She also resisted efforts by French President Francois Hollande and Italy to loosen EU budget discipline rules by exempting public investment when calculating national deficits. The European Central Bank also rejected any let-out clauses from fiscal consolidation.
"Differentiating between good and bad deficits makes no sense," ECB executive board member Joerg Asmussen told Reuters. "Each deficit has to be refinanced on the capital markets. One should not touch the rules of the (EU) Stability Pact." Amid optimism from many leaders that the euro zone has turned the corner by agreeing on a single banking supervisor and fresh support for Greece, Merkel warned that the bloc faced a long, hard slog to clean up public finances and revive growth. "One reason I am careful with my forecasts is the adjustment process, the changes that we are going through are very difficult and painful," she said.
European Council President Herman Van Rompuy told a news conference that the issue of how to finance a Single Resolution Mechanism for banks until levies on financial institutions provided sufficient money would have be decided later. However, European Commission President Jose Manuel Barroso said the bloc's ESM rescue fund would be able to inject capital directly into troubled banks in countries under an assistance programme, without it weighing on national debt, from mid-2013.
Greek Prime Minister Antonis Samaras said direct ESM recapitalisation for Greek banks could reduce Greek debt by 50 billion euros, but Germany and its north European allies have so far rejected any assumption of so-called "legacy assets". After more than eight hours of late-night talks, leaders promised to push ahead with setting up a mechanism to resolve problem banks and launched talks on how to make countries stick to economic targets with the help of a small common fund.
Merkel made clear she had agreed only to a carrot-and-stick "solidarity fund" to reward states that carry out major economic reforms. "We are talking about support linked to improvements in competitiveness." she told reporters. "We are talking about a very limited budget. Not three digit billions, rather 10 or 15 or 20 billion euros." Hollande played down the setback to his hopes for a more ambitious fund, telling reporters: "Frankly, if we manage to pull together 10, 15, 20 billion euros quickly for the solidarity mechanism, I will take them and we'll see what happens afterwards."
With officials concerned about complacency creeping into decision-making now that financial markets have calmed and the crisis seems less acute, leaders appeared intent on showing that they are not relaxing. But the combination of the German election next September and French reluctance to consider EU treaty changes before European Parliament elections in 2014 mean bolder steps in integration have been deferred until much later.
The sixth and last EU summit of 2012 had been intended to discuss how to overhaul economic and monetary union and correct the flaws that have fuelled three years of debt crisis. The meeting was held just hours after EU finance ministers achieved a significant breakthrough by agreeing to make the European Central Bank the top supervisor of euro zone banks, the first stage in an eventual banking union.
That decision, and another by euro zone ministers to release up to 50 billion euros in new aid to Greece, marked two positive developments after a long year of crisis-management and eased pressure on leaders to make major strides. The ECB said on Friday that even if financial stability strains had eased in the euro area since last summer, when ECB President Mario Draghi vowed to do whatever it took to preserve the euro, the situation remained very fragile.