German Chancellor Angela Merkel proposed a new European aid fundto bolster competitiveness as she highlighted disagreements overbudget rules, joint borrowing and bank supervision in a pre-summitaddress.

Speaking to lawmakers in Berlin before heading to Brussels for atwo-day gathering of European Union leaders, Merkel laid out hervision for more economic coordination, while expressing “surprise”at negative reaction to a proposal for a watchdog with veto powerover national budgets. Her vision includes a fund “limited in timeand project-based” and possibly stocked by the proposed financialtransaction tax, she said.

“To give all member states the opportunity then to improve theircompetitiveness and to actually be able to implement thesecommitments, I propose that we introduce a new element ofsolidarity,” Merkel said in her speech at the Reichstag parliamentbuilding. “Yes, we need solidarity, but we need a form ofsolidarity that leads to what we need: more competitiveness.”

Exactly three years after Greece touched off the financialcrisis by revealing a bigger-than-expected budget deficit, leaderswill gather to discuss joint banking supervision and a report by EUPresident Herman van Rompuy that lays out options for closereconomic and fiscal union. Included in his blueprint is a proposalfor pooling euro-area debt that is supported by France, Spain andItaly and rejected by Merkel.

Financial aid without conditions attached has in some casesfrustrated the drive to streamline economies, “and therefore jointliability is the wrong answer,” she said. What is needed is“exactly this kind of dedicated solidarity.”

Heading into the summit, Spanish and Italian markets haverallied on expectations Greece won't get kicked out the euro, Spainwill get the money it needs and the European Central Bank will useits balance sheet to limit potential turmoil. Spanish 10-year bondyields fell to their lowest in six months, declining 7 basis pointsto 5.39 percent at 11:49 a.m. in Brussels.

Merkel's fund for troubled euro-region members could be financedby proceeds from a transaction tax that she said was backed by 11member states. It “would maybe even lead to more euro statesintroducing” the levy, she said.

European leaders, the EU Commission and parliament would monitoroutlays from the fund. Countries struggling to balance investmentwith budget discipline could use it to finance projects, shesaid.

Veto Power

Merkel said strengthened oversight over national budgets“presupposes” boosting the power of the EU's monetary affairscommissioner. German Finance Minister Wolfgang Schaeuble raised theidea this week, suggesting the EU official be allowed to rejectnational budgets as a way to enforce spending discipline.

Merkel's message of locking in fiscal rigor risks conflict withpartners such as France and prompted criticism in her governingcoalition. Markus Soeder, the state finance minister of Bavaria, isskeptical about the idea of budget oversight from Brussels,according to an interview in the Die Welt newspaper today. Soeder'sChristian Social Union party is part of Merkel's government.

Merkel coupled her talk of progress on “tough reforms in manycountries” with a warning that “naturally, more work is needed” tolock in fiscal stability that Germany, the biggest contributor toeuro-area bailouts, says is the only solution.

Countries such as Spain and Greece are making progress withoverhauling their economies, she said, restating her goal ofkeeping Greece in the euro to avoid splintering the 17-nationcurrency bloc.

“We've done a lot in these three years,” Merkel said. “We'veachieved a lot more than in previous years in Europe and thecontours of a stability union are already clearly discernible.”

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