EUROPEAN MONETARY FUND:THE EU authorities are seeking power to set detailed guidelines for public sector pay in member states as they advance plans to create a European Monetary Fund (EMF) to prop up governments at risk of sovereign default.

The development follows months of pressure on the euro amid anxiety about the Greek budget deficit and the potential for contagion in the single currency zone.

It comes as high-level officials in key European institutions apply discreet pressure on Germany for moves to enhance the “credibility” of the euro system.

Although the precise parameters of an EMF plan remain subject to negotiation, the scheme would in essence create a lender of last resort within the EU. However, sources briefed on the discussions said assistance would come at a very steep cost to participating countries.

Still under discussion is the extent to which this can be done without breaching the no-bailout clause in EU law. While a spokesman for EU economics commissioner Olli Rehn declined to say whether the EU treaties would have to be changed to proceed with such a plan, other officials believe no change would be required.

However, Dr Merkel said treaty changes would be required.

“Such a fund cannot be created without treaty changes,” said Dr Merkel. “If the EU wants to remain capable of acting, it will keep encountering situations where the Lisbon Treaty cannot be the end of history.

“The EU has to be able to react to the challenges of the time,” she said. “We thought we wouldn’t need such a facility from the euro zone because we assumed that such a situation would not come to pass in the common currency area.”

Dr Merkel said yesterday in Berlin that the Greek crisis had changed her mind in favour of greater EU oversight of euro zone member states’ economies.

The European Commission is rapidly proceeding with a plan to advance the reach of its economic monitoring system. Informed sources said the EU executive was likely to demand a say in this process over public sector pay, a crucial but contentious component of public expenditure.

Dr Merkel said the time had come for euro zone members to agree to share greater financial data than at present to allow closer scrutiny from the EU statistics agency, Eurostat, as well as other euro zone members.

The reform measures are being prepared in a looming overhaul of the euro zone rulebook in an effort to prevent any repeat of the financial emergency in Greece.

German officials have complained about insufficient and incorrect information supplied by Greece to Eurostat, although Dr Merkel said yesterday her suggestions were not directed at Greece which, she said, had yet to ask for financial assistance.

The new measures would strengthen the co-ordination and surveillance of “budgetary discipline” in the single currency area.

While public pay cuts have proved highly controversial in Ireland, the sources pointed out that pay cuts adopted last week by the Greek government were introduced at the behest of the European authorities.

EU economics commissioner Olli Rehn, who says the Greek case illustrates the requirement for tougher economic supervision by the EU executive, will lean on a key clause in the Lisbon Treaty to revise the rules that govern the euro. The clause in question – article 136 – empowers EU governments to adopt “measures specific” to euro members “to set out economic policy guidelines for them”.

National governments have no veto in such cases to prevent the adoption of such measures.

“There is a clear opportunity in political terms to do this and do this now,” said a source briefed on the plan.

The commission’s decision to embark down this road follows threats by EU finance ministers to impose new austerity policies on Greece if the administration of prime minister George Papandreou did not adopt drastic new measures. Mr Papandreou yielded to such pressure last week, introducing new cutbacks and tax-raising measures last week.