The European Commission gave on February 3 2010 its seal of approval to Greece’s plans to stabilise government finances, but asked for more details on specific measures and warned that it would closely watch their implementation.

Revelations in 2009 by new socialist prime minister George Papandreou that the outgoing conservative government had greatly understated the size of the budget deficit sparked fears of a possible default, which hit both the euro and bond prices.

With fellow euro area members unwilling to set a precedent by bailing out Athens, especially amid concerns that bigger economies like Italy or Spain could request similar assistance, Greece was asked to present a workable plan to bring its budget deficit within the boundary set by euro zone rules, which is three per cent of gross domestic product (GDP).

Greece’s budget deficit is projected to reach 12.7 per cent of GDP in 2010 and the government in Athens now plans to reduce it below three per cent in 2012.

Greece presented its plan in January and on the eve of the EC’s decision, Papandreou unveiled new measures, including a hike on fuel taxes, which could raise as much as a billion euro a year, and a wider freeze on public sector salaries.

In a televised address that followed meetings with opposition party leaders, Papandreou asked the public for broad-reaching support for the measures, Greek daily Kathimerini said.

He blamed the current public finance crisis on international markets, rather than his predecessor in office, and said that the markets were treating Greece as the "weak link in the euro zone," as quoted by Kathimerini.

Euro area countries have rejected the option of Greece being bailed out by the International Monetary Fund, which would imply that the EU cannot enforce its own rules.

Hawkeye
Instead of a bailout, Greece will have to fix its public finances on its own and it will have to do so under the watchful gaze of the European Commission.

The EC welcomed Papandreou’s announcement of a 10 per cent cut in bonuses for public sector employees, a freeze on all public sector wages and the planned increase in the retirement age in the public sector.

At the same time, the Commission asked Greece to "spell out the announced fiscal measures and implementation calendar in the coming weeks and welcomes its readiness to adopt and swiftly implement additional measures if needed. The fiscal measures to be implemented in 2011 and 2012 should also be further detailed."

"Implementation of all the measures, including the reforms to increase the competitiveness of the economy in the field of pensions, health care, public administration, the functioning of product markets, labour market, absorption of structural funds, supervision of the financial sector, and statistics, will be carefully monitored through regular reports to be sent to the Commission by Greece," the EC said in its statement.

Some austerity measures have been spelled out, including the elimination of tax exemptions, the rise of excise duties on tobacco and alcohol and measures to fight tax evasion on the revenue side.

On the spending side, the Greek government will cut public servant allowances, freeze recruitment in 2010 and would only hire one for every five civil servants retiring. The government has also set up a contingency reserve and frozen all budgetary appropriations by 10 per cent and already adopted nominal cuts in public consumption and operational expenditure, according to the Commission’s statement.

Papandreou’s cabinet was given one month to present a detailed implementation calendar of the austerity measures announced in February and would have to present detailed plans for 2011 and 2012 "in the coming months".

Beyond the immediate cost-cutting measures, the Commission recommended that Athens "adopts a comprehensive structural reform package aimed at increasing the effectiveness of the public administration, stepping up pension and healthcare reform, improving labour market functioning and the effectiveness of the wage bargaining system, enhancing product market functioning and the business environment, and maintaining banking and financial sector stability."

To ensure that the Greek government started implementing the recovery plan, the EC demanded a "first report in mid-March 2010, spelling out the implementation calendar of the measures to achieve the 2010 budgetary targets, standing also ready to adopt additional measures if needed, and quarterly integrated reports from mid-May 2010 on the implementation of the recommendations, including on the reforms."

Furthermore, to prevent Athens from misreporting budgetary statistics in the future, the Commission started infringement proceedings against Greece, asking Papandreou’s cabinet to fix systemic deficiencies by May 15 2010.

Following through
The Commission’s endorsement of the Greek government’s plan is unlikely to persuade all sceptics in spite of the provisions meant to enforce compliance.

"The proposed measures will intensify pressure on the Greek government to consolidate its budget. Nevertheless, it seems unrealistic to expect that Greece will reduce the deficit ratio below the three per cent ceiling by 2012," Commerzbank analyst Christoph Weil said, as quoted by Reuters.

Ben May from Capital Economics, a London-based consultancy that has a track record of scepticism about Eastern Europe’s chances of emerging unscathed from the current downturn, said, as quoted by AFP: "The European Commission’s endorsement of the Greek government’s plan to get its public finances under control is unlikely to relieve market concerns over Greece’s position altogether".

The planned strikes by civil servants will test the resolve of the socialist government in Athens to follow through on its plans.

Joaquin Almunia, the outgoing European Commissioner for Economic and Monetary Affairs, was optimistic that the bloc could enforce compliance: "I am fully convinced that the European Union and euro area have instruments enough to deal with this issue and solve this problem."

"The important question to address is, how are we going to use these instruments? The European and economic union has to show solidarity. The necessary measures have to be in place as soon as possible," he said, as quoted by Reuters.

Emphasising the Commission’s promise to take a tough approach in enforcing the rules, he said: "If we consider that because of weak implementation of the measures, the objectives are not being achieved, we will ask the Greek authorities to adopt additional measures to gain again credibility of the success of the programme."

Reflecting the scepticism was also the market response. After an initial buoyant reaction – the euro rose against the US dollar and the cost of insuring Greek public debt fell by 0.2 per cent after the announcement – the initial enthusiasm quickly subsided, with the exchange rate and credit default swaps returning to pre-announcement values.