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BERLIN (Reuters) - Germany's Angela Merkel called ahead of an EU summit for stronger central powers to intervene when member states break budget rules and rebuffed demands from Berlin's partners for the quick creation of a pan-European bank supervisor.
In a speech to the lower house of parliament hours before EU leaders meet, the chancellor put herself on a collision course with French Socialist President Francois Hollande and others, who are reluctant to cede sovereignty over fiscal policy and want the ECB to get new watchdog powers by year-end.
"We are of the opinion - and I speak for the whole German government on this - that we could go a step further by giving Europe real rights of intervention in national budgets," she said, voicing support for Finance Minister Wolfgang Schaeuble's idea of a European "currency commissioner".
On banking supervision, she said quality must come before speed, reiterating her view that rushing to meet a January 2013 target date for giving the European Central Bank (ECB) new powers was a recipe for disaster.
Merkel also made clear that funneling aid directly to European banks from the bloc's new rescue mechanism, the ESM, could not happen until the new supervisory body was fully operational.
"I want to be clear that completion of the legal process for banking supervision is not enough in itself," she said. "This banking supervision must be able to work and act effectively."
After her speech, in which Merkel reiterated her desire to keep Greece in the euro zone, her main challenger in next year's German election, Social Democrat (SPD) Peer Steinbrueck, launched a withering attack on her crisis management.
"It was a grave mistake that you allowed your coalition to launch a bullying campaign against Greece's membership in the euro zone. You didn't intervene, you didn't speak out for Europe and you vacillated," he said, thumping his fist on the podium.
"Neither (former conservative chancellor) Helmut Kohl nor any of your predecessors would have allowed a European neighbor to be abused for domestic political purposes like that."
Merkel stared glumly ahead and did not respond to the feisty attack.
In her speech, she said that giving more powers over national budgets to European authorities would require beefing up the European Parliament to provide full democratic legitimacy.
She said concerns about a "two-tier" Europe should not prevent a discussion about limiting participation in debates on euro zone issues to the 17 states in the currency, rather than the full 27-member EU represented in the parliament.
Merkel also praised the efforts of struggling euro zone states to cut debt and deficits and improve competitiveness and said she had sensed a "strong desire for change" in Greece on her recent visit to Athens.
But the chancellor said it was up to Spain to decide whether it should seek further aid from the euro zone after agreeing on a 100 billion euro program to recapitalize its banks.
"It is Spain's decision alone whether and how much aid it needs on top of (the banking rescue) from the ESM," she said.
Reporting by Berlin bureau; Writing by Stephen Brown; Editing by Noah Barkin