German Chancellor Friedrich Merz and five other EU leaders have threatened to withhold agreement on the bloc’s next seven-year budget unless "hundreds of billions" of euros in spending cuts are secured, writes The Financial Times.

"The ultimatum underscores divisions over the EU’s new spending priorities, including defence and efforts to shore up ailing industries against Chinese and US competition, while continuing to support farmers and poorer regions that have traditionally absorbed the bulk of its budget.

The EU budget "must be fundamentally reformed. We must make choices", according to a letter signed by the leaders of Germany, the Netherlands, Sweden, Denmark, Austria and Finland and seen by the FT.

"Unless the budget is cut by hundreds of billions, there won’t be an agreement this year," said a diplomat from one of the signatory countries.

The 6 leaders want to shift resources towards defence and innovative companies to reflect growing economic and security challenges, while reducing funding for farmers and poorer regions, which traditionally absorb about 2-thirds of the EU budget. The 2028-2034 budget requires unanimous agreement among all 27 member states. The six countries’ threat to withhold their consent goes against a commitment made by EU leaders in June to reach a deal this year before elections in France, Italy, Spain and Poland risk complicating the negotiations. The budget is largely financed by contributions from member states, with the six signatories accounting for about 40 per cent of EU budget revenues. They have called for substantial cuts to the €2tn headline figure proposed by the European Commission, reflecting efforts to rein in spending at home.

Ireland, which currently holds the rotating EU presidency, has been tasked with producing a compromise proposal by mid-October. The Irish government must reconcile demands from the biggest net contributors with a majority of countries who insist on farm subsidies and regional development funding being maintained.

A group of 17 countries, including Spain and Italy, insist that funding for these traditional spending areas should increase and that the overall budget should exceed the proposed €2tn. Some also want the EU to issue more joint debt to finance the higher spending - a taboo for Berlin and its allies. France, a net contributor to the EU budget but also the bloc’s largest beneficiary of farm subsidies, is pushing for EU-wide taxes to help fund the increase.

The Commission has proposed raising about €60bn a year through such levies, including higher contributions from the bloc’s cap-and-trade carbon market, tariffs on carbon-intensive imports, a tax on non-recycled electronic waste, tobacco duties and a levy on large companies. But each has faced resistance, given that taxation is largely a national power governments do not want to surrender to Brussels. EU diplomats also warn that the measures would not raise enough to meet all the bloc`s spending needs", - reads the article.