Tiny Luxembourg faces giant tasks in EU hot seat

Without the clout of a European Union heavyweight, tiny Luxembourg needs all its diplomatic skills as EU President for the next six months to broker deals on the bloc's long-term budget and overhaul fiscal discipline rules.

The Grand Duchy, with a population of 460,000, will have to deal with heavy-hitters like Britain, France, Germany and Italy that will be pressing, some for a cap on EU spending and some for new escape clauses in the budgetary rulebook.

Size, however, is by no means a measure of how successfully a country performs as president of the 25-nation EU.

Daniel Gros, director of the Centre for European Policy Studies, points out that after Italy's failure to steer the EU to an agreement on a first Constitution last year it was a smaller member state, Ireland, that found the compromise.

"Luxembourg is not coming to this with a particular axe to grind," he said.

"It's not a question of size so much as the agenda-setting power that the presidency brings with it."

Nevertheless, Luxembourg has a heavy and difficult agenda. It will also be expected to come up with plans to revive the Lisbon Agenda, a discredited reform programme to make Europe the most competitive economy by 2010, and lead a response to the euro's growth-hobbling strength against the dollar.

Keeping member states focused on these issues may be tough given that several will be preoccupied with national elections or referendums on the constitution, which was drawn up to help the enlarged union function smoothly.

Should the Constitution treaty be rejected by even one state it will fall to Luxembourg to propose a solution to the crisis.

On the diplomatic front, the Netherlands, which hands the Presidency to Luxembourg today, open EU membership talks with Turkey.

Nevertheless, when US President George W. Bush visits Brussels in February to mend fences broken during his first administration, his EU host will be Luxembourg, which stood by Europe's fiercest opponents of the 2003 Iraq war.

Rediscovering transatlantic amity may be all the harder if, as now seems possible next year, big countries like France and Germany win their bid to lift the EU's arms embargo on China.

Luxembourg Prime Minister Jean-Claude Juncker has vowed to set the EU's 2007-2013 spending during his presidency.

But he will have to weigh a push for more by the bloc's executive commission against the demands of its six net payers - Austria, Britain, France, Germany, the Netherlands and Sweden - which want to cap the EU budget at its current level.

"The compromise which needs to be looked for will be found between the position of... the six net contributing countries and the commission's proposal. We have six months," Mr Juncker told a news conference last week But Mr Gros said there was little scope for Luxembourg to influence the budget debate.

"In the end ... those countries which do not want to pay more than will win because if they don't give in then the old budget will continue," he said.

However, Mr Juncker has made it clear he will be no pushover when it comes to reform of the pact capping budget deficits - the discredited Stability and Growth Pact. The review was triggered by a controversial decision by EU Finance Ministers in 2003 to suspend disciplinary action against France and Germany, the eurozone's two powerhouses, after they repeatedly bust the three per cent of gross domestic product limit. Mr Juncker has rejected pleas by France, Germany and Italy for certain types of spending to be excluded from deficits, and is expected to press for a more subtle interpretation of the same rules to help countries through economic downturns.