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Merkel and Hollande clash on EU budget tsar before summit

BERLIN/BRUSSELS -- Germany and France, Europe's two central powers, clashed over greater European Union control of national budgets and moves towards a single banking supervisor before a summit of the bloc's leaders on Thursday.

German Chancellor Angela Merkel demanded stronger authority for the executive European Commission to veto national budgets that breach EU rules, but French President Francois Hollande said the issue was not on the summit agenda and the priority was to get moving on a European banking union.

Addressing parliament in Berlin hours before the 22nd summit since the start of the eurozone's debt crisis, Merkel sought to slow the race to create a single European banking supervisor, saying quality was more important than speed.

Germany, reluctant to see its politically sensitive regional Landesbanks and savings banks come under outside supervision, insists European oversight should only cover big cross-border banks, and rejects any joint deposit guarantee which could see richer countries prop up the banks in their poorer counterparts.

Hollande told reporters at a preparatory gathering of Socialist leaders: “The topic of this summit is not the fiscal union but the banking union, so the only decision that will be taken is to set up a banking union by the end of the year and especially the banking supervision.”

Merkel and Hollande are expected to hold a one-on-one meeting before the summit proper begins, EU officials said, which may provide a chance to discuss their differences.

Merkel skirted the issue of a possible credit line for Spain, which eurozone officials expect Madrid to request within weeks, but reiterated her desire to keep Greece in the currency area despite its chronic debt problems.

“We have made good progress on strengthening fiscal discipline with the fiscal pact but we are of the opinion, and I speak for the whole German government on this, that we could go a step further by giving Europe real rights of intervention in national budgets,” Merkel told the Bundestag lower house.

Merkel also advocated the creation of a European fund to invest in specific projects in member states which she said could be fuelled by a financial transaction tax which 11 eurozone countries have said they will adopt.

Her call echoed a proposal for the 17-member eurozone to have its own budget - known in EU jargon as a “fiscal capacity” - on top of the 27-nation union's common budget, which mostly funds agriculture and aid to poorer regions.

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