BRUSSELS, Dec 30 (AFP) - Luxembourg, one of the European Union's smallest states, takes over the EU helm on January 1 and will face huge challenges over the next six months, notably aiming to seal a deal on funding for the expanding bloc.
Luxembourg Prime Minister Jean-Claude Juncker will also have his work cut out keeping a lid on EU strains when re-elected US President George W. Bush makes a landmark February visit, hoping finally to bury the Iraq war hatchet.
The Grand Duchy of Luxembourg -- population 444,000 -- will be holding the EU's reins of power for the 11th time since helping create the European bloc as one of its six founder members in 1957.
On the economic front Juncker, who doubles as his country's finance minister, also wants to strike a deal at a March EU summit on reforming the tattered budget rules underpinning Europe's single currency.
But the first key date in the half-year EU presidency will be February 22, when Bush is expected to meet European leaders in Brussels only weeks after taking office for a second term after his November re-election.
Europe hopes that the visit will show whether Bush is serious about boosting transatlantic cooperation, badly shaken by the Iraq conflict, as the US leader suggested in a December letter to EU commission chief Jose Manuel Barroso.
EU leaders will be keen to discuss relaunching the Middle East peace process with Bush, in particular after Palestinian elections in January which many hope could trigger a revival of hope for the region after Yasser Arafat's death.
Other key issues threatening to cloud the talks include Europe's plans to lift an arms embargo on China, Iran's nuclear plans, global efforts to tackle climate change and the record slump of the US dollar.
Closer to home, the EU will sign membership treaties in April with Romania and Bulgaria who want to join in 2007, while starting accession talks with Croatia in March and Turkey in principle in October.
Another cloud hanging over the EU is public skepticism over a first-ever constitution for the bloc, which will start to be tested in a series of referendums starting with Spain in February and France possibly in June.
But perhaps Juncker's biggest challenge over the next six months will be to forge an agreement between the 25 European Union (EU) states on the bloc's budget plans for the six-year period from 2007-13.
Juncker wants a deal by June. But haggling is set to be fierce, with EU paymasters like France, Britain and German fighting hard to cap spending, seen as bad news for the 10 mostly poorer states which joined the EU in May.
Luxembourg hopes British elections expected in May may open the way for an accord notably on Britain's long-cherished EU budget rebate, an issue on which Prime Minister Tony Blair is unlikely to give ground before the polls.
"If we don't reach an agreement on the main points in June, it will be impossible to put in place programs which must be available from January 1, 2007," Juncker warned this month.
Even before that, Juncker hopes to hammer out a deal to reform the rules underpinning Europe's single currency, enshrined in the battered Stability and Growth Pact, at the EU's traditional March economic summit.
That meeting will also see yet another attempt to revive the EU's flagging Lisbon strategy, launched in 2000 aimed at making Europe the world's most dynamic economy by the end of the decade.
Critics say the strategy has failed because its aims are too diffuse.
Juncker has said he wants to relaunch the strategy "with a limited number of priorities", centred on three areas: "the economy, social policy and the environment."

12/30/2004 13:17 GMT - AFP