EU to tell Greece to do more to cut deficit - report

ATHENS Sat Jan 30, 2010 11:54am GMT

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ATHENS (Reuters) - The European Union will tell Greece next week to take extra measures by May 15 to shore up its finances and cut a spiralling deficit, Greek newspaper Ta Nea said Saturday, citing a draft of the recommendations.

The European Commission's recommendations, due to be made public on February 3, include cutting nominal wages in the public sector and setting a ceiling for high pensions, Ta Nea said.

Greece is seeking EU approval for an austerity plan it presented this month to reduce its budget deficit to below 3 percent of GDP by 2012 from 12.7 percent in 2009 and avoid a debt crisis seen as a threat to the euro zone.

The Greek finance ministry said in a statement the measures outlined in the report were already included in its own deficit-cutting program. It added the European commission had already expressed its backing for the government plan.

"There is no issue of the EU rejecting the Greek growth and stability program," it said.

The European Commission declined to comment.

The Greek plan does not envisage nominal pay cuts but it includes reductions in special allowances which make up a large chunk of Greek civil servants' overall income. This would translate roughly into a 3 to 4 percent cut in the public wage bill, labour unions say.

Under the headline "Urgent measures to be taken by 15 May 2010," the EU document will tell Greece to "cut average nominal wages, including in central government, local governments, state agencies and other public institutions."

The EU will also urge Greece to introduce advance tax payments for the self-employed and possibly a tax on luxury goods, according to the document, excerpts of which were printed by Ta Nea. Most other recommendations, as reported in the paper, are already part of the Greek plan.

CONTAGION WORRIES

Greece has been hit hard on international markets, with bond yields soaring and shares plummeting, after the country's new Socialist government revealed in October its budget deficit was twice as big as previously announced and more than four times the euro zone ceiling of 3 percent of GDP.

Concerns that Athens may not be able to service its debt have put pressure on the euro and raised questions over whether fellow euro-zone member states would come to Greece's rescue.

There are also growing worries that the Greek debt crisis could spill over to other weak members of the currency bloc, such as Spain, Portugal, Ireland and Italy.

German daily Sueddeutsche Zeitung quoted an EU draft memorandum as saying the situation in Greece was a "big challenge and in the long term risky," and could force other euro-zone countries to pay higher risk premiums on their bonds.

Prime Minister George Papandreou's government, which came to power on a promise to tax the rich and help the poor to get Greece out of recession, has announced nominal wage freezes for civil servants earning more than 2,000 euros a month. It plans to award pay increases in line with inflation to all others.

The biggest public sector union, ADEDY, has called a 24-hour strike for February 10 to protest against the austerity measures.

Papandreou said in Davos this week he would speed up introduction of a tax reform, by the end of February, and that he would also introduce changes to the pension system by the end of April.

(Reporting by Harry Papachristou, additional reporting by Sarah Marsh in Berlin, writing by Silvia Aloisi; editing by William Hardy)

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