The European Union would gain far-reaching powers to rewrite national budgets for euro zone countries that breach debt and deficit rules under proposals likely to be discussed at a summit this week, according to a draft report seen by the Financial Times.

The proposals are part of an ambitious plan to turn the euro zone into a closer fiscal union, giving Brussels more powers to serve like a finance ministry for all 17 members of the currency union. They are contained in a report to be presented at the summit, which will also outline plans for a banking union and political union.

Thursday's summit comes amid investor fears that the euro zone is re-entering a danger zone. Bond and equity markets were hit on Monday as Cyprus became the fifth country to apply for an international bailout, citing its banking sector's large exposure to the Greek economy. In Greece, the five-day-old coalition government suffered a setback as its finance minister resigned.

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Berlin has demanded tough controls over national budgets as a prerequisite for mutualizing sovereign debt within the euro zone and the proposals appear to be an effort to get the German government to support a move towards commonly issued euro zone bonds.

Under the plans for closer fiscal union, the European Commission would present detailed adjustments for a country in breach of its commitments. The changes would be put to a vote of all other EU countries.

Although the budget amendments would be described as a "proposal," the EU has strong new tools to punish countries that do not adopt such proposals, including levying big fines.

The measures move well beyond plans presented by the commission last year, which give Brussels the power to review budgets before they are submitted to national parliaments, but not the authority to dictate changes.

Officials cautioned the report is still a work in progress. The four co-authors – Herman Van Rompuy, European Council president; José Manuel Barroso, European Commission president; Mario Draghi, European Central Bank chief; and Jean-Claude Juncker, chair of the euro group of euro zone finance ministers – met on Monday afternoon to revise the draft, which was expected to be sent to national capitals later on Monday night.

In addition to the new powers for Brussels, the draft includes a proposal requiring euro zone governments to collectively agree their debt levels and the "upper limits" of their national budgets annually. If a country needs to increase its borrowing, it would be forced to go to other euro zone governments to get prior approval.

Although the draft does not call for immediate moves towards full-scale euro zone bonds, it does suggest interim steps, including studying limited mutualization of short-term debt, known as eurobills. A redemption fund – first proposed by a panel of German economic experts that would only mutualise current debts of euro zone countries in excess of 60 per cent of their economic output – is also presented as a possible interim step.

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The banking proposals include ideas that have already been aired, such as urging euro zone leaders to give their €500-billion ($625-billion U.S.) bailout fund the power to directly inject capital into struggling banks. But the draft proposes creating a common EU bank supervisor with powers to reach into far more banks than originally thought.

A German-backed plan only covers large, cross-border banks, but the draft proposes giving the new supervisor the power to intervene in smaller banks if it sees a risk. Germany has resisted giving EU authorities powers over its politically powerful regional savings banks.