Spain wants euro zone fiscal authority MADRID (Reuters) - Spain on Saturday proposed the set up a new fiscal authority in the euro zone which would control and harmonize national budgets and manage the European 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. 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 authorities, which have hiked taxes, slashed spending, cut social benefits and bailed out troubled banks, argue that there is little else they 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. 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 the bloc 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. It is not the first time a European leader has proposed creating such an authority but the size of Spain - a country deemed too big to fail - may now accelerate talks. Its set-up 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, the euro zone paymaster, has however said further integration in Europe was required, including additional controls on national public finances. German chancellor Angela Merkel said there should be no taboos when discussing these questions. With the debt crisis now centered on Spain's teetering banking sector, talks are also under way on creating a banking union in Europe based on a centralized supervision, a European deposit scheme and a central fund that would cope with failed lenders. Rajoy backed the idea on Saturday and said that the government would say before the end of June how it will recapitalize Spain's troubled banking sector, which is currently being reviewed by independent auditors. Additional reporting by Andreas Rinke in Berlin; Editing by Mike Nesbit