Greece told to improve public finances quickly

Stability programme to be presented in January as trade unions call strike against austerity plans.

The Greek government has been given a month to come up with a plan to convince its eurozone partners that it can bring its public finances under control. A Greek government official said that a ‘stability programme’ will be presented in early January and discussed by eurozone finance ministers at a meeting on 18 January. 

Greece is expected to have a deficit of 12.7% of gross domestic product (GDP) in 2009, the largest in the EU. The maximum deficit allowed under the EU’s stability and growth pact is 3%.

Joaquín Almunia, the European commissioner for economic and monetary affairs, said that the stability programme should spell out “concrete measures that will strengthen fiscal adjustment in 2010 and ensure a fast consolidation of public finances”.

The finance ministers will decide at the meeting how much time Greece should be given to bring its deficit within the 3% limit. Whatever deadline is set can, in theory, be enforced through financial sanctions, although in practice such a step has never been taken.

A Greek government official said that the programme would further develop plans announced by Greek Prime Minister George Papandreou on Monday (14 December) for reducing the deficit.

Tax on bonuses

Measures announced by Papandreou included a 90% tax on bankers’ bonuses, a freeze on civil service recruitment, a freeze on pay-rises for civil-servants paid more than €2,000 a month, and a reduction in social security spending. Papandreou also said that he will crack down on corruption in the state administration and on tax evasion.

José Manuel Barroso, the president of the European Commission, said last week that Greece had a “huge” problem with corruption at “all levels” in the civil service. He added that Papandreou had promised during a summit of EU leaders on 10 December to “suppress” two of Greece’s five tiers of public administration.

Trade unions in Greece are expected to hold strikes today (17 December) in protest against Papandreou’s decision to resort to austerity measures to reduce the deficit.

The Greek prime minster held a meeting with opposition leaders on Tuesday (15 December) seeking to generate cross-party support for his plans.

The Greek parliament will next week adopt the country’s 2010 budget, which was presented by the government on 20 November, and envisages a deficit of 9.1% of GDP in 2010.

Government debt

Papandreou was forced to bring forward his announcement of austerity measures by a spike in the cost of insuring Greek government debt on the financial markets, as well as heavy selling of Greek bonds. The developments were triggered by negative reports last week by Fitch and Standard & Poor’s, two credit-rating agencies.

Fitch cut its rating on Greek sovereign debt to BBB+, the lowest in the eurozone, while Standard & Poor’s said that it was considering a similar move. The announcements sparked fears among traders that Greece will not be able to service its public debt, which the European Commission estimates will reach 124.9% of GDP in 2010.

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