Euro zone needs new 'fiscal' tool to fight crises: ECB's Draghi

FLORENCE (Reuters) - The euro zone needs a new, common "fiscal instrument" to hold its member countries together even when they come under attack in financial markets, European Central Bank President Mario Draghi said on Friday.

European Union leaders due to meet next month are expected to deliver incremental progress on some of the outstanding issues in the bloc, such a common backstop for providing cash to banks that are being wound down.

Speaking at an event in Florence, Draghi backed that step and raised the game, calling for a government-backed tool designed to help weaker countries if they are being overly penalised by investors during a debt crisis.

"We need an additional fiscal instrument to maintain convergence during large shocks, without having to over-burden monetary policy," Draghi said.

"Its aim would be to provide an extra layer of stabilisation, thereby reinforcing confidence in national policies."

Draghi's proposal was light on detail and he conceded that any such instrument was "not conceptually easy to design", including due to EU rules on financing governments.

Similar ideas, put forward since the 2010-12 euro zone debt crisis, have been torpedoed by Germany, whose cash-rich government fears having to foot the bill for more indebted members of the currency club, such as Italy.

These concerns were likely heightened by coalition talks between Italy's anti-establishment party 5-Star and the far-right League, both of which have expressed varying degrees of scepticism towards the euro project in recent years.

Draghi said the single currency was trusted by euro zone citizens but emphasised it had to deliver the benefits its promised.

"The people of Europe...expect the euro to deliver the stability and prosperity it promised," Draghi said.

"So our duty, as policymakers, is to return their trust and to address the areas of our union that we all know are incomplete."

(Reporting By Silvia Ognibene, Writing by Francesco Canepa in Frankfurt, Editing by Catherine Evans, William Maclean)