Merkel: 'We need to take a deep breath to overcome this crisis'

Chancellor Angela Merkel said today that Europe could only hope to come out of its crisis stronger and compete in a globalised world if its members pressed ahead with painful reforms and moved to more responsible budget policies.

Speaking at a meeting of the Federation of German Industries (BDI), Merkel acknowledged that Germany was "not an island" that could disconnect from economic developments in Europe and the world economy.

But she placed the onus on Berlin's struggling euro zone partners to fix their own economies, rejecting the idea that Germany should relax its own productivity drive in order to help its partners.

"We need to take a deep breath to overcome this crisis," Merkel said. "We must make the efforts that will allow Europe to come out of this crisis stronger than it went in."

"There is a lack of confidence on financial markets that some euro zone states can pay back their debts in the long term," she continued. "The world wonders how competitive euro zone countries are."

The German leader said tough reforms in southern Europe had led to some convergence of unit labour costs across the euro zone, but made clear that there was still work to do.

She also expressed regret that the European Court of Justice had not been given stronger powers to intervene in national budget policies in the euro zone.

"We can't have support without controls. The two go hand in hand," Merkel said.

"We are feeling that Germany is not an island. We are an export nation. Forty percent of our exports go to the euro zone, 60 percent to the European Union. We can't disconnect from European and global economic developments," Merkel said.

She dismissed the notion that Berlin was slamming on the brakes in the creation of a European banking watchdog. In recent weeks, the German government has made clear that it sees a January deadline for putting this in place as unrealistic.

"We want stronger European banking supervision," she said.

Merkel was due to meet European Central Bank President Mario Draghi this afternoon. Later he will give a speech to the same industry conference.