Germany, France in push for EU \'fiscal union\'

A day after French President Nicolas Sarkozy said Europe needed to be "refounded" in response to a crisis threatening the European Union\'s very existence, Merkel insisted that progress had been made.

And she left no doubt over the enormity of what awaits European heads of state at their meeting next Friday in Brussels, insisting: "The future of the euro is indivisibly linked to the unification of Europe."

In a keenly awaited speech to the German parliament, Merkel said Europe was "on the verge" of creating a "stability union" for the 17-nation eurozone, with greater budgetary discipline and checks.

"Anyone who had said a few months ago that we, at the end of 2011, would be taking very serious and concrete steps toward a European stability union, a European fiscal union, toward introducing (budgetary) intervention in Europe would have been considered crazy," she said.

Merkel said she would be holding talks with "almost everyone" in the run-up to the summit that many commentators have dubbed the last chance to save the single currency introduced with such euphoria a decade ago.

And she confirmed she would head for Paris for talks with Sarkozy on Monday to thrash out a joint Franco-German position on changing the EU founding texts ahead of the summit.

Highlighting the challenges facing Europe\'s leaders, unemployment in crisis-hit Spain hit a 15-year high.

Nevertheless, European stock markets rallied at the open, following Asian gains, with traders still in a bullish mood in the wake of joint central bank action Wednesday to ease tensions in the global financial system.

The euro rose and tensions on the European bond markets eased significantly.

Markets also cheered a sharp drop in US unemployment to its lowest level since March 2009, down to 8.6 percent in November from 9.0 percent the prior month.

But despite a sense of optimism, one analyst warned of the dangers of failure.

"The main players are in overdrive to come up with a comprehensive strategy to address the long-term issues," said Juergen Michels from Citibank.

"Market pressure is growing, and the risk of another half-baked deal would likely be more detrimental for confidence, which would have a negative impact on economic activity."

In a joint news conference later Friday, Merkel and Austrian Chancellor Werner Faymann both insisted that the treaty changes under consideration would not require a referendum.

Meanwhile, Sarkozy was due to brief reporters after a meeting with British Prime Minister David Cameron.

In a landmark speech Thursday, the French president warned the developed world was entering a "new economic cycle" dominated by debt reduction, heralding tough times ahead for jobs and business.

"We must confront with total solidarity those who doubt the stability of the euro and speculate on its break-up," he declared.

For her part, Merkel said she was heading to Brussels "with the aim of changing the EU treaty" to push through her goals. "Rules must be respected. Respect for them must be supervised. Their violation must have consequences."

And she warned the eurozone would go it alone if no agreement could be struck on EU treaty change, while stressing the euro club was open to all.

"There is no alternative to changing the European treaties or -- this would be the second-best option -- to creating a new treaty within the eurogroup," she said, referring to the 17 members of the euro club.

Many European partners want to see more decisive action by the European Central Bank, stepping in to buy up the bonds of distressed eurozone nations and effectively acting as the lender of last resort as in Britain or the United States.

A front-page story in Friday\'s Sueddeutsche Zeitung suggested Merkel might be softening her position on the ECB\'s role in return for stricter fiscal discipline.

"A concrete plan for treaty change, ECB intervention and then eurobonds -- that\'s the script for the euro endgame and the scenario which the federal government is working towards," wrote the Die Zeit weekly.

Merkel dismissed this in her speech, stressing the ECB\'s independence and insisting: "The mandate of the ECB is different to that of the United States Fed or of the Bank of England," referring to the Federal Reserve Bank.

"It is written clearly in the treaties: the mandate is to guarantee price stability and that is exactly what the ECB is doing and ... I am completely convinced of that," the chancellor said.

She also reiterated that eurobonds, a pooling of the debt of eurozone nations, was not the solution, saying anyone who believed that to be the case "had not understood the nature of the crisis."

Germany, Europe\'s top economy, believes that eurobonds and any compromise of ECB independence would lead to inflation, which the central bank was set up to prevent.

Merkel pulled no punches as Europe heads into a week likely to define it for years to come.

"Europe is in its most difficult existential test. As chancellor, I am going to do everything ... to ensure that Europe comes stronger out of this test than when it went in," she told MPs.

"Despite all the turbulence we have seen in recent times, the euro has proved itself. It is stable ... the euro is much more than just a currency," she added.

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