Merkel says 'big rethink needed'

25 January 2012 Last updated at 12:14 ET

German Chancellor Angela Merkel: "We need a big rethink"

Germany's Chancellor Angela Merkel has told the World Economic Forum that a "big rethink" is needed in the eurozone within the global economy.

"Structural reforms that lead to more jobs are essential," she told delegates at the Swiss resort of Davos. "Do we dare to be more European?"

The eurozone is still struggling with a sovereign debt crisis and is trying to agree reform to its political system.

But many want Germany and other nations to boost the size of their rescue fund.

The International Monetary Fund (IMF) wants the eurozone to inject more cash into its rescue fund.

The IMF wants the sum available for bailouts to grow beyond 500bn euros ($647bn; £416bn) to ensure talks between private creditors and Greece do not grind to a halt.

The reserves could be bolstered by merging the temporary European Financial Stability Fund with the permanent European Stability Mechanism, according to IMF's managing director, Christine Lagarde.

IMF chief Lagarde wants eurozone governments to contribute more

"If the two together could make a common fund, it would be a very strong signal of confidence in Europe," she said.

The situation is urgent according to the IMF, which recently predicted that the economic growth rate in Europe could halve this year from an earlier estimate of 3.3% if the eurozone crisis remains unsolved.

Lessons learnt

Mrs Merkel disagrees with Ms Lagarde about what is needed.

"We have said right from the start that we want to stand up for the euro, but what we don't want is a situation where we are forced to promise something that we will not be able to fulfil," she said.

"Let us take a moment to reflect what lessons we have learned from the global financial and economic crisis.

"Is what we have learned sufficient? There's still room for improvement. There was a glaring lack of regulation that led to the predicament."

Mrs Merkel said that the austerity reforms being enacted - currently being felt from the Irish Republic to Italy - had to be balanced with reforms of how Europe is governed.

Last year, the 17 nations that use the euro agreed to adopt reforms that would allow European institutions to punish nations that exceed their budget deficit limits.

Mrs Merkel also acknowledged "tensions" between countries that have adopted the euro and those that have not inside the European Union (EU).

Permanent arrangement

At a summit in December, most of the EU vowed to add about 200bn euros to the IMF's resources - which in turn could be lent to stricken nations such as Greece or to the eurozone's bailout fund.

The UK decided not to take part in a new treaty, leading the other nations to agree a "fiscal compact" between themselves.

Mrs Merkel would like the arrangement to become permanent.

"The main message of this fiscal compact that we are working on - the fact that every country introduces a debt ceiling in its constitution and that the European Commission and the European Court of Justice can control this - the main message is: we are ready for more commitment. We are not talking our way out of it," she said.

Leading politicians and executives meet in Davos every year

Rather, Mrs Merkel said she would work to ensure the EU develops "political structures" to make the euro work properly.

"The message is that we are ready for more commitment. We are no longer making excuses," she said.

"That is important because otherwise we will continue to lose credibility.

"We have taken some steps closer to a fiscal union, but we can get faster, gain speed and become more decisive.

"I'm absolutely convinced that we will get out of this crisis."

The future of the world economy is high on the agenda as some of world's most powerful people gather in Davos.

They meet annually in the Swiss resort to discuss the state of the world.