At a news conference in the Belgian capital, Brussels, yesterday, the European Union (EU) economic and monetary affairs commissioner, Joaquin Almunia, announced that the European Commission was endorsing Greece's Stability and Growth Programme for 2010–13. Almunia said that the Commission recognises that implementation of the plan, which foresees the fiscal deficit falling from 12.7% of GDP in 2009 to 8.7% in 2010 and 2.0% in 2010, "will not be easy…but it deserves support".

Nevertheless, this endorsement came with a series of recommendations attached, which the Commission believes are key to Greece achieving its ambitious targets. In summary, the Commission requested that Greece do the following:

• Provide more details about the fiscal measures and the timing of their implementation. Specifically, the Commission expects the Greek government to reveal a calendar with a detailed explanation of the measures to be taken, not only in 2010, but also in the next two years, by mid-March.
• Implement significant reforms aimed at improving the effectiveness of the public administration and tax collection mechanism.
• Step up healthcare and pension reforms, while also tackling rigidities in the labour and product markets.
• Introduce more permanent measures in order to reduce spending in the medium term; the Commission has endorsed the measures already announced by the government to rein in public spending, such as reducing public sector wages.

As a result of Greece's constant failure to produce reliable statistical data, the Commission has also initiated infringement proceedings against the country. The government is required to work with the Commission and agree on an action plan to solve this problem, which should be unveiled by 15 May.

Government Unveils Further Fiscal Measures

In a televised address to the country on Tuesday night (2 February), Prime Minister George Papandreou reiterated the government's willingness to tackle the country's dire fiscal situation. Moreover, he announced that the government will introduce more measures to bring the deficit down.

In particular, he said that wage cuts in the public sector, which had previously been due to apply to those earning more than 2,000 euro (US$2,769) a month, will now apply to all of those in the civil service. Moreover, he announced that the government will introduce a new fuel tax—which is expected to raise 1 billion euro—and more stringent rules for offshore companies. He also suggested that the retirement age may be raised in order to deal with the pension time-bomb.

Outlook and Implications

The Commission's endorsement was widely expected. Indeed, IHS Global Insight believes that it did not really have any alternative, knowing that its failure to back the plans would have put the Greek economy under intense pressure.

The fact that this endorsement came with a series of recommendations was not surprising either. The markets' reaction to the Stability and Growth Programme when it was unveiled last month was relatively muted and the continued increase in spreads in the weeks that followed suggested that the plan was not seen as doing enough to achieve the very ambitious targets. However, we believe that the main problem was the lack of detail on how those targets would be achieved. This would be worrying even in normal circumstances, but the Greek government's lack of fiscal credibility makes a clear and detailed explanation of the measures even more important.

We believe that the EU backing is a positive first step to enhance the plan's credibility. However, it is now up to the Greek government to meet the Commission's requirements in a timely and proper manner. For this to happen, though, the government needs all the political support it can get. Encouragingly, the Panhellenic Socialist Movement (PASOK) government holds a majority in parliament and the main opposition party, New Democracy (ND), has already announced that it will support the reforms, albeit not without serious consideration and caution.

Recently re-elected Greek president Carolos Papoulias has called for national unity to tackle the crisis, but given the country's history of political riots, these strict austerity measures are likely to provoke a violent public backlash. The government's nerve has already been tested by ongoing road and border blockades by Greek farmers demanding financial assistance to compensate for lower prices of agricultural products .Today, Greek tax collectors and customs officers commenced a two-day walkout, initiating yet another wave of strikes against the austerity measures. The Confederation of Greek Trade Unions (GSEE), Greece's biggest trade union, which represents about 2 million workers in the private sector, is set to approve a major widespread strike for later this month. Similarly, the Confederation of Public Servants (ADEDY), which represents about 600,000 civil servants, has already announced that it will stage a separate protest next Wednesday (10 February) to oppose the austerity measures. The smaller Communist-backed All Militant Workers' Front Union (PAME) will also participate in next week's strike. The unions' representatives have criticised Papandreou for "bowing to the demands of the markets" and breaking his pre-election pledges, thus undermining social dialogue.

This highlights that despite the EU backing, there are still several challenges ahead. The fiscal programme is likely to become harsher under pressure from the EU, imposing further cuts and possibly tax hikes. It is unlikely that the unions will welcome these reforms and Greece is likely to face a severe wave of public demonstrations and strikes in the coming months. National dialogue and a full explanation from the government of the scale of the crisis could lead to a better understanding of the severity of the problems and thereby ensure much-needed public support for legislators to push the reforms through.

Global Insight (Reino Unido)