June 2 (Reuters) — Spain called on Saturday for a new fiscal euro zone authority which would harmonize national budgets and manage the block’s debts.

Prime Minister Mariano Rajoy said the authority was the answer to the European debt crisis and would go a long way in alleviating Spain’s woes as it would send a clear signal to investors that the single currency is an irreversible project.

It is not the first time a European leader has proposed creating such an authority but the woes and the size of Spain – a country deemed too big to fail – may now accelerate talks ahead of a EU summit on June 28-29.

The prospect of a Greek euro exit and Spain’s parlous finances have prompted EU policymakers to hurriedly consider measures such as a “banking union”.

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 recapitalize directly ailing banks or though 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, harmonize the fiscal policy of member states and enable a centralized control of (public) finances,” he added.

NO TABOOS

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 currency.

Adding to growing pressure for dramatic policy action at this month EU leaders’ summit, he warned that the Central Bank could not fill the policy vacuum.

The set-up of the new authority would require a change in the European Union treaties, a usually lengthy and politically painful process which requires ratification in the 27-member states of the bloc.

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.

German chancellor Angela Merkel said there should be no taboos when discussing these questions.

A day after Berlin supported giving Spain an extra year to cut its deficit down to the 3 percent of GDP threshold, Merkel said it should be possible for countries that violate fiscal rules to be sued in the European Court of Justice.

BANKING UNION

Merkel also praised higher German wage deals and signaled 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. “We won’t be able to create a successful currency together this way.”

With the debt crisis now centered on Spain’s teetering banking sector, talks are also under way on creating a banking union in the euro zone based on a centralized supervision, a European deposit scheme and a central fund that would cope with failed lenders.

Germany’s finance ministry said on Friday it was willing to consider this option in a mid-term perspective.

Rajoy backed the idea on Saturday. He also said that the government would explain before the end of June how it will recapitalize Spain’s troubled 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 a full, individual audit of its ailing banks, a source with knowledge of the decision told Reuters on Saturday.