UPDATE 1-German MPs to pass crisis tools but concessions grate
* Merkel should get 2/3 majority with opposition help
* Eurosceptics angered by concessions at EU summit
* Court will delay ratification, may seek referendum
BERLIN, June 29 (Reuters) - Germany's parliament will finally approve a permanent euro zone bailout scheme and new budget rules on Friday drawn up by Angela Merkel, but legal hurdles remain and her overnight concessions to euro zone partners Italy and Spain may make them harder to overcome.
A deal with the opposition should give the chancellor, hurrying back from a tense European Union summit, the required two-thirds majority in the Bundestag (lower house) and Bundesrat (upper house) votes beginning at 5 p.m. (1500 GMT).
But ratification of the tools for combating the debt crisis, the European Stability Mechanism (ESM) and "fiscal pact" for budget discipline, may force Germany to test its commitment to Europe in a referendum as anger grows over aid to weaker states.
Merkel insisted the deal at the summit to use the rescue funds to ease Spanish and Italian borrowing costs without extra austerity measures, and to recapitalise banks directly, did not violate her mantra of no aid without conditionality.
"In this respect we remain entirely in the scheme we have followed until now, that entails performance, counter-performance and control," Merkel told reporters.
But it could exacerbate impatience with the bailouts in Germany, which has no big Eurosceptic party but where Merkel's centre-right coalition includes a small band of rebels who will vote "no" in the Bundestag on Friday.
Klaus-Peter Willsch, a member of the Bundestag from Merkel's Christian Democrats (CDU), said the concessions would result in "Germany being liable for everyone". Fellow MP Wolfgang Bosbach called a decision to scrap the ESM's preferred creditor status "good news for private creditors but bad news for taxpayers".
The summit deal should not harm Merkel's chances of success in Friday's votes as the opposition Social Democrats (SPD) favour greater solidarity with Italy and Spain, in line with France's Socialist president, Francois Hollande.
To secure their votes, Merkel has already granted growth and job-creation measures in return for them dropping calls for joint euro bonds, which Merkel says will not exist in her lifetime.
The euro zone's biggest member is taking ratification of the ESM and Merkel's fiscal pact to the wire, voting on the last day possible for the original July 1 deadline for the ESM.
IMPOSING MORE EUROPE
The bailout scheme cannot come into effect without German backing as it needs approval by countries making up 90 percent of its capital base. This has now been put back to July 9 with only a handful of the euro zone's 17 countries having complied.
But Germany risks missing the second deadline too, because parliament is not the final hurdle. Ratification also requires approval by the all-powerful Constitutional Court - which has slapped the government's wrist for taking short cuts on European policy - and President Joachim Gauck's signature.
This could take weeks. In a series of rulings since 2009, the court in Karlsruhe has expressed reservations about the steady transfer of power to Brussels, and affirmed the right of Germany's parliament to vet decisions taken at European level.
Tension between Germany's democratic principles and a push to give Brussels more power to intervene in national policy appears to be approaching breaking point.
The court, bombarded by petitions from politicians and academics to block the ESM, may decide to clear the bailout and fiscal pact but demand steps "to ensure that the upper and lower houses of parliament are sufficiently involved", said Daniel Thym, law professor at the University of Constance.
There is a chance it could link approval to a change in the constitution - which would require Germany's first national referendum in the post-war era. At the very least, experts say the could warn that approval of any future integration, beyond the ESM and fiscal compact, would require constitutional change.
Calling a referendum would be a risky ploy in Germany, where Adolf Hitler gave plebiscites a bad name in the 1930s by using them to amass power as Fuehrer, stuff the Reichstag with Nazis and legitimise occupying the Rhineland and annexing Austria.
But europhile Finance Minister Wolfgang Schaeuble says the changes being contemplated - on the road to "political and fiscal union" - may need a referendum sooner than many think.
The leader of Merkel's Bavarian allies in the CSU, Horst Seehofer, wrote in business daily Handelsblatt: "Politicians cannot simply impose more Europe on us from the top down ... That's why I'm pleading for our constitution to allow us to have referendums on all important European matters."
Historian Heinrich August Winkler spoke of Germany being "on the brink of a referendum" with the court possibly demanding one and "even linking it to approval of the ESM and Fiscal Compact".
Winkler said if that occurs it could become a central issue in the 2013 elections when Merkel should seek a third term, with pro-European parties attempting to call the Eurosceptics' bluff by making it a "yes" or "no" vote on Europe and the euro.
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