Under intense pressure to rein in Greece’s soaring budget deficit, Greek Prime Minister George Papandreou on Monday announced ambitious measures to reassure Europe and investors that he had an exit route out of the country’s worst crisis in decades.
“We need to move immediately to a new social deal,” the prime minister said in a highly anticipated speech to business groups and labor unions. “We must change or sink. Our biggest deficit is the deficit of credibility. Markets want to see action, not words.”
Greek bond markets were thrown into turmoil last week when Fitch Ratings downgraded Greece’s credit rating on fears that the country’s soaring budget deficit and heavy debt might cause the country to default. Greece’s deficit is 12.7 percent of its GDP, and its debt is estimated at 300 billion euros (US$440 billion), more than 110 percent of GDP.
Greece’s financial crisis poses a critical challenge for the EU, with the credibility of the euro as much at stake as that of Greece. If other countries in the bloc rush to Greece’s aid — and so far they have not — their help would be seen as rewarding bad behavior. But if they leave Greece to fend for itself, or to seek a bailout from the IMF, they could spread the panic to Spain, Ireland and other member nations in dire financial straits.
In his speech on Monday, Papandreou tried to allay Europe’s fears. He vowed to reduce state spending by 10 percent and to bring the budget deficit to less than 3 percent of GDP in 2013.
He said he would introduce a new progressive tax scale, crack down on rampant tax evasion and cut bureaucracy to attract foreign investment.
Papandreou also called for reform of Greece’s struggling pension system, which by some estimates will run out of money within a year. He said that starting in 2011, Greece would hire one new state worker for every five who retired. One in four Greeks works for the state, a result of decades of public-sector hiring to prevent social unrest.
Papandreou said his government would soon “make decisions that haven’t been made in decades.”
“The state is hostage to vested interests that hamper the fair management of state funding. We are ready to clash with these interests,” he said.
In an indication of the gravity of the crisis, everyone from the leaders of labor unions to business leaders seems to be reserving judgment about the Papandreou government, fearing that any criticism might further weaken Greece’s hand.
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