Any reduction in the eurozone would exact a significant toll on the region's economy, the president of the European Commission warned on Wednesday, as he urged Germany to show leadership in solving Europe's escalating debt crisis.

Jose Manuel Barroso, president of the European Commission, the EU's executive arm, in a speech in Berlin urged EU governments to ensure that reforming the 17-member eurozone does not come at the price of creating new divisions among member states.

"The idea that we have two unions in Europe means disunion," Barroso said.

"There cannot be peace and prosperity in the North or in the West of Europe if there is no peace and prosperity in the South or in the East," he said.

Barroso argued that all EU member states should strive to adopt the euro and any reforms of the single currency area should not result in new conditions for joining.

"All EU states should have the euro as its currency," he said. "The challenge is how to further deepen euro area integration without creating divisions with those who are not yet in it."

French President Nicolas Sarkozy has advocated a two-speed Europe in which eurozone countries accelerate and deepen integration while an expanding group outside the currency bloc stays more loosely connected — a signal that some members may have to quit the euro if the entire structure is not to crumble.

On Wednesday, EU sources said German and French officials have discussed plans for a radical overhaul of the EU that would involve setting up a more integrated and potentially smaller eurozone.
Barroso's comments appeared to signal opposition.

He said some studies show that the gross domestic product of Germany, Europe's largest economy, could contract by 3 percent if the eurozone shrank to a few members and its economy would shed 1 million jobs.

"What is more, it would jeopardize the future prosperity of the next generation," he said.

Germany, in particular, Barroso said, must show it is striving for an integrated and competitive EU.

Germany is footing more than a quarter of Europe's bill and vouches for nearly half of the bloc's crisis bailout fund, the European Financial Stability Facility. Many Germans are increasingly wary of bailing out struggling states such as Greece.

On Wednesday, Europe's debt crisis deepened dramatically as Italian borrowing costs topped reached a breaking point as Italy replaced Greece at the centre of the crisis.

Barroso also warned about risks of Europe losing focus in other policy areas, such defense or its push to gain clout on the global stage, because of political battles associated with reforming the eurozone.

"Reinforced governance of the euro area must be a central pillar ... But this should not detract from the importance of strengthening European integration in other areas," he said.