She told MPs: "Nobody should take for granted another 50 years of peace and prosperity in Europe ... that's why I say: If the euro fails, Europe fails.
"We have a historical obligation: To protect by all means Europe's unification process begun by our forefathers after centuries of hatred and blood spill. None of us can foresee what the consequences would be if we were to fail."
The vice president of the Bundestag lower house of parliament said 503 lawmakers had voted in favour of the motion, 89 had voted against and there were four abstentions.
The parliamentary vote binds Ms Merkel to sticking closely to the text of the motion passed by the Bundestag in her negotiations in Brussels, thus strengthening her bargaining power.
Ms Merkel said the summit's aim must be a solution that allows Greece to cut its debt load to 120pc of gross domestic product by 2020.
"That won't work without the private sector participating to a significantly higher extent" than was agreed in July, she said.
She didn't spell out how much banks and other bondholders should contribute, but according to Greece's international creditors, a cut of 50pc on Greek bonds now would take the country's debt to just above 120pc of GDP.
Greece's debts are set to spiral above an estimated 180pc of economic output next year.
Ms Merkel insisted that cutting Greece's debts alone won't solve the country's economic problems.
"Painful and necessary structural reforms must be implemented," she said, adding that a "permanent surveillance" of Greece would be "desirable".
Athens' financial reform efforts have been monitored every three months by inspectors from the European Union, European Central Bank and International Monetary Fund since it received a bailout in May 2010. Greece has opposed calls for a permanent surveillance mechanism.
Ms Merkel stressed the need for Europe to also make sure the crisis doesn't spread yet further, saying that recapitalizing troubled banks is "absolutely necessary".
"Anyone who wants private creditors to participate in debt sustainability must also ensure that a screening off, a protection against the danger of contagion is decided at the same time," she told lawmakers. "Anything else is simply irresponsible."
The EU summit will consider plans to boost the €440bn Financial Stability Fund, or EFSF, by offering government bond buyers insurance against possible losses and attracting capital from private investors and sovereign wealth funds.
Germany's government decided to put that move to a vote in parliament, and thrashed out a joint resolution with two of the three opposition parties. Germany, as the largest economy in the 17-nation eurozone, will be paying out a large share of the bailout money.
The risks Germany will shoulder are "justifiable," Ms Merkel said.
"I'll even go a step further and say that it would not be justifiable and responsible not to take the risk," she added. "I do not have a better alternative."
In her speech, Merkel stressed that the EU must be prepared to overhaul its treaties to overcome the crisis for good and ensure a better functioning of the eurozone's 17 nations and the EU's 27 members.
A future treaty must allow that eurozone countries not living up to their fiscal and budgetary responsibilities under the bloc's growth and stability pact be taken to the European Court of Justice, she said.
Wednesday's joint resolution underlines the German parliament's expectations that, once the changes are implemented, the European Central Bank will no longer need to buy government bonds, as it has since last year - a move that has caused concern in Germany.
With eurozone politicians disagreeing over how to calm the debt crisis, the ECB has taken on the role of firefighter by buying up the bonds of financially weakened governments on the open market. That keeps the bond prices up and the interest rates down, allowing troubled European countries to borrow on financial markets at lower rates than they otherwise could.
The ECB has bought €169.5bn in government bonds since mid-2010.
Brussels - Peace should not be taken for granted if the euro fails, German chancellor Merkel told MPs Wednesday (26 October) ahead of the eurozone summit where an increase of the bail-out fund firepower may lead to Germany's own state assets being taken as collateral.
In a dark blue jacket reflecting the mood in and about the eurozone, Merkel abandoned her usual cautious rhetoric warned outright of a war.
"Nobody should take for granted another 50 years of peace and prosperity in Europe. They are not for granted. That's why I say: If the euro fails, Europe fails," Merkel said, followed by a long applause from all political groups.
"We have a historical obligation: To protect by all means Europe's unification process begun by our forefathers after centuries of hatred and blood spill. None of us can foresee what the consequences would be if we were to fail."
"It cannot be that sometime in the future they say the political generation responsible for Europe in the second decade of the 21 century has failed in the face of history," the chancellor continued.
She was asking for the parliament's "political" green light on a negotiation mandate for the EU summit, beginning later today in Brussels. The summit is seeking to increase the firepower of the €440 billion-strong European Financial Stability Facility (EFSF) to stop the sovereign debt crisis spreading to countries like Italy and ultimately, France.
The Bundestag approved the measure by a large majority, with 503 members in favour, 89 opposing and four abstaining.
German 'risks'...
While stressing that Germany's contribution to the EFSF loan guarantees would continue to be capped at €211 billion, she said she could not exclude there may be "risks" for Germany linked to the EFSF increase of firepower. Her own party colleagues had demanded that she clearly excludes German state assets, such as the central bank's gold reserves, to be put as collateral for the EFSF lending power.
"Nobody can clearly estimate if there will be such risks. What I can say is that we cannot exclude it," she said, insisting that the current situation is pushing European leaders into "uncharted territories".
"Not to take these risks would be irresponsible. There is no better and more sensible alternative. Europe and the world are looking at Germany," the chancellor said.
Looking ahead to the summit, the chancellor repeated her long-standing stance that "there is no silver bullet, no simple solutions. We will still deal with these topics for years from now."
She repeated her insistence that the EU treaty had to be changed, in the medium term, to be more strict on countries breaching the euro deficit rules.
"Where does it say that any treaty change has to take 10 years or that there should be no more changes after the Lisbon Treaty," she asked.
EU leaders last Sunday agreed to have an evaluation presented to them in December by council chief Herman Van Rompuy about the possibility for a "limited" treaty change.
'Permanent supervision' for Greece...
On the three euro-countries currently propped by EU-IMF loans, Merkel said Ireland was on "the right path", Portugal showed it could implement the promised reforms, while Greece was still "at the beginning of a long road."
For the first time, as opposition MPs noted later on in the debate, Merkel had words of praise for the ordinary Greek citizens feeling the brunt of the austerity measures demanded by international lenders. "People in Greece have to stomach a lot of sacrifices. They deserve our respect and also a sustainable growth perspective in the eurozone."
According to the latest report of the so-called troika, consisting of experts sent from the European Commission, the European Central Bank and the International Monetary Fund, Greece will need even higher debt restructuring and losses for private lenders compared to what EU leaders had agreed upon on 21 July.
"But debt restructuring alone does not solve the problem. Painful structural reforms have to be made, otherwise even after debt restructuring we're back to where we are today," Merkel warned.
That's why, she said, Greece would have to be "assisted" for quite some time. "It's not enough that the troika comes and goes every three months. It would be desirable to have a permanent supervision in Greece," she said, adding that this issue would be brought up at the summit.
In return for what seems to be an unprecedented sovereignty loss in an old EU member state, Merkel promised German investments and mentioned a meeting of local representatives from Germany and Greece in the coming weeks.
"We want Greece to be back on its feet again as soon as possible and will do everything we can to this end," she concluded.
Her junior coalition party, the Liberal Free Democrats (FDP), had less sympathy for Greece, however. Rainer Bruederle, leader of the FDP group, said that the troika had given Athens a "D" and that "nobody expects Greece to turn into an A student over night," as it was now just like eastern-European transition countries 20 years ago.
Sticking to the teacher-pupil metaphor, Bruederle urged Greeks to "do their homework" and said the country could not be funded endlessly like a "bottomless pit".
The leftist opposition was outraged, with Die Linke leader Gregor Gysi pointing out that austerity has forced 27,000 small and medium enterprises to go bankrupt in Greece and that teachers earn as little as €1,000 a month. "What more do you want from them? Do you want them to starve to death?" he said....
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