Financial crisis is "fuelling populism and extremism" in Europe, a top European Union official said today.

Jose Manuel Barroso, the president of the European Commission, said EU countries need to realise they are in the crisis together, and that they must work together to get out of it.

"Europe needs a new direction," Mr Barroso said in his annual State of the Union address.

"Old ideas" will not work anymore and greater political union is needed in order to save the euro currency, he said.

Mr Barroso said the EU needs to "move toward a federation of nation states" that involves shared sovereignty, drawing a distinction between that and a "superstate".

"Pooled sovereignty means more power, not less," he argued.

He said the Commission would continue to pursue a financial transaction tax, so that taxpayers can benefit from the financial services industry, instead of only having the sector benefiting from taxpayers.

He also said the EU should have the capability to intervene militarily in conflicts when needed.