EU leaders gathered on Friday (19 June) to review the bloc's upcoming seven-year budget, set to rank among the year's most heated talks.

While governments backed fresh ways to merge funding sources and boost outlays on defence, energy and innovation, the central issue of the budget's total size remains open, an EU official noted right after the session.

The commission and parliament seek a bigger budget than the present one to cover fresh goals such as defence, competitiveness and energy security, while keeping most current spending on farmers and less-developed regions intact.

A bloc of member states called the 'friends of cohesion', drawn mostly from net recipient countries, also backs a larger overall budget.

Yet the opposing 'frugal countries' - among them Germany, the Nordic states and the Netherlands, all net contributors - insist on a far smaller total than the nearly two trillion euros proposed by the commission.

The Cypriot six-month rotating presidency last week issued a so-called negotiating box to map possible deals, trimming the overall proposal by two percent (from €1.76 trillion to €1.73 trillion) while protecting farm and regional spending from reductions.

Yet this move did not break the deadlock.

The Netherlands voiced especially strong opposition, with Prime Minister Rob Jetten calling the plan truly unacceptable on Friday.

This proposal will never reach the finish line, he stated.

The current proposal is clearly too high, German Chancellor Friedrich Merz said. Reaching a figure of €1.6 or even €1.7 trillion for the next seven years cannot be justified in my view.

Irish Turn at the Helm

Attention now shifts to Ireland, which assumes the EU's rotating presidency from July and must craft a workable compromise.

The next negotiating box will appear at the leaders' summit in Brussels in October, with the aim of sealing an accord before year-end.

The coming months require finding the right resource level to fund the EU's expanded goals, one official said.

Given the wide gap between frugals and those seeking a larger budget, reaching agreement on size while meeting all demands will prove very difficult, said Irish Taoiseach Micheál Martin, whose country will lead talks in the second half of the year.

We have a 50-50 chance of a deal by year-end, a senior diplomat added.

Two Paths Forward?

With both sides deadlocked, two main options surfaced. The first involves postponing repayments on the EU's pandemic loans, which would cost €150bn across the next budget cycle.

Frugals strongly oppose this route. Asked if it offered a workable way to expand fiscal room, the Dutch prime minister replied simply no.

Central to Friday's talks is the question of own resources. Over 70 percent of the EU budget comes from national contributions.

The EU also raises its own revenues through own resources. In the present budget these stem from customs duties and VAT.

For the next period the commission has suggested new streams from the EU carbon market, a tariff on carbon-heavy imports, plus fresh charges on electronic waste, tobacco and large firms with turnovers above €100m, expected to yield around €58bn yearly.

The European Parliament seeks to go further with taxes on Big Tech, crypto and online gambling that could bring an extra estimated €11bn each year.

Country leaders did not examine the scope of such steps in detail on Friday, an EU official told EUobserver.

Yet with the overall budget level likely too low to match commission goals, finding new own resources will prove vital, the official said.

Own resources can square the circle budget-wise, though all these ideas require unanimous backing from every member state, another EU diplomat told EUobserver.

2026 Deadline

EU Council President António Costa has fixed a year-end deadline, officially to lock in the budget ahead of its 2028 start.

Observers widely believe the real pressure stems from politics. A series of key elections next year in Poland, Italy and, above all, France could upend any deal not secured in advance, viewed as the true driver behind the December target.

We all know, even if it is not stated officially, they want it wrapped up in case Le Pen wins the French elections, said Czech Prime Minister Andrej Babiš.