The Deauville declarationGreece's brush with insolvency and grave fiscal weakness in a clutch of other euro countries – Ireland among them – have led to fevered efforts in Brussels to fortify the foundations of the single currency. In addition to creating a temporary rescue net for any euro country, EU leaders have been moulding stringent new rules to impose greater financial discipline on member states.

After months of talks it was agreed last week in Luxembourg to penalise rule-breakers with new financial sanctions. But the game suddenly changed on Monday when Nicolas Sarkozy said he was backing Angela Merkel in her push fo’r different sanctions altogether. A joint declaration issued by the French and German leaders raises the prospect of a new European referendum in Ireland, as the measures they want cannot be introduced without changing the Lisbon Treaty.

They can't be seriousThey can. The Greek bailout was deeply unpopular in Germany, the biggest contributor to the rescue. This led to pressure on Merkel to prevent fiscally sober Germans finding themselves on the hook in perpetuity for spendthrift behaviour in any other country. She must also contend with an activist constitutional court in Germany, which issued strict anti-bailout rulings in the past.

Merkel believes individual euro countries and their lenders should face the consequences of fiscal laxity by irresponsible governments. As a condition for supporting the establishment of a permanent bailout fund she wants to introduce insolvency procedures under which governments can renegotiate the terms of their debt. To do that the treaty must be changed.

Big dealIn EU terms these are giant steps, and Merkel fought a lone battle until Sarkozy came on board in Deauville. Why did Paris move? Because Berlin agreed to water down the quasi-automatic character of the financial sanctions embraced in the Luxembourg pact. Brussels insiders also suspect Merkel may have done a private deal to ensure French support for Axel Weber, chief of Germany's Bundesbank, when the presidency of the European Central Bank falls vacant next year.

Upshot for IrelandThe Taoiseach faces the prospect of a European convention on treaty change in the spring.

Why another referendum?The Government is bound by a 1987 Supreme Court ruling in a case brought by the late Raymond Crotty, an economist and political activist. The ruling holds that any significant transfer of powers to the EU from Ireland must be referred to the people. Legal experts in Dublin are examining whether a referendum would be required if other EU leaders bowed to Merkel and Sarkozy.

Oh no, not againMaybe not. True, the Franco-German demands cannot lightly be dismissed. Yet there is considerable resistance in other European capitals to the manoeuvre by Merkel and Sarkozy. At a summit next week in Brussels, expect plenty of argument about whether Angie and Sarko can achieve their objectives without reopening the Lisbon treaty.

The bettingThe expectation at this point is that Merkel and her new ally will hold firm. They could be in for a rough ride.