Why is EU treaty change needed to stabilise euro?

(BRUSSELS) - Potentially explosive EU treaty change takes centre stage at an EU summit opening Thursday as Europe's power couple Angela Merkel and Nicolas Sarkozy push to throw a fiscal strait-jacket on the eurozone.

The French-German demand for a rewrite of the European Union rulebook, which history has shown to be a long and politically dangerous road, aims to enshrine tough rules ensuring budgetary rigour across the 17 nations sharing the euro.

Nations agree tighter rules and better policing can help overcome the debt crisis in the long term, but are sharply divided over how to implement change and how far to go.

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 deutsche mark with the euro because member nations failed to respect the rules of the game demanding budgetary discipline in return."

Given the failure of the initial and loosely-implemented Stability and Growth Pact governing the single currency, which France and Germany were the first to flout in 2004, Merkel is now calling for a "fiscal union" carving rules in stone that would be legally binding.

Q: What changes are under consideration?

A: Germany had wanted the European Court of Justice to have the authority to sanction repeated budget offenders, but France was cool to that idea. So the suggestion is for the court to verify states meet the obligation of introducing a so-called "golden rule" into their legislation, requiring a balanced budget. This way, eurozone debt levels could be brought back within a fixed threshold. Sanctions would be automatic and immediate and Brussels could be given guardianship of countries in dire straits.

Special powers too could be conferred on a European commissioner to step in and intervene directly in national budgets when deemed necessary.

Q: Are all the changes about tightening fiscal discipline?

A: No. EU president Herman Van Rompuy wants to also improve economic policy convergence in the 17-nation eurozone on issues such as tax, which Ireland is expected to resist to safeguard its cheaper corporate tax.

With national interests and political stakes at play, others may demand a quid pro quo, notably Britain which has already threatened to scupper a deal failing EU pledges to protect the country's profitable financial sector.

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, the European Commission wants treaty change to be submitted to the entire 27 to avoid deepening the chasm.

But the leaders will be asked to consider a change affecting only eurozone countries -- as treaty change requires ratification by unanimous vote. This is when non-euro members, such as British Prime Minister David Cameron, may be tempted to ask for a pay-back. Under pressure from eurosceptics in his Conservative party, he could even ask to repatriate powers touching on labour laws and financial regulation to London.

Q: Can it be done quickly?

A: This is likely to be the crux of the problem. The European Commission and Van Rompuy see a quick light option to the fore for the most urgent changes -- a deal during the summit to amend Protocol 12 of the Lisbon Treaty which would speedily reassure the markets. It would need approval by parliaments and would take two to three months in all.

But Germany, which has an almost religious belief in the constitution, is opposed because it would not enable tougher automatic sanctions against debt and deficit offenders.

Carving into stone quasi-automatic sanctions against sinners would require a "limited" treaty amendment of Article 136 that would take up to two years to implement. It would stunt a country's ability to wriggle out of sanctions by changing voting procedures and bolster the Commission's right to meddle in national budget plans.

Q: What does Germany want?

A: Germany is digging in its heels for the second longer option. But if this is rejected by the 27 leaders or gets bogged down in political haggling, then it could be put to the 17 eurozone nations under a simpler intergovernmental procedure likely to lead to a two-speed Europe.