The European Commission will endorse today (3 February) a Greek plan to cut its budget deficit below the EU ceiling of 3% of GDP by the end of 2012, saying it was feasible despite risks.
The Commission's assessment will be closely watched by financial markets as they weigh Greece's credibility as a debtor. Sharp upward revisions to Greek deficit and debt figures last year led to ratings downgrades and sent yields soaring.
"The Commission has assessed the programme. The envisaged correction of the deficit is feasible but subject to risks," Commission President José Manuel Barroso said in a statement.
"Provided such risks will not be allowed to materialise through the timely implementation of corrective measures the deficit will indeed be corrected. We believe this will be done. The Greek government is committed to taking such measures," he said.
Greece's financial problems have sparked talk about a possible bailout by the EU and fears about the stability of the 16-country euro area if markets' doubts about Greece spill over to other eurozone countries with large deficits.
"Indeed, a successful correction of its very excessive deficit is not only important for Greece but for the euro area and the EU as a whole," Barroso said.
The Commission's much-anticipated recommendations on what Greece should do are likely to be in line with what Athens has promised in its long-term austerity plan, which forecasts a gap of 2.8% in 2012, down from 12.7% in 2009.
The Commission, the EU's executive arm, will formally present its recommendations on Wednesday and they will then be sent for the approval of EU finance ministers on 15-16 February.
"We consider that the achievement of these objectives in the coming three years, before the end of 2012, is absolutely necessary," Economic and Monetary Affairs Commissioner Joaquin Almunia told Reuters on Monday.
Whether the Greek programme works has become a measure for stability across the European Union and especially the 16 countries that use the 10-year-old euro single currency.
In its assessment of the Greek plan, the Commission is likely to raise doubts about growth forecasts, an EU source said. If growth turns out to be lower than expected, the Commission could ask Greece for additional measures to compensate for the shortfall.
Greece has been pounded by financial markets since revealing its 2009 budget deficit was more than four times the EU ceiling. Investors were also alarmed by Commission findings that Greek statistics were unreliable and prone to political influence.
The premium investors demand for holding Greek debt rather than more reliable German Bunds hit a lifetime high of around 400 basis points last Thursday, leading to fears of a spillover that could engulf countries such as Spain and Portugal.
In an effort to get its financial house in order, Greece has made a serious of promises, including plans to cut public sector wages, impose a public-sector hiring freeze, change the tax scale and fight tax evasion. But there is a reluctance in some parts of the Socialist government to implement all the measures, fearing a popular backlash. Strikes are already planned.
A draft bill on the new tax system is expected to be presented this month and is likely include higher taxes on real estate transactions among other things, but no VAT hike.
Greece also plans a pension system reform because it is the EU country whose public finances are most at risk from an ageing population. Unless it changes the current system, it could be spending a quarter of its GDP on pensions by 2060.
As well as its assessment of Greece's plans, the Commission will also on Wednesday issue a warning to Greece about its policies in areas other than budget reform, using powers given to it by the EU's Lisbon reform treaty for the first time.
Warnings can be issued to countries whose economic policies are not consistent with EU guidelines, or countries which risk jeopardising the proper functioning of the euro zone.
The Commission will launch infringement proceedings against Greece for sending false statistics and later also demand auditing powers for the EU statistics office Eurostat to be able to check the accuracy of such data in the future.
(EURACTIV with Reuters.)
Greek markets were hit at the end of 2009 by concerns about the country's fiscal deterioration after the new socialist government revealed the budget deficit would reach 12.7% of GDP in 2009, more than twice previous forecasts.
Greece is also set to become the EU's most indebted country this year, with debt rising to 124.9% of GDP, according to EU data.
Hammered by markets, Greece has pledged to cut its double-digit budget gap to below the EU's 3% of GDP limit by 2012.
EU officials went on a three-day visit to Athens in January to inspect the plan, and asked Greece for a more specific three-year plan to shore up the country's ailing finances.
- Greek Ministry of Finance:Update of the Hellenic Stability and Growth Programme(Jan. 2010)
- BBC:Greece unveils austerity programme to cut deficit
- Irish Times:EU backs Greek austerity package
- AFP:Greek PM urges unity ahead of crunch EU budget report
- Bloomberg:Euro Weakens Amid Concern European Fiscal Deficits May Worsen
- Washington Post:E.U. officials seeks to quell rumors of a pending bailout for Greece
- Reuters:Stiglitz: Fears Greece will go bust irrational