European Union reacts favorably to $6.5 billion austerity plan from Greece

The Greek government announced its new austerity plan Wednesday, intending to close its budget gap by 4.8 billion euros ($6.5 billion). But pensioners and civil servants have already demonstrated their unhappiness. (March 03)
By Associated Press
Thursday, March 4, 2010

ATHENS -- With creditors demanding solutions to the Greek debt crisis and the financial world increasingly on edge, Athens on Wednesday moved to freeze pensions, cut civil service salaries and slap new taxes on everything from cigarettes and alcohol to fuel and precious gems.

Markets and the European Union reacted well to the $6.5 billion austerity plan. But Greek unions were outraged -- and the country's embattled prime minister, who had likened the situation to a "state of war," is headed to Germany and France seeking more definite expressions of support.

Prime Minister George Papandreou warned that unless the new measures won European Union and market backing, bringing down the cost of borrowing for the country, Greece would turn to the International Monetary Fund.

Greece is already receiving technical help from the IMF but has not yet appealed for a bailout. The IMF has bailed out E.U. members Hungary, Romania and Latvia, as well as nonmembers Iceland, Ukraine, Belarus and Serbia -- but never one of the countries that uses the euro. The IMF said it approved of the new plan, which is to be voted on Friday in Parliament.

The savings, which amount to roughly 2 percent of gross domestic product, would be split evenly between increasing revenue and slashing spending. Tax increases include a 20 percent hike for alcohol, a 65 percent increase on cigarettes and raising the sales tax from 19 percent to 21 percent. Cuts include curbing civil servants' pay, cutting bonuses and stipends, and freezing pensions.

Papandreou heads to Berlin on Friday to meet with German Chancellor Angela Merkel -- whose country is highly reluctant to indicate concrete assistance -- and then to Paris for talks with French President Nicolas Sarkozy before flying to Washington to consult with President Obama.

Greece had taken an "important step" toward realizing its goal of cutting its budget deficit, Merkel said in Berlin.

Greece announced an austerity plan in January, but it won only lukewarm support from the E.U. and didn't calm jittery markets. But the latest batch of budget cuts won early approval from the E.U. and leading credit ratings agencies Moody's Investor Service and Fitch Ratings, both of which had downgraded Greece's credit rating in December.

E.U. Economic and Monetary Affairs Commissioner Olli Rehn, who had demanded new measures during a visit to Athens on Monday, described the new plan as a "potential turning point."

"I can see that there is a very strong determination and unity to reform the country and put the public finances under control. This can be made a real turning point in the fiscal history and economic development of Greece," he said.

Moody's said that the austerity measures were a "clear manifestation" of the government's resolve and that officials should be allowed time to follow through and implement the measures, while Fitch Ratings said that "politically challenging measures like a rise in VAT and further cuts in public sector pay indicate that the Greek authorities are indeed serious about cutting the deficit."

While the markets were happy, Greece's labor unions were not. "These measures are terrible. I think the government does not realize how little people in this country are being paid," said Despina Spanou of the civil servants union ADEDY. "We have no other choice other than to step up [our protests]." The union has called its third 24-hour strike for March 16.

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