The strength of the euro masked underlying fiscal problems within the euro zone, the President of the European Union, Herman Van Rompuy said in an interview published on Monday.

The euro became a strong currency with very small interest rate spreads (on government bonds). It was like some kind of sleeping pill, some kind of drug. We weren't aware of the underlying problems, Rompuy told the Financial Times.

Rompuy also attacked the financial markets for overreacting to Europe's economic difficulties and being swayed by rumors and prejudices.

The markets were too indulgent in the first decade, but now they overreact a lot of the time to small incidents, Rompuy said.

European leaders will meet on Thursday to set out proposals to convince financial markets they can contain a debt crisis by agreeing how to tighten economic policy coordination and strengthen budget discipline.

A task force under Rompuy has started work on reforms to reinforce budget rules and changes are planned to tighten financial regulations after the global economic crisis.

Most of us are not happy with excessive market developments, Rompuy told the FT. But when you look at this in a broader perspective, the markets are sanctioning bad policies, sometimes excessively, disproportionately and based on rumors and prejudices.

Rompuy told the paper European leaders were committed to implementing tough reforms to safeguard the euro zone's future.

The toughest thing now is reforms in the budgetary field and the economy competitiveness, labor market reforms, the retirement age, he said.

Of course, it will be difficult. At certain times there will be social unrest and political opposition to all this. But I know most of the leaders now. They are preparing to take huge risks because they know what is at stake for the euro zone.

(Reporting by Caroline Copley; Editing by Marguerita Choy)