06/14/2012 04:57 am ET Updated Aug 13, 2012

Angela Merkel: European Fiscal Union 'A Herculean Task But It Is Unavoidable'

* Merkel speaks in parliament before June 18-19 G20 summit

* Calls debt mutualisation "counterproductive"

* German leader says German strength "not infinite"

* Backs stronger role for ECB in bank supervision

By Noah Barkin and Annika Breidthardt

BERLIN, June 14 (Reuters) - Germany's Angela Merkel rejected any quick solution to the euro zone's deepening debt crisis as counterproductive on Thursday, saying Europe must instead pursue the "Herculean task" of closer political integration.

Speaking to parliament before a meeting of Group of 20 leaders in Los Cabos, Mexico, next week, the chancellor reiterated her opposition to "miracle solutions" like joint euro zone bonds and a Europe-wide deposit guarantee scheme for banks, saying Germany could only go so far.

"Germany is strong, Germany is the economic engine and Germany is the anchor of stability in Europe. I say that Germany is putting this strength and this power to use for the well-being of people, not just in Germany but also to help European unity and the global economy," Merkel said. "But we also know, Germany's strength is not infinite."

Concerns about Europe's debt crisis, which first erupted in late 2009, have grown in recent months as contagion has spread to larger members of the single currency bloc.

Spain announced at the weekend that it would seek a rescue of up to 100 billion euros ($125 billion) for its banks.

On Sunday, Greece votes in an election where a radical left party that opposes the strict terms of the country's bailout could emerge victorious, increasing the chances of it abandoning the euro and returning to the drachma.

Germany's partners, including the United States, have ratcheted up the pressure on Merkel to take more radical steps to stem the crisis and she acknowledged in her speech that "all eyes" would be focused on Berlin in Los Cabos, where leaders will also discuss IMF reform and "green growth".

"No matter how important the other themes are, they will all be overshadowed in Los Cabos by one that has preoccupied us in Germany, in Europe and internationally for the past two years, and that is the European sovereign debt crisis," Merkel said.

"It will be the central theme. It will dominate the discussions. And therefore there is no doubt that we, that Germany, will be the centre of attention. It is so. All eyes are focused on Germany because we are the biggest economy in Europe, because we are a big exporter."


But she rejected "easy solutions" involving the mutualisation of European debt as counterproductive and said that they were constitutionally impossible in Germany.

"We don't make policy for the markets, but for the future of the people in our country," Merkel said.

U.S. Treasury Secretary Timothy Geithner said on Wednesday that it was unfair to put all the blame for Europe's failure to resolve its crisis on Germany.

But he also kept up pressure on European leaders to coalesce quickly around a bold plan for closer fiscal integration, including the contours of a so-called "banking union".

U.S. President Barack Obama faces a tough re-election battle where the health of the economy is paramount, and he can ill afford a new flare-up of Europe's debt crisis.

Merkel said past years had shown that Europe made a mistake by pressing ahead with monetary union and the creation of the euro 13 years ago, without worrying about the need for closer political integration.

She wants euro zone countries to agree to give up more sovereignty over their budgets, convinced that financial market jitters will ease if Europe sets out a road map towards a "fiscal union".

But many of Germany's partners, including large neighbour France, are reluctant to do that, setting leaders up for a potential showdown at an EU summit on June 28-29.

"I know that it's arduous, that it's painful, that it's drawn-out. It's a Herculean task but it is unavoidable," Merkel said of closer integration.

She reiterated her support for more independent supervision of the banking sector in Europe, saying "stress tests" for banks conducted by the European Banking Authority (EBA) last year had been a failure because they relied on national authorities that had an interest in playing down problems.

"I would have nothing against giving the ECB a tougher, stronger role here," Merkel said.