Angela Merkel issues veto ultimatum as European leaders refuse to give peace a chance

European leaders, meeting for the first time since the EU won the Nobel peace prize, carried on as normal last night - battling acrimoniously over the future of the euro.

The German Chancellor Angela Merkel angered some other EU leaders before a two-day summit by calling for the European Commission to have the power to veto national budgets.

France, and a number of other countries, unwilling to consider such a loss of sovereignty, accused Berlin of deliberately raising the "federal" stakes to derail, or delay, discussions on a single supervision system for banks inside the eurozone.

The French President, Francois Hollande, said that the German proposal for a Brussels "super-commissioner", with powers to reject deficit-busting national budgets, was "not on the agenda" of the summit in Brussels. "The only decision that will be taken is to set up a (European) banking union by the end of the year," he said.

The French and German leaders had private talks before the summit began last night. French officials said that Ms Merkel had accepted Mr Hollande's insistence that a rapid timetable must be agreed for setting up a European banking union.

The argument, though both tactical and technical, points to persistent disagreements between Berlin and Paris, and "northern" and "southern" EU countries on how to resolve the now two year crisis in the eurozone. Although this week's summit is not expected to reach firm decisions - two more meetings are planned before the end of the year - an open quarrel could upset the uneasy calm in the sovereign debt and equity markets.

Early agreement on a banking union, approved in outline last June, is regarded by many EU governments as a vital next step in the struggle to cure the sovereign debt problems of southern Europe and rescue the euro from permanent crisis or even collapse. Berlin, although it agrees to the idea in principle, is fighting a rear-guard action to prevent the Europe-wide banking regulator from supervising German regional and savings banks. 

In a speech to the Bundestag before leaving for Brussels, Chancellor Merkel, also rejected early agreement on the related proposal that eurozone rescue funds should be used to prop-up individual banks, not just struggling countries. This is regarded by Madrid and Rome, with support from Paris and other capitals, as an indispensable step towards solving the Eurozone crisis.

Having rejected rapid progress towards "federal" control of banking, Ms Merkel upped the ante by championing the idea - already floated by Berlin - of a final Brussels say on the tax and spending plans of eurozone nations.

"We have made good progress on strengthening fiscal discipline with the fiscal pact but… we could go a step further by giving Europe real rights of intervention in national budgets," Ms Merkel said.

French officials said that this "maximalist" approach was designed to disguise Germany's difficulties in agreeing more limited EU powers over banking. In a press interview before the summit, the French president, Mr Hollande, made a similar point. He said: "those who are most eager to talk about political union are sometimes those who are most reticent about taking urgent decisions that would make it inevitable".

The idea of Brussels control over national budgets is a red rag to the eurosceptic left wing of Mr Hollande's Socialist party, which uneasily enacted the EU fiscal discipline pact this month. The French president is also desperate to avoid radical changes in the EU treaty, which he might have to put to a referendum.

Mr Hollande denies that he is in deep discord with Ms Merkel but the days of the "Merkozy" tandem and pre-cooked Franco-German summit agreements are clearly over.

Outline agreement is expected tomorrow however on plans for a Eurozone "fund", or budget - parallel to the existing EU budget. The fund, which could pay for infrastructure schemes or help to ease debt payments, would be financed by a tiny tax on all financial market transactions which is adamantly opposed by Britain but has now been approved in principle by 11 eurozone nations.

In a document circulated to the summit, the EU council president, Herman Van Rompuy said: "Every (participating) member state, regardless of their income levels, would over time contribute to the fiscal capacity and then benefit from its support."

Meanwhile on streets of Athens...

Hundreds of youths pelted riot police with petrol bombs, bottles and chunks of marble yesterday as yet another Greek anti-austerity demonstration descended into violence.

Authorities said 70,000 protesters took to the streets in two separate demonstrations in Athens during the second general strike in a month. The government is negotiating new austerity measures with Greece's creditors. The measures for 2013-14 are worth €13.5bn (£11bn) and aim to prevent Greece from going bankrupt and potentially having to leave the eurozone. AP