Greece Bites the Bullet on Austerity Plan

ATHENS (March 3) -- Greece faced crunch time Wednesday, ordering an additional $6.5 billion in radical budget cuts that will slash 30 percent off civil servants' holiday bonuses and slap fresh taxes on consumers. The measures amounted to a last-ditch bid to stave off the euro zone's first debt default and the broader financial fallout that would cause.

The austerity plan, announced after an urgent cabinet meeting, comes days before Greece's embattled Prime Minister George Papandreou flies to Germany to enlist the help of Europe's biggest and healthiest economy.

The move also aimed to calm jittery debt markets and help ease the sale of a 10-year bond that the government hopes will raise between $4 billion and $7 billion for Greece's sagging economy.

"This was a necessary decision. It was not a matter of choice," a somber-looking Papandreou said after talks with Greek President Karolos Papoulias. "It was a matter of survival for our country, allowing it to breathe and break free from the clutches of speculative forces."

The new measures include an increase in sales tax from 19 to 21 percent and additional tax hikes on alcohol, cigarettes, luxury yachts, cars and precious stones. Cuts in civil servants' stipends and bonuses were also decreed, along with a 5 percent slash in education spending and a freeze on state pensions.

Initial designs to scrap half of the two months of extra pay public-sector workers receive annually were dropped in the face of widespread outrage by government workers, who make up about a million of the country's 4.5 million labor force.

Instead, the newly elected socialist government cut holiday bonuses by 30 percent, enough to still leave powerful public-sector labor unions fuming.

"The measures are lopsided," Yannis Panagopoulos, president of Greece's biggest labor union, said after talks with the prime minister. "There is no sense of social justice."

As news spread of the fresh austerity measures earlier Wednesday, hundreds of senior citizens wielding canes and colorful banners broke through a police cordon guarding the prime minister's office to protest pension freezes.

In the center of Athens, angry dock workers took to the finance ministry to protest layoffs as the country's powerful civil-servant union, Adedy, dispatched an army of supporters to the streets, blaring calls for a 24-hour nationwide walkout on March 16.

Greece is under intense pressure from the European Union and financial markets to slash its budget deficit, which hit an estimated 12.7 percent of gross domestic product last year, more than four times the EU's cap of 3 percent.

International bond markets have driven up the cost of borrowing for debt-plagued Greece and sparked fears of cascading debt crises along Europe's southern rim.

Wednesday's measures cap a first dose of austerity reforms cutting public-sector entitlements by 10 percent on average and freezing civil-service wages.

Government officials hope a successful bond sale will claw back market confidence in Greece's ability to fix its fiscal malaise or convince Europe to come to the country's rescue with a bailout package by as early as Friday.

Financial experts, however, remain cautious.

"The problem isn't just about finding the money or securing another loan," says Savas Robolis, an economics professor at Panteion University in Athens. "The problem is what comes next, after the bailout."

Greece's socialist PASOK party rose to power last October, trouncing a corrupt and scandal-plagued center-right government. It promised to shield salaries and pensions while injecting $4.5 billion in stimulus spending meant to resuscitate the economy through infrastructure projects and environmentally sustainable development.

But just weeks after taking office, once it got a better sense of the abysmal state of government finances, the government quickly backpedaled on all its pledges, stripping voters -- mainly the youth -- of hopes of a new Greece.

In the last decade alone, more than 850,000 Greek graduates have left the country as the perennial promise to reinvent Greece through development has remained undelivered.

"Without development we are heading into a deeper and darker recession," Robolis warns. "If no development plan is incorporated in the government's design to yank the country out of the crisis, then we're doomed."

By 2020, he says, "Greece will have done away with all those who have some incentive to do something in their lives, leaving Greece as a poor country, with poor pensioners and poor tourists."