By Robin Emmott
BRUSSELS (Reuters) - Four months ago, President Francois Hollande warned Brussels not to tell France how to run its finances. In a few weeks' time, the European Commission will do exactly that as a new era of rigid fiscal surveillance begins in Europe.
In one of the most far-reaching responses to the region's debt crisis, the Commission, the EU's executive, will now run the rule over the budget plans of the 17 euro zone countries before they are fully digested by national parliaments.
The aim is to raise a red flag before it is too late and prevent a repeat of the turmoil of the past four years, which began because countries were living far beyond their means.
The Commission, which acts as a civil service for the EU, will have the right to send back any budget plans it thinks do not make the grade. Countries can ignore its advice, but face tough, rapidly imposed fines if they stray out of line.
The rules underscore just how far power over budget policy has shifted from capitals to Brussels and marks a fundamental change in the way the currency area is run, with a sizeable amount of sovereignty being surrendered - perhaps more than many governments realized at the time.
If it works, it may launch the euro zone towards a single finance ministry handling taxation and bond issuance - a once unthinkable scenario that the crisis pushed leaders to consider.
"In the euro zone, whatever one country does affects everyone else," said Pablo Zalba, a Spanish lawmaker in the European Parliament, which this year approved the Commission's monitoring powers, known in EU jargon as the Two-Pack.
"We cannot make the same mistakes again," said Zalba.
The International Monetary Fund, which has played a central role in euro zone bailouts, backed the idea of a fiscal union in a new report this week, seeing it as a way to underpin an emerging single banking framework for the currency bloc.
The United States faced a similar dilemma more than 200 years ago when its original confederation of 13 states found they faced financial ruin until they agreed an effective, central government with a wide range of enforceable powers.
NO DIKTATS FOR FRANCE
Under the new rules, countries must submit their draft 2014 budgets to the Commission by October 15. They are then scrutinized for any shortcomings, whether they be unrealistic revenue projections, insufficient spending cuts or base financing that relies more on creativity than reality.
They also face peer pressure to behave. Euro zone finance ministers will hold a special meeting on November 22 to coordinate fiscal policy and ensure everyone is meeting agreed targets.
"We are embarking on a new era of economic governance in which the euro zone's credibility will be at stake," said a senior euro zone official who will attend the meeting.
What's more, the rules are only one piece of a complex jigsaw of budgetary surveillance, which extends to the European statistics agency Eurostat and the powers it has to search governments suspected of massaging their accounts.
Another set of six rules that became EU law in December 2011 - dubbed the Six-Pack - gave the Commission powers to review EU national economies more thoroughly and penalize rule-breakers.
Governments have also signed up to a fiscal pact that imposes quasi-automatic sanctions on countries that breach deficit limits and enshrines balanced budget rules in law.
It all adds up to a new world order, but one that runs the risk of putting errant countries at odds with the Commission and testing whether governments can submit to a higher authority.
Few EU officials need to be reminded of the 2005 debacle in which France and Germany pressured the EU to relax budget deficit rules, sowing the seeds for Greece's spending explosion.
In 2009, a new Greek government revealed the country's deficit would be an alarming 12.5 percent of economic output, not the 3.7 percent originally foreseen.
That restatement not only forced Athens into a bailout but called into question the euro's foundations as a currency area with no strictly enforced rules on how to handle spending.
EU officials concede they are worried about whether big euro zone countries will follow the Commission's advice.
"The Commission and governments are going to clash," said Carsten Brzeski, a euro zone economist at ING. "Integration means that someone else can tell you what to do."
With concern growing that France is running off-track, the Commission has told Paris to cut spending and reform its pension system in return for a two-year reprieve on budget deficit cuts.
President Hollande angered Germany in late May by declaring: "the European Commission cannot dictate what we should do."
But his finance minister, Pierre Moscovici, will meet EU Economic and Monetary Affairs Commissioner Olli Rehn on Thursday to convince Brussels that France is playing by the rules.
A next step could be a system of binding contracts between the Commission and euro zone countries that set deadlines to deliver budgetary and economic reforms in return for money.
Those funds would come from a central pot created by euro zone states that would be separate from the European Union's current budget and which some officials have dubbed a "candy machine", with rewards dispensed for good behavior.
While that might seem ambitious, it may not be bold enough.
"Fiscal coordination is not fiscal union. Reaching it will be a very long and painful process," said Zsolt Darvas at Bruegel, a think-tank providing input to EU policymaking.
(Reporting by Robin Emmott; Editing by Christina Fincher)
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