Prescription aimed at rescuing the single currency is one that other member nations may find hard to swallow

Angela Merkel has called for the surrender of key national powers over tax-and-spend policies to Brussels by the 17 countries in the eurozone within three years in order to rescue and shore up the embattled single currency.

In a rare landmark policy speech on Wednesday to the European parliament in Brussels, the German chancellor voiced Berlin's absolute determination to stand by the euro and to strengthen the EU through greater integration of policymaking. But her commitment came with a price tag that many others in the eurozone may find hard to swallow.

Merkel called for a major centralisation in Brussels of sovereign national powers in sensitive areas of fiscal, budgetary and economic policies, arguing that action already taken during three years of euro crisis had only left the job half-done. "Stronger economic policy co-ordination will also perhaps be needed in areas that affect the core of national sovereignty. I'm thinking of sensitive policy areas such as labour market and tax policy," the chancellor said. "We need solutions creating a sensible balance between the necessary new intervention rights at the European level and the scope for action of the member states and their parliaments. The European institutions must be strengthened to allow them to correct mistakes and breaches of the rules effectively."

She added that eurozone governments should strike "binding and feasible reform contracts" with the European commission, which then could be partly financed from a new eurozone budget.

The latter ideas were floated last month at an EU summit but no agreement was reached. Merkel said that she wanted her proposals agreed at another Brussels summit next month and that the blueprint for a more solid, stable and more tightly controlled monetary union should be implemented "in the next two to three years".

Merkel also called for greater harmonisation in regulation of the financial markets across Europe and supported the contested idea of making the European Central Bank in Frankfurt the new supervisor of the eurozone's banking sector.

But she made plain, despite strong criticism from France, Italy, and Spain, that she was in no hurry to see the new banking supervisor established.

Stressing the need for "quality before speed", she said: "It's important that we take great care to clarify the complex legal issues, because I want a banking supervisor worthy of the name."

EU officials involved in drafting the new supervisory framework admit that the Germans are working hard to slow the policy down and will be able to continue to throw up obstacles over the next 12-18 months.

Merkel said eurozone governments had made a good start to compelling greater fiscal rigour in the single currency area by pushing ahead with their fiscal pact, the treaty vetoed by David Cameron last December. But the pact did not go far enough.

"I can well imagine going further," said Merkel, "by for example giving the European level real rights to intervene in national budgets when the agreed ceilings [for eurozone deficit and debt levels] are not observed."

Merkel's demand for stronger policing powers for Brussels and for the surrender of national budgetary prerogatives will run into strong resistance in France and in other countries such as the Netherlands.

The German leader also said the European treaties might need to be re-opened and renegotiated to establish the new stiffer eurozone regime. Many countries, led by France, also oppose opening the treaties as that could trigger referendums in several countries.

Merkel dismissed fears that her proposals for a much more integrated eurozone would split the EU between the 17 single currencies and the 10 others outside it. But she added there would need to be new forms of political organisation to legitimise the moves being considered, such as only having MEPs from eurozone countries in the European parliament voting on policies only affecting the single currency area.