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European Commission accepts Greece's rescue plan but warns further spending cuts and new taxes might be needed
By Finfacts Team
Feb 3, 2010 - 3:29:55 PM
The European Commission today accepted Greece's plan to slash its budget deficit, but warned that further spending cuts and new taxes might be needed to correct the country's public finance imbalances.
The Commission adopted a series of recommendations to ensure that the budget deficit of Greece is brought below 3% of GDP (gross domestic product) by 2012, that the government timely implements a reform programme to restore the competitiveness of its economy and generally runs policies that take account of its long-term interest and the general interest of the euro area and of the European Union as a whole.
The EU's executive arm demanded regular updates from Greece on implementing the plan to slash a deficit from 12.7% of GDP and said further steps may be needed. Greek Prime Minister George Papandreou yesterday announced a fuel-tax increase, expanded a partial wage freeze to cover all public workers and also announced other measures.
" Greece has adopted an ambitious programme to correct its fiscal imbalances and to reform its economy. Yesterday's announcement strengthens the government's commitment to deliver the programme's objectives of more sustainable public finances and a more competitive economy. This is in the interest of the Greek people, who will benefit of better and more durable growth and job opportunities in the future, and it is in the interest of the euro area and of the EU as a whole. The Commission fully supports Greece in this difficult task,"said outgoing Economic and Monetary Affairs Commissioner Joaquín Almunia, adding:"The Commission will monitor the execution of the budget and of the reforms very closely and regularly and welcomes the Greek government's readiness to adopt further measures as and when necessary."
The Commission said it welcomes the announcement by the Greek government, on Tuesday, of a set of additional fiscal measures (concerning the wage bill, excises on fuel and pension reform), to safeguard the budgetary targets set in the programme. It calls on Greece to spell out the announced fiscal measures and implementation calendar in the coming weeks and welcomes its readiness to adopt and swiftly implement additional measures if needed. The fiscal measures to be implemented in 2011 and 2012 should also be further detailed. Implementation of all the measures, including the reforms to increase the competitiveness of the economy in the field of pensions, healthcare, public administration, the functioning of product markets, labour market, absorption of structural funds, supervision of the financial sector, and statistics, will be carefully monitored through regular reports to be sent to the Commission by Greece.
Bloomberg reports that Greek bonds gained, with the premium to hold government debt over comparable German bunds slipping 19 basis points to 335 (3.55%) basis points. That gauge rose to an 11-year high last week of 396 basis points on concern over the government’s ability to tame the deficit and finance its debt. Greece woes also dragged down Spanish and Portuguese bonds amid speculation that their deficits threaten monetary union.
“Greece is in the center of a speculative game aimed at the euro,” Papandreou said in a televised speech in Athens late yesterday. “It is our national duty to stop the attempts to push our country to the edge of the cliff.”
On 15 January, the Greek government submitted to the Commission its stability programme for the period 2010-2013 which envisages reducing the budget deficit by 4 percentage points to 8.7% of GDP in 2010 and thereafter to 5.6% in 2011, 2.8% in 2012 and 2% in 2013. The Commission said the programme contains a package of concrete fiscal consolidation measures for 2010, with an estimated quantification for each of the measures, as well as a timeframe for their adoption and implementation. On the revenue side it includes the elimination of tax exemptions, the rise of excise duties on tobacco and alcohol and measures to fight tax evasion. Regarding expenditure, the government will cut public servant allowances, freeze recruitment in 2010 and will only recruit 1 for every 5 civil servants retiring thereafter. The government has also set up a contingency reserve and frozen all budgetary appropriations per ministry by 10% and already adopted nominal cuts in public consumption and operational expenditure. The programme also outlines a number of structural reforms aimed at improving the budgetary framework and the efficiency of public spending, enhancing investment and improving the functioning of labour and product markets. After the submission of the stability programme, the Greek government announced further measures concerning public wage, excises on fuel and pension reform. The Commission asks Greece to spell out the implementation calendar of these measures within one month.
The Commission says plans for 2011and 2012 also need to be detailed in the coming months.
Given the state of the public finances in Greece and the persistent external imbalances, which result from accumulated competitiveness losses, and in order to allow for simultaneous discussion by the Council of fiscal policy and structural reforms, an integrated approach to the enhanced surveillance mechanism is being adopted.
The Commission recommends to the EU Council of Ministers that Greece adopts a
Problems with Greece's budget deficit pose significant problems for European banks, Olivia Frieser from BNP Paribas told CNBC Tuesday.:
comprehensive structural reform package aimed at increasing the effectiveness of the public administration,stepping up pension and healthcare reform, improving labour market functioning and t he effectiveness of thewage bargaining system, enhancing product market functioning and the business environment, and maintaining banking and financial sector stability.
The Commission said considering that Greece has failed in its duty to report reliable budgetary statistics, as seen again in October with a significant revision of data for 2008, it isinitiating infringement proceedings, requesting the government to take all necessary steps to ensure that the systemic failures and weaknesses identified in the recent Commission report are corrected. Greece is asked to cooperate with the Commission so as to promptly agree on an Action Plan to tackle statistical, institutional and governance deficiencies, including the adoption, by 15 May, of legislation that makes compulsory to provide public reports on budgetary execution on a monthly basis, the obligation for social security funds and hospitals to publish accounts and enhanced control mechanisms and effective personal responsibility in the statistics and general accounting offices as well as receive the appropriate resident technical assistance for the compilation of reliable statistics.
Greece is required to submit a first report in mid March 2010, spelling out the implementation calendar of the measures to achieve the 2010 budgetary targets, standing also ready to adopt additional measures if needed, and quarterly integrated reports from mid May 2010 on the implementation of the recommendations, including on the reforms.
The Commission's integrated recommendations will be discussed at the February Eurogroup and ECOFIN meetings of finance ministers.
