The problem of the eurozone was that it was "motivated by politics and delivered in economics", he said on BBC 1's Andrew Marr Show on Sunday, warning that incremental changes such as help for Spanish banks "is not enough" to address the bigger issues facing the European Union.
Europe was being presented with either "austerity with reforms "or "growth with reforms" but needed "austerity with growth and reforms", he said.
He warned Germany would not accept the "pain" of bank-rolling this "grand plan", unless other nations struggling in a two-speed euro economy accepted the "pain" of reforms.
German reluctance to pay more to save the euro was reiterated byAngela Merkel, the German Chancellor at the summit of the euro 'Big Four' in Rome on Friday.
Shooting down down calls for full mobilisation of the eurozone's bail-out funds to halt the raging bond crisis in Spain and Italy, she said: "Each country wants to help but if I am going to call on taxpayers in Germany, I must have guarantees that all is under control. Responsibility and control go hand in hand."
Europe's leaders are facing intense global pressure to head off a potentially catastrophic economic collapse at a key summit this week amid increasing calls in Greece and the euro's "Latin bloc" for an easing of harsh austerity measures.
Mr Blair said that in the long term "the European integration project" was going to go ahead, "like it or not".
"There is going to be a huge reconstruction of Europe," he said and whatever the outcome - a euro collapse or a drive to greater political and economy union in Europe - Britain needed to be part of it.
In a world in which emerging markets such as China and Brazil are become more dominant, the rational for the European Union "is not peace anymore but power", he said.
Mr Blair said the strengths of British democracy were one of the key reasons why it is so important that the country remains part of Europe.
"We have something to contribute ... and when this political reconstruction take place ... we must be part of it."
He also said Britain faced an "interesting choice" over whether to join the euro if current crisis is resolved and he believe it should still keep open the option of joining the currency.