EU Warily Supports Greece’s Deficit-Reduction Plan

The European Commission on Wednesday put Greece under more pressure to slash its deficit, saying the country should have one month to spell out its budget program for the year.

The tough talk on the euro zone’s weakest nation briefly helped to shore up the Greek government-bond market, but gains evaporated later in the day amid worries over other wobbling economies in the 16-nation currency union. The Athens stock market ended the day nearly 2% lower.

Portugal’s government-bond market weakened, and Spain’s was off as well. Portugal on Wednesday saw low demand in a Treasury bill auction and sold fewer securities than expected. The cost of insuring Portuguese debt against default hit a record. Spain increased its budget-deficit forecast for 2010.

Greece remains the euro zone’s most-troubled spot. The country recorded a budget deficit of nearly 13% of gross domestic product in 2009, far above the European Union’s 3% limit.

The commission, the EU’s executive arm, accepted a planned fiscal diet under which the Greek government has pledged to get its deficit below the 3% threshold by 2012. But the commission warned that further spending curbs and new taxes might be needed to fix the country’s public finances.

“We know that the implementation of this program is not easy … but we need to support it” and monitor it closely, economic affairs commissioner Joaquín Almunia said.

The commission is concerned that Greece is relying too heavily on fixes like combating tax evasion, which could take a long time to bear fruit and have been unsuccessful in the past.

On Tuesday, Greek Prime Minister George Papandreou outlined more-concrete measures that appeared to provide some reassurance, saying he would freeze public-sector wages and impose higher fuel taxes. Researchers at Athens-based Eurobank EFG said these moves would yield €1.2 billion ($1.67 billion) in additional savings and revenue this year.

The plan drew complaints from the umbrella public-sector union Adedy; on Wednesday, the union confirmed plans for a 24-hour strike on Feb. 10.

“These measures won’t be the last,” Adedy President Spyros Papaspyros said. “Participation in the strike and in the demonstrations for next Wednesday will be decisive.”

Still, many Greeks have come to accept the need for a period of relative austerity. “It’s easier when it’s an order from Europe,” said Giannis Lounas, a 30-year-old Athens surveyor. “The majority of people know that these measures have to be taken.”

The commission’s report recommended that Greece has until March 16 to outline how it will achieve this year’s deficit target—8.7% of GDP. In previous cases in which countries have broken the EU’s budget ceiling, the commission has never asked for so much detail so quickly, but Mr. Almunia said a rapid, credible plan is critical.

Budget cuts are essential for the country, which has seen its borrowing costs soar in recent months, prompting fears of default. Signs Athens might struggle to execute its budget plan could spur an even sharper selloff of Greek government bonds, further stretching the country’s finances. Failure also could punish other euro-zone economies with large budget deficits, including Portugal and Spain.

In its March report, Greece has to provide a clear timeline for its budget cuts and show it is “ready to adopt additional measures if needed,” the commission said. Starting in mid-May, Greece will have to provide quarterly progress reports.