I don't think you will be able to squish two children together in one seat regardless of the seat type (PE seats are generally not much wider than the economy seat and aircrew won't allow two people to sit in one seat for safety reasons).
If budget allows I would go for PE seats for all of you with baby on lap.
I would say go for the extra seat in ecomony. PE gets you nothing extra except additional legroom which the kids won't need. Also the arm rests are fixed in PE so you won't be able to raise them up to let the baby lay down like you can in economy. Also there is a greater chance of spare seats in economy so you might be able to spread out further still. We flew long haul with BA in May and had three seats each whereas PE was full up.