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Crisis-hit Greece sticks to guns on wages, taxes

Source: Reuters - Wed 10th Feb 2010

By George Georgiopoulos and Lefteris Papadimas

Greece's Socialist government announced a tough incomes policy on Tuesday, a day before unions strike against austerity measures needed to exit a fiscal crisis, and sugared the pill by hiking taxes on the rich.

On the eve of a 24-hour stoppage by the powerful ADEDY public sector union, Finance Minister George Papaconstantinou announce a wage freeze and other measures that will save the state 800 million euros this year.

Greece has pledged to cut a double digit budget deficit that has been feeding a huge debt, shaking faith in the euro and spreading to other euro zone periphery countries.

"The time has come for major changes. The country can't afford to wait any longer" Papaconstantinou told a news conference. "Everybody needs to contribute clearly to the big effort to save our economy."

He unveiled two bills, one on public sector wages and another on taxation, aiming to show that measures will be tough but fair, with the heavier burden falling on the better off.

Incomes about 60,000 euros a year will bear the brunt of the tax reform, while neither the prime minister or his ministers will get a pay rise this year, in line with a public sector salary freeze, he said.

A raft of assets, from dividends and short-term capital gains to real estate and distributed corporate profit, will be taxed more heavily while companies re-investing or hiring young people will get tax breaks. Off-shore companies and large property holders will be scrutinised.

A hiring freeze will apply in the state sector, where an array of salary supplements will be cut by 10 percent. For every five people leaving, one will be hired, he added. 

The detailed measures angered ADEDY, which said it would consider stepping up action from now on. Its strike on Wednesday is expected to affect flights, schools, hospitals and services.

Although the government enjoys solid popular support, with about 65 percent of Greeks embracing tougher measures, unions have launched a month of walkouts.

Amid speculation the European Union could bail out Greece if it shows commitment to sanitise its finances, Papaconstantinou said he expected EU partners and markets, which have been pounding Greece for months, to react more positively.

"EU partners and markets will closely monitor the implementation of our fiscal plan. I believe that the response will be positive. The measures that we have announced are becoming action" he said.

Analysts said that although the measures included no major surprises, they showed the government was moving faster on the right track.

"The fact that the government is pushing ahead with these announcements is a positive development" said Giada Giani, a Citigroup economist. "There's very little the government could do to calm markets down. What markets would like to see is a response on a European level, some sort of a financial support plan."

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