EUROPEAN COMMISSION:THE EUROPEAN Commission is pursuing a plan to create a rescue scheme akin to the International Monetary Fund (IMF) to help distressed governments avert the threat of sovereign default, a move that will intensify EU oversight of national economies.

The development follows months of acute pressure on the euro amid anxiety about the Greek budget deficit and weakness in the public finances of fellow euro members Spain and Portugal.

At high levels in the European institutions, the manoeuvre is seen as an effort to boost the credibility of the single currency system as it faces its biggest threat since it came into being in 1999.

As the German government sent a public signal yesterday of its willingness to participate in a European Monetary Fund (EMF), the EU executive said it was working on such a proposal in tandem with new measures to intensify economic co-ordination and surveillance in the euro zone.

The scheme would be “highly conditional”, a spokesman for economics commissioner Olli Rehn said. This was taken to mean that steep costs and tough policy measures would be imposed by Brussels on participants in such a scheme.

Questions centre on whether governments would have to make annual contributions to any EMF. Mr Rehn’s spokesman said the European Central Bank and the IMF are involved in the talks.

Although the talks were prompted by financial emergency in Greece, the spokesman told reporters that the scheme would not be used to assist Athens as it takes drastic action to its finances.

In the face of significant political pressure from the European authorities, Greece last week adopted a third package of drastic austerity measures in as any months.

EU finance ministers will hand down their judgment on the measures at their monthly meeting next week, an engagement at which they are likely to review preparations for an EMF plan.

While stating that the aim was to strike an agreement on a plan by June, Mr Rehn’s spokesman said it was still too early to say whether the scheme would require any change to the European treaties to dilute the bailout ban in place since the beginnings of monetary union.

However, a high-level source said discussions at present centre on the possibility of revising the Stability and Growth Pact which underpins the single currency system.