The European Commission will check euro zone countries' draft budgets to verify if they are in line with EU rules and will ask for changes if they are not, under a deal struck on Wednesday with the European Parliament.
After months of wrangling, EU lawmakers backed the new powers for the Commission, the EU executive, to further strengthen euro zone budget discipline and prevent another sovereign debt crisis.
The new law, called in EU jargon the "two-pack", complements the existing budget rules, tightened at the end of 2011 through the introduction of swifter financial sanctions for those breaking deficit and debt limits.
It gives the Commission an extra level of oversight on member countries' budgets. Governments of course are free to ignore the commission's recommendations but risk EU legal action by doing so.
"These new laws are a key element in building stronger economic governance for the euro area and boosting the EU's armor against further economic crises," European Parliament President Martin Schulz said.
Wednesday's deal is expected to become law in March and will oblige euro zone governments to send draft budgets for the following year, based on independent economic forecasts, to the Commission before October 15 for verification.
"This will mean that the euro area can benefit from a more integrated and effective policy-setting framework already for the 2014 budgetary cycle," the EU Economic and Monetary Affairs Commissioner Olli Rehn said after the deal was reached.
Euro zone countries already agree, in a process that takes up the first six months of the year, on where their fiscal policy should be heading the following year. The Commission makes suggestions that must be approved by governments.
The additional step of vetting draft national budgets in October before they are submitted to national parliaments for approval is meant to catch any divergences from what governments themselves had already agreed to earlier.
The new law will allow the Commission to put a country that is "threatened with financial difficulties" under strict surveillance. That means the government would be under an obligation to deal with the problems that led to the difficulties and entail quarterly reviews of its progress.
The agreement ends a long deadlock between the parliament and the Commission over the new legislation.
While parliament did not object to the new powers themselves, it wanted in return for its support that the Commission present a proposal for a European Redemption Fund.
It would mutualism euro zone debt over 60 percent of GDP and help pay it down over 20 years via cheaper euro zone funding.
The Redemption Fund idea, even though originally presented by a group of German economists, has been firmly rejected by the Germans and several other euro zone governments, who say any debt mutualization could only come at the end of a long process that would ensure banking, political and fiscal union first.
The Commission did not want to promise parliament to draft a proposal that had no support from euro zone governments.
In the end, a deal was possible because the Commission will set up a high level group of experts to study the feasibility of the redemption fund idea and report back by March 2014.
The conclusions of the working group will not be binding for the Commission, but if there is a strong recommendation for such a fund, the EU executive might then decide to draft such a proposal before the end of its term in June 2014.
(Additional reporting by Claire Davenport; editing by Patrick Graham)