UPDATE 1-Euro zone needs deeper economic union -ECB's Asmussen
* Asmussen urges sharing sovereignty to confront crisis
* Says markets should not underestimate political will
BRUSSELS, July 17 (Reuters) - Euro zone countries need to build a deeper economic union, diluting national polices in favour of centralised powers to intervene in national budgets and prevent countries issuing too much debt, a European Central bank ratesetter said.
Euro zone leaders hope a commitment to deeper integration, even if it is a decade-long project, will reassure investors who are worried about a break-up of the single currency zone that the euro is here to stay.
"The core of the current debate about the future of economic union has a name: the further sharing of sovereignty," European Central Bank Executive Board Member Joerg Asmussen told diplomats and economists at an event in Brussels.
Euro zone leaders agreed in June to start work on a banking, fiscal and economic union, which could complete the existing monetary union and help stave off future debt crises, embarking on what they hope is a new phase in the European project.
"It means endowing the euro area with the power to effectively prevent and correct unsustainable policies in every euro area member state," he said.
"This would imply that a euro area authority would have competence to limit countries' ability to issue debt and have intervention rights into national budgets, and to compel member states to correct their policies, be that in the fiscal, structural and financial fields."
Details of the first steps in the deeper integration process are to be discussed over the next six months.
"It is a clear signal to the markets: underestimate the degree of political commitment to the single currency at your own risk," Asmussen said.
He said the euro zone would not be able to have a central budget comparable in size to that of the United States anytime soon, although the bloc's permanent rescue fund was "a good starting point" for a fiscal authority.
"For the foreseeable we will not reach a budget size comparable to the US. The EU budget is 1 percent of GDP, compared to 20, or 25 percent of GDP in the United States," he said.
IRELAND ON TRACK
He also said the European Union and its institutions had to become tougher with countries that were too slow to address their economic problems and threatened the economies of others.
"This lack of peer pressure among decision-makers has real costs -- as we had to learn painfully during this crisis," Asmussen said. "If mutual surveillance is meant to be effective, this needs to change," he said.
But a deeper euro area integration could only be sustainable if it had democratic support and accountability, with national parliaments debating the economic policy advice given to countries by the European Union's executive arm, the European Commission.
Euro zone leaders want the ECB to take over the supervision of banks in the euro zone as a first step to setting up a joint deposit guarantee scheme and a bank resolution fund.
Asmussen said the ECB was ready to play the role of a euro zone bank supervisor.
"But it is of utmost importance that this framework allows the ECB to act with effectiveness, independence and without risks to its reputation," he said.
Asked about Ireland's financial future, Asmussen said the international bailout was sufficient and the country had no need for more time to return to financial markets.
"I see clear indications that the country is managing to get along with the existing programme," Asmussen said.
Ireland was rescued with a 85 billion euro ($103.81 billion) bailout in 2010 and hopes to return to bond markets at the end of next year.