EU Finances: How Do They Work?

Where does the European Union get its money?

A system is set up so that the 25 EU member states contribute to the budget roughly in proportion to their economic size. As the largest of the bloc's economies, Germany contributes most and paid about 8.5 billion euros ($10.2 billion) more into EU coffers than it received back in 2004. The Netherlands and Sweden contribute the largest proportion of their gross national income to the union. Spain, which received nearly eight billion euros, got the biggest check from Brussels last year, followed by Greece's 4.1 billion euros.

A portion of the EU's income also comes from duties it places on agricultural and manufactured goods.

What is the "financial perspective?"

The financial perspective is a rundown of how the European Union will spend the money it receives from member states and encompasses seven years worth of spending.

European leaders are currently meeting to debate how money will be spent from 2007 to 2013. The union still has to agree on annual budgets, which set the precise spending levels, but it helps to have general boundaries settled ahead of time.

The financial perspective divides the money into six categories: sustainable growth; preservation and management of natural resources; citizenship, freedom, security and justice; the EU as a global player; administration; and compensation.

How much does the EU plan to spend?

Great Britain, which holds the rotating EU presidency during the financial negotiations, suggested a budget of 849.3 billion euros, equal to 1.03 percent of the union's gross national income and 175.7 billion euros less than the European Commission requested.

Most of the money will go to aid to farmers and rural development (46 percent) and on aid to poorer regions (30 percent).

What changes did Great Britain suggest?

Regional development funds:

The British proposal calls for trimming regional funds for the 10 new EU members by 150 billion euros, leaving 296 billion euros for seven years worth of improvements to infrastructure networks and environmental protection projects.

The British rebate:

Negotiated by Margaret Thatcher in 1984, the British rebate provides Great Britain with a refund of 66 percent of its net contribution because the UK had relatively few farms and was penalized for raising more money from its value-added tax than other member states.

Opponents, especially the French, say the rebate is no longer in tune with British prosperity and an expanded EU. They want to see the refund cut, a step the Britain refuses to make without reforms to the union's Common Agriculture Policy, which pays France about 10 billon euros a year in farm subsidies.

Financial review:

According to the most recent financial perspective, the European Commission would be called on to assess all European income and expenditures, including its agriculture policy and the British rebate, in 2009 to prepare for the 2014 budget.

How important is reaching agreement?

Though reaching a consensus would be beneficial for the union, which is desperately seeking a success story after a year that saw the European Constitution abandoned and attempts to reform the service sector fail, this isn't the last chance EU members will have to reach an agreement.

It is the 10 new member states that will be pushing hardest for a deal since the longer a budget takes, the less tends to dole out. The new states, which have to detail how they would spend their money would also like to start planning where their funds will go.