The German chancellor has called for the EU to be given the power to veto member states’ budgets, hours before leaders meet in Brussels for a summit.
Angela Merkel said the economics commissioner should be given clear rights to intervene when national budgets violated the bloc’s rules.
The idea is likely to be strongly opposed by members concerned about any increase in the EU Commission’s powers.
The summit is expected to focus on plans for a banking union.
The aim is to agree first on joint banking supervision, with the European Central Bank playing the lead role, but the UK – the EU’s main financial centre – wants safeguards to protect the powers of the Bank of England.
It and the other nine non-euro states are also concerned about voting rights in the proposed banking union.
Further complicating the issue, France and Germany differ over the timetable for such a union, with Berlin advocating caution.
Meanwhile Greece, the eurozone state worst hit by the debt crisis, is in the grip of a new, 24-hour general strike, with at least 20,000 protesters gathering in central Athens amid reports of clashes between demonstrators and police.
“This austerity is making all of Europe’s south rebel, the euro will be destroyed,” Konstantinos Balomenos, a 58-year-old worker at a water utility whose wage has been halved and who has two unemployed sons, told Reuters news agency.
‘Quality before speed’
Addressing the German parliament in Berlin on Thursday morning, Mrs Merkel said the EU should have “real rights to intervene in national budgets” that breached the limits of the EU’s growth and stability pact.
The EU’s economics commissioner, she suggested, should have the authority to send a budget back to a national parliament.
Unfortunately, Mrs Merkel said, some EU member states were not ready for such a step.
“I am astonished that, no sooner does someone make a progressive proposal… the cry immediately comes that this won’t work, Germany is isolated, we can’t do it,” she added.
“This is not how we build a credible Europe.”
Her government has proposed a full fiscal union with control at European level of tax and spending.
The summit is taking place amid calmer European stock markets than at previous meetings and with less immediate concern over the debt crises in Spain and Greece, analysts say.
However, the banking union proposal has brought urgency to the talks, with the EU’s executive Commission, the ECB and several states including Spain and France wanting its legal basis to be in place by January.
In an interview with the UK’s Guardian newspaper, French President Francois Hollande said there was “no time to lose” in setting up a banking union.
However, Mrs Merkel has repeatedly stressed that “quality must trump speed”.
A top German official, who spoke to the Associated Press news agency on condition of anonymity, said many “legal, technical and political details” for a supervisory authority had still to be hammered out.
While the 17 eurozone states largely support the proposal for a banking union, the remaining 10 are uneasy that their banks might face new regulation without their say-so.
The BBC’s Aaron Heslehurst reports as protesters throw firebombs at police in Athens
The BBC’s Gavin Hewitt says little will be agreed at the summit.
It is the fourth time that the leaders of the EU’s 27 nations have met this year.
While not originally on the agenda, there is speculation Spain may ask for a limited bailout in Brussels.
One diplomatic source told AFP news agency that Spanish Prime Minister Mariano Rajoy might use the summit to “make explicit the conditions that would be imposed in exchange for aid” over and above those agreed in June to help Spain’s banks.
Other business expected to come up at the summit includes relations with China and the situation in Syria, Iran and Mali.