Merkel says fixing eurozone crisis will take years

German Chancellor Angela Merkel pushed for stronger rules against overspending as the long-term answer to Europe's debt crisis, saying fixes for the euro's flaws need to be written into changes in the basic EU treaty.

Merkel's stance, laid out Friday, could be part of what markets have greeted as an emerging plan for more effective action to contain the crisis, combined with more aggressive action by the European Central Bank to quickly lower borrowing costs for hard-pressed governments facing financial disaster.

Speaking to lawmakers in Parliament ahead of a crucial European summit next week, the German leader emphasized that tougher rules against running up debt were the only path forward -- a process could take years.

"The German government has made it clear that the European crisis will not be solved in one fell swoop," Merkel said. "It's a process, and this process will take years."

But despite her insistence on long-term changes, the push by Merkel and French President Nicolas Sarkozy is being seen as one half of new effort by European leaders to finally get a grip on the debt crisis more than two years after it started in Greece.

The other half could be more short-term help for other heavily indebted governments such as Italy from the ECB. Bank President Mario Draghi on Thursday appeared to dangle an offer of new, extraordinary measures if political leaders at the Dec. 9 summit can answer his call for "a fundamental restatement of the fiscal rules."

"Other elements might follow," Draghi said, fueling speculation that the bank could step up its so-far limited program to buy government bonds issued by struggling countries.

That helps keep their borrowing costs down, but the bank has resisted plunging in with bigger purchases, saying it was up to governments to fix their finances and not look to the central bank for help avoiding painful decisions on cutting back spending and shaking up over-regulated economies.

But Draghi stressed the bond buys "can only be limited," leaving analysts speculating he might have other forms of support in mind, such as extending more unlimited credit to banks having difficulty borrowing because of market fears they may suffer losses on the government bonds they hold.

The prospect of more ECB help has boosted markets, along with co-ordinated steps Wednesday by central banks to improve shaky commercial banks' ability to borrow U.S. dollars to fund their operations.

Bond yields down

The yield on Italian 10-year bonds fell to 6.48 per cent on Friday from over 7 per cent the day before, and stocks rose in Asia and Europe.

Italy was readying new action ahead of the summit as well. New Prime Minister Mario Monti has pledged to unveil new austerity measures and stuctural reforms at a Cabinet meeting on Monday. He will be meeting with political parties on Saturday and unions on Sunday to present his much-awaited plans.

Rising borrowing costs fed by fears of default led to Greece, Ireland and Portugal seeking bailout loans from other eurozone governments and the International Monetary Fund.

Similar fears are afflicting Italy and Spain, which are too large to bail out, feeding fears of a disastrous financial collapse that could push the global economy back into recession.

Merkel said that because the crisis is above all one of trust, in order to move forward, "we need to do away with the underlying deficiencies in the fiscal and currency union."

"In order to win back trust, we need to do more, where we today have agreements, we need in the future to have legally binding regulations," Merkel said.

The eurozone's current budget rules have been violated 60 times over the past decade by a number of nationsincluding Germany but no country has been seriously punished.

To ensure that nations are keeping their budgets in check with the limits of the stability pactdeficits not more than 3 per cent of gross domestic product and overall government debt of not more than 60 per cent of GDP -- Germany is pushing for the right to take countries in violation before the European Court of Justice.

On Thursday, Sarkozy called for a "refounding and rethinking the organization of Europe." He said that without some new "convergence" among European countries, the continent's crushing debt could destroy the euro. Merkel and Sarkozy are to meet Monday to finalize their joint strategy ahead of next week's EU summit.

No to eurobonds

Merkel reiterated her objection to so-called eurobonds, held jointly by all EU nations, telling Parliament that jointly backed government debt across the eurozone is no solution.

"The current discussion (about joint bonds) does not contribute to solving the crisis," Merkel said.

She also rejected an idea floated this week, of taking advantage of a clause in the EU's constitution to allow the eurozone nations to enact their own treaties for governing the currency, underlining that any treaty changes must include all 27 member states, not just euro members.

"We are going to Brussels with the goal of pushing through treaty changes, in order to avoid a spirit of division between the eurozone and non-eurozone members," Merkel said.