Tougher action is needed over financial woes, EC tells Greece

Commission backs budget plans but demands further curbs on public-sector pay

Greece has won the European Commission's backing for its plans to cut its budget deficit – but only on the condition that it goes further with curbs on public-sector pay. The country also faces legal action from the commission over the quality of its statistics.

Investors in Greek government bonds responded positively to yesterday's EC ruling, although concern remains that Greece's problems may spread to other European Union states with weak finances. Both Spain and Portugal saw their bonds hit yesterday as fears about their borrowing were highlighted.

On Tuesday, the Greek Prime Minister George Papandreou unveiled a package of measures – including a public-sector pay freeze, spending cuts and tax rises – which he claimed would enable the country to cut its budget deficit from 12.7 per cent of GDP last year to below 3 per cent by 2012.

However, yesterday the commission said it wanted to see Greece go further, with reductions in public-sector wage bills – some of which can be achieved by not replacing civil servants when they retire – pension reforms and better contingency planning.

It also ordered Athens to present by the middle of next month a timetable for the implementation of Mr Papandreou's proposals. He has until May to respond to the legal action the commission has begun, which requires Greece to publish updated budget accounts each month.

Joaquin Almunia, the EU's monetary affairs commissioner, said: "We are endorsing the Greek programme but we know the implementation of the programme will not be easy – it is extremely challenging but absolutely necessary and urgent."

Mr Almunia said he believed that international investors' confidence in Greece might be improved by the summer. "If in mid-2010 we can give a positive assessment of the Greek implementation of the programme, the markets will share our positive assessment," he explained. However, doubts remain about Mr Papandreou's ability to deliver the deficit reductions he has announced, with Greek union leaders already warning that their patience is wearing thin.

One large union representing public-sector workers has already announced a one-day strike later this month, while private-sector unions said yesterday they were considering similar stoppages.

Nevertheless, Mr Almunia has no choice but to insist that Greece imposes drastic budgetary measures, amid concern that its economic crisis could spread across the EU and eventually threaten the stability of the single currency.

Yesterday, Spain said its budget deficits would be up to 2.3 percentage points higher over the next three years than was previously expected, while Portugal cut the size of a government bond issue it is planning in the face of rising yields on its sovereign debt.