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Standing before a backdrop of rolling hills and shimmering lakes, U.S. President Barack Obama and European Commission President José Manuel Barroso were all smiles at the G8 meeting in Northern Ireland last month as they announced the start of negotiations on a massive trade deal between the United States and the European Union.

It would be the largest trade agreement in world history, they said, generating billions of dollars in extra revenue and creating millions of jobs. "We intend to make rapid progress," Mr. Barroso said, adding that negotiations would start July 8 in Washington.

But now, the future of the agreement has been thrown into doubt amid allegations the United States monitored phone calls and e-mails of EU officials in the U.S. and Europe, including at the EU office at the United Nations. EU officials have condemned it and threatened to end the trade talks. The U.S. insists it is only doing what other countries do.

"We should stipulate that every intelligence service – not just ours, but every European intelligence service, every Asian intelligence service, wherever there's an intelligence service – here's one thing that they're going to be doing: They're going to be trying to understand the world better, and what's going on in world capitals around the world," Mr. Obama told reporters on Monday while in Tanzania. "If that weren't the case, then there would be no use for an intelligence service."

Those comments have done little to soothe anger in parts of Europe, where spying brings back memories of the Cold War, or end the questions about how trade negotiations are possible if one side can't trust the other.

"We cannot accept this kind of behaviour between partners and allies. We ask that this immediately stop," French President François Hollande said. "There can be no negotiations or transactions in all areas until we have obtained these guarantees, for France but also for all of the European Union, for all partners of the United States."

Officials in Germany agreed and also threatened to block the negotiations. "We aren't in the Cold War anymore," said Steffen Seibert, a spokesman for German Chancellor Angela Merkel.

Mr. Barroso has ordered security sweeps of EU offices and said the allegations were "disturbing and raise serious and very important concerns." Few analysts expect the trade talks to collapse, arguing there is too much at stake and preparations have been under way for months.

They point out that trade between the U.S. and the EU already totals roughly $1-trillion (U.S.) annually and accounts for 13 million jobs. And there are estimates a trade deal would add $300-billion to the total and create an additional two million jobs.

But the bugging revelations will complicate an already complex set of negotiations that faced a number of hurdles, including questions about duties on agricultural products and demands from France that the deal exclude cultural products.

Canada and the EU have been negotiating a less complicated trade agreement for more than four years, with no end in sight. And that was without allegations of spying.

"I do think it affects the general mood and the level of trust of Europeans going into these negotiations," said Johannes Thimm, a specialist in U.S. foreign policy at the German Institute for International and Security Affairs. "I don't think it's going to directly derail negotiations; I don't think that [the trade deal] is dead because of this now. But I think it creates an additional hurdle, in addition to all the hurdles that are already there."

Mr. Thimm added that there had been strong political will across much of Europe for the talks to succeed. Germany had been particularly eager, anticipating great benefits for its economy. British Prime Minister David Cameron also hailed it as "a deal that will have a greater impact than all the other trade deals on the table put together."

But Mr. Thimm and others said the talks could now be delayed for months, as EU leaders protest and U.S. officials scramble to find ways to address the bugging charges. Mr. Obama has played down the allegations, saying all intelligence services operate in the same manner. But he and other U.S. officials have yet to offer an explanation.

At the G8, Mr. Barroso talked boldly about completing the U.S. deal in two years, saying there was nothing preventing both sides from moving forward quickly. That time frame seemed optimistic then and it seems farfetched now.

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