Changes to the Lisbon Treaty are necessary if the bloc wants to get out of the debt crisis, German Chancellor Angela Merkel said after the country's top court ruled that EU bailouts are legal.
In a speech that many onlookers called her most important, Merkel said the constitutional court's ruling reinforced her government's policies and paved the way for further reforms to the way the EU manages its debt.
Merkel faces growing dissent in her national parliament, the Bundestag, as her government is blamed for rubber-stamping bailouts without seeking parliamentarians' approval and for increasing taxpayers' financial liability in tackling the debt crisis.
In an evocative speech about the euro's future the leader took a stab at her erstwhile socialist opponents, who are blamed for killing the credibility of the EU's debt rules (the Stability and Growth Pact) by sidelining calls from the European Commission to bring down its budget deficit.
"It is quite a paradox that virtually all violations of EU rules, whether economic or environmental, lead to verdicts from the European Court of Justice, but that violations of the Stability and Growth Pact cannot be looked at by the court. We need to think about these issues," Merkel said.
The leader also insisted that the EU needs to think seriously about treaty change to forge a stronger union capable of pressuring wayward economies into making the necessary cuts to counteract their mounting debts.
The Stability and Growth Pact is currently being redrawn in Brussels to make sure that sanctions for budget offenders are more automatic and that countries cannot dismiss the Commission's demands.
Yesterday the European Parliament issued a statement which heralded progress in the pact's review but big bones of contention still stand in the way of an agreement.
Parallel to these talks, Merkel has been forging plans for a fiscal union with Germany's traditional ally, France. The union envisaged by Merkel would give Brussels more power over the country's fiscal policies, requiring a change to the EU's Lisbon Treaty.
Bundestag vote on EFSF
But before the chancellor can make any more bold moves she faces a growing challenge to her leadership. Some of Merkel's supporters have threatened to oppose new powers for the euro zone's rescue fund in a parliamentary vote later this month.
The Bundestag is unhappy that the bailout fund, the European Financial Stability Facility, has been earmarked to make straight bond purchases, a move which could up Germany's already large share of rescuing the euro zone by a substantial amount.
The constitutional court's ruling yesterday is therefore a relatively small hurdle compared to the pending Bundestag vote on the EFSF.
In addition, the court's decision may have made matters worse for the chancellor as each bailout will first require the approval of the Bundestag's budget committee before it can be agreed at EU level.
Members of parliament must be given the opportunity to review the aid and also stop it if needed, the ruling said.
Guy Verhofstadt MEP, leader of the Alliance of Liberals and Democrats for Europe group in the European Parliament, called on EU leaders to make bold moves towards a fiscal union as the only way out of the crisis.
"I appeal now for a bold and brave approach, particularly from the European Commission, which has the right of initiative," said Verhofstadt in a statement. "It is not acceptable to sit and wait for Merkel and Sarkozy to stitch up another deal between themselves. The European institutions exist to defend the Community interest. There is no greater need for this than now when governments are too scared of public opinion to propose what really needs to be done."
"Pro-Europeans should not be afraid to speak out in defence of a federal solution since that is what is now needed to end the crisis that is doing untold damage to our growth and stability."
Marta Andreasen, a former European Commission chief accountant and current MEP for British nationalist party UKIP, said: "Voices outside Europe are becoming very concerned and are asking other players to become involved. The very well-paid European institutions have been sidelined because of their ineffectiveness. Even the European Central Bank is playing from an old hymn sheet as it fights inflation by raising interest rates just as the economies come to a halt and need lower interest rates. The intergovernmental method is not working either as governments are trying to protect their citizen's interests," she said.
Raoul Ruparel, an economic analyst at Open Europe, a Eurosceptic British think-tank, said: "Giving the Bundestag's Budget Committee the final say over the use of the bailout fund is welcome from a democratic point of view, but will add another element of uncertainty to the eurozone crisis. However, so far the Budget Committee has consistently taken the government line on the bailout, albeit reluctantly, and it remains to be seen whether it dares to exercise its new power."
- 23 Sept.: German Bundestag to vote on extension of EFSF's powers.