The European Commission endorsed a Greek plan to cut its budget deficit below 3% of GDP by the end of 2012, but said it must take further steps to cut public sector wages and put finances in order.
In an assessment closely watched by financial markets weighing Greece's credibility as a debtor, the European Union executive said Athens must submit an interim report on its deficit reduction progress by mid-March.
It said the plan would not be easy to implement but Greece, whose problems have prompted suggestions the EU may have to bail it out and that other countries could run into similar problems, must be ready to make further deep fiscal adjustments.
“We are endorsing the Greek program. But at the same time we know that the implementation of the program is not easy. It is difficult. This deserves support,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia told a news conference.
“If the program is followed by decisions, by actions ... this will have a positive effect on the market. If decisions are not there, the markets will be putting additional pressure.”
Sharp upward revisions to Greek deficit and debt figures last year led to ratings downgrades and sent yields soaring, further denting investors' confidence.
Asked if Europe might have to turn to the International Monetary Fund for help, Almunia said he was confident the 27-country EU and 16-state euro zone could cope on their won. EU officials have dismissed talk of a bailout for Greece.
The Commission's recommendations on what Greece should do were broadly in line with promises made by Athens in its long-term austerity plan, which forecasts a gap of 2.8% in 2012, down from 12.7% in 2009.
In an effort to get its financial house in order, Greece has made a series of promises, including plans to cut public sector wages, impose a public sector hiring freeze, change the tax scale and fight tax evasion.
But the EU executive recommended that Greece adopt a “comprehensive structural reform package aimed at increasing the effectiveness of the public administration, stepping up pension and healthcare reform, improving labor market functioning and the effectiveness of the wage bargaining system.”
It also told Greece that the country should set aside 10% of current expenditure to create a contingency reserve in case of future budgetary pressures.
The Commission will send its recommendations to EU finance ministers for approval at a meeting on February 15-16.
It also launched legal action against Greece for sending false statistics and warned Athens over its policies in areas other than budget reform, using powers under the EU's Lisbon reform treaty for the first time.
Warnings can be issued to countries whose economic policies are not consistent with the 27-country bloc's guidelines, or countries that risk jeopardizing the proper functioning of the euro zone.
EU approval of the Greek plan was widely expected but Athens still faces questions about its ability to meet the Commission's demands.
“The proposed measures will intensify pressure on the Greek government to consolidate its budget. Nevertheless, it seems unrealistic to expect that Greece will reduce the deficit ratio below the 3% ceiling by 2012,”Christoph Weil, an analyst at Commerzbank, said in an initial reaction.
There is a reluctance in some parts of the Greek Socialist government to implement all the measures because of fears of a popular backlash. Public sector strikes are already planned.
“Everybody knows that it is almost unrealistic to reduce Greece's budget deficit from 13% of GDP to 3% within three years. The question is, how close will they come to that dream vision,” said Kornelius Purps, a bond analyst at Unicredit. (Reuters)