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

Merkel said it required stamina to solve the crisis but the fiscal compact for budget discipline was a sign of progress, as was progress on banking supervision across the bloc.

The German leader said it was premature to talk of any recapitalization of banks in the euro zone through European mechanisms before a supervisory body with robust intervention rights was in place.

She added that Germany's overall budget deficit was likely to come in at 0.9 percent of gross domestic product (GDP) this year and that the country needed to continue to boost domestic demand.

(Reporting by Noah Barkin; Writing by Stephen Brown)

• A Permanent Economic Emergency