Coalition at odds over EU as Tories call for referendum on fiscal union

Meanwhile, Merkel and Sarkozy to meet ahead of make-or-break summit to save euro

The tricky balancing act facing David Cameron over Europe became even more difficult yesterday when the tensions between the two Coalition parties burst into the open.

Iain Duncan Smith, the Conservative Work and Pensions Secretary, endorsed demands by Eurosceptic Tory MPs for a UK referendum on the proposed new EU treaty to entrench budgetary discipline in the 17 eurozone countries. But Nick Clegg, the Liberal Democrat Deputy Prime Minister, flatly rejected the calls and made clear he had no intention of allowing a public vote on Europe.

Yesterday Mr Duncan Smith appeared to stray beyond the Coalition's policy that a referendum would be held only if Britain ceded more powers to Brussels. He told Sky News: "We're the first government ever to have legislated for referendums on treaties. In other words, the British public will have a say." He added: "The Prime Minister has always said if there is major treaty change it is now legislated for that we would have a referendum."

But earlier Mr Clegg insisted that the legislation already passed by the Coalition would not require a referendum because the fiscal union would not take any powers away from Britain. He told the BBC's Andrew Marr Show: "A referendum will only take place if there is an additional surrender of sovereignty from us to the EU."

Mr Cameron would prefer any treaty change to need approval by the 17 countries using the euro but Germany would like them to be endorsed by all 27 EU members. That would put pressure on Mr Cameron from Tory MPs to secure "wins" in return, such as the return of some powers from Brussels.

Meanwhile France's President Nicolas Sarkozy and the German Chancellor Angela Merkel will meet for a business lunch at the Elysée Palace in Paris today which could shape the outcome of the most critical week in EU history.

Their success or failure will influence, but not entirely guarantee, the outcome of a profoundly hazardous EU summit in Brussels on Thursday and Friday. Another failed or fudged attempt to resolve the two-year-old eurozone debt crisis could panic markets, explode the euro, cripple banks and tip the Western economy into a deep recession.

Officials say France and Germany have edged closer in recent days but differences remain. President Sarkozy and Chancellor Merkel now agree that the survival of the euro depends on chaining the bloc's 17 economies together with more rigorous rules on debt and deficits. If EU treaty changes are promised to this effect, Germany has hinted that it will ease its objections to a short-term "fix". In other words, it would turn a blind eye to the European Central Bank extending its efforts to prop up heavily-indebted nations.

However, landmark speeches by the French and German leaders within 24 hours on Thursday and Friday revealed some radical differences in approach.

Ms Merkel wants a legally-binding fiscal union – a move towards a "United States of Europe". Fiscal policies would be overseen by an EU national budget commissioner and penalties enforced by the European Court of Justice.

President Sarkozy says this would be a surrender of national sovereignty. Fiscal rules and penalties should be more rigorous, he says, and there should be majority voting to force backsliders into line. But final decisions must not be "supranational" and technocratic. There is also concern in European capitals that Berlin's suggestions amount to a German attempt to have a greater say over domestic fiscal policies.

At a glance: who wants treaty change?

ITALY

New PM Mario Monti in favour - but he has little choice

Disquiet among Italian voters as yet another democratic right ceded to Brussels

FRANCE

Sarkozy's personal future closely tied to euro rescue efforts

Loss of sovereignty to Brussels spells danger for President, as it plays into hands of far Right

GERMANY

Fiscal union seen as way to calm markets and ease risk of further bailouts paid for by Berlin

Giving up rights to Brussels weakens Merkel's already precarious position at home

SPAIN

Greater budgetary control from Brussels represents unpopular blow to national pride

But new PM Mariano Rajoy has little option but to agree, with nation's finances in such a poor state