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European leaders have given way to German demands for a change to the European treaties, but the procedure for the change and its size has been calculated explicitly to avoid the danger that it could provoke referendums in some EU states.

Viritually all EU member states had vehemently opposed any treaty change going into the summit, but in the end they were convinced by Germany's need for the change in order to avoid a legal clash with its Karlsruhe-based Constitutional Court. The leaders agreed to construct a permanent crisis mechanism to fill the void left when the existing but temporary €110 billion bail-out package for Greece and €440 billion fund set up for the eurozone as a whole expire in 2013. According to diplomats, it is currently unclear whether this new mechanism would involve participation of eurozone members alone or the full 27 EU member states, including those who do not use the euro. Germany is worried that any permanent structure could run afoul of treaty rules forbidding EU bail-outs of member states and be struck down by the country's strict Constitutional Court, thus opening the euro once again to an assault by markets as occurred in the spring. Caught between the need for a structural change and their fear of both the activism of Karlsruhe and the growing euroscepticism of citizens, the other leaders signed off on the move only so long as the change envisaged was "small, small, small - the smallest possible ... in order to ensure there is no possibility of referendums," in the words of a Danish diplomat speaking to EUobserver. The method EU leaders chose to achieve the change will be via what is called the "special revision procedure," introduced by the Lisbon Treaty, under which the treaty can be amended by the European Council alone, so long as there is unanimity and the changes do not extend the competences of the European Union.

Just one year after the second Irish referendum on the Lisbon Treaty - one of the most bitter political battles in EU history - France and Germany are coming into an EU summit ready to pitch the idea of rewriting the legal pact. As the premiers and presidents of the bloc's 27 states arrive in Brussels on Thursday (28 October) for a two-day summit intended to endorse new fiscal rules, a last-minute deal between two of the EU's most powerful countries has caused shocked and anger across the continent.

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.

Ahead of an EU summit opening today (28 October), Liberal group leader Guy Verhofstadt warned that the European Parliament was determined to use its new powers under the Lisbon Treaty and would not let economic governance plans be "diluted" by Germany and France.

But Verhofstadt, who leads the Parliament's Liberal group, warned that such backroom deals were now over. The European Parliament, he said, would have full co-decision powers on legislative proposals that will come out later in the year to flesh out the EU's new economic governance. His warnings were echoed by other political groups in Parliament, including the centre-right European People's Party (EPP), which commands the largest number of seats in the Strasbourg assembly. Iñigo Mendez De Vigo, a Spanish MEP in charge of institutional issues at the EPP, said he welcomed the Task Force's proposals. But he added that "they should take into account that the European Parliament is now co-legislator and will play its full part in defining the reforms to come".  "I regret that the French-German proposal does not even mention the European Commission, which also has a say on this issue," De Vigo said, adding the Parliament should also be more involved. The Greens, the fourth largest group in Parliament, also backed the Liberals and the EPP, in a move which could herald a long battle with member states over the economic reform plans. The Parliament "will be a co-legislator on four of the six legislative proposals" on economic governance, said Belgian MEP Philippe Lamberts, saying his group was "in favour of a more ambitious and broader economic framework than the Commission and Council". Verhofstadt said he hoped this new battle would not take nine months, referring to the time it took to pass a recent package of financial supervision laws through the assembly.

In a statement, Verhofstadt detailed the three key areas where the Task Force had diluted the Commission's initial proposal and on which he said Parliament was ready to pick a fight. First, the Commission had proposed to impose sanctions on member countries with excessive deficits or severe imbalances at an earlier stage, without delay. By contrast, the Task Force argues that a political decision should be taken on the proposed sanctions, meaning that they could be blocked by a country capable of putting together a blocking minority. The result is that there will be no preventive procedure and therefore no sanctions, the liberal group leader warned. Second, the Task Force foresees a "double filter" for decision-making, involving a political recommendation by the Council before the Commission can take action. In practice, this means the Commission will be allowed to take sanctions only after a certain period, Verhofstadt said. Finally, while the EU executive had proposed that corrective action or sanctions be initiated directly by its own services, the Task Force called instead for a recommendation that would need subsequent backing by the bloc's 27 finance ministers. "It's easy to change a recommendation, and far more difficult to change a proposal by the Commission, because in that case you need unanimity," Verhofstadt explained.

A compromise on the 2011 EU budget is likely to coalesce around a three-percent increase compared to this year's spending after a vivid discussion among EU leaders and the European Parliament's chief about the rationale of raising the figure when most capitals are being forced to cut their own budgets.

The meeting, which usually consists of EU Parliament chief Jerzy Buzek reading out a statement and then leaving, took an extra hour to wrap up, as British Prime Minister David Cameron intervened to counter the parliament's plea for a six percent increase in the EU budget. Roughly a dozen other leaders then intervened as well, mostly backing the British premier. The Belgian and the Greek prime ministers were among the few who supported Mr Buzek's plea.

He also underlined that the parliament is willing to compromise on the six-percent figure, as long as there is "serious talk" about ensuring future funding for the EU's old and new policies. The Lisbon Treaty, he argued, had created new tasks for the EU: "More responsibilities means more funds." "It is absolutely necessary to have a compromise and finish [budget talks] in three weeks and then we want to start a serious discussion about future funding of EU policies. This is about the future of the EU itself. When we talk about cuts, we also have to think about the cost of non-Europe, of not having the added value of the EU."

European Union leaders have come to a consensus that the bloc's treaty must be changed, although only in a limited fashion, in order to allow for the creation of a permanent bail-out fund for member states. "Today we took important decisions to strengthen the euro," European Council President Herman Van Rompuy told reporters at a press conference in the early morning hours of Friday (29 October).

Initially horrified at the Franco-German demand for a wholesale re-writing of the EU rulebook only a year after the Lisbon Treaty had been approved, the other EU leaders are now warming to the idea of a "limited" tweaking of the treaty in a way that they hope will avoid major political fall-out. "Heads of state and government agree on the need for member states to establish a permanent crisis mechanism to safeguard the financial stability of the euro area as a whole and invite the president of the European Council to undertake consultations with the members of the European Council on a limited treaty change required to that effect," the draft conclusions of a two-day summit in Brussels read.

"No country is opposed in principle to a moderate treaty change but they want to know what the political and legal consequences of this would be," said one source close to the discussions. Two moves have been tentatively agreed. EU Council President Herman Van Rompuy is to be tasked with exploring whether such a limited change can be done via a simplified revision procedure, in which EU leaders can make the change without having to call a full Intergovernmental Conference (IGC) - involving negotiations between the governments, consultations with the European Parliament and the participation of the European Commission, which could open a Pandora's Box of other new proposals. Mr Van Rompuy would also explore whether legally this can be done without the tweak having to be presented to national parliaments for approval, which would almost certainly grind down the process, or even further, whether such a move would provoke referendums in some countries, notably Ireland, which maintains a constitutional requirement that any shift in powers from Dublin to Brussels be approved in a vote by the people. He would report back to the European Council in December.