By Marcin Grajewski and David Milliken
BRUSSELS/LONDON (Reuters) - European Central Bank policymakers pressed governments on Monday to follow stricter budget rules and open their books to external monitoring as they urged a new carrot-and-stick approach to fiscal policy.
ECB President Jean-Claude Trichet told European parliamentarians more scrutiny was essential, presenting proposals for a new system of incentives and sanctions including an independent budget watchdog and the potential loss of voting rights for countries breaching public debt limits.
"With the experience of the most important crisis since World War Two, we have to reinforce the framework well beyond what was the Stability and Growth Pact," he said.
"We need a quantum leap in terms of framework for surveillance. We would regret enormously not to seize this occasion.
The ECB's plan, presented to the EU budget taskforce last week, has won little support so far. European Union leaders have already agreed on a broad outline of tougher budget rules and the Commission will present detailed proposals on June 30, which will be finalized in the second half of the year.
The broad outline for the new rules made no mention of a new watchdog but does include submitting budget programs for review.
European Commission President Jose Manuel Barroso has also said there is no need for new institutions to reinforce the planned overhaul of budget rules.
Trichet stressed the new agency should be part of the European Commission, saying the ECB did not want to tread on the Commission's toes.
"We do not want to do damage to the Commission's prerogative," he said.
Governing Council member Yves Mersch said rule-breakers should be punished more mechanically than currently.
"Sanctions must be automated. There cannot be any excuses any more," Mersch told daily Luxemburger Wort.
His fellow Governing Council member Christian Noyer said the recent flare-up in market tensions -- which drove up yields on the bonds of countries perceived to be struggling with public debt and deficits -- showed the need for more discipline. "Doubts about the sustainability of public finances in many countries lie at the root of current uncertainty," Noyer, who is also governor of the Bank of France, told a business conference in Paris.
"Therefore, a condition for market tensions to abate is that budgetary discipline is implemented rigorously."
Executive Board member Jose Manuel Gonzalez-Paramo highlighted the positive, saying Spanish steps should push its borrowing costs down.
"All the steps that (Spain) has taken ... will help to put the spread at a reasonable level," he said in Bilbao.
"(To) a level that has nothing to do with 180 basis points in terms of country risk."
ECB BOND BUYING EASES
The ECB's purchases of government bonds have helped to bring down bond yields and Executive Board member Juergen Stark stressed the purchases had at least in part fulfilled their aim -- suggesting some at least may see the program approaching its use-by date.
His comments came as figures showed central bank purchases slowed last week to just 4 billion euros, the lowest weekly tally since the program began.
"Markets have calmed down and I think I would like to stress here the temporary nature of this program," Stark said at a debate on the future of the euro in London.
Greece's George Provopoulos said in an interview published in the Wall Street Journal that central banks should consider selling government bonds to the euro zone's new stabilization fund, although he rejected the idea of a state defaulting.
"Although the issue whether the EU Stabilization Fund would be able to purchase the debt obtained by the ECB under the Securities Markets Program is not foreseen under the provisions of the Stabilization Fund, the idea merits further consideration," he said.
The ECB has previously floated the idea of selling bonds bought under the purchase program -- 51 billion euros by June 18 -- back to banks, but has not said what it will do with the bonds.
For the ECB's proposals, please see the Web site: http://www.ecb.int/pub/pdf/other/reinforcingeconomicgovernanceintheeuroareaen.pdf
(Additional reporting by Antonia van de Velde in Brussels, Sakari Suoninen and Krista Hughes in Frankfurt and Paul Day in Bilbao)
(Writing by Krista Hughes, editing by Sonya Hepinstall, Ron Askew)