The leaders agreed that changes were needed to create a permanent system to handle sovereign debt problems and endorsed tougher budget discipline rules, including sanctions on states that do not keep deficits and debt in check.
Angela Merkel, the German chancellor, said "everybody agreed that there must be a permanent crisis mechanism and […] that this will require limited treaty change".
She insisted, however, that "the crisis mechanism will only be valid for cases where the stability of the euro as a whole is under threat".
But Berlin failed to win support for demands to suspend the voting rights of member states which breach the rules. This would have required more radical treaty change and will be looked at only after the other measures have been dealt with.
European Council President Herman Van Rompuy, who chaired the meeting in Brussels, said he was asked to prepare changes to the Lisbon Treaty so that they could be agreed upon at a summit in December. He will work on them with the European Commission.
Legal tricks
Officials struggled to deliver the message that legal tricks could accommodate both Germany's push for treaty change and conflicting calls from several other countries which had rejected the idea.
Regarding treaty change, the key word is "simplified", officials explained. A simplified provision, enshrined in Article 48, Section 6 of the Lisbon Treaty, allows member countries to unanimously adopt a decision amending all or part of the main elements of the Treaty on the Functioning of the EU (TFEU), which governs how the Union carries out its work.
Such a procedure would avoid the need to call a constitutional convention, experts explained. In addition, the European Parliament would only be "consulted" instead of enjoying full voting rights as part of the normal co-decision procedure.
The changes to the treaty are to be settled by mid-2013, before the expiry of the present emergency fund agreed earlier this year to deal with crises such as the one that hit Greece. The objective is to replace that with a permanent mechanism.
The simplified treaty change procedure will not enter into force until it is approved by member states in accordance with their constitutions.
Most EU countries are expected to ratify the decision by a simplified procedure in their parliaments. As for Ireland, it remains unclear whether a change effected in this way would require another referendum.
Experts also explained that the treaty changes could not be attached to Croatia's accession treaty, as the issues were not enlargement-related.
Budget cap
UK Prime Minister David Cameron appears to have been instrumental in forging a deal, lending his backing to Franco-German calls for treaty change in return for keeping a lid on the EU's 2011 budget.
11 member states, including Britain, France and Germany, will send a letter to the European Commission and Parliament today saying that their plans to increase the EU budget by 5.9% in 2011 are "especially unacceptable at a time when we are having to take difficult decisions at national level to control public expenditure".
The letter was signed by the leaders of the UK, Germany, France, the Netherlands, Sweden, the Czech Republic, Denmark, Austria, Finland, Slovenia and Estonia.
The bloc's finance ministers had earlier voted for a limited increase in the EU budget of 2.9%. "We are clear that we cannot accept any more than the 2.9% increase proposed by the finance ministers," the leaders say in the letter.
Cameron argued that a planned increase in the EU budget would cost his country's taxpayers the equivalent of one billion euros. The 2.9% rise would still cost them £435m (500m euros).
Parliament to fight back
By agreeing to cap the budget, EU leaders set themselves on a collision course with the European parliament, which has the power to approve or reject the proposed budget.
Negotiations between the European Parliament and the Council, which represents the 27 member countries, over the EU's 2011 budget kicked off on 27 October (see 'Background').
"If Cameron is prepared to give up the British rebate [...] then we can for sure discuss a reduction of the budget," said Martin Schulz, leader of the Socialist & Democrats group in the European Parliament, speaking to EUX.TV, the European policy news channel powered by EurActiv.
"The European budget is not to be compared with national budgets," said Schulz. "There are no own resources. We have no European taxes. We have no own money. It is money coming from the member states. We can make no debts. The British budget must be reduced because there is enormous debt. Europe has no debts," he said.
