By Angelika Papamiltiadou

ATHENS (MNI) – The Greek government Sunday announced a new package
of sharp spending cuts and tax increases expected to slash the country’s
gaping public budget deficit by E30 billion, or 11% of GDP, over four
years.

It agreed to implement the measures in exchange for
desperately-needed financial support from the Eurozone and the
International Monetary Fund.

The financial lifeline, agreed over the weekend, covers the first
three years of the austerity plan and is worth E110 billion, with E80
billion of that amount coming from the Eurozone nations and a E30
billion standby agreement from the IMF. In the first year, the EMU
states would disburse E30 billion of their total contribution, with the
first funds being released before May 19 — a critical debt refinancing
date for Greece.

A previous austerity plan the government had already put in place
will be replaced by the new package, which includes a series of measures
the government negotiated with the Eurozone and the IMF. The new plan
provides a little more breathing space to the beleaguered Greek
government by giving it four years rather than three to bring the
deficit under the EU’s limit of 3%.

But the measures are more draconian and are largely front-loaded.
In particular, the government is now committed to cutting the deficit by
5.5 percentage points in 2010 alone, in part because the starting point
– the 2009 deficit figure — was recently revised up from 12.7% of GDP
to 13.6%.

The plan envisions cutting that budget gap to 8.1% by the end of
this year, and would do so under economic conditions that are
considerably less favorable than previously projected. New forecasts
included in the EMU-IMF deal show Greece’s economy contracting at 4.0%
this year, nearly double the -2.2% rate previously forecast. The sharp
deterioration in the outlook is no doubt due in large part to the
enormity of the fiscal retrenchment to be undertaken.

The forecasts show the economy remaining in recession throughout
2011 and returning to growth in 2011.

Meanwhile, the country’s outstanding debt is projected to balloon
this year from 113% of GDP in 2009, as reported last month by the
European Commission, to over 133% by the end of 2010. It is seen
climbing further, to peak at a whopping 149% in 2013, before edging down
to a still-astronomical 144% by the end of 2014, the last year of the
austerity plan.

The annual deficits would continue to drop, however, to 7.6% in
2011, 6.5% in 2012, 4.9 % in 2013 and finally, to 2.6% in the last year.

Greece’s Finance Minister George Papaconstantinou said the 4-year
plan would be presented to Greek Parliament for approval on Tuesday. He
said the goal was for Greece to return to capital markets as soon as
possible. “When things smooth out, we will return to the markets,” he
said.

In a speech to his cabinet Sunday, which preceded the government’s
approval of the new plan, Prime Minister George Papandreou made clear
that the country had no option but to take the harsh medicine being
prescribed by its financial benefactors.

“Avoiding bankruptcy is a red line for our nation,” Papandreou told
his ministers in comments later distributed by his office.

“I know that with the decisions today our citizens must suffer
greater sacrifices,” he said. “The alternative, however, would be
catastrophe and greater suffering for us all. This is why we have
decided not to yield one step.”

The Greek plan was lauded by its Eurozone partners.

“It addresses the relevant policy challenges in a decisive manner,”
the European Central Bank said in a written statement issued Sunday
afternoon. “It will thereby help to restore confidence and safeguard
financial stability in the euro area.”

However, in a hint of possible things to come, the ECB said its
“Governing Council also considers essential that the Greek public
authorities stand ready to take any further measures that may become
appropriate to achieve the objectives of the programme.”

Jean-Claude Junker, president of the Eurozone finance ministers’
group (the Eurogroup), who unveiled the financial details of the EMU-IMF
aid deal at a press conference in Brussels, said the Greek
budget-cutting plan was “an ambitious program; it is austere, but it is
absolutely necessary.”

The measures, which are likely to exacerbate already inflamed
social sentiments in Greece, include:

–Abolition of two extra monthly paychecks per year in the public
sector, a widely beloved perk among government workers. Those with
pre-tax income of over 3,000 euros per month will not receive any
bonuses or benefits at all. Those below, will get an annual bonus
totaling E1,000.

–An additional 8% pay cut in benefits in certain public sector
divisions. Those with no benefits on top of their base salaries will get
a 3% pay cut.

–The abolition of the two extra monthly pension checks per year
for public sector retirees. Those with pensions below E2,500 per month
will get a E1,000 annual bonus instead.

–A four-year freeze on any increase in wages or pension payments.

–An increase in the value-added tax to 23% from 21%

–A 10% increase in taxes on tobacco, fuel and beverages

–A special new tax on businesses (no further details given)

Papaconstantinou announced there will also be reforms in the labour
market and a further increase in taxes on real estate. He said the
government is in negotiations with unions and employers to abolish a
rule that prohibits businesses from laying off more than 2% of staff in
any given month.

There would also be changes in the way compensation and overtime
are calculated, as well as lower minimum wages for young workers and the
long-term unemployed, Papaconstantinou said.

He also promised that reforms in the pension system would be tabled
imminently and that the government would proceed with liberalization of
the energy and transportation markets. In addition, it will expedite
growth and competitiveness-enhancing measures to open up professions
that have long been closed in Greece to foreigners licensed in other
European countries.

Papanconstantinou said the government would revisit the emergency
wage and income measures once the government had made it through the
crisis.

By 2014, Greece will be in a “totally different situation and the
government will examine the possibility of reinstating the income
policy,” he said. “We do not ask the Greek people to make indefinite
sacrifices.”

The Eurozone’s share of the financial aid must still be approved by
each individual member state. In some cases approval is expected to be
perfunctory. In France, which has said its first-year contribution will
be E6.3 billion, parliamentary approval is expected to be quick and
easy. In Italy, the government has said it can bypass legislators
entirely through executive decree.

But the real test will come in Germany, which at E8.4 billion in
the first year, is by far the largest contributor. Chancellor Angela
Merkel must convince hesitant members of her own governing coalition.
And assuming the measure passes German parliament by the end of next
week — as promised by Finance Minister Wolfgang Schaueble — it is
likely to face a legal challenge in Germany’s Constitutional Court.

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