Europe Economy

EU Warns Greece To Prepare For Even Tougher Measures


European finance ministers are telling Greece to prepare for even tougher spending cuts and new taxes, including a tax on luxury goods and cars, to fix its debt crisis.

Angelo Cavalli | Photodisc | Getty Images

The 16 countries that use the euro warn that Greece will need to take the extra action if current cuts don't bring its massive deficit down from 12.7 percent of economic output to 8.7 percent this year.

Greece will report back on its efforts by March 16.

Eurozone nations have pledged to help Greece if it can't repay its debts—but want Greece to make big spending cuts first.

Earlier Monday, Greece's finance minister said a detailed rescue plan from other euro zone nations would be the best way to soothe market fears that Greece could default on debt payments.

Greece's debt problem has shaken the entire euro zone and undermined the shared currency.

"My guess is that what will stop markets attacking Greece at the moment is a further more explicit message that makes operational what has been decided last Thursday," at a meeting of EU leaders, Finance Minister George Papaconstantinou said.

Market worries of a default have hiked the cost of Greek government borrowing in recent months and caused the euro to slide to a near nine-month low against the dollar.

Papaconstantinou said the 16 countries that use the euro need to go beyond that to "work out a mechanism so that if necessary the mechanism will be there" for any member that cannot pay its debts.

"I think this is the logical way of addressing the issue," he told an audience of European Union policy makers at a European Policy Centre think-tank event in Brussels.

However, Papaconstantinou said last week's statement was a "watershed" because it showed that "in the euro zone, no one country is alone and when it comes down to it they stick together."

He blamed financial markets for exaggerating Greece's debt worries, saying Greece's economic output is just over 2 percent of the euro area's and a default "would not ... create a problem for the euro area."

"Any country is prey and will be prey to speculative forces," he said. "Today it's Greece, tomorrow it could be another country."

Euro zone finance ministers meet for talks later Monday to discuss whether they think Greece's austerity program will be enough to reduce its massive deficit over the next three years. Ministers from all 27 EU countries then meet Tuesday.

The European Commission has already warned that it will ask Greece to do more if it can't implement promised spending cuts and tax hikes — which have already sparked protests and a sweeping public sector strike in Greece.

It wants to keep Greece on a tight rein, ordering the government to report back in mid-March to show what kind of cuts it has made. The EU could then demand tougher action. The Greek government has promised to do everything necessary to reduce its deficit from 12.7 percent of gross domestic product last year to 8.7 percent this year — and under a 3 percent limit set by EU rules by the end of 2012.

Greece's credibility also came under fire from the European Commission on Monday, which said it wants Greece to explain by the end of February how it used complex financial deals that allegedly made its debt limits look lower.

The EU executive is seeking the power to audit the Greek public finances following a damning report from the EU statistics agency Eurostat that said Greece falsified data to hide the extent of last year's deficit.

EU spokesman Amadeu Altafaj Tardio says the EU has given Greece an end-of-February deadline to give details on how the deals, called currency swaps, affected government accounts since 2001.

He said such swaps weren't illegal unless the Greece was not using market rates to calculate the exchange rates used for the swaps. Greece never told the EU that it was using the swaps to mask debt, he said.

Papaconstantinou said some of the derivative contracts used in the past "were at the time legal and Greece was not the only country" using them. He said they have now "been made illegal and Greece has not used them since." He said the government now does not want to use financing that is not approved by Eurostat.

"We do want to restore credibility," he said. "We have enough trouble as it is convincing people that our numbers are real."

Greek finance ministry officials, speaking on condition of anonymity, told the Associated Press on Sunday that the government has met with most major international banks over the last months "to explore options and discuss their involvement in financing Greek national debt."

They said any debt financing proposals would be conducted transparently and in line with rules on government debt set by Eurostat.