TALKS over a new European Union constitutional treaty have begun as eurozone countries push for radical powers to save Europe's single currency, UK Chancellor George Osborne revealed last night.
According to Mr Osborne, Germany, France, Italy and EU officials demanded a replacement for the controversial Lisbon Treaty at a G7 meeting in Marseille this weekend.
At the talks, Mr Osborne insisted that Britain would fight to keep its economic sovereignty against a eurozone "caucus" seeking to run the EU as a "fiscal union".
He said he expected the new treaty to be in place by 2013, on top of a minor amendment to create a permanent bailout fund later this year.
"I think it is on the cards that there may be a treaty change imposed in the next year or two, beyond what has already been proposed," Mr Osborne said.
"I think it is on the cards, this would be for the eurozone, this would be to further integrate the eurozone, further strengthen fiscal integration."
It was an about-turn on Britain's previous line that the country was not threatened by a new "fiscal union" treaty giving the EU powers to impose economic and budget policies on euro member states.
Mr Osborne admitted that the UK government was fighting to keep its vetoes over economic policy to prevent a "caucus" of 17 eurozone countries having a monopoly of power via its inbuilt majority in an EU of 27 nations.
"I'm equally clear that Britain is not part of it, but also, and I made this point (at the G7), it is crucial that Britain's interests on financial services, on the single market, on competition are protected, that we're not outvoted by the eurozone, that there is not an inbuilt eurozone caucus in the system," he said.
Brussels sources have also revealed that a proposal for formal negotiations to begin in December will be made at an EU summit next month. The talks will be chaired by Herman Van Rompuy, the EU president, and will involve a constitutional "convention" before the new treaty is agreed and ratified in all 27 EU countries.
Mr Osborne also revealed that William Hague, the UK foreign secretary, was drawing up a list of demands for powers to be repatriated to Britain in return for treaty change.
He added: "My requirement would be the protection of the UK's interests in areas such as financial services, competition, the single market, that we are able to continue to have a decisive say on things that affect us."
Speaking last week, Angela Merkel, the German chancellor, called for radical "no taboos" treaty negotiations "in order to bind the EU closer together".
Her predecessor, Gerhard Schroder, called for the EU to return to "the original goal" of a "United States of Europe" and "the European constitution" rejected by French and Dutch voters in 2005.
Handing powers back to Britain will be fiercely resisted by Germany, France, the eurozone and most EU countries.
The issue will also split the UK's coalition government of the eurosceptic Tories and pro-EU Liberal Democrats, who are opposed to regaining national vetoes.
Bill Cash, the chairman of the House of Commons European scrutiny committee, said: "This takes Britain into a new dangerous phase. It proves the need for a referendum."