Merkel warns Britain against European Union exit - Reuters Canada

By Peter Griffiths and Claire Davenport

LONDON/BRUSSELS (Reuters) - Germany's Angela Merkel on Wednesday warned Britain not to turn its back on Europe ahead of talks in London with Prime Minister David Cameron aimed at overcoming divisions that threaten to block a European Union budget deal later this month.

Cameron has said he is ready to veto the EU's seven-year budget and has attacked its "ludicrous" spending plans, in comments likely to fuel a view among many in Europe that London is drifting away from the 27-nation union.

German officials are exasperated by what they see as London's move towards Europe's margins, a feeling reinforced last week by the British parliament's vote calling for a real-terms cut in the EU's 1 trillion euro ($1.28 trillion) budget.

Before the talks, Merkel told the European Parliament she could not imagine a Europe without Britain, the world's sixth largest economy which relies on the EU for half its trade.

"I believe you can be very happy on an island, but being alone in this world doesn't make you any happier," Merkel said after British politician Nigel Farage, leader of the anti-European UK Independence Party, urged her to tell Cameron that Britain should leave the EU.

Cameron, who wants to stay in the bloc, will back a real-terms freeze in its budget for 2014-2020. He argues the EU must tighten its belt at a time of austerity and shrinking household budgets in many countries.

He was humiliated by the parliamentary defeat and opponents have accused him of losing control over his Conservative Party's anti-Europeans, a group that helped bring down former leaders and that wants a referendum on Britain's EU membership.

Cameron said there should be a separate budget for the EU's crisis-hit, 17-state, euro zone currency union, of which Britain is not a member.   Continued...