There are two major issues on the agenda -- the future of the constitution, derailed by "no" votes in France and the Netherlands, and the next EU budget for the period 2007-2013.
With nothing positive to say on the constitution, EU leaders can ill-afford an acrimonious collapse of the budget talks. But two days before the summit, this appears the most likely scenario. Differences over the size of the budget, contribution levels of member states, and receipts from subsidies will be very difficult to reconcile.
Jean-Claude Juncker, the prime minister of Luxembourg, the current EU chair, warns of a full-blown political crisis if there is no budget deal.
German Chancellor Gerhard Schroeder, speaking yesterday after a meeting with British Prime Minister Tony Blair, said the EU needs a "positive signal."
"On the other hand, we want to make sure that a signal of European development comes out of the summit in Brussels this week. This signal can only be that we need a compromise, a fair compromise from all, in regard to the financial outlook for the period from 2007 to 2013," Schroeder said.
Supporters of closer EU political integration say a budget deal would show that the political will to proceed with that vision remains intact, regardless of the failed referendums. A deal would also help buoy the euro, which has lost more than 10 percent of its value against the dollar since March.
Schroeder today signaled Berlin is ready to compromise on the size of the budget.
"We are still of the opinion that budgetary discipline is not just a case for national governments, but also for the European [government]. And our position was always to keep the budget at 1 percent of European gross domestic product, but we are prepared to be flexible in Europe's interest. We expect the same ability to be flexible from all other partners," Schroeder said.
As the largest individual contributor, and suffering from an economic downturn, Germany last year led a group of six countries demanding that the 2007-2013 budget be capped at 1 percent of EU gross national income. This is significantly less than the 1.14 percent sought by the European Commission.
The Luxembourg presidency has now suggested a 1.056 percent ceiling, which Schroeder appears willing to consider. The biggest cuts vis-a-vis the Commission proposal would affect research and development spending and development support to poorer regions. The Commission says its external relations budget would shrink by 19 percent.
However, in recent weeks another potential stumbling block has arisen. It is Britain's refusal to give up its "rebate," or a return payment from the EU budget worth some 5 billion euros ($6 billion) annually. Britain negotiated in 1984 when it was relatively poor and because its receipts from agriculture funds -- which make up 40 percent of the budget -- were exceptionally low.
The rest of the 24 EU member states argue the rebate is now obsolete, as Britain is among the bloc's richest countries. New members are particularly angered by the fact that they too must pay for the rebate.
In recent days, Blair has indicated he is prepared to consider changes to the rebate, if not scrapping it. But he has demanded that in return, France and Germany must undo a 2002 deal ruling out cuts in farm subsidies until at least 2013.
Blair made the point yesterday in Berlin, suggesting that agriculture accounts for far too much of the budget.
"Of course, everyone wants a deal that is fair, but we have to look at fairness in respect of the whole way that Europe is financed, because as I said just a moment or two ago, there are big challenges that Europe faces in the early 21st century. The question is, 'What is the right way to finance Europe for the future and for meeting those challenges?'" Blair said.
Diplomats say Britain may agree to freeze the rebate at current levels, instead of demanding a rise to 8 billion euro by 2013 as initially foreseen.
Blair's meeting with Chirac in Paris today is not expected to bring a breakthrough. Chirac has ruled out reopening the debate on farm spending. He has repeatedly been supported by Germany.
A third highly controversial issue concerns handouts to the EU's poorest regions.
The less affluent older members -- Spain, Portugal, Greece, joined by Italy -- fear the newcomers will strangle them for funds. Subsidies to the new member states are capped at 3.9 percent of their GDP or less.
But with the size of the overall budget likely to decrease, there is increasingly less room for flexibility on all sides. And if no budget deal is reached at the summit this week, the new EU members would be hardest hit.
If no deal is reached, there is a serious danger that the budget -- and related spending increases -- will not come into force in 2006. The European Commission has said it needs 12 to 18 months to prepare expenditure requests, which must also be approved by the European Parliament.
As Britain is one of the key players, a deal would be unlikely under its presidency between July-December this year. Many observers say the next chance would only come with the Finnish presidency in the second half of next year.
The biggest losers under such a scenario would be the new member states, as they would have to make do with subsidies frozen at 2006 spending levels. The poorer old members would not suffer much -- as their take would diminish under the new budget -- and nor would those benefiting most from farm subsidies.