European Union finance ministers agreed on Tuesday to increase monitoring of member states' economies from January as part of efforts to tighten budget discipline and prevent new economic crises.

The ministers gave final approval for Estonia to join the euro zone on January 1 and opened excessive deficit procedures against Finland, Cyprus, Denmark and Bulgaria -- a process under which they could be punished for breaking their deficit targets.

At talks which focused on the fine points of bank stress tests, the ministers also expressed hope they could clinch a deal soon on the creation of new pan-EU financial supervisors.

The first and foremost challenge for us now is to reinforce confidence in the European economy and for that we need to deliver on all fronts, Olli Rehn, the European Commissioner for Economic and Monetary Affairs, told a news conference.

The ministers took action on the first front, which Rehn described as safeguarding financial stability, by adopting proposals to create a European semester.

Under this proposal, member states will share information on their budget plans in the first half of each year to allow a review by other members and the executive European Commission.

It is not yet clear how this will work in practice as some countries, including Britain, want to continue to submit their budgets to their national parliaments first, but the aim is to spot any financial problems early to help avert any crises.

We are making big headway on a very substantial deepening of economic governance of the European Union, Rehn said.

EU SERVES WARNING TO FOUR COUNTRIES

The efforts include moves to reform and strengthen the EU's Stability and Growth Pact, which sets the bloc's budget rules.

Under these rules, deficits must not exceed 3 percent of gross domestic product, but few countries are expected to meet the deficit criterion this year. This has caused financial markets to doubt the credibility of the budget rules and pushed up borrowing costs for some member states.

By opening excessive deficit procedures against Finland, Cyprus, Denmark and Bulgaria, the ministers intend to show their determination to monitor budgets closely.

Only three EU member states -- Luxembourg, Estonia and Sweden -- do not face such procedures.

Estonia will become the 17th member of the euro zone after meeting the EU entry requirements on inflation, debt and deficit levels, interest rates and currency stability.

The Baltic country of 1.3 million people has long had its kroon currency fixed against the euro in a currency board at 15.6466 kroon to one euro and the ministers agreed to keep that exchange rate as the final conversion rate.

We commend Estonia for its long-standing commitment to prudent policies, Rehn said, but added that it must remain vigilant and react quickly to any signs of problems.

Estonia is still struggling to recover from recession. Its central bank said euro membership may boost investor confidence, but analysts say growth would remain sluggish.

STRESS TESTS AND FINANCIAL SUPERVISION

EU finance ministers remained divided on Tuesday over what data would be published in banks stress tests due in 10 days but pledged to make them as transparent as possible.

Like U.S. tests announced in May last year, they are intended to identify which banks need to raise new capital and to restore confidence shaken by the euro zone's debt woes.

The EU plans to announce on July 23 how its banks would fare under further adverse conditions, including a deeper fall in value of sovereign bonds, to try to boost market confidence damaged by the Greek debt crisis.

The tests will encompass 91 EU banks, which make up 65 percent of the bloc's banking sector. The list includes most of Europe's large banks that operate in more than one country, but also many German and Spanish regional banks, known as landesbanks and cajas, thought to be among the region's weakest.

French Economy Minister Christine Lagarde said a final decision might have to wait until a teleconference of EU finance ministers set for July 22. Discussions will continue until the last minute, she said.

But the prospect of a deal on an overhaul of the way banks, insurers and markets are supervised increased when the ministers said they were ready to offer concessions to the European Parliament, whose support is needed.

We are on the final strait of negotiations. We are on the right track, Internal Market Commissioner Michel Barnier said.

The reform has been deadlocked because of a dispute over how much power new supervisors will have to intervene in a country that does not follow financial rules properly.

The EU assembly wants a more centralized approach to supervising the financial sector, but a group of countries led by Britain has opposed that.

(Reporting by Ecofin team; writing by Timothy Heritage, editing by Lin Noueihed)

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