Merkel salutes Portugal's 'remarkable' cuts to health, welfare

Casting the country's efforts to satisfy Berlin against those of Ireland and Greece, whom she is pushing to accept respectively support for a common EU corporate tax base and tougher action on privatisation, she said: "Portugal today made remarkable steps, but others are still pending."

Ahead of the twin summits, Portuguese finance minister Fernando Teixeira dos Santos on Friday announced cuts amounting to 0.8 percent of GDP this year, giving the country a cushion, or "additional margin" in the words of the minister, should previously announced cuts not enable Lisbon to reach its 2011 deficit reduction target of 4.6 percent of GDP down from 7.3 percent.

The cuts hitting primarily pensioners, the unemployed and health-care, will see a reduction of 10 percent in state pensions above €1,500 a month, a cut in redundancy payments and a limiting of unemployment compensation to a maximum of 12 month's pay.

Health-care administrative and operation costs will also be pared back and publicly owned firms will also be affected.

The fresh measures come atop additional austerity imposed in January including a five-percent cut in civil servant wages and an increase in VAT to 23 percent.

The government says that the biggest savings will arrive in 2012 and 2013 however, cutting spending by a further 2.4 percent of GDP and increasing revenues by 1.3 percent of GDP over three years.

The ratcheting up of austerity comes despite warnings that the cuts themselves will push the country back into recession.

Echoing Merkel's statement, European economy and monetary affairs commissioner Olli Rehn also welcomed the news, calling the additional measures gave evidence of the government's "engagement to ensure fiscal sustainability."

A joint statement by European Commission chief Jose Manuel Barroso and European Central Bank chief Jean-Claude Trichet said that both Brussels and Frankfurt would be keeping a close watch to make sure Lisbon stuck to its promises via new national-budget oversight powers given to the EU: "The policy follow-up will be closely monitored by the European Commission, in liaison with the ECB, in the context of enhanced surveillance."

The announcement however failed to work its magic on markets, with the yield on the country's ten-year bond climbing to 7.6 percent.

No movement on Ireland

Asked about Irish expectations to lower the interest rate paid on its bail-out, Merkel said: "A lot of people expect a lot of things from you."

"We see it as our duty to make the euro as stable as possible. In order to reach one big package at the end of March, those countries who still have homework to do, will have to deliver."

She said she expected a ‘quid pro quo' from Ireland and Greece in return for movement on boosting the effective lending capacity of the permanent European rescue fund, to come into place from 2013.

"We want to make clear that a permanent mechanism would be only a last resort for countries to tap and that we need some quid pro quo, if we agree to more help and accommodating demands, we think this should be reciprocated with measures actually enhancing the stability and health of economies."