BERLIN (Reuters) - Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday.

“There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that’s enough,” the source said.

The source added that under the proposals European institutions already operating in Greece should be given “certain decision-making powers” over fiscal policy.

“This could be carried out even more stringently through external expertise,” the source said.

The Financial Times said it had obtained a copy of the proposal showing Germany wants a new euro zone “budget commissioner” to have the power to veto budget decisions taken by the Greek government if they are not in line with targets set by international lenders.

“Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time,” the document said.

Under the German plan, Athens would only be allowed to carry out normal state spending after servicing its debt, the FT said.

A Greek national flag flies at the archaeological site of the Acropolis Hill in Athens November 3, 2011. REUTERS/John Kolesidis

“If a future (bail-out) tranche is not disbursed, Greece cannot threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement,” the FT quoted the document as saying.

The German demands for greater control over Greek budget policy come amid intense talks to finalize a second 130 billion-euro rescue package for Greece, which has repeatedly failed to meet the fiscal targets set out for it by its international lenders.

CHAOTIC DEFAULT THREAT

Greece needs to strike a deal with creditors in the next couple of days to unlock its next aid package in order to avoid a chaotic default.

“No country has put forward such a proposal at the Eurogroup,” a Greek finance ministry official said on condition of anonymity, adding that the government would not formally comment on reports based on unnamed sources.

The German demands are likely to prompt a strong reaction in Athens ahead of elections expected to take place in April.

“One of the ideas being discussed is to set up a clearly defined priorities on reducing deficits through legally binding guidelines,” the European source said.

He added that in Greece the problem is that a lot of the budget-making process is done in a decentralized manner.

“Clearly defined, legally binding guidelines on that could lead to more coherence and make it easier to take decisions - and that would contribute to give a whole new dynamic to efforts to implement the program,” the source said.

“It is clear that talks on how to help Greece get back on the right track are continuing,” the source said. “We’re all striving to achieve a lasting stabilization of Greece,” he said. “That’s the focus of what all of us in Europe are working on right now.”