EU 'to seek new powers over national budgets'

The European Union looks set to seek extensive new powers to impose changes to national budgets as part of its plan for a more closely integrated fiscal union in the eurozone, it has been reported – although a new less detailed version of the proposals has since been published.

Meanwhile José Manuel Barroso, President of the European Commission, said that the EU would require "greater democratic accountability" in order to enact the changes and that political union should also be on the table.

According to the Financial Times, a draft of a document to be presented at this week's EU summit went beyond widely trailed proposals for a banking union. The newspaper said the plans would allow the European Commission to set out changes to the budgets of member states that do not meet commitments on debts and deficits. The changes would be voted on by other EU countries, with the threat of fines for non-compliance.

In addition, eurozone countries would have to collectively agree on their debt levels and win approval for any move to increase their borrowing. The draft also suggested a step-by-step approach towards the mutualisation of debt – long resisted by Germany – first through collectivising short-term debt or via a redemption fund.

Proposals for a banking union included allowing the EU's bail-out fund to recapitalise a country's banks directly, and the creation of a common banking supervisor for the whole EU, the Financial Times said.

The report on the future of the eurozone has been prepared by European Council President Herman Van Rompuy, Barroso, European Central Bank chief Mario Draghi, and Eurogroup chairman Jean-Claude Juncker as an attempt to restore confidence in the viability of the single currency. On Tuesday Van Rompuy published a scaled-back and shorter version of the document outlining fewer details about the proposals.

In a speech at the European Policy Centre today, Barroso said the report presented at the summit in Brussels would be "the start of the process towards deeper integration" and part of that would be "a more integrated and stronger political framework, or a political union". He said closer economic ties implied "major changes to the way our citizens are governed" and "greater democratic accountability and legitimacy are absolutely crucial".

Barroso added: "We must look at the role and competences of national parliaments in European affairs, and we must enhance the links between the national parliaments and the European Parliament."

Speaking to the BBC this morning, Guy Verhofstadt, leader of the Alliance of Liberals and Democrats in the parliament, said the measures outlined in the draft document were "absolutely necessary".

He said it was "impossible to continue with the single currency and the monetary union if there is not a full-fledged fiscal union", and added that the "pressure is now so big on countries like Spain and Italy that even Germany is ready to go ahead". However he noted that it was "not the first time that a few days before the summit they announce a breakthrough on these issues" and then "finally you see that they cannot agree".

Should the ideas in the draft document be implemented it would mark a significant step towards a single Brussels finance ministry for the 17 eurozone countries. In March former European trade commissioner Lord Mandelson suggested that the "logic" of what was happening suggested a need for "spending ceilings and a central finance ministry to decide what is going to be taxed and how the money is going to be spent".

The summit on Thursday and Friday comes after Cyprus last night became the fifth eurozone country – along with Greece, Ireland, Portugal and Spain – to ask for an EU financial bail-out. It followed the Spanish government's official request earlier in the day for up to €100bn for its banks. Cypriot banks have struggled to cope with their heavy exposure to Greece's economic crisis and the government needs to find €1.8bn to recapitalise the country's second largest lender, Cyprus Popular Bank, before June 30.

A European official quoted by Reuters said the total amount of emergency funding could be as much as €10bn, more than half the size of the island's economy. Cyprus is also continuing its efforts to secure a loan from China or Russia, having already borrowed €2.5bn from Russia last year.

Both Cyprus and Spain suffered at the hands of rating agencies yesterday. Fitch reduced Cyprus to junk status, while Moody's downgraded 28 Spanish banks after cutting the government's credit score earlier in the month.

Elsewhere, Athens University economics professor Yannis Stournaras has been named as Greece's finance minister after National Bank president Vassilis Rapanos turned the position down due to ill-health. With new Prime Minister Antonis Samaras unable to attend the EU summit following eye surgery, the country's President Karolos Papoulias will lead a ministerial delegation to Brussels.