- The Washington Times - Wednesday, February 3, 2010

BRUSSELS — The European Union backed Greece’s plan to shrink a massive budget gap as “achievable” but warned it would demand tougher cutbacks if Athens does not stick to promised spending curbs and reforms.

Markets at first reacted positively with narrowing spreads on Greek government bonds showing that they are more confident that Greece can overcome its debt crisis and will not default on its borrowings. However, spreads rose again in Wednesday-afternoon trading.

The EU warned Greece may still need to do far more to cut high public sector wages and reduce inflation that has been above the euro-zone average for the past decade.

Civil servants are already angry with a government austerity program that freezes their pay and stalls recruitment. They are planning to strike Feb. 10, and customs and tax officials are set to walk off the job this week.

Greece is under immense pressure from markets and other EU governments to make cuts that would bring its budget deficit down from 12.7 percent of economic output last year to 2 percent in 2013.

EU Economy Commissioner Joaquin Almunia said Greece “deserves support” but needs monitoring “so as to avoid slippages” and missing deficit reduction targets. Greece has agreed to report regularly to the EU on what it is doing, starting in mid-March.

He said Greece’s program “should be adopted as urgently as possible” to make sure it can meet its goal for 2010 “without doubts.”

“It is extremely challenging, it is absolutely necessary,” he said of the program.

Greece Prime Minister George Papandreou on Tuesday toughened his plan with higher fuel taxes, increased retirement ages and an overhaul of the tax system. These will be presented to the Greek parliament next week.

But the EU wants more, saying Greece needs to curb pension spending that is set to more than double to almost a quarter of gross domestic product in 2060. Health care also needs reforms, it says, because it frequently has caused the government budget to overrun.

Wider economic reforms to make Greece more competitive are also essential, it says. Greece lags behind other EU countries on liberalizing energy and transport, adding costs to businesses that are also burdened with hefty red tape.

Greece is the worst-performing EU country in the World Bank’s business environment list, which charts how easy it is to start and run a company. It also has rigid labor market rules that makes it hard for young people to get a job and protects older workers who already have one.

Mr. Almunia said Greece, Spain and Portugal had all seen a “permanent loss of competitiveness since they are members” of the euro zone, pointing to labor costs that are much higher than other euro nations. All three also have soaring deficits and high debt.

Greece’s debt crisis has alarmed bond markets and rocked the credibility of the European Union’s shared currency, causing the euro to slide against the U.S. dollar in recent weeks and Greece to pay higher spreads on borrowing as investors see more risk that it could default.

The Greek stock market at first reacted positively to EU support for the Greek budget, with the Greece Composite Index up 1.42 percent in early afternoon trading, but then sank and traded down 1.46 percent

Yield spreads over the equivalent German government bond also initially narrowed to 3.346 percentage points Wednesday, before rising to 3.48 percentage points. They were about 3.50 percentage points late Tuesday and have fallen in recent days as markets see less risk of a Greek default.

The crisis has also sparked speculation that Greece may need a bailout from other EU nations to pay its bills if it can’t make the cuts it is promising or borrow the money it needs from markets.

Greek and European officials say this won’t be necessary and deny reports that they are talking about a possible financial rescue package, which would be unprecedented for one of the 16 member countries of the euro zone.

The EU is also calling on Greece to overhaul its statistics collection, following a sudden revision of its deficit last year and an EU report that said Greece falsified its accounts to make the deficit look smaller.

Associated Press writer Elena Becatoros in Athens contributed to this story.

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