* ECB: Eurogroup should be guardian of fiscal sustainability
* Independent fiscal watchdog should be created
* Could support establishment of crisis institution
(Adds detail)
By Sakari Suoninen
FRANKFURT, June 17 (Reuters) - Euro zone finance ministers should be the guardians of fiscal sustainability in the 16-country bloc, the European Central Bank said on Thursday.
"For the euro area, the Eurogroup should assume a shared responsibility for sound national fiscal policies," the ECB said in its preliminary proposals for the reform of the economic governance framework.
"The Eurogroup, as the guardian of fiscal sustainability, should review in detail national budgetary plans, consider the risk of adverse spill-over effects and agree on a number of precise ex ante fiscal policy guidelines."
The ECB thinks all countries should feel responsible for each other's fiscal policies.
"The ECB favours ... an approach, which should be based on a genuine sense of co-responsibility of all euro area countries," it said.
Surveillance of fiscal rules should target especially the countries with biggest problems, the ECB said, and added a new institution could be founded.
"An independent European fiscal agency could be set up under a mandate from the Eurogroup/Council, acting as its `watchdog'."
The ECB said laxity in enforcing sanctions must end and incentives must be improved.
"At the EU level, the European Commission, the Eurogroup and the EU Council have not been sufficiently stringent in applying the EU fiscal rules," the ECB said.
"At the national level, incentives for sustainable fiscal positions were insufficient."
Sanctions for breaching budget deficit rules should be applied more automatically and an independent EU fiscal agency should be created.
Sanctions should also be wider in spectrum and the independence of fiscal surveillance should be strengthened, the central bank said.
"Financial sanctions could include reduced access to EU cohesion funds and other types of EU transfers including EU structural funds and EU subsidies in general."
CRISIS FUND
The euro zone is battling the biggest crisis since the introduction of the common currency as Greece has lost trust in the markets due to high debt and deficit levels.
The EU and IMF agreed at the beginning of May to lend Greece 110 billion euros over three years to help it pay billions in expiring debt after being shut out of financial markets by the high cost of borrowing.
The ECB said that in case a country runs into difficulties in the future, aid should not be provided where, "market financing is no longer available."
It also said it could support the establishment of a euro-zone crisis management institution on the basis of the European Financial Stability Facility, provided it did not step on the ECB's territory.
"Any new framework needs to respect the independence of the ECB, and the prohibitions of monetary financing and privileged access," it said.
Moreover, new rules should not include the threat of expulsion from the euro zone or the EU, because it would not be seen as credible.
There should be sanctions for countries which get aid but do not comply with conditions, the ECB said, adding its proposals focus on the 16-country euro zone, but could selectively apply to the whole EU.
The central bank made the comments to the European Union task force, which is led by EU President Herman Van Rompuy.
The ECB document was dated June 10 and the accompanying letter to Van Rompuy June 15.
Its comments are available on its Web site: http://www.ecb.int/pub/pdf/other/reinforcingeconomicgovernanceintheeuroareaen.pdf (Reporting by Sakari Suoninen; Editing by Susan Fenton, Ron Askew)