Why EU treaty change is key to the euro's future

(BRUSSELS) - A push for EU treaty change by Europe's power couple Nicolas Sarkozy and Angela Merkel will dominate a European Union summit next week, pivotal to the future of the euro and the 27-nation bloc.

The struggle by the French and German leaders in the past weeks to finesse a joint plan for treaty change highlights the complex national interests and diverse political stakes at play.

Question: Why treaty change?

Answer: Because Berlin wants it. As one European diplomat put it: "The Germans fundamentally feel they were wronged by agreeing to replace the deutschmark with the euro because member nations failed to respect the rules of the game demanding budgetary discipline in return."

Given the failure of the original and loosely-implemented Stability and Growth Pact governing the single currency, Chancellor Merkel is now calling for a "fiscal union" tightening the rules and setting sanctions that would be carved in stone and be made legally binding in "constitutional" form.

Q: What changes are under consideration?

A: Germany wants the European Court of Justice to have the authority to sanction repeated budget offenders, but France is cool to that idea. Berlin also favours giving Brussels guardianship of countries in dire straits, thus removing a measure of sovereignty -- as is happening in Greece. Other ideas include the enforcement of a "Golden Rule" setting a deficit ceiling across the bloc, or a freeze on voting rights or on EU subsidies in the case of a breach.

Germany and the Netherlands believe special powers should be conferred on a European commissioner to step in and intervene directly in national budgets when deemed necessary. France however is reticent, on the grounds that budgets should be left to capitals.

Q: Are all the changes about tightening fiscal discipline?

A: No. EU president Herman Van Rompuy is to set out other ideas at the summit, including ways of improving economic policy convergence in the 17-nation eurozone. France for example wants an end to unanimous votes on tax issues. But Ireland fears this could lead to a rise in its cheaper company tax.

Some countries favour treaty change to allow the creation of eurobonds, but Germany disagrees. Internal markets commissioner Michel Barnier is suggesting the European Central Bank be enabled to directly refinance the eurozone rescue fund.

Q: How can the treaty be changed?

A: How to change the EU's rule-book is highly contentious. Because of a widening rift between the 17 eurozone nations and the 10 states outside the single currency, EU officials say treaty change will be submitted to the entire 27 next week to avoid deepening the chasm.

The 27 leaders would be asked to consider a change affecting only eurozone countries -- Protocol 14 of the Lisbon treaty -- as treaty change requires ratification by unanimous vote. So non-euro members may be tempted to ask a pay-back. A case in point is Britain, where Prime Minister David Cameron is under pressure from eurosceptics in his Conservative party to repatriate powers touching on labour laws and financial regulation to London.

In case of snags, Paris and Berlin could opt for an inter-governmental agreement on the lines of the Schengen border-free pact, involving the 17 euro nations -- or only those ready to sign up. That would lead to a two- or even three-tier Europe.