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updated 12/14/2003 6:32:37 PM ET 2003-12-14T23:32:37

Germany has issued dark hints that Spain and Poland will be punished financially for blocking a deal on a new European Union constitution at the divisive EU summit in Brussels at the weekend.

The early breakdown of the meeting on Saturday has thrown the future of the constitutional treaty into doubt, and threatened to open up new rifts in Europe.

Germany is now expected to exact revenge on Spain and Poland early in 2004, when member states start discussing the next EU budget round. Gerhard Schröder, the German chancellor, warned there were "certain parallels" between the treaty negotiations and the the seven-year EU budget period, which starts in 2007.

Germany, the biggest net contributor to the budget, says it wants to keep spending pegged to just 1 percent of the EU's GDP, or roughly €100 billion (£70bn, $117 billion) a year. That is about €25 billion a year less than many inside the European Commission argue is needed to sustain aid to the poorest EU regions, including southern Spain and all of Poland.

José María Aznar, the Spanish prime minister, and Leszek Miller, his Polish counterpart, refused to agree to a new EU voting system that would have sealed a deal on the new constitution in Brussels.

Although both leaders received domestic praise for defending the existing voting system - which gives Spain and Poland disproportionate power inside the EU - they know there could be a price to pay.

"Poland should now brace itself for serious political and economic repercussions because of its stance over the constitution," said Roman Giertych, leader of the far-right opposition League of Polish Families.

Mr. Schröder will now hope German threats of financial retribution will force Spain and Poland to back down when treaty talks finally resume. That may not be for some time, with most expecting the constitutional treaty to remain parked at least until the Dutch EU presidency in the second half of 2004, or even early 2005.

However Bertie Ahern, the Irish prime minister, whose country assumes the EU presidency in January, may decide to try again to broker a deal next June after the European elections - if there is sign of any movement from the main protagonists.

"He is one of the most experienced negotiators in Europe because of the Northern Ireland peace process," said an Irish diplomat. "We'll see what we can do."

The breakdown of the talks prompted French President Jacques Chirac to reopen his warnings that a Europe of 25 was heading for deadlock, and that "pioneer groups" would be needed to push ahead with integration.

"This will provide an engine, an example that will allow Europe to go faster, further and better," he said.

French diplomats said Mr. Chirac blamed Polish and Spanish intransigence - and Britain's determination to hold on to its national veto in key fields - as evidence of the need for a so-called avant-garde, or vanguard.

Some suspect Mr. Chirac and Mr. Schröder were happy for the summit to collapse early, specifically to make that point. "You would think it was a stitch-up by Chirac and Schröder to have the summit collapse," said one east European diplomat.

However, hopes of agreeing an early statement of intent with the EU's other five founding members stumbled when Silvio Berlusconi of Italy and and Jean-Claude Juncker of Luxembourg objected.

"A two-speed Europe would only be the result of persistent disagreements," Mr. Juncker said.

Additional reporting by Stefan Wagstyl in Brussels

Copyright The Financial Times Ltd. All rights reserved.

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