Former foreign minister Joschka Fischer urged Chancellor Angela Merkel on Friday to admit to Germany that ceding central bank independence and some sovereignty, and underwriting other states' debts, was the inevitable price of saving the euro.

There is no way round it: the price of the stability union will be a 'transfer union' and vice-versa, Fischer told Reuters in an interview.

German critics of bailing out over-indebted members of the euro zone such as Greece call this process a 'transfer union', whereby fiscally-disciplined countries like Germany pay for the excessive debts and deficits of their European partners.

You can't have one without the other -- that is the price of the euro, said Fischer, who was a strong advocate of Europe as foreign minister from 1998-2005, when his Greens shared power with Gerhard Schroeder's Social Democrats (SPD).

Fischer, a sharp critic of conservative leader Merkel's leadership in the sovereign debt crisis, said her government was always doing too little, too late. Which means the solutions to the debt crisis are getting more and more costly.

Merkel should stop resisting calls from financial markets and foreign governments to back a stronger role for the European Central Bank and to jointly-issued euro zone bonds, the former Greens politician said.

At the moment there is no perfect solution, said Fischer, who has retired from German politics and became a consultant to the Nabucco gas pipeline project in 2009.

His old party and the SPD back the idea of euro bonds -- which Merkel says would just remove the incentive for states to reign in debts and spending by levelling off interest rates and could threaten the top credit rating of countries like Germany.

However none of Germany's parliamentary parties currently dare to question the central tenet of an independent ECB, which Germans consider the best defence against the hyperinflation that the country suffered between the two world wars.

Merkel's current focus in the euro crisis - beyond urging the implementation of decisions to boost the euro-zone bailout fund and recapitalise banks - is to seek fiscal discipline via centralised monitoring of the budgets of European states.

This would require what she touts as limited treaty changes enabling countries to cede some sovereignty to the European Union's executive Commission, which would appoint a Budget Commissioner and impose sanctions on rule breakers.

Fischer said what Europe needed was a massive handover of sovereignty to Brussels, in order to convince financial markets that the bloc is serious about defending the euro.

So far in the crisis the markets have been in the driving seat, because they didn't believe politicians would face up to the consequences of having a common currency and say where they wanted to go, said Fischer.

With an agreement among all 27 EU members unlikely, Fischer said, the 17 euro members should agree treaty changes among themselves to create an avant-garde, a vanguard.

(Writing by Stephen Brown; Editing by Rosalind Russell)