Euro is facing 'existential crisis,' Merkel says

Admitting that a decision taken in 2004 to tolerate breaches of the eurozone's rules on deficits was a "big mistake", Ms Merkel vowed to push for sanctions, such as slashing EU funds and stripping voting rights, for countries who fail to get a grip on their public spending.

She said her government will on Friday present a set of nine measures aimed at limiting the "debt policy" of eurozone countries to a task force led by EU council president Herman Van Rompuy.

"The current crisis facing the euro is the biggest test Europe has faced in decades. It is an existential test and it must be overcome ... if the euro fails, then Europe fails," she said to applause of her own camp. But the rhetoric was subject to loud comments and booing from leftist opposition parties.

Speaking to journalists shortly after the debate, Social Democrat MP Angelika Schwall-Dueren said Ms Merkel's behaviour as "the teacher of Europe", telling other governments what to do, had little chance of success.

She also criticised the government for allowing the mass-selling tabloid Bild to "basically run the debate" around the Greek bail-out, stirring negative sentiments among the population against the allegedly "lazy Greeks."

Thomas Silberhorn from Ms Merkel's CDU/CSU party argued that bail-outs should not be seen as a one-size-fits-all solution and that ultimately there should be an option to let a country default if reforms are not implemented thoroughly.

"We agreed to the rescue package [for Greece] because it would have been a bigger problem for the eurozone if we didn't. But if a bailout doesn't work, then it can actually become a bigger problem to keep paying and paying and getting no reforms done," he said.

In yet further proof of the markets' sensitivity to German comments, the euro fell over half a US cent following Ms Merkel's speech. On Tuesday, it dropped dropped to a 4-year low of 1.21 US dollars in Asia after a German ban on short selling was introduced by the government.