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Merkel backs EMF call

EU authorities are moving towards the creation of a European Monetary Fund (EMF) with the power to set guidelines for public sector pay.

German Chancellor Angela Merkel supported the idea of an EMF to prop up governments at risk of sovereign debt.

But the European Commission emphasised that if a plan was set up, it would be accompanied by deeper surveillance over the public finances of member states.

The EC said it was investigating how to enforce the co-ordination of economies and address the economic imbalances between member states.

Chancellor Merkel said the EU had lacked the tools to deal with the Greek debt crisis and "the sanctions we have were not good enough".

"We want to be able to resolve our problems in the future without the IMF," she said.

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.

Greece's huge public sector deficit and its overall debt burden, which is expected to rise to 120pc of the size of its economy this year, came as a shock to the Commission because the true extent of the country's runaway deficit was not revealed in published statistics until late last year.

The full details of the EMF, including whether it would require an amendment to the EU treaty, have yet to be pinned down, but it would not be ready in time to be relevant to the current crisis.