The EU's top court has backed the European Commission's bid to boost pay for EU staff by 3.7%, instead of the 1.85% that the member states wanted.
The 27 governments - collectively called the Council - wanted to limit the pay rise to 1.85% because of tough economic conditions in Europe.
The European Court of Justice says the Council "exceeded its powers" when it decided on the 1.85% figure.
The court case, affecting about 45,000 EU staff, began in January.
"The articles of the [Council] regulation that fix new amounts for salaries are annulled," the court ruling said on Wednesday.
Under the rules, staff salary adjustments take effect on 1 July, so the pay increase will have to be backdated. The move will still require a new Council regulation in line with the court ruling.
The green light for the higher EU pay rise comes as national civil services are shedding jobs and freezing or cutting staff pay.
The pay settlement for 2009-2010 was based on 2008 figures, reflecting economic conditions that were much better at the time.
A complicated formula is used, based on civil service pay in eight of the EU's richer countries and on the cost of living in Brussels. The eight reference countries account for 76% of the EU's total GDP.
The judges, who are also on the EU payroll, said the Council's only legal option to adjust EU salaries because of an economic downturn was under an exceptional clause in the regulations - but the Council had not taken that route. The Commission would have had to agree to such a move anyway.
The Commission - the EU's executive arm - drafts laws and acts as guardian of the treaties.
The court, whose rulings are binding on member states, sits in Luxembourg.
Basic gross monthly salaries for Commission staff currently range from about 2,600 euros (£2,211) for a secretary to about 18,000 euros (£15,300) for a head of department, and about 20,000 euros for a commissioner.
The special Community tax paid by EU staff is generally lower than national rates of income tax for civil servants.
EU staff in Brussels and Luxembourg also get a wide range of allowances, including a residence allowance equivalent to 15% of their basic salary.
Family-related allowances include a household allowance, a dependant child allowance, an educational allowance and a pre-school allowance.
The Commission said it was satisfied with the court's decision, which was in line with the agreed method of salary adjustment.
A Commission spokesman, Michael Mann, told the BBC that for 2010-2011 the salary calculation indicated a 2% cut in purchasing power for EU staff in Brussels, to match an equivalent cut in civil servants' salaries in the eight EU reference countries.
So to keep pace with the 2.4% inflation rate in Brussels the EU pay increase for 2010-2011 would have to be 0.4%, he said.
Since 2004 EU salaries have lost 5.3% of their purchasing power, he said.