BERLIN, Dec 8 (Reuters) - Political interference by European Union members risks hampering the European Commission’s role of overseeing budget rules, the German finance ministry said in a policy paper seen by Reuters on Tuesday.

“The supervision duties must be administered independently of political interests,” the ministry wrote in the paper which was submitted to parliament’s budget committee.

The commission’s role as guardian of European Union treaties should not be compromised by political interests or interference, the paper, entitled “Further development of the Economic and Monetary Union: items for debate,” said.

The Commission last month said Italy, Lithuania, Austria and Spain risk breaking EU rules with their 2016 budget plans, while France might also not meet some of the fiscal targets set out by EU finance ministers.

The rules say a government has to keep the headline budget shortfall below 3 percent of GDP and strive to balance its books in structural terms - excluding one-off revenues and spending and the effects of the business cycle.

The finance ministry three-page paper calls for reducing the euro zone’s aggregate 94 percent debt-to-output ratio to minimise the single currency area’s exposure to market fluctuations. “We must reduce the debt quotas permanently,” it said.

It added that existing plans for a euro zone fiscal council were insufficient.

An internal firewall, or outsourcing of supervisory activities to independent institutions could guard against interference, it said.

The ministry welcomed Commission plans for national ownership of economic reforms, and suggested refocusing the EU budget on “additional value” to finance structural reform plans, digitalisation projects and the energy union.

On the banking union, it called for a reduction of regulatory exceptions that allow banks to hold sovereign bonds on their balance sheets.

“This could strengthen market incentives for the reduction of debt, reducing the danger of contagion from states to the banking sector and improving the manageability of possible state insolvencies,” it added.

The internal market is a major contributor to the stability and growth of the euro zone but its benefits must extend to all 28 EU members, the ministry said. (Reporting by Matthias Sobolewski; Writing by Paul Carrel and Joseph Nasr; editing by Richard Balmforth)