Battle over treaty change divides Europe ahead of summit

Last week at a bilateral pow-wow in Deauville, France, President Nicolas Sarkozy and German Chancellor Angela Merkel cut a deal in which Berlin backed Paris in its desire to water down sanctions to be imposed on excessive-spending EU countries.

In return, Paris endorsed Berlin's push for a change to the EU treaty in order to set-up an EU bailout fund and default mechanism.

Ms Merkel is adamant that her country cannot endorse a repeat of the emergency bail-outs cobbled together this spring.

Germany is the main bankroller of the €110 billion loan to Greece and of the European Financial Stability Fund (EFSF), the yet-to-be-tapped €440 billion rescue mechanism for the eurozone as a whole. Both of these funds have an expiry date of 2013 and Berlin is looking to see that something more substantial replaces them before then.

The default mechanism would signal to investors that they, rather than taxpayers alone, would be on the hook for at least part of the costs of the bankruptcy of a country. The mechanism is designed to deal with sovereign defaults without setting off a cascading panic in the markets similar to the Greek debt crisis that shook Europe in spring.

The idea is highly controversial, with even the reticent European Central Bank chief Jean-Claude Trichet voicing steadfast opposition.

More controversial still is the opinion of Ms Merkel's lawyers that a permanent fund and the default procedure require a change to the EU treaty. Germany is worried that its Constitutional Court would slap down any extension of the Greek-type bail-out on the basis that the current EU treaty specifically rules out member state rescues.

The Franco-German alliance also wants spendthrift states to be stripped of their voting rights within the Council of Ministers - a move that everyone agrees would require a treaty change.

For all their power, Berlin and Paris are believed to be almost isolated among the 27 on this question.

Eurozone chief Jean-Claude Juncker said of the idea on Thursday morning that: "The withdrawal of voting rights for budget-sinning countries isn't a possible way forward and I reject any changes to the EU treaty in this case."

Luxembourg Foreign Minister Jean Asselborn said there is a "risk that we will be plunged back into months and years of navel-gazing," referring to the 10-year-long period of EU introspection and internecine warfare that led up to Lisbon.

As one incredulous EU diplomat put it ahead of the summit: "Do you really believe the Irish prime minister can head back to Ireland and tell his people they have to vote in favour of removing their voting rights?"

Italy, the Netherlands, Portugal, Spain and the UK are believed to be adamantly opposed to the voting rights sanctions proposal. Some officials from the group say that other measures under consideration, such as a freeze on EU payments of structural funds, are tough enough.

Heading into the summit, Ms Merkel publicly remained resolute in her demand for a major change to the treaty.

German diplomats however were talking down the scale of the adjustment. A minor rewording of Lisbon's 'no-bail-out' clause could be possible without a wholesale rewrite of the treaty, avoiding rounds of negotiations and referendums, the diplomats said.

Meanwhile, some EU officials believe that Germany and France are bluffing and will drop the voting rights sanctions idea in return for the changes on the bailout fund and the crisis resolution mechanism.