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BRUSSELS/FRANKFURT (Reuters) - The European Commission is seeking far tighter control of national budgets to combat the euro zone's debt crisis, a senior official said on Friday, as the ECB's chief urged rapid action on a euro zone fund for rescuing countries in trouble.
With the crisis set to topple a fifth euro zone government this weekend, the likely next Spanish prime minister appealed to financial markets for breathing space as he begins tackling his nation's problems - something they may not give him.
In Berlin, Chancellor Angela Merkel made clear she favored a step-by-step approach to tackling a crisis that is spreading to large countries at the heart of the euro project such as Italy, Spain and possibly even France.
One element of Merkel's approach is to keep the pressure on euro zone budget sinners to get their finances in order.
A suggestion of how this could be institutionalized in the medium term came from Brussels. The senior euro zone official said the Commission would next week propose tough monitoring of national economies and budgets, which could eventually lead to some form of common bonds backed by the bloc as a whole.
If the plan were accepted by European Union leaders - a process likely to take a year or more - member nations might have to yield significant control over their finances to Brussels. Commission officials could even appear before national assemblies to justify their budget demands.
"The Commission would be of course stepping on the toes of national parliaments and their national sovereignty, so if it disagrees with them on the budget, it would have to be brave enough to go and defend its case," the official said.
Greece, Ireland and Portugal - all small peripheral euro zone economies - have already been forced to accept EU/IMF bailouts as they can no longer afford to borrow commercially.
Now Italy's borrowing costs have reached unsustainable levels, while Spain's are nearing this point and the crisis is even starting to affect AAA-rated France.
The Commission will propose two regulations next Wednesday to improve euro zone economic governance and calm market concerns about the sustainability of the euro project, said the official, who requested anonymity.
One would link the possibility of getting emergency loans from euro zone bailout funds to countries accepting prior close monitoring of their economies by the Commission.
The other would give Brussels the right to suggest changes to budgets. "The Commission would have the right to issue opinions or even ask for a new budget," the official said.
Strong economies such as Germany, the Netherlands and Finland - where voters are tiring of having to rescue the euro zone's weaker members - are likely to back the proposals enthusiastically when they go to an EU summit on December 9.
However, others will probably object to such intrusive monitoring by Brussels.
In Frankfurt, the European Central Bank looked for much quicker action. ECB President Mario Draghi told euro zone governments to get their new rescue fund up and running, expressing exasperation at their lack of progress in responding to the escalating debt crisis.
The ECB is under intense pressure to play a greater role in tackling the crisis. A Reuters poll of 50 bond strategists in Europe and the United States gave an even probability that it would eventually agree to print money.
Draghi said the governments had failed to put into practice decisions underpinning the European Financial Stability Facility - the rescue fund that they have promised to equip with more firepower without yet explaining how.
"Where is the implementation of these long-standing decisions?" Draghi told a banking conference. "We should not be waiting any longer."
Many analysts believe the only way to stem the contagion is for the ECB to buy up large quantities of bonds, effectively the sort of "quantitative easing" undertaken by the U.S. and British central banks to stimulate their economies.
This would mark a controversial break from its existing policy, where it offsets government bond purchases by draining liquidity from the system in separate operations.
While the ECB, with strong German support, is anxious to remain free from political interference and is resisting calls to take major action, it has made limited bond purchases that have steadied investors' nerves.
The euro rose on Friday as pressure on Italian and Spanish bonds eased after the ECB stepped in to stabilize the market, but fears that both countries' borrowing costs are still at unsustainable levels sent European shares to new five-week lows.
Euro zone governments have set a December deadline to strengthen the EFSF but these efforts have been undermined by delays, surging borrowing costs and lack of investor interest.
The crisis has already toppled four euro zone governments, those of Greece, Ireland, Italy and Portugal, replaced either in
elections or by technocrat-led administrations.
Spain's Socialist government is likely to become the fifth casualty, as the conservative opposition holds a double-digit opinion poll lead before a parliamentary election on Sunday.
The probable next prime minister, People's Party leader Mariano Rajoy, asked markets to be patient as he gets to grips with Spain's problems, reflected in 22 percent unemployment.
"We hope ... they realize that there are elections here and those that win have the right to a minimum of time, preferably more than half an hour," Rajoy said in a radio interview.
If Rajoy wins, as expected, he is unlikely to be sworn in until around December 20.
Markets may not wait that long for the euro zone's fourth largest economy. Spain sold 10-year government bonds on Thursday with a yield of almost 7 percent, a level that forced other euro zone countries to resort to international bailouts.
In Berlin, Merkel rebuffed demands from visiting British Prime Minister David Cameron for decisive action.
"The British demand that we use a large amount of firepower to win back credibility for the euro zone is right," she said. "But we have to take care that we don't pretend to have powers we don't have. Because the markets will figure out very quickly that this won't work."
In Rome, Prime Minister Mario Monti won an overwhelming vote of confidence in parliament.
But Monti, a former European commissioner who replaced the discredited Silvio Berlusconi, first warned politicians they would have to face the Italian public if they sabotaged a sweeping package of reforms aimed at tackling the debt crisis.
Greece's new government, led by former ECB vice president Lucas Papademos, took a first step toward meeting terms of a new international bailout its needs in order to avoid bankruptcy, submitting a budget bill that foresees no new austerity measures next year as long as reforms are enacted.
Writing by Giles Elgood and David Stamp