ATHENS | With creditors demanding solutions to the Greek debt crisis and the financial world increasingly on edge, Athens on Wednesday froze pensions, cut civil service salaries and slapped 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 combustible 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.
Such a move would be highly unpalatable for the European Union, highlighting the bloc’s inability to manage the crisis on its own.
“From today the problem can’t be considered ’Greek’. We are doing what we must and more,” Mr. Papandreou said during a closed-door Cabinet meeting, in a speech released later. “So now, it is the time of Europe.”
If the EU and the markets don’t respond “as we would wish, because of speculative behavior, our last resort would be the International Monetary Fund,” he said.
Greece is already receiving technical help from the IMF, but has not yet appealed to it for a bailout. The IMF has bailed out EU members Hungary, Romania and Latvia, as well as nonmembers Iceland, Ukraine, Belarus and Serbia — but never a member of the euro zone.
Mr. Papandreou said the decisions for the measures, which amount to savings of $6.5 billion, or roughly 2 percent of gross domestic product, were “not taken out of choice but out of necessity.”
Savings will be split evenly between increasing revenue and slashing spending. Tax increases include a 20 percent rise for alcohol, a 65 percent increase on cigarettes, and a rise in the sales tax, or VAT, from 19 percent to 21 percent; while cuts include curbing civil servants’ pay, cutting bonuses and stipends and freezing pensions.
Greece shocked its EU partners in October when Mr. Papandreou’s newly elected Socialists sharply revised the budget deficit to a staggering 12.7 percent of gross domestic product in 2009, from earlier estimates of below 4 percent of GDP. The crisis has hammered the euro, the common currency used by 16 nations, and made Greece’s cost of borrowing on the international markets skyrocket. It has also sparked market expectations of some sort of bailout led by Germany and France.
Athens has repeatedly said it wants EU help to borrow money at lower rates, but European officials have remained tightlipped over any potential rescue plan, insisting Athens must first improve its finances.
Mr. Papandreou heads to Berlin Friday to meet with German Chancellor Angela Merkel — whose country is highly reluctant to indicate any form of concrete assistance — and then to Paris for talks with French President Nicolas Sarkozy before flying to Washington to meet President Obama.
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