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Friday, March 5, 2010

Greece: Papandreou on Tightrope as Endgame Approaches

Financial Times
In private, Greek analysts have been debating for months exactly when the Socialist government would make what was widely seen as an inevitable U-turn on the economy.

That shift - in the form of the toughest fiscal package in the country's post-second world war history - came yesterday after several months of sustained pressure from financial markets.

In the aftermath of a sweeping victory at national elections last October, George Papandreou, prime minister, had been unwilling to abandon pre-electoral promises of wage increases, higher social spending and huge public investment in "green" development.

It took both turmoil on Greek bond markets and a "series of private ear bashings", as one Athens official put it, from Europe's most senior political and economic personalities to persuade Mr Papandreou to chart a radically different course.

José Manuel Barroso, European Commission president, Jean-Claude Trichet, president of the European Central Bank, and Angela Merkel, German chancellor, all warned the prime minister in recent weeks that, without more aggressive reforms, Greece risked being cut adrift by its European partners.

At yesterday's cabinet session called to approve a freeze on pensions, cuts in Christmas and Easter bonuses for public sector workers and rises in value added tax, Mr Papandreou is said to have told a potentially rebellious minister that socialist ideology would have to be set aside, at least temporarily.

In public the prime minister, who still enjoys high approval ratings, has ratcheted up the rhetoric to reflect a deepening sense of crisis among Greeks. The new measures, he said, were necessary to avert "a catastrophe" - a word associated in Greece with the disastrous 1922 military defeat by the Turks that plunged the country into years of economic crisis, including a sovereign default.

The new measures are due to be approved by parliament this week under emergency procedures, opening the way for Mr Papandreou to travel to Berlin and Paris at the weekend to argue the case for Greece to receive some form of financial support from its eurozone partners.


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Such support he hopes could allow Greece to return to international markets to finance its bloated public debt. However, a raft of challenges lies ahead. Deadlines loom for the Socialists to push through legislation modernising the tax system and announce an overhaul of the debt-burdened state pension system.

Moreover, Greece's recession could be deeper than the "worst-case" scenario for this year's budget. IOBE, a private sector think-tank, predicts the economy will shrink this year by 2.2 per cent, a significantly higher figure than the government's minus 0.3 per cent target.

Meanwhile, the stand-off with the unions escalates. Ominously, Mr Papandreou appeared yesterday to have lost the backing of Adedy, the main public sector trade union. Spyros Papaspyros, Adedy president, said that by cutting the bonuses, which grant two extra annual salaries to public sector workers, the Socialists crossed a red line. "We are not going to become sacrificial victims, regardless of the struggle to save the country," he said.

Given the unions' capacity to create havoc in the streets of Athens, as well as the ability of officials to delay the implementation of reforms, it is too early to say whether the Socialists' third try will succeed. The markets, too, still have to be persuaded the Socialists can turn Greece round.

Mr Papandreou, a famously patient politician, will have to persevere to turn his announcements into reality.