EU summit: Merkel agenda for euro reform riles France
The German chancellor has called for the EU to be given the power to veto member states' budgets, as leaders meet in Brussels for a summit.
Angela Merkel said the EU economics commissioner should be given clear rights to intervene when national budgets violated the bloc's rules.
But French President Francois Hollande said the summit must keep focused on plans for a banking union.
He wants action to revive growth, while Germany stresses budget discipline.
"The topic of this summit is not the fiscal union but the banking union, so the only decision that will be taken is to set up a banking union by the end of the year and especially the banking supervision. The other topic is not on the agenda," Mr Hollande said.
The banking union plan is fraught with legal complications, as it would give more powers to the European Central Bank (ECB) and possibly weaken those of national regulators. There is speculation that it could lead to treaty changes - something that has caused big headaches for the EU in the past.
The aim is to agree first on joint banking supervision, with the ECB playing the lead role. But the UK - the EU's main financial centre - wants safeguards to protect the powers of the Bank of England.
The UK and some of the other nine non-euro states are also concerned about voting rights in the proposed banking union.
France and Germany differ over the timetable for such a union, with Berlin advocating caution.
Germany is also at odds with the European Commission over the scope of the proposed ECB supervision. Under the plan, all 6,000 banks in the 17-nation eurozone would be included, but Germany wants it limited to the biggest, "systemic" banks.
As the summit got under way its chairman, European Council President Herman Van Rompuy, invited all 27 leaders to attend the Nobel Peace Prize ceremony in Norway. The EU was awarded the prize last week.
"To mark this joyful occasion I hope all EU Heads of State or Government will be able to join celebrations in Oslo in December," he said on Twitter.
But Greece, the eurozone state worst hit by the debt crisis, was gripped by another 24-hour general strike on Thursday, with at least 20,000 protesters thronging central Athens, amid clashes between demonstrators and police.
'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."
On the banking union Mrs Merkel has repeatedly stressed that "quality must trump speed".
Prime Minister Fredrik Reinfeldt of Sweden, one of the 10 EU countries outside the euro, echoed her stance, saying "there are a lot of questions that need to be answered legally" and "it's better to get things right than to rush things".
The idea is that the ECB would be able to intervene early on to prevent a systemically dangerous accumulation of debt on a bank's balance sheets.
Once the legal framework is in place the new permanent rescue fund, the European Stability Mechanism (ESM), will be able to recapitalise struggling banks directly, without adding to a country's sovereign debt pile.
The prize is a system that avoids huge taxpayer-funded bailouts like those arranged for Greece, the Republic of Ireland and Portugal.
UK 'pulling away'
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.
UK Prime Minister David Cameron made it clear that improving the EU single market was his priority at the summit.
He said that in the "global race" there was a risk of the EU falling behind.
The EU single market "still isn't finished, in digital, in services, in energy, and that is the agenda I'll be pushing very hard at this council", he said.
Later Finland's Europe Minister, Alex Stubb, said the UK was looking increasingly isolated and the summit appeared to be "26 plus one".
"I think Britain is right now, voluntarily, by its own will, putting itself in the margins," he told Reuters news agency.
"It's almost as if the boat is pulling away and one of our best friends is somehow saying 'bye bye' and there's not really that much we can do about it."