Greece faces tough measures in bid to save 'Titanic' economy

Eurozone split between bailout and hardline policy

European finance ministers have told Greece to prepare for even tougher spending cuts and new taxes, including a tax on luxury goods and cars, to fix its debt crisis.

During talks between the finance ministers of the 16 eurozone nations in Brussels last night, Greece was warned that it will need to take the extra measures if current cutbacks don't drastically reduce its massive deficit. Greece has until 16 March to report back on its progress.

Greece had signalled that its "Titanic" economy should not be subject to even harsher medicine. Paris and Berlin remain still divided about the wisdom of a bailout for Greece.

Ahead of the meeting, the euro relapsed towards last week's nine-month low against the dollar as investors grew increasingly nervous about the absence of any concrete package for Greece from eurozone finance ministers. The issue is becoming acute because, while Greece has just €7bn (£6bn) in reserve, she faces more than twice that in short-term financing needs: two large bond redemptions worth more than €8bn each fall due in April and May.

At their summit last week, European leaders offered "political" backing and declarations of solidarity towards Greece in return for "additional" measures, such as oversight of Greek Treasury affairs by the IMF and a monthly report, starting in March, by the Prime Minister on his nation's progress towards reducing the budget deficit. But there are deeper divisions. At the weekend the president of the European Central Bank, Jean-Claude Trichet, said Greece must "take the extra measures that will be necessary to make credible their turnaround plan". The suggestion is that the Greeks should raise VAT by a further one or two percentage points and cut public pay further.

Mr Trichet and the German government are believed to lead a group sceptical about the value of offering Greece a financial rescue package. The Finnish Finance Minister appeared to back that hard line, saying: "The only country that can help Greece is Greece itself." If some EU countries could help Greece, he added, it would be bilaterally – and not involve the EU as a whole. French ministers are thought to be more willing to prevent further disruption to the eurozone.

As on previous occasions, the Greek government stressed that its largest deficit was the "credibility gap" its reform efforts face. It has promised to get the deficit down from 13 per cent to 9 per cent of GDP this year, but a wave of strikes and protests have undermined faith in that pledge. In Brussels yesterday, the Finance Minister, George Papaconstantinou, said: "You lose credibility fast, you regain it slowly. The Greek pension system is not viable as it stands. My argument is yes, we are doing enough, yes we will be able to do it. We are trying to change the course of the Titanic; it cannot be done in a day. If additional fiscal measures are needed, we will take them."

However, there is increasingly hostile talk in European circles about market speculation. Mr Papaconstantinou said: "Today it is Greece, tomorrow it can be another country. Any European country can be prey to speculative forces."

In the past, Greece's Prime Minister, George Papandreou, has talked about those with "ulterior motives" seeking to undermine the euro. The French Finance Minister, Christine Lagarde, has also made veiled threats against the credit default swaps market, in effect a vehicle for short sellers, saying she wanted to "take a second look at the validity" of this market.