German Chancellor Angela Merkel (right) wants tougher EU powers to punish countries that breach budget rules.
"There should be the right to declare such budgets null an void... otherwise we will not get out of the situation," she said in her strongest language yet on common EU fiscal powers.
EU leaders want to calm concerns that a new bailout fund would discourage countries from cutting deficits. Ms Merkel warned that letting Greece default would destroy investor confidence in the eurozone.
Meanwhile, Germany's central banker Jens Weidmann has dismissed reports that a beefed-up bailout fund would be sufficient to tackle the eurozone's debt crisis.
Markets were not concerned about the size of the rescue fund, rather about the political capacity to deliver, he said.
"This is a very dangerous thing. It means you completely blur the responsibility between fiscal and monetary policy," Mr Weidmann said.