Germany alone cannot save Europe, Merkel says

"But even Germany's powers are not unlimited. That is why our special responsibility as Europe's largest economy is to use these powers in a credible way... not to overestimate them, but to move step by step on our path to a political union."

The step-by-step approach she has become renowned for since the crisis began three years ago is once again being challenged by the markets. Spain's borrowing costs on Thursday spiked above seven percent - a rate at which Greece, Portugal and Ireland were forced to seek a full-blown bail-out.

Merkel said Spain was doing the "right things", but it still had to deal with the fallout of a burst real estate bubble created by "irresponsible actions in the past ten years."

She said it was good that Spain announced its intention to seek a eurozone bail-out of up to €100bn for its cash-strapped banks, but insisted that "the sooner this request is made, the better."

Spanish newspaper El Mundo earlier this month reported that Merkel had pressured the previous government of Jose Luis Zapatero several times to accept a bail-out. EUobserver understands Merkel made some 30 phone calls over the past year to convince Spanish officials to acknowledge their funding problem.

The current Prime Minister, Mariano Rajoy, has also refused to go for a full-blown, sovereignty-denting bail-out. Not going the full way has backfired, as ratings agencies downgraded Spain close to 'junk' status, citing lack of clarity over the aid.

Spanish finance minister Luis de Guindos on Thursday admitted that the current borrowing costs are "not a situation that can be maintained over time... and I am convinced that we will continue to take more measures in the coming days and weeks to help bring it down."

But Merkel also used the Spanish situation as an example for the failure of Europe's recently created banking authority (EBA), which gave a clean bill of health to the Spanish banks just six months before they started unravelling.

She said the European Central Bank should instead take on a "stronger role with supervisory competences, so as to protect us from delaying problems due to national influences."

"We need a credible banking supervision," she stressed.

Handelsblatt on Friday reported on plans to be tabled at the 28-29 June summit beefing up the ECB which would basically strip the London-based EBA of any authority. The German central bank, however, is not supportive of the plans.