretty unpleasant things may well collide: a possible UK veto, hours of acrimony over money, rich countries pitted against poor ones, reputational damage to the EU on top of the Greek crisis, and the undermining of Ireland’s presidency.

Although there have been faint signs of optimism that a deal can be struck, differences may be irreconcilable.

“It’s very easy to envisage scenarios where a deal can’t be done,” says a senior EU diplomat.

So what is the summit about?

The EU’s budget runs over a seven-year period. The next round runs from 2014 to 2020; while the very last-minute deadline for agreement could be the end of 2013, common sense and legal precedent demands that it be done by the end of this year.

The budget is really a set of spending commitments and the headline figures that are agreed in what is called the Multi-Annual Financial Framework (MFF) are spending ceilings.

In other words, the details of the budget deal would still have to be worked out during the Irish presidency between the member states and the European Parliament which, under the Lisbon Treaty, has a much greater say in the EU budget.

More precisely, 68 pieces of legislation will have to be hammered out by Irish ministers in Brussels and Strasbourg in order to provide the legal underpinning of each of the spending sectors.

So, if no deal is done this week, then that can’t happen and the Irish presidency will be thrown into disarray. Even though the annual budget would simply “roll-over” from 2013 to 2014 and so on, it would have no legal basis.

How does the process work?

At the beginning of each seven-year budget round the European Commission sets out its budget proposal. On this occasion it was for a budget of €1.035 trillion, a 5pc increase on the previous one.

That was immediately attacked by the UK and others as too high, at a time when governments were cutting budgets at home. David Cameron, the UK prime minister, has threatened to veto the budget if it doesn’t represent at the very least a freeze in real terms on the previous framework.

Because Tory eurosceptics have threatened to revolt if he doesn’t come back from Brussels with a decrease, Cameron’s room for manoeuvre is limited. Since the UK’s contributions to the EU kitty require a Commons vote, he will need real and tangible concessions to quell his backbenchers.

In the run up to the summit the Cyprus Presidency proposed a cut of €50bn. Then the President of the European Council Herman Van Rompuy put forward a cut of €75bn. Britain, Germany, the Netherlands, Sweden and Finland say the cuts should be in the order of €200bn.

As always, for Ireland the big challenge will be to defend the Common Agriculture Policy (CAP), but officials have accepted that in the current climate it is under serious threat.

The original proposal by the Commission already envisaged more money for Research and Development, education and transport and less on farm supports, with the CAP declining as an overall percentage of the EU budget from 39.4% to 36.2%.

Under Van Rompuy’s latest offer the CAP budget will be cut by €25.5 billion. The Irish government is not spelling out yet how much that would reduce direct farm payments to Irish farmers, or by how much the equally important rural development aid would fall, but the IFA claims the current proposals would cut €1 billion euro from the Irish agri-food sector over the seven year period.

Ireland currently gets €1.2 billion a year for agriculture, both in direct farm payments and in rural development money. Over the last seven year period we also received €900 million in EU Cohesion funding, which is designed to bring poorer member states up to the same level as richer ones.

Taoiseach Enda Kenny will argue that CAP funding should be maintained, since the agri-food sector is a successful and vital part of Ireland’s economy, but also that Cohesion funding should stay high as well.

Ireland has the backing of France on CAP supports, as well as, to a lesser extent, Germany, but officials are aware that farm support will come under intense pressure.

Other demands the government will make are to maintain R&D spending under the EU’s seven Horizon 2020 research programme, as well as any funding for broadband and energy efficiency under the Connecting Europe facility.

But again, these areas will face downward pressure. Indeed, Ireland has not much bargaining power: even our bailout programme status only gives us scope to push, with Spanish support, for an increase in funding to help the unemployed.

The other problem for Ireland is that for the first time France, normally a key player, finds itself on the backfoot.

Traditionally France and Germany would line up before a summit to strike a joint position. Times have changed. France has fallen badly behind Germany in terms of wealth, competitiveness and political heft.

Furthermore, Chancellor Angela Merkel has been tilting surprisingly closely towards London, in order to keep David Cameron inside the tent, much to the bewilderment of its erstwhile closest ally.

“Psychologically for the French, because of their standing and mastery of detail, they have been used to getting their own way,” says one EU diplomat. “Now they find themselves as simply another member state.”

France was shocked by the manner in which Herman Van Rompuy proposed such a robust cut in the CAP budget – €25.5 billion.

“The CAP is not there just to give room for manoeuvre …,” an exasperated Bernard Cazeneuve, the French European Affairs Minister, told Reuters. “ It supports an agro-food sector which generates huge growth and contributes enormously to Europe’s trade surplus.”

France is also on the defensive because it will lose out in Cohesion funding, since poor regions in wealthy countries are in the firing line, and because it is a major contributor to EU coffers without the sweetner of a rebate.

For similar reasons Italy is coming to the summit in an unhappy mood, and Mario Monti may – once again – line up with President Francois Hollande, and the Spanish prime minister Mariano Rajoy, to push back against the budget-cutting tide.

Greece and Portugal are also unhappy with cuts to Cohesion spending.

On the question of rebates, Britain will once again defend the €3.6 billion it gets back from EU coffers first won by Margaret Thatcher in 1984, but other countries are also pressing for a rebate – Sweden, Denmark and Austria – and that could muddy the issue to London’s detriment.

What threatens to make this summit a long, and bitterly drawn out affair, is that 27 heads of government and their bands of civil servants, are not haggling over the language that will form part of a final communique. Instead, they are haggling over money, percentages and figures.

On Thursday morning the President of the European Council Herman Van Rompuy, and the Commission President Jose Manuel Barroso, will start by holding bilateral talks with each of the leaders, a process which will run throughout the day.

Taoiseach Enda Kenny is expected to meet the two men just before lunchtime.
An optimistic reading foresees the summit concluding with a budget deal on Friday evening, but many fear the process could drag on through until Saturday night.

One scenario is that, if the mood is positive, leaders could agree broad swathes of the budget and come back again before Christmas to pull together outstanding technical issues.

But the big fear is that the talks break down in acrimony, most likely because of a UK veto.

The danger then is that Europe’s image will once again be badly damaged (the amount of money involved, while high, is still just over 1% of national GDPs) at a time when European prestige is already in tatters over the Greek crisis.

Furthermore, in December EU leaders were due to gather for the last summit of 2012 to flesh out the roadmap to an EU banking union, complete with a new EU banking supervisor, and a planned deeper monetary union.

If the budget talks collapse, the mood will be far from conducive for those complex and politically divisive issues to be tackled. That will bode ill for market sentiment towards the euro, and for Ireland’s aspirations for a deal sometime next year on bank debt.

There is every possibility that national posturing at a time of unprecedented economic gloom has conspired to create such a negative atmosphere, and that in the end sense, and the notion that Europe simply must have a viable budget, will prevail.

But the process has developed its own depressing mystique.

“It is as much about group psychology and politics, as about facts,” bemoans one EU diplomat.