PREVIEW-EU leaders face battle over treaty change

* Franco-German demands split EU

* Germany wants deal to be reached on treaty change

* Lack of progress on reforms could unsettle markets

By Timothy Heritage

BRUSSELS, Oct 27 (BestGrowthStock) – The European Union struggled on
Wednesday to ensure tensions over Franco-German calls to change
the EU treaty do not threaten a summit deal on strengthening the
bloc’s budget rules to avert new sovereign debt crises.

EU leaders are expected at talks in Brussels on Thursday and
Friday to approve an Oct. 18 agreement by a task force of
finance ministers to impose sanctions on member states that
violate budget deficit and debt limits. [ID:nLDE69I1FB]

But Germany and France, the EU’s dominant powers, have upset
many of their partners by reaching a deal independently to push
for changes to the bloc’s fundamental treaty which they say are
needed to guarantee long-term fiscal discipline.

“There will be a hot discussion on treaty change,” said a
senior EU diplomat. But he added: “We will approve the task
force report in the shape it was agreed.”

Germany wants limited amendments to the EU’s Lisbon treaty
to allow for a permanent system to handle sovereign debt crises
in countries that use the euro and has threatened to block the
other reforms if no deal is reached on treaty alterations.

Such an outcome could unsettle financial markets looking for
legal certainty and already worried by debt problems in eurozone
countries such as Portugal, Ireland and Greece. [ID:nLDE68T0MG]

“Look back at what had to happen with the Lisbon treaty. We
needed 10 years to bring that treaty into being. So for heaven’s
sake, I think it would be irresponsible, and I say that again,
if we were to reopen the Pandora’s box,” European Justice
Commissioner Viviane Reding told reporters in Brussels.

Her comments underlined the split on the issue between the
EU’s executive Commission and German Chancellor Angela Merkel
and French President Nicolas Sarkozy, who announced their
proposals at talks in the French town of Deauville on Oct. 18.

Merkel says treaty changes are needed to ensure fiscal
discipline.

She also hopes broad EU agreement on treaty change will show
her critics in Germany that she has won something in exchange
for bowing to French demands to allow some political discretion
over sanctions for deficit and debt sinners. [ID:nLDE69H2DD]

PREVENTING A NEW CRISIS

Moves to reform the Stability and Growth Pact, which sets
out the EU’s budget rules, began in earnest after leaders agreed
in March on the need for closer economic coordination after
Greece’s debt crisis exposed flaws in the pact.

Germany, Europe’s biggest economy, demanded new rules as the
price for bailing out Greece and then providing a wider safety
net for the eurozone in May in the form of the 440-billion-euro
European Financial Stability Facility for all euro zone states.

EU finance ministers agreed in September on a “semester” of
economic policy coordination under which countries will
submit their annual budgets for review by the Commission and
other member states before they are adopted at a national level.

But when they agreed on tougher sanctions for debt and
deficit sinners [ID:nLDE69I1FB], the Deauville deal between
France and Germany meant the sanctions process was not as tough
as expected and the calls for treaty change caused concern.

EU envoys say about half the other EU states have criticised
the calls, particularly German demands to make it possible to
suspend the voting rights of states which seriously violate the
principles of Economic and Monetary Union. [ID:nLDE69Q0H2]

Berlin also favours the development of national insolvency
procedures under which lenders to euro zone governments would
for the first time face debt write-downs in a financial crisis.

Treaty changes require the backing of all 27 EU countries
and the European Parliament.

Some states, such as Ireland, could struggle to win public
backing if a referendum is needed so Germany is likely to seek
small changes which it hopes would avoid any need for
referendums. [ID:nLDE69Q0H2]

Financial markets have not reacted much to the EU divisions
of the past week, but EU leaders are aware this may not last.

“If there is not a deal or an agreement on how to proceed at
the summit, I’d say it would be a bit premature to upset markets
… but I guess they would start to get a bit spooked if there
was no deal in the longer term,” the senior envoy said.

PREVIEW-EU leaders face battle over treaty change