Translated material
Crisis in European style
Greece is ready to exceed its budget deficit reduction plan
The Greek government is ready to continue cutting wages and subsidies, as well as significantly increasing taxes. As Finance Minister Giorgos Papakonstantinou said yesterday when presenting the draft budget for 2011, the deficit will be reduced to 7%. According to analysts, this will significantly worsen public sentiment, but will inspire investors.Already this year, as the Greek authorities say, the budget deficit will be reduced to 7.8% instead of the previously announced 8.1%. However, this is largely due to the upward revision of GDP and record inflation at 5.8%.
It is expected that by the end of 2010, Greece's public debt will amount to 307 billion euros, or 130% of GDP, and a year later it will rise to 324 billion euros, or 139% of GDP.
To achieve these results, the Greek authorities intend to reduce costs by 2 billion euros and increase taxes by more than 7 billion euros. Social spending and subsidies will decrease by 4-5%, and government consumer spending by 10%. It is also planned to revise the salary policy, reducing the number of additional payments to civil servants. Break-even companies will be subject to an emergency contribution of 10% of profit. Taxes on real estate, luxury goods, vehicle inspection, soft drinks and gambling will also increase.
Mr. Papaconstantinou also said that the target revenue growth rate is set at 13.7%, but most likely it will not be possible to achieve it and will have to limit it to 8.7%.
“This is a very serious challenge,” National Bank of Greece economist Nicholas Magginas told Bloomberg. -- There is a growing likelihood that pessimistic forecasts of weak earnings growth will come true. This will put additional pressure on the country given additional spending cuts that are already a done deal.” Chinese Premier Wen Jiabao, while on a visit to Athens late last week, said that China plans to buy Greek bonds, as Greece has again decided to seek loans from foreign markets.
However, the attention of investors concerned about the debt crisis is now focused not only on Greece. According to the Financial Times, Ireland's budget deficit for the current year will be larger than expected, and the main factor in such dynamics will be a slowdown in the growth of the national economy, and not a reduction in tax revenues. Nobel laureate in economics Joseph Stiglitz, in an interview with the Sunday Telegraph, said that the eurozone economy is unbalanced, since Ireland, Portugal and Greece have a negative trade balance, and Germany has a surplus. In addition, the economist believes that speculators may soon begin to put pressure on Spanish government bonds, as they previously attacked Greek securities.
Joseph Stiglitz believes Europe's fragile economic recovery could be permanently undermined by the tight budget discipline that is spreading across the region. "If governments cut budget deficits too quickly, they risk returning to recession," Mr. Stiglitz said. “If America was the cause of the first global recession, then Europe is now leading to the second.”
He also believes that the banking sector has returned to business as usual too quickly and the risk of another financial crisis remains, despite some improvements in the regulatory system.