BRITISH PRIME minister David Cameron predicted further tension in the euro area due to German ambivalence about bailouts but chancellor Angela Merkel pledged to defend the currency’s central role in the European peace project.

Addressing the World Economic Forum yesterday, Mr Cameron pinpointed deficiencies in stress-tests of Irish banks to support his demand for tougher standards in new tests this spring.

In doing so he repeated the view of his chancellor, George Osborne, that the results of the Irish exercise last summer undermined the entire European effort.

“Last year’s round of stress tests didn’t go nearly far enough. They said we were €3.5 billion short and six months down the line, the Irish banks alone needed 10 times that,” he said.

“This year’s tests have got to be tougher, stretching over a three-year period, covering liquidity as well as capital and involving independent bodies such as the IMF.”

As European Union leaders prepare to discuss efforts to reinforce the euro zone bailout fund at a summit next Friday, Mr Cameron said more trouble was in store.

“I think the pressure in the euro zone will get greater. I think it’s very hard for German taxpayers to understand why they must pay for other people in Europe who retire earlier than they do,” he said.

A top-level euro zone official insisted, however, that fears about Berlin’s response to the crisis were overplayed, particularly in the light of a more moderate stance on bailouts among Germany’s opposition social democrats.

In her address to the forum, Dr Merkel acknowledged that markets still lacked confidence in the capacity of weaker currency members to reduce very high debt but said the currency would not fail.

The euro, she argued, was a bulwark against Europe’s long history of war and bloodshed.

“The euro is our currency. Much more than a currency, it is if you like the embodiment of Europe of today,” she said.

She made no mention of the conditions to apply to such aid or to aid recipients such as Ireland and Greece. Her tone and language, however, was similar in many respects to that of French president Nicolas Sarkozy, who told the forum a day earlier that neither he nor Dr Merkel would ever drop the euro.

On the day in which Fine Gael signalled its willingness to change the Constitution to introduce a “debt brake” akin to that of Germany, Dr Merkel said that provision should be a model for other countries to follow.

EU countries should move towards convergence of their retirement age and education systems, she said.

She made no reference to her joint initiative with Mr Sarkozy to align their tax systems, something the French leader said other countries should follow.

Without specifying any of the measures that might be taken to boost the European Financial Stability Facility, as the bailout fund is known, the chancellor said there was no contradiction between austerity and growth.

“Savings measures and growth are not opposites,” she said as she argued that excessive public debt was the single greatest threat to Europe’s prosperity.

“I was criticised and told Germany should contribute to growth, and if you consolidate, you’ll endanger growth,” she said.

“But we had a very interesting experience in the last two years.

“We cut spending and had growth of 3.6 per cent last year,” she said.