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UPDATE 1-Pause or paralysis? EU-Mercosur hitch stalls EU trade momentum

(Updates with Spain paragraph 4, German Chancellor, Brazilian president paragraph 12)

By Philip Blenkinsop

BRUSSELS, Dec 4 (Reuters) - Just a week after hailing approval of a trade agreement with New Zealand as a sign the European Union's free trade ambitions were back on track, a hitch in a planned EU-Mercosur deal has brought them to a grinding halt.

The EU and the Mercosur bloc of Argentina, Brazil, Paraguay and Uruguay will not be able to close free trade negotiations this week, as envisaged, with Argentina's incoming government needing to approve outstanding issues.

The European Commission's clear goal was to wrap up negotiations by the end of the year, an aim shared by Brazilian President Luiz Inacio Lula da Silva.

Spain, which holds the six-month rotating EU presidency, said it still sees ways to clinch a deal by year end.

However, that target looks decreasingly likely as attention switches to next week's EU leaders' summit focused on Ukraine. A new Argentine government will also need to bed in.

Argentina's future foreign minister, Diana Mondino, told Reuters the new government wanted to strike an EU-Mercosur deal and that negotiations would continue.

"And hopefully, someday, somehow, it will be done," she said.

French President Emmanuel Macron strongly suggested "someday" might never come, telling reporters at the COP28 summit in Dubai on Saturday that he was against the agreement.

"What happened is that we've added a few lines at the top in a bid to please the French, but it's no good for anybody," he said.

France has been the EU-Mercosur agreement's biggest EU critic, insisting environmental commitments be added and reluctant to upset its farmers by agreeing to increase beef imports.

The European Commission said the EU and Mercosur negotiators were engaged in "intense and constructive" discussions, had made substantial progress and aimed to conclude as swiftly. A spokesperson made no reference to any time frame.

German Chancellor Olaf Scholz and Brazil's Lula, meeting in Berlin on Monday, said they too wanted a swift conclusion. Lula said the EU must decide if it wanted a trade agreement with Mercosur or not.

CLOSING WINDOW

Brussels has talked of a unique window of opportunity to salvage the EU-Mercosur agreement, which was concluded in 2019 but stalled by EU demands for commitments on Amazon deforestation and climate change.

Proponents say the EU increasingly needs trade deals with reliable partners because of Russia's invasion of Ukraine and the bloc's desire to reduce its reliance on China for raw materials. An EU-Mercosur deal would be the bloc's largest to date, removing 4 billion euros ($4.35 billion) of import tariffs on its products.

If talks entered a 25th year in 2024, the window of opportunity will start closing as the European Parliament election approaches. The EU and Mercosur presidencies of Spain and Brazil, the deal's biggest proponents, will also have ended.

Andre Sapir, senior fellow of Brussels think tank Bruegel, said it was possible to get a good deal, but there were reasons why EU-Mercosur talks had lasted over 20 years. Brazil, Argentina relations were difficult, while in Europe, Germany wanted to sell more manufactured goods and France was nervous about a potential surge of farm product imports.

"Then came these additional elements of climate and also raw materials," he said. "Even by EU standards, this is complicated." ($1 = 0.9200 euros) (Reporting by Philip Blenkinsop; additional reporting by Belen Carreno in Madrid, Andreas Rinke and Sarah Marsh in Berlin, Michel Rose in Paris, Jorgelina do Rosario in Buenos Aires; editing by Christina Fincher)

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