Germany sets tone for 'controversial' summit

The paper, put together by European Council President Herman Van Rompuy, gives "priority" to mutualising debt and puts "more controls and legal obligations" in second place and then only "very imprecisely."

"Accountability and control clearly stand in disproportion in this report," said the Chancellor.

Eurobonds - mentioned in the summit paper as a medium-term objective - would not only go against the German constitution but are also "economically wrong and counterproductive."

What is needed is more EU powers to step in when national budgets get out of line, she noted.

"I will sound out whether other member states are prepared to take this path - including necessary treaty change," she said.

The German leader's tough words set the scene for what is likely to be a bruising summit beginning Thursday.

The extra supervisory powers that Merkel is calling for chip away at what is the heart of a state's powers - the right to decide how and when to spend money.

Berlin has been increasingly grumbling about other capitals calling on Germany to open its pockets but being unprepared to accept greater external controls.

A key issue is relations with France. Merkel will meet President Francois Hollande in Paris on Wednesday evening. Hollande has been pressing Germany to show more solidarity before Paris will accept a loss of sovereignty - traditionally a hard-sell among Hollande's own socialists.

Meanwhile, Spain and particularly too-big-to-fail Italy are the other two main players in the eurozone game.

While Merkel is focussing on long term structural change to the eurozone, Madrid and Rome are looking for quick solutions as their borrowing costs have jumped upwards.

One of the ideas pushed by Italian leader Mario Monti - who says he is prepared to sweat out a days-long summit to get a satisfactory outcome - is that the eurozone rescue fund buy the bonds of troubled but well-intentioned eurozone countries to lower borrowing costs.

Another mooted plan is to have the eurozone fund directly recapitalise troubled banks - rather than going via the government and pushing a state further into debt - something particularly relevant to Spain.

"I have no illusions. I am expecting controversial discussions in Brussels," said the Chancellor of the summit, adding that "many eyes" will be on Germany.