25th Feb 2024

Greek PM outlines deficit-cutting measures

  • Spanish PM Jose Zapatero (left) talking with Greek PM George Papandreou at a recent EU summit (Photo: Council)

Greek Prime Minister George Papandreou has outlined a series of new budgetary measures, in a bid to convince markets and European partners that the country is capable of tackling its rising debt problem.

In a highly anticipated policy speech on Monday night (14 December), Mr Papandreou said Greece needed to "change or sink."

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"It is time to address and resolve once and for all deep rooted problems that are holding the nation back," said the recently elected Socialist leader, under strong pressure to scale back the nation's deficit which is set to reach 12.7 percent of GDP this year.

Repeating an earlier pledge to bring the deficit below 3 percent by 2013, the Greek leader said he would introduce a new progressive tax scale, crackdown on rampant tax evasion and cut bureaucracy to attract foreign investors.

His proposals also included curbs on public sector hiring and pay, a 10-percent cut in social security and "a significant reduction in military expenditures," with the new measures set to come into force from early next year.

The announcement of a new 90 percent tax on bonuses for senior bankers in the private sector and a ban on bonuses for executives at public sector corporations was well received by many in the audience, consisting of union and business leaders. The UK and France announced a similar tax last week.

But an indication that public sector workers would receive real wage rises overall next year, in spite of the hole in public finances, highlights the difficult juggling act Mr Papandreou is trying to perform between bringing down costs and appeasing strike-happy unions.

Campaign pledges made in the run up to the October elections included real wage increases and higher welfare spending in 2010, with the government now concerned that new austerity measures could prompt a return to last December's violent social unrest.

Just hours before Mr Papandreou's speech on Monday, a leading trade union representing civil servants fired a warning shot across the bows, urging the administration to clarify its policies and indicating the industrial action to come.

"The escalation of our strike activity will be immediate and will be declared by early February," said the Adedy union.

A tumultuous week

Last week saw recent concerns over Greece's public finances rise to new levels following a downgrade by credit rating agency Fitch to BBB plus.

With public debt set to rise from 113 to 124 percent of GDP next year - the highest in the eurozone – investors have been increasingly worried about a possible sovereign default, prompting a rapid sell-off of Greek bonds.

The cost of borrowing for the country has risen considerably in recent days, with investors now demanding 2.3 percent extra interest on Greek 10-year bonds compared to their German equivalent.

In Athens, the stockmarket lost 10 percent early in the week, before partially recuperating.

The Greek government has also had to deal with a barrage of comments from EU leaders and policy makers, in what appeared like a co-ordinated strategy to shock the Greek administration into action.

At a meeting of EU centre-right leaders on Thursday, German Chancellor Angela Merkel even suggested the EU could be mandated to force the Greek parliament to make the necessary structural changes.

Questions over whether Eurozone partners would step in to bailout Greece have served to confuse markets, while analysts have been on overdrive all week over the current state of the Stability and Growth Pact – rules underpinning the euro area.

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