Gordon Brown has called for a limit on EU spending ahead of a meeting to thrash out the organisation's budget.
Mr Brown wants Europe to be more efficient
The chancellor, due to meet European finance ministers on Tuesday, has argued for faster EU economic reform, employment and prosperity.
He says the EU budget should be "limited and refocused to support the Union's priorities".
But European Parliament President Pat Cox warned that it was no time to be calling for "Europe on the cheap".
The British chancellor is currently involved in a row with European Commission President Romano Prodi over the size of the EU's budget following its expansion from 15 nations to 25 in May.
Mr Prodi wants spending to be increased to the maximum permitted 1.24% of EU GDP to help cope with the accession of 10 poorer states from eastern Europe and the Mediterranean.
But the six biggest contributors to EU coffers - Britain, France, Germany, the Netherlands, Austria and Sweden - recently signed a joint letter calling for the cap to be reduced to 1% of GDP, effectively preventing any increase in the £70bn budget.
On Tuesday, the EU finance ministers will gather in Brussels, but a final decision on the budget for the five-year period until 2009 is not expected until a European Council meeting of government heads at the end of March.
Mr Brown's call for budget restraint came in a Treasury paper titled Advancing Long-Term Prosperity: Economic Reform In An Enlarged Europe.
In it, the chancellor warns that the EU has not done enough to fulfil targets for improved productivity and efficiency agreed at the Lisbon Summit in 2000.
He said action was needed to reduce European red tape, remove obstacles to the single market in services, reform the Common Agricultural Policy (CAP) and remove barriers to trade between the EU and America.
He called for the creation of a new post of European Union vice-president with responsibility for overseeing progress in reform and a brief including the promotion of enterprise, improved functioning of Europe's labour market and the development of a more pro-active competition policy.
"Europe must ensure that its policies do not protect and shelter inefficiency, but promote competitiveness, enterprise, innovation and skills," he said.
"Policies such as those to reduce the burden of regulation and to reform further the state aid rules and the CAP, will ensure that Europe secures its place in the modern global economy."
But Pat Cox said the EU's enlargement to 25 members was an investment in solidarity.
He warned: "Europe's capacity to act effectively tomorrow is now being tested.
"In too much of European policy and politics, there are gaps between rhetoric and realisation, between lofty conclusions of agreements at summits and delivery of a product in the end.
"This is not the time to do Europe on the cheap, nor is it the time for short termism, retreat or hesitation."
Mr Cox, who is opposed to the proposed capping of the budget at 1% of GDP from 2007, said maintaining the status quo - when 10 countries with incomes below the EU's average were joining - would create a funding decrease.