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'I'm not in favor of EU political union': Dutch PM

Europe needs to 'continue with austerity': Dutch PM

The European banking union is "crucial" but national governments in Europe need more decision-making powers, the Dutch Prime Minister told CNBC.

Mark Rutte said he was "not in favor" of a political union in Europe. Banking union was, however, a necessary step.

"I think the banking union is crucial because we have very big banks so we should not deal with them at a national level. So I am a big fan and very much in favor of the banking union. I am not in favor of a political union," Rutte told CNBC in a TV interview.

"We should do much more at a national level and this is why we…started this debate on what should be done in Brussels, what should be done in the national capitals. And this makes Europe more relevant."

(Read more: Dutch Fin Min Dijsselbloem: I take S&P downgrade seriously)

The comments come amid fierce debate over the power that lawmakers in Brussels have over national governments. Britain is one of the staunchest critics of the European Union and could hold a referendum next year to negotiate the country's exit.

However, Rutte also said that the benefits of European Union (EU) membership must be told in order to counter a rising wave of right-wing populist parties on the continent.

The big issues have been 'tackled': Dutch PM

"We have to show the people, what are the advantages of European cooperation, that this leads to more jobs...It would be crazy not to be part of a European common market. So we have to make this point and show the relevance to the people," Rutte said.

The Prime Minister was also questioned on the Dutch economy which is still facing several problems.

Unemployment rose more than expected in December, according to official statistics released on Thursday, jumping to 8.5 percent from 8.2 percent in November. Economists had forecast a slight increase to 8.3 percent.

(Read more: S&P cuts Netherlands rating, raises outlook for Spain)

Standard & Poor's also downgraded the Netherlands from its top triple A rating in November, citing weak growth prospects.

The Dutch central bank expects the economy to grow 0.5 percent in 2014 and nearly 1.0 percent in 2015, after contracting 1 percent last year.

But Rutte was upbeat on the prospects for growth.

"In the Netherlands, we have had a difficult year and we are now getting out of this difficulty. So we have now growth prospects for 2014," he told CNBC.

"I think we have tackled the big issues and now we have to put in place the necessary reforms."

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal