* Central authority would manage European debts
* Pressure mounts for policy action at end-June EU summit
* Merkel ready for deeper EU integration, no taboos in talks
* Proposals for a banking union also under consideration
* Rajoy says Spain "not on the eve of apocalypse"
By Julien Toyer
MADRID, June 2 Spain, the latest combat zone in
Europe's long-running debt wars, urged the euro zone to set up a
new fiscal authority to manage the bloc's finances and send a
clear signal to markets that the single currency project is
Prime Minister Mariano Rajoy said the authority would also
go a long way to alleviating Spain's woes which, along with the
prospect of a Greek euro exit, have threatened to derail the
single currency project.
It is not the first time a European leader has proposed
creating such an authority but the problems and the size of
Spain - a country deemed too big to fail - have prompted EU
policymakers to hurriedly consider measures such as creating a
fiscal and banking union ahead of a EU summit on June 28-29.
Germany, the paymaster of the euro zone, and others insist
such a move can only happen as part of a drive to much closer
fiscal union and relinquishing of national sovereignty.
Overspending in the regions and troubles with a banking
sector badly hit by a property crash four years ago have sent
Spain's borrowing costs to record highs and pushed the country
closer to seeking an international bailout.
The risk premium investors demand to hold Spanish 10-year
debt rather than German bonds rose to its highest since the
launch of the euro - 548 basis points - on Friday.
The Spanish government, which has hiked taxes, slashed
spending, cut social benefits and bailed out troubled banks,
argues that there is little else it can do and the European
Union should now act to ease the country's liquidity concerns.
In private, senior Spanish officials have said this could be
done by using European money to recapitalise directly ailing
banks or through a direct intervention of the European Central
Bank on the bond market.
They have also said the euro zone should quickly move
towards a fiscal union to complete its 13-year monetary union
but Rajoy went a step further by making a formal offer.
"The European Union needs to reinforce its architecture,"
Rajoy said at an event in Sitges, in the north-eastern province
of Catalonia. "This entails moving towards more integration,
transferring more sovereignty, especially in the fiscal field.
"And this means a compromise to create a new European fiscal
authority which would guide the fiscal policy in the euro zone,
harmonise the fiscal policy of member states and enable a
centralised control of (public) finances," he added.
He also said the authority would be in charge of managing
European debts and should be constituted by countries of the
euro zone meeting strict conditions.
Earlier this week, ECB President Mario Draghi said EU
leaders should break away from the incremental approach that has
failed to get ahead of the euro zone debt crisis for more than
two years and quickly clarify their vision for the future of the
Adding to growing pressure for dramatic policy action at
this month EU leaders' summit, he warned that the ECB could not
fill the policy vacuum.
Establishing a new authority could require a change in the
EU treaties, a usually lengthy and politically painful process
which requires ratification in all 27 member states of the bloc.
A spokesman for Olli Rehn, the EU commissioner in charge of
economic and monetary affairs, s aid draft legislation d esigned
to step up financial discipline in the euro zone, would create
such a fiscal authority by granting new powers to the EU's
"This would grant enhanced powers to the European Commision
on fiscal surveillance, including allowing the sanctioning of
countries," said Amadeu Altafaj.
"Even before a budget is drafted and reaches the national
parliament, the Commission could ask for a revision of the
budgetary plans if it considers this would not allow a country
to meet its fiscal commitments, and thereby could endanger
Germany has said further integration in Europe was required,
including additional controls on national public finances, and
was ready to consider revising the treaties if needed.
A day after Berlin supported giving Spain an extra year to
cut its deficit down to the 3 percent of GDP threshold,
Chancellor Angela Merkel said it should be possible for
countries that violate fiscal rules to be sued in the European
Court of Justice.
The idea is already part of a new "fiscal compact" signed by
25 EU states and which is due to come into force next year.
Several countries, including France, Austria and Finland,
have already signalled they are not willing to give up their
parliaments' budgetary powers.
Merkel also praised higher German wage deals and signalled
flexibility on a financial transaction tax, in a sign she is
open to new measures to boost growth in Europe.
The comments, at a conference of her Christian Democrats
(CDU) in Berlin, show that she is ready to heed calls for
Germany to do more for growth but wants other euro states to
accept giving up sovereignty over their budgets in exchange.
"You can't ask for euro bonds, but then not be prepared to
take the next step towards closer integration," she said.
In an interview with Greek newspaper Vima, Italian Prime
Minister Mario Monti said while he believed common bonds in the
17-nation euro zone would become a reality they should not
become a "licence to spend and burden others."
With the debt crisis now centred on Spain's teetering
banking sector, talks are also under way on creating a banking
union in the euro zone based on centralised supervision, a
European deposit scheme and a central fund that would cope with
Germany's finance ministry said on Friday it was willing to
consider this option in a mid-term perspective.
"NOT ON THE EVE OF THE APOCALYPSE"
Rajoy backed the idea on Saturday and said that the
government would explain before the end of June how it would
recapitalise Spain's banking sector, which is currently being
reviewed by independent auditors.
Spain has picked the "Big Four" accounting firms KPMG
, PwC, Deloitte and Ernst & Young
to carry out a full, individual audit of its ailing
banks, a source with knowledge of the decision told Reuters on
Moving away from pessimistic speeches in recent weeks, Rajoy
said Spain would weather the financial storm by stepping up
efforts to rein in public finances and by implementing
structural reforms at national and European level.
"We're not walking on a bed of roses but we're also not on
the eve of the apocalypse," he said.