Exclusive - Greece needs to announce more austerity

BRUSSELS Tue Mar 13, 2012 6:10pm GMT

1 of 3. Greece's Prime Minister Lucas Papademos (C) arrives at an European Union leaders summit in Brussels March 1, 2012.

Credit: Reuters/Francois Lenoir

BRUSSELS (Reuters) - Greece will have to slash a further 5.5 percent of GDP in government spending in 2013 and 2014 to meet agreed fiscal targets underpinning the second international bailout for Athens, a European Commission report said.

The Compliance Report by the European Union's executive describes the progress of Greek reforms necessary for the release of new euro zone money to Athens and recommends the first disbursement be made as soon as possible.

The report, obtained by Reuters, said a package of savings adopted by Greece in early 2012 worth 1.5 percent of gross domestic product should allow Athens to meet the target of bringing the primary deficit down to 1 percent this year.

"However, current projections reveal large fiscal gaps in 2013-14," the Commission report said, adding that the shortfall for the two years totalled 5.5 percent.

"Therefore, substantial additional expenditure cuts will have to be announced and adopted by Greece in the coming months, in particular when Greece updates its medium-term budget in May 2012," the report said.

Greece is to hold parliamentary elections in April. It is already feeling sharp pain from austerity, with high unemployment that includes more young people out of work that in.

The report said that in preparation for the new cuts the government was reviewing public spending programmes, focusing on savings in social transfers, defence and the restructuring of central and local administration.

There would be job cuts in the public sector according to a redundancy and recruitment rule of 1 entry for 5 exits. Athens is to further cut pharmaceutical spending and operational spending of hospitals as well as welfare cash benefits.

"The continuation of the very comprehensive international financial assistance can only be expected if policy implementation improves," the Commission report said.

"The determination of the Greek authorities to stick to the agreed policies will be tested already in the coming months when the deficit-reducing measures to close the large gap for 2013-14 need to be identified," it said.

The new measures are necessary for Greece to keep receiving financial aid from the euro zone and the International Monetary Fund under a second bailout worth 130 billion euros that will keep Athens financed through 2014.

But to get subsequent tranches of the financing, Greece has to achieve a primary surplus of 1.8 percent in 2013 and 4.5 percent in 2014.

"The current policies are not sufficient to bring the public accounts to these targets. The government will have to identify this amount (5.5 percent of GDP) of measures by June 2012 and adopt them in the 2013 and 2014 budgets to reach the targets," the report said.

(Reporting By Jan Strupczewski. Editing by Jeremy Gaunt.)