The German chancellor has called for the EU to be given the power to veto member states' budgets, as leaders meet in Brussels for a summit.
Angela Merkel said the EU economics commissioner should be given clear rights to intervene when national budgets violated the bloc's rules.
The idea is likely to be strongly opposed by members concerned about any increase in the EU Commission's powers.
The summit is expected to focus on plans for a banking union.
The aim is to agree first on joint banking supervision, with the European Central Bank playing the lead role, but the UK - the EU's main financial centre - wants safeguards to protect the powers of the Bank of England.
It and the other nine non-euro states are also concerned about voting rights in the proposed banking union.
Further complicating the issue, France and Germany differ over the timetable for such a union, with Berlin advocating caution.
French President Francois Hollande stressed that Chancellor Merkel's proposal on budgets was not the priority.
"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. The other topic is not on the agenda," he said.
As the summit got under way its chairman, European Council President Herman Van Rompuy, invited all 27 leaders to attend the Nobel Peace Prize ceremony in Norway. The EU was awarded the prize last week.
"To mark this joyful occasion I hope all EU Heads of State or Government will be able to join celebrations in Oslo in December," he said on Twitter.
But Greece, the eurozone state worst hit by the debt crisis, was gripped by another 24-hour general strike on Thursday, with at least 20,000 protesters gathering in central Athens, amid clashes between demonstrators and police.
'Quality before speed'
Addressing the German parliament in Berlin on Thursday morning, Mrs Merkel said the EU should have "real rights to intervene in national budgets" that breached the limits of the EU's growth and stability pact.
The EU's economics commissioner, she suggested, should have the authority to send a budget back to a national parliament.
Unfortunately, Mrs Merkel said, some EU member states were not ready for such a step.
"I am astonished that, no sooner does someone make a progressive proposal... the cry immediately comes that this won't work, Germany is isolated, we can't do it," she added.
"This is not how we build a credible Europe."
Her government has proposed a full fiscal union with control at European level of tax and spending.
But UK Prime Minister David Cameron said his focus was on improving the EU single market.
He said that in the "global race" there was a risk of the EU falling behind, Reuters reported.
He complained that the EU single market "still isn't finished, in digital, in services, in energy, and that is the agenda I'll be pushing very hard at this council".
The summit is taking place amid calmer European stock markets than at previous meetings and with less immediate concern over the debt crises in Spain and Greece, analysts say.
However, the banking union proposal has brought urgency to the talks, with the EU's executive Commission, the ECB and several states including Spain and France wanting its legal basis to be in place by January.
In an interview with the UK's Guardian newspaper President Hollande said there was "no time to lose" in setting up a banking union.
However, Mrs Merkel has repeatedly stressed that "quality must trump speed".
Prime Minister Fredrik Reinfeldt of Sweden, one of the 10 EU countries outside the euro, said that on a banking union "there are a lot of questions that need to be answered legally" and "it's better to get things right than to rush things".
While the 17 eurozone states largely support the banking union plan, the other countries are uneasy that their banks might face new regulation without their say-so.
The BBC's Gavin Hewitt says little will be agreed at the summit.
It is the fourth time that the EU leaders have met this year.
While not originally on the agenda, there is speculation Spain may ask for a limited bailout in Brussels.
One diplomatic source told AFP news agency that Spanish Prime Minister Mariano Rajoy might use the summit to "make explicit the conditions that would be imposed in exchange for aid" over and above those agreed in June to help Spain's banks.
Other business expected to come up at the summit includes relations with China and the situation in Syria, Iran and Mali.
Source: BBC News