Merkel renews push for 'sanctions' under Euro rescue fund

(LUXEMBOURG) - German Chancellor Angela Merkel insisted Tuesday that plans for a European Monetary Fund will only work if strengthened "sanctions" are incorporated to penalise wayward spenders.

Speaking in Luxembourg, after meeting Prime Minister Jean-Claude Juncker, who presides over a group of finance ministers from the 16 countries that share the euro, Merkel also pushed the European Commission to act on derivatives that are partly blamed for exacerbating the Greek debt crisis.

"There must be sanctions," she said of plans that were due to be outlined to his European Commission peers by the EU's economic and monetary affairs overlord Olli Rehn in Strasbourg, France, on Tuesday.

The current system for keeping in check annual deficits and compounded debt levels for European Union countries is acknowledged as having failed, with 20 out of 27 EU nations breaching set public deficit limits.

According to German media, Berlin envisages the enforced suspension of European financial aid -- for instance to build roads or support farming -- as well as the withdrawal of EU decision-making voting rights.

Merkel said the plans for a European rescue fund were being formulated to combat "situations of last resort" but added that they must not be perceived as an instrument that "weakens" the existing framework.

Designed to shore up the euro currency should Greek-like spiralling debts trigger fresh market mayhem, Merkel admitted on Monday that many questions need to be addressed, not least "who will pay into" the fund and "how independent it will be."

The German-driven plans immediately hit obstacles as the European Central Bank's top economist warned that such a fund would create the "wrong incentives" and France countered that it could take "years" to set up, with Merkel herself saying EU treaties would need re-written.

Berlin and Paris are, however, more closely aligned in their desire to limit the room for maneouvre enjoyed by speculative traders on markets, notably by curbing scope for derivatives products to wreak havoc with national debt levels.

Merkel said France, Germany, Greece and Luxembourg will together present plans to the commission seeking tighter regulation of Credit Default Swaps (CDS) trading.

"We are agreed there is a need to limit financial speculation," she said, "without banning" such products, a type of insurance to protect holders of bonds or other types of debt against the risk of default.

She said "rapid" action is required to ensure "the primacy of states over speculators."

Derivatives have been thrust further into the spotlight by reports of coordinated market action by multi-billion-dollar hedge funds to bring down the value of the euro.